G.R. No.

83748 May 12, 1989

FLAVIO K MACASAET & ASSOCIATES, INC., petitioner,
vs.
COMMISSION ON AUDIT and PHILIPPINE TOURISM AUTHORITY, respondents.
In this Petition for Certiorari, pursuant to Section 7, Article IX of the 1987 Constitution, 1 petitioner,
Flavio K. Macasaet & Associates, Inc., prays that the ruling of public respondent Commission on Audit
(COA) denying its claim for completion of payment of professional fees be overturned. The facts follow.
On 15 September 1977 respondent Philippine Tourism Authority (PTA) entered into a Contract for
"Project Design and Management Services for the development of the proposed Zamboanga Golf and
Country Club, Calarian, Zamboanga City" with petitioner company, but originally with Flavio K
Macasaet alone (hereinafter referred to simply as the "Contract").
Under the Contract, PTA obligated itself to pay petitioner a professional fee of seven (7%) of the actual
construction cost, as follows:

Pursuant to the foregoing Schedule, the PTA made periodic payments of the stipulated professional
fees to petitioner. And, upon completion of the project, PTA paid petitioners what it perceived to be the
balance of the latter's professional fees.
It turned out, however, that after the project was completed, PTA paid Supra Construction Company,
the main contractor, the additional sum of P3,148,198.26 representing the escalation cost of the
contract price due to the increase in the price of construction materials.
Upon learning of the price escalation, petitioner requested payment of P219,302.47 additional
professional fee representing seven (7%) percent of P3,148,198.26.
On 3 July 1985 PTA denied payment on the ground that "the subject price escalation referred to
increased cost of construction materials and did not entail additional work on the part of petitioner as to
entitle it to additional compensation under Article VI of the contract." 2

ARTICLE IV PROFESSIONAL FEE

Reconsiderations sought by the petitioner, up to respondent COA, were to no avail. The latter
expressed the opinion that "to allow subject claim in the absence of a showing that extra or additional
services had been rendered by claimant would certainly result in overpayment to him to the prejudice
of the Government" (1st Indorsement, July 10, 1987, p. 3, Rollo, p. 42).

In consideration for the professional services to be performed by Designer under

Article I of this Agreement, the Authority shall pay seven percent (7%) of the
actual construction cost.

Hence this Petition, to which we gave due course.

In addition, a Schedule of Payments was provided for while the construction was in progress and up to
its final completion, thus:
ARTICLE V SCHEDULE OF PAYMENTS
1. Upon the execution of the Agreement but not more than fifteen (15) days, a
minimum payment equivalent to 10 percent of the professional fee as provided in
Art. IV computed upon a reasonable estimated construction cost of the project.
2. Upon the completion of the schematic design services, but not more than 15
days after the submission of the schematic design to the Authority, a sum
equivalent to 15% of the professional fee as stated in Art. IV computed upon the
reasonable estimated construction cost of the project.
3. Upon completion of the design development services, but not more than 15
days after submission of the design development to the authority, a sum
equivalent to 20% of the professional fee as stated in Art. IV, computed upon the
reasonable estimated construction cost.

The basic issue for resolution is petitioner's entitlement to additional professional fees, which, in turn,
hinges on whether or not the price escalation should be included in the "final actual project cost."
Public respondents, through the Solicitor General, maintain that petitioner had been paid its
professional fee upon completion of the project and that its claim for additional payment is without any
legal and factual basis for, after all, no additional architectural services were rendered other than the
ones under the terms of the Contract. On the other hand, petitioner anchors its claim to additional
professional fees, not on any change in services rendered, but on Article IV, and paragraph 5 of Article
V, of the Contract, supra.
The very terminologies used in the Contract call for affirmative relief in petitioner's favor.
Under Article IV of said Contract, petitioner was to be entitled to seven (7%) of the "actual construction
cost." Under paragraphs 1, 2, 3, and 4, Article V, periodic payments were to be based on a
"reasonable estimated construction cost." ultimately, under paragraph 5, Article V, the balance of the
professional fee was to be computed on the basis of "the final actual project cost."

4. Upon completion of the contract document services but not more than 15 days
after submission of the contract document to the Authority, a sum equivalent to
25% of the professional fee as stated in Art. IV, shall be paid computed on the
same basis as above.

The use of the terms "actual construction cost", gradating into "final actual project cost" is not without
significance. The real intendment of the parties, as shown by paragraph 5, Article V, of their Contract
was to base the ultimate balance of petitioner's professional fees not on "actual construction cost"
alone but on the final actual project cost; not on "construction cost" alone but on "project cost." By so
providing, the Contract allowed for flexibility based on actuality and as a matter of equity for the
contracting parties. For evidently, the final actual project cost would not necessarily tally with the actual
construction cost initially computed. The "final actual project cost" covers the totality of all costs as
actually and finally determined, and logically includes the escalation cost of the contract price.

5. Upon completion of the work and acceptance thereof by the Authority, the
balance of the professional fee, computed on the final actual project cost shall be
paid. (Emphasis supplied)

It matters not that the price escalation awarded to the construction company did not entail additional
work for petitioner. As a matter of fact, neither did it for the main contractor. The increased cost of
materials was not the doing of either contracting party.

1
CIVIL LAW REVIEW 2

That an escalation clause was not specifically provided for in the Contract is of no moment either for it
may be considered as already "built-in" and understood from the very terms "actual construction cost,"
and eventually "final actual project cost."
Article VI of the Contract, supra, has no bearing on the present controversy either. It speaks of any
major change in the planning and engineering aspects necessitating the award and payment of
additional compensation. Admittedly, there was no additional work by petitioner, which required
additional compensation. Rather, petitioner's claim is for payment of the balance of its professional
fees based on the "final actual project cost" and not for additional compensation based on Article VI.
The terminologies in the contract being clear, leaving no doubt as to the intention of the contracting
parties, their literal meaning control (Article 1370, Civil Code). The price escalation cost must be
deemed included in the final actual project cost and petitioner held entitled to the payment of its
additional professional fees. Obligations arising from contract have the force of law between the
contracting parties and should be complied with in good faith (Article 11 59, Civil Code).
WHEREFORE, the ruling of respondent Commission on Audit is hereby SET ASIDE and respondent
Philippines Tourism Authority is hereby ordered to pay petitioner the additional amount of P219,302.47
to complete the payment of its professional fee under their Contract for Project Design and
Management Services.
SO ORDERED.

G.R. No. 140047

July 13, 2004

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,

vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST
INTEGRATED BONDING AND INSURANCE COMPANY, INC., respondents.
This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi
Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in
Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906
and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation1
(hereinafter Philguarantee) sought reimbursement from the respondents of the sum of money it paid to
Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc.
(VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and
Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical TherapyMedical
Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and
Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce
for a total contract price of ID5,416,089/046 (or about US$18,739,668).2

into a joint venture agreement with Ajyal wherein the former undertook the execution of the entire
Project, while the latter would be entitled to a commission of 4% of the contract price. 3 Later, or on 8
April 1981, respondent 3-Plex, not being accredited by or registered with the Philippine Overseas
Construction Board (POCB), assigned and transferred all its rights and interests under the joint venture
agreement to VPECI, a construction and engineering firm duly registered with the POCB.4 However, on
2 May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project would be
under their joint management.5
The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5%
of the total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the
advance payment to be released upon signing of the contract.6 To comply with these requirements,
respondents 3-Plex and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a
government financial institution empowered to issue guarantees for qualified Filipino contractors to
secure the performance of approved service contracts abroad.7
Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8 were
issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and
advance payment bonds, but they were not accepted by SOB. What SOB required was a letterguarantee from Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a performance
bond in favor of SOB on the condition that another foreign bank, not Philguarantee, would issue a
counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a
counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from the
petitioner. Thus, three layers of guarantees had to be arranged.9
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al
Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the amount
of ID271,808/610 and Letter of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in the
amount of ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters of
guarantee were secured by (1) a Deed of Undertaking12 executed by respondents VPECI, Spouses
Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada
Santos; and (2) a surety bond13 issued by respondent First Integrated Bonding and Insurance
Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the amount
of coverage from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner's
guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract15 for the
construction of the Institute of Physical Therapy Medical Rehabilitation Center, Phase II, in Baghdad,
Iraq, wherein the joint venture contractor undertook to complete the Project within a period of 547 days
or 18 months. Under the Contract, the Joint Venture would supply manpower and materials, and SOB
would refund to the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the
exchange rate of 1 Dinar to 3.37777 US Dollars.16
The construction, which was supposed to start on 2 June 1981, commenced only on the last week of
August 1981. Because of this delay and the slow progress of the construction work due to some
setbacks and difficulties, the Project was not completed on 15 November 1982 as scheduled. But in
October 1982, upon foreseeing the impossibility of meeting the deadline and upon the request of Al
Ahli Bank, the joint venture contractor worked for the renewal or extension of the Performance Bond
and Advance Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-F (Performance
Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then
renewed or extended to 9 February 1983 and 9 March 1983, respectively.17 The surety bond was also
extended for another period of one year, from 12 May 1982 to 12 May 1983.18 The Performance Bond
was further extended twelve times with validity of up to 8 December 1986,19 while the Advance
Payment Guarantee was extended three times more up to 24 May 1984 when the latter was cancelled
after full refund or reimbursement by the joint venture contractor.20 The surety bond was likewise
extended to 8 May 1987.21

On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex
International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered
2
CIVIL LAW REVIEW 2

As of March 1986, the status of the Project was 51% accomplished, meaning the structures were
already finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary
works, which both required importation of equipment and materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment
of its performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq
Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the
performance guarantee for being a drastic action in contravention of its mutual agreement with the
latter that (1) the imposition of penalty would be held in abeyance until the completion of the project;
and (2) the time extension would be open, depending on the developments on the negotiations for a
foreign loan to finance the completion of the project.23 It also wrote SOB protesting the call for lack of
factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi government's
lack of foreign exchange with which to pay its (VPECI's) accomplishments and (2) SOB's
noncompliance for the past several years with the provision in the contract that 75% of the billings
would be paid in US dollars.24 Subsequently, or on 19 November 1986, respondent VPECI advised the
petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the amicable settlement of
the Project.25
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had
already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding
reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related
expenses.26
Both petitioner Philguarantee and respondent VPECI sought the assistance of some government
agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in
abeyance the payment by the petitioner "to allow the diplomatic machinery to take its course, for
otherwise, the Philippine government , through the Philguarantee and the Central Bank, would become
instruments of the Iraqi Government in consummating a clear act of injustice and inequity committed
against a Filipino contractor."27
On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of
US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the
performance counter-guarantee for VPECI's project in Iraq. 28

execution of the Project. Considering the Project owner's violations of the contract which rendered
impossible the joint venture contractor's performance of its undertaking, no valid call on the guarantee
could be made. Furthermore, the trial court held that no valid notice was first made by the Project
owner SOB to the joint venture contractor before the call on the guarantee. Accordingly, it dismissed
the complaint, as well as the counterclaims and cross-claim, and ordered the petitioner to pay
attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and
the Santos Spouses, plus costs. 33
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as
follows:
First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to 1985,
having sent some of its people to Baghdad during that period. The successive
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the SOB
(project owner) which had not anyway complied with its contractual commitment to tender
75% of payment in US Dollars, and which still retained overdue amounts collectible by
VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its
contractual undertakings with VPECI, principally, the payment of foreign currency (US$) for
75% of the total contract price, as well as of the complications and injustice that will result
from its payment of the full amount of the performance guarantee, as evident in
PHILGUARANTEE's letter dated 13 May 1987 .

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and
there was still an amount collectible from and still being retained by the project owner, which
amount can be set-off with the sum covered by the performance guarantee.

On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank,
and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the
advances made on its counter-guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988. 30
Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest
and penalty charges demanded by the latter bank.31
On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the
amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant
to their joint and solidary obligations under the deed of undertaking and surety bond.32 When the
respondents failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of
money against the respondents before the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of
action against the respondents. It opined that at the time the call was made on the guarantee which
was executed for a specific period, the guarantee had already lapsed or expired. There was no valid
renewal or extension of the guarantee for failure of the petitioner to secure respondents' express
consent thereto. The trial court also found that the joint venture contractor incurred no delay in the

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of
the war situation at the time in Iraq, appellant, though earlier has made representations with
the SOB regarding a possible amicable termination of the Project as suggested by VPECI,
made a complete turn-around and insisted on acting in favor of the unjustified "call" by the
foreign banks.35
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of
Appeals erred in affirming the trial court's ruling that
I
RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF
ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.
II
3

CIVIL LAW REVIEW 2

PETITIONER CANNOT CLAIM SUBROGATION.

III
IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE
UNDER THEIR DEED OF UNDERTAKING.36
The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under
Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking
and surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable
the nature and extent of its liability are analogous to those of suretyship. Its liability accrued upon the
failure of the respondents to finish the construction of the Institute of Physical Therapy Buildings in
Baghdad.
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the
principal debtor, the contract is called suretyship. 37
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to
both. In both contracts, there is a promise to answer for the debt or default of another. However, in this
jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the same instrument executed at the same
time and on the same consideration. On the other hand, the contract of guaranty is the
guarantor's own separate undertaking often supported by a consideration separate from that
supporting the contract of the principal; the original contract of his principal is not his
contract.
2. A surety assumes liability as a regular party to the undertaking; while the liability of a
guarantor is conditional depending on the failure of the primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a guarantor is
charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is
not bound to take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to
the principal or by want of notice of the default of the principal, no matter how much he may
be injured thereby. A guarantor is often discharged by the mere indulgence of the creditor to
the principal, and is usually not liable unless notified of the default of the principal. 38
In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which
provides in part as follows:
In consideration of your issuing the above performance guarantee/counter-guarantee, we
hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay
you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand

Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the
performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy
Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related
thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation
unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest
and other incidental expenses. (Emphasis supplied)39
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual
milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling that the
petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional
and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its
subsidiary and conditional quality because it does not take effect until the fulfillment of the condition,
namely, that the principal obligor should fail in his obligation at the time and in the form he bound
himself.40 In other words, an unconditional guarantee is still subject to the condition that the principal
debtor should default in his obligation first before resort to the guarantor could be had. A conditional
guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous
event, beyond the mere default of the principal, and generally upon notice of the principal's default and
reasonable diligence in exhausting proper remedies against the principal.41
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by
respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of
an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner's
guaranty is unconditional does not make it a surety. Besides, surety is never presumed. A party should
not be considered a surety where the contract itself stipulates that he is acting only as a guarantor. It is
only when the guarantor binds himself solidarily with the principal debtor that the contract becomes one
of suretyship.42
Having determined petitioner's liability as guarantor, the next question we have to grapple with is
whether the respondent contractor has defaulted in its obligations that would justify resort to the
guaranty. This is a mixed question of fact and law that is better addressed by the lower courts, since
this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals
are binding or conclusive upon this Court unless they are not supported by the evidence or unless
strong and cogent reasons dictate otherwise.43 The factual findings of the Court of Appeals are
normally not reviewable by us under Rule 45 of the Rules of Court except when they are at variance
with those of the trial court. 44 The trial court and the Court of Appeals were in unison that the
respondent contractor cannot be considered to have defaulted in its obligations because the cause of
the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the respondent contractor has
defaulted in the performance of its obligations under the service contract. The question of whether
there is a breach of an agreement, which includes default or mora,45 pertains to the essential or
intrinsic validity of a contract. 46
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule
followed by most legal systems, however, is that the intrinsic validity of a contract must be governed by
the lex contractus or "proper law of the contract." This is the law voluntarily agreed upon by the parties
(the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex loci
intentionis). The law selected may be implied from such factors as substantial connection with the
transaction, or the nationality or domicile of the parties.47 Philippine courts would do well to adopt the
first and most basic rule in most legal systems, namely, to allow the parties to select the law applicable
to their contract, subject to the limitation that it is not against the law, morals, or public policy of the
forum and that the chosen law must bear a substantive relationship to the transaction. 48
4

CIVIL LAW REVIEW 2

It must be noted that the service contract between SOB and VPECI contains no express choice of the
law that would govern it. In the United States and Europe, the two rules that now seem to have
emerged as "kings of the hill" are (1) the parties may choose the governing law; and (2) in the absence
of such a choice, the applicable law is that of the State that "has the most significant relationship to the
transaction and the parties."49 Another authority proposed that all matters relating to the time, place,
and manner of performance and valid excuses for non-performance are determined by the law of the
place of performance or lex loci solutionis, which is useful because it is undoubtedly always connected
to the contract in a significant way.50

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq
and therefore have to be imported;
5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of
Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using
Iraqui Dinars as medium of acquisition.

In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is
the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether respondent
VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign
law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as
the processual presumption, comes into play. Where foreign law is not pleaded or, even if pleaded, is
not proved, the presumption is that foreign law is the same as ours.51
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations,
neither party incurs in delay if the other party does not comply or is not ready to comply in a proper
manner with what is incumbent upon him."
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a
cause imputable to the former. 52 It is the non-fulfillment of an obligation with respect to time.53
It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished
portion consisted in the purchase and installation of electro-mechanical equipment and materials,
which were available from foreign suppliers, thus requiring US Dollars for their importation. The
monthly billings and payments made by SOB54 reveal that the agreement between the parties was a
periodic payment by the Project owner to the contractor depending on the percentage of
accomplishment within the period. 55 The payments were, in turn, to be used by the contractor to
finance the subsequent phase of the work. 56 However, as explained by VPECI in its letter to the
Department of Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the
completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of
the Contractor purely in Iraqi Dinars and which payment came only after some delays.

8. Following the approved construction program of the CONTRACT, upon completion of the
civil works portion of the installation of equipment for the building, should immediately follow,
however, the CONTRACT specified that these equipment which are to be installed and to
form part of the PROJECT have to be procured outside Iraq since these are not being
locally manufactured. Copy f the relevant portion of the Technical Specification is hereto
attached as Annex "C" and made an integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi
government in completing the PROJECT, the Contractor without any obligation on its part to
do so but with the knowledge and consent of SOB and the Ministry of Housing &
Construction of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through
the facilities of Circle International S.A., the Contractor's Sub-contractor and SACE MEDIO
CREDITO which will act as the guarantor for this foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB
is informed of the developments of this negotiation, attached is a copy of the draft of the
loan Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender,
and counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito)
Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione (Sace). Negotiations
went on and continued until it suddenly collapsed due to the reported default by Iraq in the
payment of its obligations with Italian government, copy of the news clipping dated June 18,
1986 is hereto attached as Annex "D" to form an integral part hereof;
15. On September 15, 1986, Contractor received information from Circle International S.A.
that because of the news report that Iraq defaulted in its obligations with European banks,
the approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of
the letter of Circle International together with the news clippings are hereto attached as
Annexes "F" and "F-1", respectively.57

5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency
(US$), to finance the purchase of various equipment, materials, supplies, tools and to pay
for the cost of project management, supervision and skilled labor not available in Iraq and
therefore have to be imported and or obtained from the Philippines and other sources
outside Iraq.
5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance
into the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be
used to purchase equipment, materials, supplies, etc. outside of Iraq;

As found by both the Court of Appeals and the trial court, the delay or the non-completion of the
Project was caused by factors not imputable to the respondent contractor. It was rather due mainly to
the persistent violations by SOB of the terms and conditions of the contract, particularly its failure to
pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract does
not perform in a proper manner the prestation which he is bound to perform under the contract, he is
not entitled to demand the performance of the other party. A party does not incur in delay if the other
party fails to perform the obligation incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi
Dinars did not render impossible the performance of the Project by VPECI. Such posture is quite
contrary to its previous representations. In his 26 March 1987 letter to the Office of the Middle Eastern
and African Affairs (OMEAA), DFA, Manila, petitioner's Executive Vice-President Jesus M. Taedo
stated that while VPECI had taken every possible measure to complete the Project, the war situation in
Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus:
5

CIVIL LAW REVIEW 2

VPECI has taken every possible measure for the completion of the project but the war
situation in Iraq particularly the lack of foreign exchange is proving to be a great obstacle.
Our performance counterguarantee was called last 26 October 1986 when the negotiations
for a foreign currency loan with the Italian government through Banco de Roma bogged
down following news report that Iraq has defaulted in its obligation with major European
banks. Unless the situation in Iraq is improved as to allay the bank's apprehension, there is
no assurance that the project will ever be completed. 58
In order that the debtor may be in default it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and
(3) that the creditor requires the performance because it must appear that the tolerance or
benevolence of the creditor must have ended. 59
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet
itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the
Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that
there was delay and that the delay was attributable to VPECI, still the effects of that delay ceased upon
the renunciation by the creditor, SOB, which could be implied when the latter granted several
extensions of time to the former. 60 Besides, no demand has yet been made by SOB against the
respondent contractor. Demand is generally necessary even if a period has been fixed in the
obligation. And default generally begins from the moment the creditor demands judicially or extrajudicially the performance of the obligation. Without such demand, the effects of default will not arise.61
Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be
compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and
all legal remedies against the said debtor have been resorted to by the creditor.62 It could also set up
compensation as regards what the creditor SOB may owe the principal debtor VPECI.63 In this case,
however, the petitioner has clearly waived these rights and remedies by making the payment of an
obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal
debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had
collectibles from SOB which could be set off with the amount covered by the performance guarantee.
In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of
the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry
of Foreign Affairs stating that the past due obligations of the joint venture contractor from the petitioner
would "be deducted from the dues of the two contractors."64
Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner
raised as among the arguments to be presented in support of the cancellation of the counter-guarantee
the fact that the amount of ID281,414/066 retained by SOB from the Project was more than enough to
cover the counter-guarantee of ID271,808/610; thus:

In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it
should have set up compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13
May 1987 letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of the project was mainly due to
SOB's violation of contract terms and as such, call on the guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity committed
against a Filipino contractor. It is for this reason that we are constrained to seek your
assistance not only in ascertaining the veracity of Al Ahli Bank's claim that it has paid
Rafidain Bank but possibly averting such an event. As any payment effected by the banks
will complicate matters, we cannot help underscore the urgency of VPECI's bid for
government intervention for the amicable termination of the contract and release of the
performance guarantee. 66
But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's
outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded by
the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount of the
performance bond counter-guarantee but also interests and penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the
respondents for what it has paid under Letter of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would be legally
subrogated to the rights which the creditor has against the debtor.68 However, a person who makes
payment without the knowledge or against the will of the debtor has the right to recover only insofar as
the payment has been beneficial to the debtor.69 If the obligation was subject to defenses on the part of
the debtor, the same defenses which could have been set up against the creditor can be set up against
the paying guarantor.70
From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the
petitioner guarantor did not in any way benefit the principal debtor, given the project status and the
conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found to
have valid defenses against SOB, which are fully supported by evidence and which have been
meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of
undertaking and the surety bond secured petitioner's guaranty, the petitioner is precluded from
enforcing the same by reason of the petitioner's undue payment on the guaranty. Rights under the
deed of undertaking and the surety bond do not arise because these contracts depend on the validity
of the enforcement of the guaranty.

6.1 Present the following arguments in cancelling the counterguarantee:

The Iraqi Government does not have the foreign exchange to fulfill its
contractual obligations of paying 75% of progress billings in US dollars.

It could also be argued that the amount of ID281,414/066 retained by SOB from
the proposed project is more than the amount of the outstanding
counterguarantee.65

The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI
should have, in the first place, defaulted in its obligation and that the creditor SOB should have first
made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in whole
or in part, that the guarantor should pay.71 When the petitioner guarantor in this case paid against the
will of the debtor VPECI, the debtor VPECI may set up against it defenses available against the
creditor SOB at the time of payment. This is the hard lesson that the petitioner must learn.
As the government arm in pursuing its objective of providing "the necessary support and assistance in
order to enable [Filipino exporters and contractors to operate viably under the prevailing economic
and business conditions,"72 the petitioner should have exercised prudence and caution under the
circumstances. As aptly put by the Court of Appeals, it would be the height of inequity to allow the
6

CIVIL LAW REVIEW 2

petitioner to pass on its losses to the Filipino contractor VPECI which had sternly warned against
paying the Al Ahli Bank and constantly apprised it of the developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision
of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was
included in the agreement of the parties because the term "deep well" was mentioned in both
proposals. It also gave credence to the testimony of respondent's witness Guillermo Pili, the proprietor
of SPGMI which installed the deep well, that petitioner Tanguilig told him that the cost of constructing
the deep well would be deducted from the contract price of P60,000.00. Upon these premises the
appellate court concluded that respondent's payment of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively extinguishing his contractual obligation. However, it
rejected petitioner's claim of force majeure and ordered the latter to reconstruct the windmill in
accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief
from this Court. He raises two issues: firstly, whether the agreement to construct the windmill system
included the installation of a deep well and, secondly, whether petitioner is under obligation to
reconstruct the windmill after it collapsed.

G.R. No. 117190 January 2, 1997

We reverse the appellate court on the first issue but sustain it on the second.
JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
GENERAL MERCHANDISING, petitioner,
vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.
This case involves the proper interpretation of the contract entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J.M.T.
Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to construct a
windmill system for him. After some negotiations they agreed on the construction of the windmill for a
consideration of P60,000.00 with a one-year guaranty from the date of completion and acceptance by
respondent Herce Jr. of the project. Pursuant to the agreement respondent paid petitioner a down
payment of P30,000.00 and an installment payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a
complaint to collect the amount. In his Answer before the trial court respondent denied the claim saying
that he had already paid this amount to the San Pedro General Merchandising Inc. (SPGMI) which
constructed the deep well to which the windmill system was to be connected. According to respondent,
since the deep well formed part of the system the payment he tendered to SPGMI should be credited
to his account by petitioner. Moreover, assuming that he owed petitioner a balance of P15,000.00, this
should be offset by the defects in the windmill system which caused the structure to collapse after a
strong wind hit their place. 1
Petitioner denied that the construction of a deep well was included in the agreement to build the
windmill system, for the contract price of P60,000.00 was solely for the windmill assembly and its
installation, exclusive of other incidental materials needed for the project. He also disowned any
obligation to repair or reconstruct the system and insisted that he delivered it in good and working
condition to respondent who accepted the same without protest. Besides, its collapse was attributable
to a typhoon, a force majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the deep well was not part of the
windmill project as evidenced clearly by the letter proposals submitted by petitioner to respondent. 2 It
noted that "[i]f the intention of the parties is to include the construction of the deep well in the project,
the same should be stated in the proposals. In the absence of such an agreement, it could be safely
concluded that the construction of the deep well is not a part of the project undertaken by the plaintiff."
3
With respect to the repair of the windmill, the trial court found that "there is no clear and convincing
proof that the windmill system fell down due to the defect of the construction." 4

The preponderance of evidence supports the finding of the trial court that the installation of a deep well
was not included in the proposals of petitioner to construct a windmill system for respondent. There
were in fact two (2) proposals: one dated 19 May 1987 which pegged the contract price at P87,000.00
(Exh. "1"). This was rejected by respondent. The other was submitted three days later, i.e., on 22 May
1987 which contained more specifications but proposed a lower contract price of P60,000.00 (Exh.
"A"). The latter proposal was accepted by respondent and the construction immediately followed. The
pertinent portions of the first letter-proposal (Exh. "1") are reproduced hereunder
In connection with your Windmill System and Installation, we would like to quote to you as
follows:
One (1) Set Windmill suitable for 2 inches diameter deepwell, 2 HP,
capacity, 14 feet in diameter, with 20 pieces blade, Tower 40 feet
high, including mechanism which is not advisable to operate during
extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor Materials and Installation,
operated water pump, we would like to quote to you as
follows
One (1) set Windmill assembly for 2 inches or 3 inches deep-well
pump, 6 Stroke, 14 feet diameter, 1-lot blade materials, 40 feet Tower
complete with standard appurtenances up to Cylinder pump, shafting
U.S. adjustable International Metal.
One (1) lot Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate
valve, cross Tee coupling.
One (1) lot Float valve.
One (1) lot Concreting materials foundation.
7

CIVIL LAW REVIEW 2

F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither
is there an itemization or description of the materials to be used in constructing the deep well. There is
absolutely no mention in the two (2) documents that a deep well pump is a component of the proposed
windmill system. The contract prices fixed in both proposals cover only the features specifically
described therein and no other. While the words "deep well" and "deep well pump" are mentioned in
both, these do not indicate that a deep well is part of the windmill system. They merely describe the
type of deep well pump for which the proposed windmill would be suitable. As correctly pointed out by
petitioner, the words "deep well" preceded by the prepositions "for" and "suitable for" were meant only
to convey the idea that the proposed windmill would be appropriate for a deep well pump with a
diameter of 2 to 3 inches. For if the real intent of petitioner was to include a deep well in the agreement
to construct a windmill, he would have used instead the conjunctions "and" or "with." Since the terms of
the instruments are clear and leave no doubt as to their meaning they should not be disturbed.

petitioner and Guillermo Pili and/or SPGMI has been established regarding the construction of the
deep well. Specifically, witness Pili did not testify that he entered into a contract with petitioner for the
construction of respondent's deep well. If SPGMI was really commissioned by petitioner to construct
the deep well, an agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned effectively belie
respondent's assertions. These circumstances only show that the construction of the well by
SPGMI was for the sole account of respondent and that petitioner merely supervised the
installation of the well because the windmill was to be connected to it. There is no legal nor
factual basis by which this Court can impose upon petitioner an obligation he did not
expressly assume nor ratify.

Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be
accorded primordial consideration 5 and, in case
of doubt, their contemporaneous and subsequent acts shall be principally considered. 6 An examination
of such contemporaneous and subsequent acts of respondent as well as the attendant circumstances
does not persuade us to uphold him.

The second issue is not a novel one. In a long line of cases 11 this Court has consistently
held that in order for a party to claim exemption from liability by reason of fortuitous event
under Art. 1174 of the Civil Code the event should be the sole and proximate cause of the
loss or destruction of the object of the contract. In Nakpil vs. Court of Appeals, 12 four (4)
requisites must concur: (a) the cause of the breach of the obligation must be independent of
the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the
event must be such as to render it impossible for the debtor to fulfill his obligation in a
normal manner; and, (d) the debtor must be free from any participation in or aggravation of
the injury to the creditor.

Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the
installation of a deep well pump. He contends that since petitioner did not have the capacity to install
the pump the latter agreed to have a third party do the work the cost of which was to be deducted from
the contract price. To prove his point, he presented Guillermo Pili of SPGMI who declared that
petitioner Tanguilig approached him with a letter from respondent Herce Jr. asking him to build a deep
well pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig." 7

Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous
event. Interestingly, the evidence does not disclose that there was actually a typhoon on the
day the windmill collapsed. Petitioner merely stated that there was a "strong wind." But a
strong wind in this case cannot be fortuitous unforeseeable nor unavoidable. On the
contrary, a strong wind should be present in places where windmills are constructed,
otherwise the windmills will not turn.

We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a
letter is unsubstantiated. The alleged letter was never presented in court by private respondent for
reasons known only to him. But granting that this written communication existed, it could not have
simply contained a request for Pili to install a deep well; it would have also mentioned the party who
would pay for the undertaking. It strains credulity that respondent would keep silent on this matter and
leave it all to petitioner Tanguilig to verbally convey to Pili that the deep well was part of the windmill
construction and that its payment would come from the contract price of P60,000.00.

The appellate court correctly observed that "given the newly-constructed windmill system,
the same would not have collapsed had there been no inherent defect in it which could only
be attributable to the appellee." 13 It emphasized that respondent had in his favor the
presumption that "things have happened according to the ordinary course of nature and the
ordinary habits of life." 14 This presumption has not been rebutted by petitioner.

We find it also unusual that Pili would readily consent to build a deep well the payment for which would
come supposedly from the windmill contract price on the mere representation of petitioner, whom he
had never met before, without a written commitment at least from the former. For if indeed the deep
well were part of the windmill project, the contract for its installation would have been strictly a matter
between petitioner and Pili himself with the former assuming the obligation to pay the price. That it was
respondent Herce Jr. himself who paid for the deep well by handing over to Pili the amount of
P15,000.00 clearly indicates that the contract for the deep well was not part of the windmill project but
a separate agreement between respondent and Pili. Besides, if the price of P60,000.00 included the
deep well, the obligation of respondent was to pay the entire amount to petitioner without prejudice to
any action that Guillermo Pili or SPGMI may take, if any, against the latter. Significantly, when asked
why he tendered payment directly to Pili and not to petitioner, respondent explained, rather lamely, that
he did it "because he has (sic) the money, so (he) just paid the money in his possession." 8
Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear
that "payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it," 9 it does not appear from the record that
Pili and/or SPGMI was so authorized.

Finally, petitioner's argument that private respondent was already in default in the payment
of his outstanding balance of P15,000.00 and hence should bear his own loss, is untenable.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. 15 When the windmill
failed to function properly it became incumbent upon petitioner to institute the proper repairs
in accordance with the guaranty stated in the contract. Thus, respondent cannot be said to
have incurred in delay; instead, it is petitioner who should bear the expenses for the
reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this point that if a
person obliged to do something fails to do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is
directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest
at the legal rate from the date of the filing of the complaint. In return, petitioner is ordered to
"reconstruct subject defective windmill system, in accordance with the one-year guaranty" 16
and to complete the same within three (3) months from the finality of this decision. SO
ORDERED.

Respondent cannot claim the benefit of the law concerning "payments made by a third person." 10 The
Civil Code provisions do not apply in the instant case because no creditor-debtor relationship between
8
CIVIL LAW REVIEW 2

G.R. No. 90926 July 6, 1990

ALEX G. LEE, petitioner,
vs.
HON. SALVADOR P. DE GUZMAN, JR., Regional Trial Court of Makati, Branch 142 and
MOTORCARS, INCORPORATED, respondents.
On November 8, 1983, a free-lance salesman of respondent Motorcars, Inc., (then Delta Motors
Corporation) named Arsenio Tumibay signed in behalf of Domingo Tupaz its Branch Manager in
Makati, a price quotation (Exhibit "A") and delivered to petitioner Alex B. Lee for the sale of one (1) unit
Toyota Corolla Liftback, 1983 model, with the quoted price of P149,700.00 plus miscellaneous
expenses of P10,033.00. On the same date, petitioner Lee as customer, signed the vehicle sales order
(Exhibit "C") The delivery of the subject vehicle was within the month of November, 1983.
In view of such order, petitioner Lee deposited the amount of P1,000.00 on November 10, 1983 as
required in the aforesaid price quotation, to which Tumibay wrote petitioner the information that the
Motorcars Inc., had acknowledged receipt of the delivery receipt for petitioner. Thereupon, on
December 15, 1983, petitioner's counsel, Atty. Doroteo A. Dadal, wrote Mr. Nicolas O. Carranceja, Jr.,
Executive Vice-President of Motorcars, demanding for delivery of the said Toyota car. The respondent
car company replied on December 19, 1983, through its counsel Atty. Benjamin S. Benito, that due to
the sudden change of prices by the car manufacturer, they had decided to exercise the option
contained in the vehicle sales order, (Exhibits "C") which states:
Whenever deposits are made by customers for vehicles, parts and services
ordered, the sales for such vehicles, parts or services shall be at the option of
Motorcars, Inc., and refund of the deposits shall be made upon request and
without undue delay should such option be exercised (p. 21, Rollo)

In this Court's resolution dated August 31, 1987, through the Third Division, the decision appealed from
was affirmed, and the petition was denied. This Court ruled:
The issue of whether or not there was a perfected contract of sale appears to
have been correctly decided by the respondent court. This Court also finds no
reason to disturb the ruling of the respondent court on the factual issue of
whether or not the branch manager could bind the petitioner.
It appearing that the findings of fact of the respondent court are supported by
substantial evidence and there being no showing that its decision is not in accord
with law or jurisprudence, the COURT RESOLVED to DENY the petition. (p. 32,
Rollo)
When the case was remanded to the trial Court, petitioner filed a Motion for Writ of Execution. Instead
of complying with the Order of the court, respondent company filed a motion to quash writ of execution.
Said motion was anchored on the premise that the obligation has become impossible to comply on the
ground that the Delta Motors Corporation has closed shop. Petitioner opposed the quashal of the Writ
of execution and consequently, the motion to quash was denied. An alias writ of execution was filed by
petitioner, but respondent company continued to defy the Order of the Court. Petitioner filed a motion
for contempt of court for the stance of the respondent company was contumacious in nature.
Respondent company filed an opposition thereto reiterating the grounds relied on in the Motion to
quash writ of execution. Respondent trial court issued the questioned Order, dated August 10, 1989,
which was adjudged favorably for the respondent company, which order as alleged by the petition, was
totally at war with the previous order granting the alias writ of execution.
Hence, this petition for certiorari with mandamus.
Two issues are presented by both parties for Our consideration. They are:

The respondent car company thus offered to refund petitioner's deposit of P1,000.00. Part
of the vehicle sales order also reads, viz:
This order is not valid unless signed and accepted by the dealer principal,
President, Executive Vice President or General Sales Manager of the dealership
. . . (supra)
The trial court rendered judgment in favor of respondent car company ruling as follows:
Exhibit "A" is merely a quotation offered by defendant's sales representative.
Exhibit "C", the vehicle sales order, was not signed and accepted by defendant's
President, Executive Vice President, nor its General Sales Manager, hence, not
valid because it exercised the option in Exh. "1" beforestated due to sudden
change of prices by the car manufacturer (Exh. "2"). Exhibit "C" which contains;
Exhibits "1" and "1-A", having been signed by plaintiff binds him alone There was
no perfected contract in accordance with Article 1318, Civil Code. (p. 21, Rollo)
Petitioner was ordered to pay respondent P5,000 for damages and attorney's fees.
Expectedly dissatisfied with the aforesaid court's ruling, petitioner appealed to the Court of Appeals
which reversed the decision appealed from ruling that there was a perfected contract of sale, and that
there was the undisputed signature of one Mr. Domingo Tapas, the branch manager of Motorcars.
Thereupon, the Court of Appeals ordered respondent company to deliver to petitioner the subject
vehicle upon payment by the latter of the amount of P149,700.00 and the amount of P8,833.00 for
Miscellaneous Expenses and/or Incidental Charges. Thus, respondent appealed to this Court,
docketed as G.R. No. 77992.

1. Whether or not the decision rendered by the Court of Appeals and affirmed by
the Supreme Court is capable of performance and can by judiciously executed;
and
2. Whether or not the corporation officers are liable for contempt.
The Court takes notice of the fact that as alleged in the Comment and Memorandum of respondent
company and contained in the questioned order, which is not disputed by the petitioner, that while the
Motion for Contempt was pending before the respondent trial court, petitioner indicated his willingness
to accept a second-hand car but failed to show its availability as the classified ads refer to 1984 Models
and could not be said that they are the same models as what appears in Exhibit "C", the sales order. In
addition, respondent car company even offered the amount of P20,000 as a gesture to buy peace.
It is the contention of the petitioner that the obligation is not impossible for the 1983 Toyota cars are
still available in the market today. It is however the contention of respondent company that the
obligation is impossible for the car manufacturer had closed shop and no longer manufacturing 1983
models of Toyota much less deliver the car specified in Exhibit "C".
The question is, should respondent Motorcars be made liable to fulfill a seemingly impossible
obligation?
It is well-settled that when after a judgment has become final and executory, facts and circumstances
transpire which render its execution impossible or unjust, the interested party may ask a competent
court to stay its execution or prevent its enforcement. 1
9

CIVIL LAW REVIEW 2

We find that respondent Court did not act with grave abuse of discretion in denying the motion for
contempt.
Unfortunately it is not possible for Motorcars to comply with the writ of execution since admittedly, the
then Delta Motors who manufactured 1983 models of Toyota Liftback had already closed shop, but be
this as it may, there is no question that indeed there was a perfected contract of sale between
petitioner Lee and private respondent Motorcars pursuant to this Court's (through the Third Division)
resolution dated August 31, 1987.
The relief left for petitioner Lee is that found under Article 1170 of the Civil Code which provides:
"(T)hose who in the performance of their obligations are guilty of fraud, negligence or delay, and those
who in any manner contravene the tenor thereof, are liable for damages."
The reply letter of private respondent company dated December 19, 1983 which said that "due to the
sudden change of prices by the car manufacturer, they have decided to exercise the option . . ." did not
relieve Motorcars from the contract had entered into with petitioner Lee. There was therefore delay in
the delivery of the subject vehicle which entitles petitioner to be awarded damages. The records show
that the subject vehicle should have been delivered within the month of November, 1983. (Annex C,
Records).
Considering the circumstances attendant to this case, a total amount of damages worth Fifty Thousand
Pesos (P50,000.00) would be reasonable, twenty thousand pesos (P20,000.00) of which as temperate
damages 2 inclusive of attorney's fees and the remaining thirty thousand pesos (P30,000.00) as
exemplary damages. 3
PREMISES CONSIDERED, insofar as the denial of the motion for contempt by the lower court, dated
August 10, 1989 is concerned, the petition for certiorari with mandamus is hereby DISMISSED, but the
respondent is ordered to give to the petitioner the amount of damages adverted to in the next
preceding paragraph.
SO ORDERED.

G.R. No. 115129 February 12, 1997

IGNACIO BARZAGA, petitioner,
vs.
COURT OF APPEALS and ANGELITO ALVIAR, respondents.
The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his family. On the
nineteenth of December Ignacio's wife succumbed to a debilitating ailment after prolonged pain and
suffering. Forewarned by her attending physicians of her impending death, she expressed her wish to
be laid to rest before Christmas day to spare her family from keeping lonely vigil over her remains while
the whole of Christendom celebrate the Nativity of their Redeemer.
Drained to the bone from the tragedy that befell his family yet preoccupied with overseeing the wake
for his departed wife, Ignacio Barzaga set out to arrange for her interment on the twenty-fourth of
December in obedience semper fidelis to her dying wish. But her final entreaty, unfortunately, could not
be carried out. Dire events conspired to block his plans that forthwith gave him and his family their
gloomiest Christmas ever.

This is Barzaga's story. On 21 December 1990, at about three o'clock in the afternoon, he went to the
hardware store of respondent Angelito Alviar to inquire about the availability of certain materials to be
used in the construction of a niche for his wife. He also asked if the materials could be delivered at
once. Marina Boncales, Alviar's storekeeper, replied that she had yet to verify if the store had pending
deliveries that afternoon because if there were then all subsequent purchases would have to be
delivered the following day. With that reply petitioner left.
At seven o'clock the following morning, 22 December, Barzaga returned to Alviar's hardware store to
follow up his purchase of construction materials. He told the store employees that the materials he was
buying would have to be delivered at the Memorial Cemetery in Dasmarinas, Cavite, by eight o'clock
that morning since his hired workers were already at the burial site and time was of the essence.
Marina Boncales agreed to deliver the items at the designated time, date and place. With this
assurance, Barzaga purchased the materials and paid in full the amount of P2,110.00. Thereafter he
joined his workers at the cemetery, which was only a kilometer away, to await the delivery.
The construction materials did not arrive at eight o'clock as promised. At nine o'clock, the delivery was
still nowhere in sight. Barzaga returned to the hardware store to inquire about the delay. Boncales
assured him that although the delivery truck was not yet around it had already left the garage and that
as soon as it arrived the materials would be brought over to the cemetery in no time at all. That left
petitioner no choice but to rejoin his workers at the memorial park and wait for the materials.
By ten o'clock, there was still no delivery. This prompted petitioner to return to the store to inquire
about the materials. But he received the same answer from respondent's employees who even cajoled
him to go back to the burial place as they would just follow with his construction materials.
After hours of waiting which seemed interminable to him Barzaga became extremely upset. He
decided to dismiss his laborers for the day. He proceeded to the police station, which was just nearby,
and lodged a complaint against Alviar. He had his complaint entered in the police blotter. When he
returned again to the store he saw the delivery truck already there but the materials he purchased were
not yet ready for loading. Distressed that Alviar's employees were not the least concerned, despite his
impassioned pleas, Barzaga decided to cancel his transaction with the store and look for construction
materials elsewhere.
In the afternoon of that day, petitioner was able to buy from another store. But since darkness was
already setting in and his workers had left, he made up his mind to start his project the following
morning, 23 December. But he knew that the niche would not be finish in time for the scheduled burial
the following day. His laborers had to take a break on Christmas Day and they could only resume in
the morning of the twenty-sixth. The niche was completed in the afternoon and Barzaga's wife was
finally laid to rest. However, it was two-and-a-half (2-1/2) days behind schedule.
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish, Barzaga wrote
private respondent Alviar demanding recompense for the damage he suffered. Alviar did not respond.
Consequently, petitioner sued him before the Regional Trial Court. 1
Resisting petitioner's claim, private respondent contended that legal delay could not be validly ascribed
to him because no specific time of delivery was agreed upon between them. He pointed out that the
invoices evidencing the sale did not contain any stipulation as to the exact time of delivery and that
assuming that the materials were not delivered within the period desired by petitioner, the delivery
truck suffered a flat tire on the way to the store to pick up the materials. Besides, his men were ready
to make the delivery by ten-thirty in the morning of 22 December but petitioner refused to accept them.
According to Alviar, it was this obstinate refusal of petitioner to accept delivery that caused the delay in
the construction of the niche and the consequent failure of the family to inter their loved one on the
twenty-fourth of December, and that, if at all, it was petitioner and no other who brought about all his
personal woes.

10
CIVIL LAW REVIEW 2

Upholding the proposition that respondent incurred in delay in the delivery of the construction materials
resulting in undue prejudice to petitioner, the trial court ordered respondent Alviar to pay petitioner (a)
P2,110.00 as refund for the purchase price of the materials with interest per annum computed at the
legal rate from the date of the filing of the complaint, (b) P5,000.00 as temperate damages, (c)
P20,000.00 as moral damages, (d) P5,000.00 as litigation expenses, and (e) P5,000.00 as attorney's
fees.
On appeal, respondent Court of Appeals reversed the lower court and ruled that there was no
contractual commitment as to the exact time of delivery since this was not indicated in the invoice
receipts covering the sale. 2
The arrangement to deliver the materials merely implied that delivery should be made within a
reasonable time but that the conclusion that since petitioner's workers were already at the graveyard
the delivery had to be made at that precise moment, is non-sequitur. The Court of Appeals also held
that assuming that there was delay, petitioner still had sufficient time to construct the tomb and hold his
wife's burial as she wished.
We sustain the trial court. An assiduous scrutiny of the record convinces us that respondent Angelito
Alviar was negligent and incurred in delay in the performance of his contractual obligation. This
sufficiently entitles petitioner Ignacio Barzaga to be indemnified for the damage he suffered as a
consequence of delay or a contractual breach. The law expressly provides that those who in the
performance of their obligation are guilty of fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages. 3
Contrary to the appellate court's factual determination, there was a specific time agreed upon for the
delivery of the materials to the cemetery. Petitioner went to private respondent's store on 21 December
precisely to inquire if the materials he intended to purchase could be delivered immediately. But he
was told by the storekeeper that if there were still deliveries to be made that afternoon his order would
be delivered the following day. With this in mind Barzaga decided to buy the construction materials the
following morning after he was assured of immediate delivery according to his time frame. The
argument that the invoices never indicated a specific delivery time must fall in the face of the positive
verbal commitment of respondent's storekeeper. Consequently it was no longer necessary to indicate
in the invoices the exact time the purchased items were to be brought to the cemetery. In fact,
storekeeper Boncales admitted that it was her custom not to indicate the time of delivery whenever she
prepared invoices. 4
Private respondent invokes fortuitous event as his handy excuse for that "bit of delay" in the delivery of
petitioner's purchases. He maintains that Barzaga should have allowed his delivery men a little more
time to bring the construction materials over to the cemetery since a few hours more would not really
matter and considering that his truck had a flat tire. Besides, according to him, Barzaga still had
sufficient time to build the tomb for his wife.
This is a gratuitous assertion that borders on callousness. Private respondent had no right to
manipulate petitioner's timetable and substitute it with his own. Petitioner had a deadline to meet. A
few hours of delay was no piddling matter to him who in his bereavement had yet to attend to other
pressing family concerns. Despite this, respondent's employees still made light of his earnest
importunings for an immediate delivery. As petitioner bitterly declared in court " . . . they (respondent's
employees) were making a fool out of me." 5
We also find unacceptable respondent's justification that his truck had a flat tire, for this event, if indeed
it happened, was forseeable according to the trial court, and as such should have been reasonably
guarded against. The nature of private respondent's business requires that he should be ready at all
times to meet contingencies of this kind. One piece of testimony by respondent's witness Marina
Boncales has caught our attention - that the delivery truck arrived a little late than usual because it
came from a delivery of materials in Langcaan, Dasmarinas, Cavite. 6 Significantly, this information was
withheld by Boncales from petitioner when the latter was negotiating with her for the purchase of
construction materials. Consequently, it is not unreasonable to suppose that had she told petitioner of

this fact and that the delivery of the materials would consequently be delayed, petitioner would not
have bought the materials from respondent's hardware store but elsewhere which could meet his time
requirement. The deliberate suppression of this information by itself manifests a certain degree of bad
faith on the part of respondent's storekeeper.
The appellate court appears to have belittled petitioner's submission that under the prevailing
circumstances time was of the essence in the delivery of the materials to the grave site. However, we
find petitioner's assertion to be anchored on solid ground. The niche had to be constructed at the very
least on the twenty-second of December considering that it would take about two (2) days to finish the
job if the interment was to take place on the twenty-fourth of the month. Respondent's delay in the
delivery of the construction materials wasted so much time that construction of the tomb could start
only on the twenty-third. It could not be ready for the scheduled burial of petitioner's wife. This
undoubtedly prolonged the wake, in addition to the fact that work at the cemetery had to be put off on
Christmas day.
This case is clearly one of non-performance of a reciprocal obligation. 7 In their contract of purchase
and sale, petitioner had already complied fully with what was required of him as purchaser, i.e., the
payment of the purchase price of P2,110.00. It was incumbent upon respondent to immediately fulfill
his obligation to deliver the goods otherwise delay would attach.
We therefore sustain the award of moral damages. It cannot be denied that petitioner and his family
suffered wounded feelings, mental anguish and serious anxiety while keeping watch on Christmas day
over the remains of their loved one who could not be laid to rest on the date she herself had chosen.
There is no gainsaying the inexpressible pain and sorrow Ignacio Barzaga and his family bore at that
moment caused no less by the ineptitude, cavalier behavior and bad faith of respondent and his
employees in the performance of an obligation voluntarily entered into.
We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude of the
employees of respondent over which he exercised supervisory authority indicates gross negligence in
the fulfillment of his business obligations. Respondent Alviar and his employees should have exercised
fairness and good judgment in dealing with petitioner who was then grieving over the loss of his wife.
Instead of commiserating with him, respondent and his employees contributed to petitioner's anguish
by causing him to bear the agony resulting from his inability to fulfill his wife's dying wish.
We delete however the award of temperate damages. Under Art. 2224 of the Civil Code, temperate
damages are more than nominal but less than compensatory, and may be recovered when the court
finds that some pecuniary loss has been suffered but the amount cannot, from the nature of the case,
be proved with certainty. In this case, the trial court found that plaintiff suffered damages in the form of
wages for the hired workers for 22 December 1990 and expenses incurred during the extra two (2)
days of the wake. The record however does not show that petitioner presented proof of the actual
amount of expenses he incurred which seems to be the reason the trial court awarded to him
temperate damages instead. This is an erroneous application of the concept of temperate damages.
While petitioner may have indeed suffered pecuniary losses, these by their very nature could be
established with certainty by means of payment receipts. As such, the claim falls unequivocally within
the realm of actual or compensatory damages. Petitioner's failure to prove actual expenditure
consequently conduces to a failure of his claim. For in determining actual damages, the court cannot
rely on mere assertions, speculations, conjectures or guesswork but must depend on competent proof
and on the best evidence obtainable regarding the actual amount of loss. 8
We affirm the award of attorney's fees and litigation expenses. Award of damages, attorney's fees and
litigation costs is left to the sound discretion of the court, and if such discretion be well exercised, as in
this case, it will not be disturbed on appeal. 9
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE except insofar as
it GRANTED on a motion for reconsideration the refund by private respondent of the amount of
P2,110.00 paid by petitioner for the construction materials. Consequently, except for the award of
P5,000.00 as temperate damages which we delete, the decision of the Regional Trial Court granting
11

CIVIL LAW REVIEW 2

petitioner (a) P2,110.00 as refund for the value of materials with interest computed at the legal rate per
annum from the date of the filing of the case; (b) P20,000.00 as moral damages; (c) P10,000.00 as
exemplary damages; (d) P5,000.00 as litigation expenses; and (4) P5,000.00 as attorney's fees, is
AFFIRMED. No costs.
SO ORDERED.

G.R. No. L-47379 May 16, 1988

NATIONAL POWER CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION, INC., respondents.

The record shows that on November 4,1967, typhoon 'Welming' hit Central
Luzon, passing through defendant's Angat Hydro-electric Project and Dam at lpo,
Norzagaray, Bulacan. Strong winds struck the project area, and heavy rains
intermittently fell. Due to the heavy downpour, the water in the reservoir of the
Angat Dam was rising perilously at the rate of sixty (60) centimeters per hour. To
prevent an overflow of water from the dam, since the water level had reached the
danger height of 212 meters above sea level, the defendant corporation caused
the opening of the spillway gates." (pp. 45-46, L-47379, Rollo)
The appellate court sustained the findings of the trial court that the evidence preponlderantly
established the fact that due to the negligent manner with which the spillway gates of the Angat Dam
were opened, an extraordinary large volume of water rushed out of the gates, and hit the installations
and construction works of ECI at the lpo site with terrific impact, as a result of which the latter's
stockpile of materials and supplies, camp facilities and permanent structures and accessories either
washed away, lost or destroyed.
The appellate court further found that:

G.R. No. L-47481 May 16, 1988

ENGINEERING CONSTRUCTION, INC., petitioner,
vs.
COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents.
These consolidated petitions seek to set aside the decision of the respondent Court of Appeals which
adjudged the National Power Corporation liable for damages against Engineering Construction, Inc.
The appellate court, however, reduced the amount of damages awarded by the trial court. Hence, both
parties filed their respective petitions: the National Power Corporation (NPC) in G.R. No. 47379,
questioning the decision of the Court of Appeals for holding it liable for damages and the Engineering
Construction, Inc. (ECI) in G.R. No. 47481, questioning the same decision for reducing the
consequential damages and attorney's fees and for eliminating the exemplary damages.

It cannot be pretended that there was no negligence or that the appellant

exercised extraordinary care in the opening of the spillway gates of the Angat
Dam. Maintainers of the dam knew very well that it was far more safe to open
them gradually. But the spillway gates were opened only when typhoon Welming
was already at its height, in a vain effort to race against time and prevent the
overflow of water from the dam as it 'was rising dangerously at the rate of sixty
centimeters per hour. 'Action could have been taken as early as November 3,
1967, when the water in the reservoir was still low. At that time, the gates of the
dam could have been opened in a regulated manner. Let it be stressed that the
appellant knew of the coming of the typhoon four days before it actually hit the
project area. (p. 53, L-47379, Rollo)
As to the award of damages, the appellate court held:

The facts are succinctly summarized by the respondent Court of Appeals, as follows:
On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful
bidder, executed a contract in Manila with the National Waterworks and
Sewerage Authority (NAWASA), whereby the former undertook to furnish all
tools, labor, equipment, and materials (not furnished by Owner), and to construct
the proposed 2nd lpo-Bicti Tunnel, Intake and Outlet Structures, and Appurtenant
Structures, and Appurtenant Features, at Norzagaray, Bulacan, and to complete
said works within eight hundred (800) calendar days from the date the Contractor
receives the formal notice to proceed (Exh. A).
The project involved two (2) major phases: the first phase comprising, the tunnel
work covering a distance of seven (7) kilometers, passing through the mountain,
from the Ipo river, a part of Norzagaray, Bulacan, where the Ipo Dam of the
defendant National Power Corporation is located, to Bicti; the other phase
consisting of the outworks at both ends of the tunnel.
By September 1967, the plaintiff corporation already had completed the first
major phase of the work, namely, the tunnel excavation work. Some portions of
the outworks at the Bicti site were still under construction. As soon as the plaintiff
corporation had finished the tunnel excavation work at the Bicti site, all the
equipment no longer needed there were transferred to the Ipo site where some
projects were yet to be completed.

We come now to the award of damages. The appellee submitted a list of

estimated losses and damages to the tunnel project (Ipo side) caused by the
instant flooding of the Angat River (Exh. J-1). The damages were itemized in four
categories, to wit: Camp Facilities P55,700.00; Equipment, Parts and Plant
P375,659.51; Materials P107,175.80; and Permanent Structures and accessories
P137,250.00, with an aggregate total amount of P675,785.31. The list is
supported by several vouchers which were all submitted as Exhibits K to M-38 a,
N to O, P to U-2 and V to X- 60-a (Vide: Folders Nos. 1 to 4). The appellant did
not submit proofs to traverse the aforementioned documentary evidence. We
hold that the lower court did not commit any error in awarding P 675,785.31 as
actual or compensatory damages.
However, We cannot sustain the award of P333,200.00 as consequential
damages. This amount is broken down as follows: P213,200.00 as and for the
rentals of a crane to temporarily replace the one "destroyed beyond repair," and
P120,000.00 as one month bonus which the appellee failed to realize in
accordance with the contract which the appellee had with NAWASA. Said rental
of the crane allegedly covered the period of one year at the rate of P40.00 an
hour for 16 hours a day. The evidence, however, shows that the appellee bought
a crane also a crawler type, on November 10, 1967, six (6) days after the
incident in question (Exh N) And according to the lower court, which finding was
never assailed, the appellee resumed its normal construction work on the IpoBicti Project after a stoppage of only one month. There is no evidence when the
appellee received the crane from the seller, Asian Enterprise Limited. But there
was an agreement that the shipment of the goods would be effected within 60
12

CIVIL LAW REVIEW 2

days from the opening of the letter of credit (Exh. N).<re||an1w> It appearing
that the contract of sale was consummated, We must conclude or at least
assume that the crane was delivered to the appellee within 60 days as stipulated.
The appellee then could have availed of the services of another crane for a
period of only one month (after a work stoppage of one month) at the rate of P
40.00 an hour for 16 hours a day or a total of P 19,200.00 as rental.
But the value of the new crane cannot be included as part of actual damages
because the old was reactivated after it was repaired. The cost of the repair was
P 77,000.00 as shown in item No. 1 under the Equipment, Parts and Plants
category (Exh. J-1), which amount of repair was already included in the actual or
compensatory damages. (pp. 54-56, L-47379, Rollo)
The appellate court likewise rejected the award of unrealized bonus from NAWASA in the amount of
P120,000.00 (computed at P4,000.00 a day in case construction is finished before the specified time,
i.e., within 800 calendar days), considering that the incident occurred after more than three (3) years or
one thousand one hundred seventy (1,170) days. The court also eliminated the award of exemplary
damages as there was no gross negligence on the part of NPC and reduced the amount of attorney's
fees from P50,000.00 to P30,000.00.
In these consolidated petitions, NPC assails the appellate court's decision as being erroneous on the
ground that the destruction and loss of the ECI's equipment and facilities were due to force majeure. It
argues that the rapid rise of the water level in the reservoir of its Angat Dam due to heavy rains brought
about by the typhoon was an extraordinary occurrence that could not have been foreseen, and thus,
the subsequent release of water through the spillway gates and its resultant effect, if any, on ECI's
equipment and facilities may rightly be attributed to force majeure.
On the other hand, ECI assails the reduction of the consequential damages from P333,200.00 to
P19,000.00 on the grounds that the appellate court had no basis in concluding that ECI acquired a new
Crawler-type crane and therefore, it only can claim rentals for the temporary use of the leased crane
for a period of one month; and that the award of P4,000.00 a day or P120,000.00 a month bonus is
justified since the period limitation on ECI's contract with NAWASA had dual effects, i.e., bonus for
earlier completion and liquidated damages for delayed performance; and in either case at the rate of
P4,000.00 daily. Thus, since NPC's negligence compelled work stoppage for a period of one month,
the said award of P120,000.00 is justified. ECI further assailes the reduction of attorney's fees and the
total elimination of exemplary damages.
Both petitions are without merit.
It is clear from the appellate court's decision that based on its findings of fact and that of the trial
court's, petitioner NPC was undoubtedly negligent because it opened the spillway gates of the Angat
Dam only at the height of typhoon "Welming" when it knew very well that it was safer to have opened
the same gradually and earlier, as it was also undeniable that NPC knew of the coming typhoon at
least four days before it actually struck. And even though the typhoon was an act of God or what we
may call force majeure, NPC cannot escape liability because its negligence was the proximate cause
of the loss and damage. As we have ruled in Juan F. Nakpil & Sons v. Court of Appeals, (144 SCRA
596, 606-607):
Thus, if upon the happening of a fortuitous event or an act of God, there concurs
a corresponding fraud, negligence, delay or violation or contravention in any
manner of the tenor of the obligation as provided for in Article 1170 of the Civil
Code, which results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act
must be one occasioned exclusively by the violence of nature and human
agencies are to be excluded from creating or entering into the cause of the

mischief. When the effect, the cause of which is to be considered, is found to be

in part the result of the participation of man, whether it be from active intervention
or neglect, or failure to act, the whole occurrence is thereby humanized, as it
was, and removed from the rules applicable to the acts of God. (1 Corpus Juris,
pp. 1174-1175).
Thus, it has been held that when the negligence of a person concurs with an act
of God in producing a loss, such person is not exempt from liability by showing
that the immediate cause of the damage was the act of God. To be exempt from
liability for loss because of an act of God, he must be free from any previous
negligence or misconduct by which the loss or damage may have been
occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan 49
O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).
Furthermore, the question of whether or not there was negligence on the part of NPC is a question of
fact which properly falls within the jurisdiction of the Court of Appeals and will not be disturbed by this
Court unless the same is clearly unfounded. Thus, in Tolentino v. Court of appeals, (150 SCRA 26, 36)
we ruled:
Moreover, the findings of fact of the Court of Appeals are generally final and
conclusive upon the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA
890 [1983]. In fact it is settled that the Supreme Court is not supposed to weigh
evidence but only to determine its substantially (Nuez v. Sandiganbayan, 100
SCRA 433 [1982] and will generally not disturb said findings of fact when
supported by substantial evidence (Aytona v. Court of Appeals, 113 SCRA 575
[1985]; Collector of Customs of Manila v. Intermediate Appellate Court, 137
SCRA 3 [1985]. On the other hand substantial evidence is defined as such
relevant evidence as a reasonable mind might accept as adequate to support a
conclusion (Philippine Metal Products, Inc. v. Court of Industrial Relations, 90
SCRA 135 [1979]; Police Commission v. Lood, 127 SCRA 757 [1984]; Canete v.
WCC, 136 SCRA 302 [1985])
Therefore, the respondent Court of Appeals did not err in holding the NPC liable for damages.
Likewise, it did not err in reducing the consequential damages from P333,200.00 to P19,000.00. As
shown by the records, while there was no categorical statement or admission on the part of ECI that it
bought a new crane to replace the damaged one, a sales contract was presented to the effect that the
new crane would be delivered to it by Asian Enterprises within 60 days from the opening of the letter of
credit at the cost of P106,336.75. The offer was made by Asian Enterprises a few days after the flood.
As compared to the amount of P106,336.75 for a brand new crane and paying the alleged amount of
P4,000.00 a day as rental for the use of a temporary crane, which use petitioner ECI alleged to have
lasted for a period of one year, thus, totalling P120,000.00, plus the fact that there was already a sales
contract between it and Asian Enterprises, there is no reason why ECI should opt to rent a temporary
crane for a period of one year. The appellate court also found that the damaged crane was
subsequently repaired and reactivated and the cost of repair was P77,000.00. Therefore, it included
the said amount in the award of of compensatory damages, but not the value of the new crane. We do
not find anything erroneous in the decision of the appellate court that the consequential damages
should represent only the service of the temporary crane for one month. A contrary ruling would result
in the unjust enrichment of ECI.
The P120,000.00 bonus was also properly eliminated as the same was granted by the trial court on the
premise that it represented ECI's lost opportunity "to earn the one month bonus from NAWASA ... ." As
stated earlier, the loss or damage to ECI's equipment and facilities occurred long after the stipulated
deadline to finish the construction. No bonus, therefore, could have been possibly earned by ECI at
that point in time. The supposed liquidated damages for failure to finish the project within the stipulated
13

CIVIL LAW REVIEW 2

period or the opposite of the claim for bonus is not clearly presented in the records of these petitions. It
is not shown that NAWASA imposed them.
As to the question of exemplary damages, we sustain the appellate court in eliminating the same since
it found that there was no bad faith on the part of NPC and that neither can the latter's negligence be
considered gross. In Dee Hua Liong Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we
ruled:
Neither may private respondent recover exemplary damages since he is not
entitled to moral or compensatory damages, and again because the petitioner is
not shown to have acted in a wanton, fraudulent, reckless or oppressive manner
(Art. 2234, Civil Code; Yutuk v. Manila Electric Co., 2 SCRA 377; Francisco v.
Government Service Insurance System, 7 SCRA 577; Gutierrez v. Villegas, 8
SCRA 527; Air France v. Carrascoso, 18 SCRA 155; Pan Pacific (Phil.) v. Phil.
Advertising Corp., 23 SCRA 977; Marchan v. Mendoza, 24 SCRA 888).
We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There are no
compelling reasons why we should set aside the appellate court's finding that the latter amount suffices
for the services rendered by ECI's counsel.
WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED for LACK
OF MERIT. The decision appealed from is AFFIRMED.
SO ORDERED.

G.R. No. L-12219

yet exhibited fright, and the rider had made no sign for the automobile to stop. Seeing that the pony
was apparently quiet, the defendant, instead of veering to the right while yet some distance away or
slowing down, continued to approach directly toward the horse without diminution of speed. When he
had gotten quite near, there being then no possibility of the horse getting across to the other side, the
defendant quickly turned his car sufficiently to the right to escape hitting the horse alongside of the
railing where it as then standing; but in so doing the automobile passed in such close proximity to the
animal that it became frightened and turned its body across the bridge with its head toward the railing.
In so doing, it as struck on the hock of the left hind leg by the flange of the car and the limb was
broken. The horse fell and its rider was thrown off with some violence. From the evidence adduced in
the case we believe that when the accident occurred the free space where the pony stood between the
automobile and the railing of the bridge was probably less than one and one half meters. As a result of
its injuries the horse died. The plaintiff received contusions which caused temporary unconsciousness
and required medical attention for several days.
The question presented for decision is whether or not the defendant in maneuvering his car in the
manner above described was guilty of negligence such as gives rise to a civil obligation to repair the
damage done; and we are of the opinion that he is so liable. As the defendant started across the
bridge, he had the right to assume that the horse and the rider would pass over to the proper side; but
as he moved toward the center of the bridge it was demonstrated to his eyes that this would not be
done; and he must in a moment have perceived that it was too late for the horse to cross with safety in
front of the moving vehicle. In the nature of things this change of situation occurred while the
automobile was yet some distance away; and from this moment it was not longer within the power of
the plaintiff to escape being run down by going to a place of greater safety. The control of the situation
had then passed entirely to the defendant; and it was his duty either to bring his car to an immediate
stop or, seeing that there were no other persons on the bridge, to take the other side and pass
sufficiently far away from the horse to avoid the danger of collision. Instead of doing this, the defendant
ran straight on until he was almost upon the horse. He was, we think, deceived into doing this by the
fact that the horse had not yet exhibited fright. But in view of the known nature of horses, there was an
appreciable risk that, if the animal in question was unacquainted with automobiles, he might get exited
and jump under the conditions which here confronted him. When the defendant exposed the horse and
rider to this danger he was, in our opinion, negligent in the eye of the law.

March 15, 1918

AMADO PICART, plaintiff-appellant,

vs.
FRANK SMITH, JR., defendant-appellee.
In this action the plaintiff, Amado Picart, seeks to recover of the defendant, Frank Smith, jr., the sum of
P31,000, as damages alleged to have been caused by an automobile driven by the defendant. From a
judgment of the Court of First Instance of the Province of La Union absolving the defendant from
liability the plaintiff has appealed.
The occurrence which gave rise to the institution of this action took place on December 12, 1912, on
the Carlatan Bridge, at San Fernando, La Union. It appears that upon the occasion in question the
plaintiff was riding on his pony over said bridge. Before he had gotten half way across, the defendant
approached from the opposite direction in an automobile, going at the rate of about ten or twelve miles
per hour. As the defendant neared the bridge he saw a horseman on it and blew his horn to give
warning of his approach. He continued his course and after he had taken the bridge he gave two more
successive blasts, as it appeared to him that the man on horseback before him was not observing the
rule of the road.
The plaintiff, it appears, saw the automobile coming and heard the warning signals. However, being
perturbed by the novelty of the apparition or the rapidity of the approach, he pulled the pony closely up
against the railing on the right side of the bridge instead of going to the left. He says that the reason he
did this was that he thought he did not have sufficient time to get over to the other side. The bridge is
shown to have a length of about 75 meters and a width of 4.80 meters. As the automobile approached,
the defendant guided it toward his left, that being the proper side of the road for the machine. In so
doing the defendant assumed that the horseman would move to the other side. The pony had not as

The test by which to determine the existence of negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged negligent act use that person would have used in the
same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard
supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The
existence of negligence in a given case is not determined by reference to the personal judgment of the
actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent
in the man of ordinary intelligence and prudence and determines liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation must of
course be always determined in the light of human experience and in view of the facts involved in the
particular case. Abstract speculations cannot here be of much value but this much can be profitably
said: Reasonable men govern their conduct by the circumstances which are before them or known to
them. They are not, and are not supposed to be, omniscient of the future. Hence they can be expected
to take care only when there is something before them to suggest or warn of danger. Could a prudent
man, in the case under consideration, foresee harm as a result of the course actually pursued? If so, it
was the duty of the actor to take precautions to guard against that harm. Reasonable foresight of harm,
followed by ignoring of the suggestion born of this prevision, is always necessary before negligence
can be held to exist. Stated in these terms, the proper criterion for determining the existence of
negligence in a given case is this: Conduct is said to be negligent when a prudent man in the position
of the tortfeasor would have foreseen that an effect harmful to another was sufficiently probable to
warrant his foregoing conduct or guarding against its consequences.
Applying this test to the conduct of the defendant in the present case we think that negligence is clearly
established. A prudent man, placed in the position of the defendant, would in our opinion, have
recognized that the course which he was pursuing was fraught with risk, and would therefore have
14

CIVIL LAW REVIEW 2

foreseen harm to the horse and the rider as reasonable consequence of that course. Under these
circumstances the law imposed on the defendant the duty to guard against the threatened harm.
It goes without saying that the plaintiff himself was not free from fault, for he was guilty of antecedent
negligence in planting himself on the wrong side of the road. But as we have already stated, the
defendant was also negligent; and in such case the problem always is to discover which agent is
immediately and directly responsible. It will be noted that the negligent acts of the two parties were not
contemporaneous, since the negligence of the defendant succeeded the negligence of the plaintiff by
an appreciable interval. Under these circumstances the law is that the person who has the last fair
chance to avoid the impending harm and fails to do so is chargeable with the consequences, without
reference to the prior negligence of the other party.
The decision in the case of Rkes vs. Atlantic, Gulf and Pacific Co. (7 Phil. Rep., 359) should perhaps
be mentioned in this connection. This Court there held that while contributory negligence on the part of
the person injured did not constitute a bar to recovery, it could be received in evidence to reduce the
damages which would otherwise have been assessed wholly against the other party. The defendant
company had there employed the plaintiff, as a laborer, to assist in transporting iron rails from a barge
in Manila harbor to the company's yards located not far away. The rails were conveyed upon cars
which were hauled along a narrow track. At certain spot near the water's edge the track gave way by
reason of the combined effect of the weight of the car and the insecurity of the road bed. The car was
in consequence upset; the rails slid off; and the plaintiff's leg was caught and broken. It appeared in
evidence that the accident was due to the effects of the typhoon which had dislodged one of the
supports of the track. The court found that the defendant company was negligent in having failed to
repair the bed of the track and also that the plaintiff was, at the moment of the accident, guilty of
contributory negligence in walking at the side of the car instead of being in front or behind. It was held
that while the defendant was liable to the plaintiff by reason of its negligence in having failed to keep
the track in proper repair nevertheless the amount of the damages should be reduced on account of
the contributory negligence in the plaintiff. As will be seen the defendant's negligence in that case
consisted in an omission only. The liability of the company arose from its responsibility for the
dangerous condition of its track. In a case like the one now before us, where the defendant was
actually present and operating the automobile which caused the damage, we do not feel constrained to
attempt to weigh the negligence of the respective parties in order to apportion the damage according to
the degree of their relative fault. It is enough to say that the negligence of the defendant was in this
case the immediate and determining cause of the accident and that the antecedent negligence of the
plaintiff was a more remote factor in the case.
A point of minor importance in the case is indicated in the special defense pleaded in the defendant's
answer, to the effect that the subject matter of the action had been previously adjudicated in the court
of a justice of the peace. In this connection it appears that soon after the accident in question occurred,
the plaintiff caused criminal proceedings to be instituted before a justice of the peace charging the
defendant with the infliction of serious injuries (lesiones graves). At the preliminary investigation the
defendant was discharged by the magistrate and the proceedings were dismissed. Conceding that the
acquittal of the defendant at the trial upon the merits in a criminal prosecution for the offense
mentioned would be res adjudicata upon the question of his civil liability arising from negligence -- a
point upon which it is unnecessary to express an opinion -- the action of the justice of the peace in
dismissing the criminal proceeding upon the preliminary hearing can have no effect. (See U. S. vs.
Banzuela and Banzuela, 31 Phil. Rep., 564.)
From what has been said it results that the judgment of the lower court must be reversed, and
judgment is her rendered that the plaintiff recover of the defendant the sum of two hundred pesos
(P200), with costs of other instances. The sum here awarded is estimated to include the value of the
horse, medical expenses of the plaintiff, the loss or damage occasioned to articles of his apparel, and
lawful interest on the whole to the date of this recovery. The other damages claimed by the plaintiff are
remote or otherwise of such character as not to be recoverable. So ordered.

G.R. No. 138569. September 11, 2003

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner,
vs.
COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs, respondents.
The Case
Before us is a petition for review of the Decision of the Court of Appeals dated 27 October 1998 and its
Resolution dated 11 May 1999. The assailed decision reversed the Decision of the Regional Trial
Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known
as Solidbank Corporation (Solidbank), of any liability. The questioned resolution of the appellate
court denied the motion for reconsideration of Solidbank but modified the decision by deleting the
award of exemplary damages, attorneys fees, expenses of litigation and cost of suit.
The Facts
Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the
practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings
Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a
savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed
the messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank.
Macaraya also gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The
teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two
deposit slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING
TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to make
another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went
to Allied Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed
him that somebody got the passbook. Calapre went back to L.C. Diaz and reported the incident to
Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000.
Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and
check. The teller stamped the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD
OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No.
6 told Macaraya that someone got the passbook but she could not remember to whom she gave the
passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that
someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for
P90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check
that it had long closed. PBC subsequently dishonored the check because of insufficient funds and
because the signature in the check differed from PBCs specimen signature. Failing to get back the
passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C.
Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz),
called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new
15

CIVIL LAW REVIEW 2

account. On the same day, Diaz formally wrote Solidbank to make the same request. It was also on
the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of
P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however,
denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000.
In an Information dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan
(Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The
Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to
Dismiss on 4 August 1992.

Solidbank did not have any participation in the custody and care of the passbook. The trial court
believed that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate
cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized withdrawal.
Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a person other
than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized
person; and (3) the possession by an unauthorized person of a PBC check long closed by L.C. Diaz,
which check was deposited on the day of the fraudulent withdrawal.

On 25 August 1992, L.C. Diaz filed a Complaint for Recovery of a Sum of Money against Solidbank
with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December
1994 a decision absolving Solidbank and dismissing the complaint.

The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary
procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its
account. L.C. Diaz claimed that a letter must accompany withdrawals of more than P20,000. The
letter must request Solidbank to allow the withdrawal and convert the amount to a managers check.
The bearer must also have a letter authorizing him to withdraw the same amount. Another person
driving a car must accompany the bearer so that he would not walk from Solidbank to the office in
making the withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its
past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any separate letter of
authorization or any communication with Solidbank that the money be converted into a managers
check.

L.C. Diaz then appealed to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.

The trial court further justified the dismissal of the complaint by holding that the case was a last ditch
effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary
damages and attorneys fees.

The dispositive portion of the decision of the trial court reads:

The Ruling of the Trial Court

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount
of Thirty Thousand Pesos (P30,000.00) as attorneys fees.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money.
Solidbank refused.

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook.
The rules state that possession of this book shall raise the presumption of ownership and any
payment or payments made by the bank upon the production of the said book and entry therein of the
withdrawal shall have the same effect as if made to the depositor personally.

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

With costs against plaintiff.

SO ORDERED.

At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he
also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The
specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal
slip with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere
Manuel (Manuel) for authentication. Manuel verified the signatures on the withdrawal slip. The
withdrawal slip was then given to another officer who compared the signatures on the withdrawal slip
with the specimen on the signature cards. The trial court concluded that Solidbank acted with care and
observed the rules on savings account when it allowed the withdrawal of P300,000 from the savings
account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures
on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence
the National Bureau of Investigation (NBI) report on the authenticity of the signatures on the
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because
it is derogatory to its action.
Another provision of the rules on savings account states that the depositor must keep the passbook
under lock and key. When another person presents the passbook for withdrawal prior to Solidbanks
receipt of the notice of loss of the passbook, that person is considered as the owner of the passbook.
The trial court ruled that the passbook presented during the questioned transaction was now out of the
lock and key and presumptively ready for a business transaction.

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized
withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this
conclusion after applying the provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for
whose acts he must respond; and (c) the connection of cause and effect between the fault or
negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for
P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated
that the teller, who was not presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz,
Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the
16

CIVIL LAW REVIEW 2

identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for
its negligence in the selection and supervision of its employees.

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK

SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST
CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED
THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER
EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE
PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE
ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD
FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF
A BIG AMOUNT IN A SAVINGS ACCOUNT.

II.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST

CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD
THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS
UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS
PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT
WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS
CHECKS AND OTHER FINANCIAL DOCUMENTS.

III.

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT

CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER
ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME
FROM ITS EMPLOYEE EMERANO ILAGAN.

IV.

THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES

AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL
CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS
NEGLIGENCE WAS ONLY CONTRIBUTORY.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its
messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape
liability because of the doctrine of last clear chance. Solidbank could have averted the injury suffered
by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a
good father of a family. The business and functions of banks are affected with public interest. Banks
are obligated to treat the accounts of their depositors with meticulous care, always having in mind the
fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in
its duty, violating its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new
one entered.
1.

2.

Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay

plaintiff-appellant the sum of Three Hundred Thousand Pesos (P300,000.00),
with interest thereon at the rate of 12% per annum from the date of filing of the
complaint until paid, the sum of P20,000.00 as exemplary damages, and
P20,000.00 as attorneys fees and expenses of litigation as well as the cost of
suit; and
Ordering the dismissal of defendant-appellees counterclaim in the amount of
P30,000.00 as attorneys fees.

The Ruling of the Court

SO ORDERED.
The petition is partly meritorious.
Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but
modified the award of damages. The appellate court deleted the award of exemplary damages and
attorneys fees. Invoking Article 2231 of the Civil Code, the appellate court ruled that exemplary
damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of
simple negligence only, the award of exemplary damages was not justified. Consequently, the award of
attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of
litigation and cost of suit were also not imposed on Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with
modification by deleting the award of exemplary damages and attorneys fees, expenses of litigation
and cost of suit.
SO ORDERED.
Hence, this petition.
The Issues

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial
court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a
recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a
depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to
determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa
aquiliana is generally applicable when there is no pre-existing contractual relationship between the
parties.
We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil Code on
simple loan. Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loan.
There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and
the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:
17
CIVIL LAW REVIEW 2

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 (RA 8791), which took effect on 13 June 2000, declares that the State
recognizes the fiduciary nature of banking that requires high standards of integrity and performance.
This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme
Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, holding that
the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.
This fiduciary relationship means that the banks obligation to observe high standards of integrity and
performance is deemed written into every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good
father of a family. Section 2 of RA 8791 prescribes the statutory diligence required from banks that
banks must observe high standards of integrity and performance in servicing their depositors.
Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000
from L.C. Diazs savings account, jurisprudence at the time of the withdrawal already imposed on
banks the same high standard of diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not convert the contract between
the bank and its depositors from a simple loan to a trust agreement, whether express or implied.
Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. The
law simply imposes on the bank a higher standard of integrity and performance in complying with its
obligations under the contract of simple loan, beyond those required of non-bank debtors under a
similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks
do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to
offer the lowest possible interest rate to depositors while charging the highest possible interest rate on
their own borrowers. The interest spread or differential belongs to the bank and not to the depositors
who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest
spread or income belongs to the depositors, a situation that Congress certainly did not intend in
enacting Section 2 of RA 8791.

In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the
defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or
negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was
negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual
obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a
presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to
Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its
employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the
teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The
record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook.
Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the
person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this
procedure in the present case.
Solidbank is bound by the negligence of its employees under the principle of respondeat superior or
command responsibility. The defense of exercising the required diligence in the selection and
supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.
The bank must not only exercise high standards of integrity and performance, it must also insure that
its employees do likewise because this is the only way to insure that the bank will comply with its
fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the
passbook, and thus failed to prove that this teller exercised the high standards of integrity and
performance required of Solidbanks employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its
passbook under lock and key was the proximate cause that allowed the impostor to withdraw the
P300,000. For the appellate court, the proximate cause was the tellers negligence in processing the
withdrawal without first verifying with L.C. Diaz. We do not agree with either court.

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance
of every kind of obligation is demandable. For breach of the savings deposit agreement due to
negligence, or culpa contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied
Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for
the processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings account
require that the deposit book should be carefully guarded by the depositor and kept under lock and
key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the
law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the
passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the
passbook only to the depositor or his authorized representative. The tellers know, or should know, that
the rules on savings account provide that any person in possession of the passbook is presumptively
its owner. If the tellers give the passbook to the wrong person, they would be clothing that person
presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For
failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and
Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the
passbook, and in insuring its return to the party authorized to receive the same.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the result would not have occurred.
Proximate cause is determined by the facts of each case upon mixed considerations of logic, common
sense, policy and precedent.
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in
possession of the passbook while it was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the
passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by
the impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere
possession of the passbook raises the presumption of ownership. It was the negligent act of
Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the
passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened.
Thus, the proximate cause of the unauthorized withdrawal was Solidbanks negligence in not returning
the passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized
withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have
18

CIVIL LAW REVIEW 2

the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank
and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to
measures that the parties must observe whenever withdrawals of large amounts are made does not
direct Solidbank to call up L.C. Diaz.
There is no law mandating banks to call up their clients whenever their representatives withdraw
significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual
practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal.
Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check,
which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion
from the withdrawal of a much bigger amount of money. The appellate court thus erred when it
imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this
from banks and when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since
Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more
need for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking
and Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount
of P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this
large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then
hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in
cockfight and horse racing. Ilagan was apprehended and meekly admitted his guilt (Emphasis
supplied.)

clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does
not exculpate the defendant from his breach of contract.
Mitigated Damages
Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the
circumstances. This means that if the defendant exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing
a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the
liability of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals, where the Court held the depositor guilty of
contributory negligence, we allocated the damages between the depositor and the bank on a 40-60
ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual
damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the
actual damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be
borne by private respondent L.C. Diaz and Company, CPAs. Proportionate costs.
SO ORDERED.

L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000
was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented
the passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the
P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding
of the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check
and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks claim
that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by
Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are negligent but the negligent act of
one is appreciably later than that of the other, or where it is impossible to determine whose fault or
negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do
so, is chargeable with the loss. Stated differently, the antecedent negligence of the plaintiff does not
preclude him from recovering damages caused by the supervening negligence of the defendant, who
had the last fair chance to prevent the impending harm by the exercise of due diligence.
We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of
contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case
of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance
to avoid the loss, would exonerate the defendant from liability. Such contributory negligence or last
19
CIVIL LAW REVIEW 2

G.R. No. 150255. April 22, 2005

SCHMITZ TRANSPORT & BROKERAGE CORPORATION, Petitioners,
vs.
TRANSPORT VENTURE, INC., INDUSTRIAL INSURANCE COMPANY, LTD., and BLACK SEA
SHIPPING AND DODWELL now INCHCAPE SHIPPING SERVICES, Respondents.
On petition for review is the June 27, 2001 Decision1 of the Court of Appeals, as well as its Resolution2
dated September 28, 2001 denying the motion for reconsideration, which affirmed that of Branch 21 of
the Regional Trial Court (RTC) of Manila in Civil Case No. 92-631323 holding petitioner Schmitz
Transport Brokerage Corporation (Schmitz Transport), together with Black Sea Shipping Corporation
(Black Sea), represented by its ship agent Inchcape Shipping Inc. (Inchcape), and Transport Venture
(TVI), solidarily liable for the loss of 37 hot rolled steel sheets in coil that were washed overboard a
barge.
On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk, Russia on
board M/V "Alexander Saveliev" (a vessel of Russian registry and owned by Black Sea) 545 hot rolled
steel sheets in coil weighing 6,992,450 metric tons.
The cargoes, which were to be discharged at the port of Manila in favor of the consignee, Little Giant
Steel Pipe Corporation (Little Giant),4 were insured against all risks with Industrial Insurance Company
Ltd. (Industrial Insurance) under Marine Policy No. M-91-3747-TIS.5
The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports Authority (PPA)
assigned it a place of berth at the outside breakwater at the Manila South Harbor. 6
Schmitz Transport, whose services the consignee engaged to secure the requisite clearances, to
receive the cargoes from the shipside, and to deliver them to its (the consignees) warehouse at
Cainta, Rizal,7 in turn engaged the services of TVI to send a barge and tugboat at shipside.

Industrial Insurance later filed a complaint against Schmitz Transport, TVI, and Black Sea through its
representative Inchcape (the defendants) before the RTC of Manila, for the recovery of the amount it
paid to Little Giant plus adjustment fees, attorneys fees, and litigation expenses.16
Industrial Insurance faulted the defendants for undertaking the unloading of the cargoes while typhoon
signal No. 1 was raised in Metro Manila.17
By Decision of November 24, 1997, Branch 21 of the RTC held all the defendants negligent for
unloading the cargoes outside of the breakwater notwithstanding the storm signal. 18 The dispositive
portion of the decision reads:
WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, ordering the
defendants to pay plaintiff jointly and severally the sum of P5,246,113.11 with interest from the date the
complaint was filed until fully satisfied, as well as the sum of P5,000.00 representing the adjustment
fee plus the sum of 20% of the amount recoverable from the defendants as attorneys fees plus the
costs of suit. The counterclaims and cross claims of defendants are hereby DISMISSED for lack of
[m]erit.19
To the trial courts decision, the defendants Schmitz Transport and TVI filed a joint motion for
reconsideration assailing the finding that they are common carriers and the award of excessive
attorneys fees of more than P1,000,000. And they argued that they were not motivated by gross or
evident bad faith and that the incident was caused by a fortuitous event. 20
By resolution of February 4, 1998, the trial court denied the motion for reconsideration. 21
All the defendants appealed to the Court of Appeals which, by decision of June 27, 2001, affirmed in
toto the decision of the trial court, 22 it finding that all the defendants were common carriers Black
Sea and TVI for engaging in the transport of goods and cargoes over the seas as a regular business
and not as an isolated transaction,23 and Schmitz Transport for entering into a contract with Little Giant
to transport the cargoes from ship to port for a fee.24

On October 26, 1991, around 4:30 p.m., TVIs tugboat "Lailani" towed the barge "Erika V" to shipside. 8
By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the barge alongside the vessel,
left and returned to the port terminal.9 At 9:00 p.m., arrastre operator Ocean Terminal Services Inc.
commenced to unload 37 of the 545 coils from the vessel unto the barge.
By 12:30 a.m. of October 27, 1991 during which the weather condition had become inclement due to
an approaching storm, the unloading unto the barge of the 37 coils was accomplished.10 No tugboat
pulled the barge back to the pier, however.
At around 5:30 a.m. of October 27, 1991, due to strong waves,11 the crew of the barge abandoned it
and transferred to the vessel. The barge pitched and rolled with the waves and eventually capsized,
washing the 37 coils into the sea.12 At 7:00 a.m., a tugboat finally arrived to pull the already empty and
damaged barge back to the pier.13
Earnest efforts on the part of both the consignee Little Giant and Industrial Insurance to recover the
lost cargoes proved futile.14
Little Giant thus filed a formal claim against Industrial Insurance which paid it the amount of
P5,246,113.11. Little Giant thereupon executed a subrogation receipt15 in favor of Industrial Insurance.

In holding all the defendants solidarily liable, the appellate court ruled that "each one was essential
such that without each others contributory negligence the incident would not have happened and so
much so that the person principally liable cannot be distinguished with sufficient accuracy."25
In discrediting the defense of fortuitous event, the appellate court held that "although defendants
obviously had nothing to do with the force of nature, they however had control of where to anchor the
vessel, where discharge will take place and even when the discharging will commence."26
The defendants respective motions for reconsideration having been denied by Resolution27 of
September 28, 2001, Schmitz Transport (hereinafter referred to as petitioner) filed the present petition
against TVI, Industrial Insurance and Black Sea.
Petitioner asserts that in chartering the barge and tugboat of TVI, it was acting for its principal,
consignee Little Giant, hence, the transportation contract was by and between Little Giant and TVI. 28
By Resolution of January 23, 2002, herein respondents Industrial Insurance, Black Sea, and TVI were
required to file their respective Comments.29
By its Comment, Black Sea argued that the cargoes were received by the consignee through petitioner
in good order, hence, it cannot be faulted, it having had no control and supervision thereover. 30

20
CIVIL LAW REVIEW 2

For its part, TVI maintained that it acted as a passive party as it merely received the cargoes and
transferred them unto the barge upon the instruction of petitioner.31

The proximate cause of the loss having been determined, who among the parties is/are responsible
therefor?

In issue then are:

Contrary to petitioners insistence, this Court, as did the appellate court, finds that petitioner is a
common carrier. For it undertook to transport the cargoes from the shipside of "M/V Alexander
Saveliev" to the consignees warehouse at Cainta, Rizal. As the appellate court put it, "as long as a
person or corporation holds [itself] to the public for the purpose of transporting goods as [a] business,
[it] is already considered a common carrier regardless if [it] owns the vehicle to be used or has to hire
one."42 That petitioner is a common carrier, the testimony of its own Vice-President and General
Manager Noel Aro that part of the services it offers to its clients as a brokerage firm includes the
transportation of cargoes reflects so.

(1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act of negligence
on the part of petitioner Black Sea and TVI, and
(2) If there was negligence, whether liability for the loss may attach to Black Sea, petitioner and TVI.
When a fortuitous event occurs, Article 1174 of the Civil Code absolves any party from any and all
liability arising therefrom:
ART. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which though foreseen, were inevitable.
In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and unexpected
occurrence, or the failure of the debtor to comply with his obligation, must be independent of human
will; (2) it must be impossible to foresee the event which constitute the caso fortuito, or if it can be
foreseen it must be impossible to avoid; (3) the occurrence must be such as to render it impossible for
the debtor to fulfill his obligation in any manner; and (4) the obligor must be free from any participation
in the aggravation of the injury resulting to the creditor.32
[T]he principle embodied in the act of God doctrine strictly requires that the act must be occasioned
solely by the violence of nature. Human intervention is to be excluded from creating or entering into the
cause of the mischief. When the effect is found to be in part the result of the participation of man,
whether due to his active intervention or neglect or failure to act, the whole occurrence is then
humanized and removed from the rules applicable to the acts of God.33
The appellate court, in affirming the finding of the trial court that human intervention in the form of
contributory negligence by all the defendants resulted to the loss of the cargoes,34 held that unloading
outside the breakwater, instead of inside the breakwater, while a storm signal was up constitutes
negligence.35 It thus concluded that the proximate cause of the loss was Black Seas negligence in
deciding to unload the cargoes at an unsafe place and while a typhoon was approaching.36
From a review of the records of the case, there is no indication that there was greater risk in loading
the cargoes outside the breakwater. As the defendants proffered, the weather on October 26, 1991
remained normal with moderate sea condition such that port operations continued and proceeded
normally.37
The weather data report,38 furnished and verified by the Chief of the Climate Data Section of PAG-ASA
and marked as a common exhibit of the parties, states that while typhoon signal No. 1 was hoisted
over Metro Manila on October 23-31, 1991, the sea condition at the port of Manila at 5:00 p.m. - 11:00
p.m. of October 26, 1991 was moderate. It cannot, therefore, be said that the defendants were
negligent in not unloading the cargoes upon the barge on October 26, 1991 inside the breakwater.
That no tugboat towed back the barge to the pier after the cargoes were completely loaded by 12:30 in
the morning39 is, however, a material fact which the appellate court failed to properly consider and
appreciate40 the proximate cause of the loss of the cargoes. Had the barge been towed back
promptly to the pier, the deteriorating sea conditions notwithstanding, the loss could have been
avoided. But the barge was left floating in open sea until big waves set in at 5:30 a.m., causing it to
sink along with the cargoes.41 The loss thus falls outside the "act of God doctrine."

Atty. Jubay: Will you please tell us what [are you] functions x x x as Executive Vice-President and
General Manager of said Company?
Mr. Aro: Well, I oversee the entire operation of the brokerage and transport business of the company. I
also handle the various division heads of the company for operation matters, and all other related
functions that the President may assign to me from time to time, Sir.
Q: Now, in connection [with] your duties and functions as you mentioned, will you please tell the
Honorable Court if you came to know the company by the name Little Giant Steel Pipe Corporation?
A: Yes, Sir. Actually, we are the brokerage firm of that Company.
Q: And since when have you been the brokerage firm of that company, if you can recall?
A: Since 1990, Sir.
Q: Now, you said that you are the brokerage firm of this Company. What work or duty did you perform
in behalf of this company?
A: We handled the releases (sic) of their cargo[es] from the Bureau of Customs. We [are] also incharged of the delivery of the goods to their warehouses. We also handled the clearances of their
shipment at the Bureau of Customs, Sir.
xxx
Q: Now, what precisely [was] your agreement with this Little Giant Steel Pipe Corporation with regards
to this shipment? What work did you do with this shipment?
A: We handled the unloading of the cargo[es] from vessel to lighter and then the delivery of [the]
cargo[es] from lighter to BASECO then to the truck and to the warehouse, Sir.
Q: Now, in connection with this work which you are doing, Mr. Witness, you are supposed to perform,
what equipment do (sic) you require or did you use in order to effect this unloading, transfer and
delivery to the warehouse?
A: Actually, we used the barges for the ship side operations, this unloading [from] vessel to lighter, and
on this we hired or we sub-contracted with [T]ransport Ventures, Inc. which [was] in-charged (sic) of
the barges. Also, in BASECO compound we are leasing cranes to have the cargo unloaded from the
barge to trucks, [and] then we used trucks to deliver [the cargoes] to the consignees warehouse, Sir.
21

CIVIL LAW REVIEW 2

Q: And whose trucks do you use from BASECO compound to the consignees warehouse?
A: We utilized of (sic) our own trucks and we have some other contracted trucks, Sir.
xxx
ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it you have to contract for
the barges of Transport Ventures Incorporated in this particular operation?
A: Firstly, we dont own any barges. That is why we hired the services of another firm whom we know
[al]ready for quite sometime, which is Transport Ventures, Inc. (Emphasis supplied)43
It is settled that under a given set of facts, a customs broker may be regarded as a common carrier.
Thus, this Court, in A.F. Sanchez Brokerage, Inc. v. The Honorable Court of Appeals,44 held:
The appellate court did not err in finding petitioner, a customs broker, to be also a common carrier, as
defined under Article 1732 of the Civil Code, to wit,
Art. 1732. Common carriers are persons, corporations, firms or associations engaged in the business
of carrying or transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public.
xxx
Article 1732 does not distinguish between one whose principal business activity is the carrying of
goods and one who does such carrying only as an ancillary activity. The contention, therefore, of
petitioner that it is not a common carrier but a customs broker whose principal function is to prepare
the correct customs declaration and proper shipping documents as required by law is bereft of merit. It
suffices that petitioner undertakes to deliver the goods for pecuniary consideration.45
And in Calvo v. UCPB General Insurance Co. Inc.,46 this Court held that as the transportation of goods
is an integral part of a customs broker, the customs broker is also a common carrier. For to declare
otherwise "would be to deprive those with whom [it] contracts the protection which the law affords them
notwithstanding the fact that the obligation to carry goods for [its] customers, is part and parcel of
petitioners business."47
As for petitioners argument that being the agent of Little Giant, any negligence it committed was
deemed the negligence of its principal, it does not persuade.
True, petitioner was the broker-agent of Little Giant in securing the release of the cargoes. In effecting
the transportation of the cargoes from the shipside and into Little Giants warehouse, however,
petitioner was discharging its own personal obligation under a contact of carriage.
Petitioner, which did not have any barge or tugboat, engaged the services of TVI as handler48 to
provide the barge and the tugboat. In their Service Contract,49 while Little Giant was named as the
consignee, petitioner did not disclose that it was acting on commission and was chartering the vessel
for Little Giant.50 Little Giant did not thus automatically become a party to the Service Contract and was
not, therefore, bound by the terms and conditions therein.
Not being a party to the service contract, Little Giant cannot directly sue TVI based thereon but it can
maintain a cause of action for negligence.51

In the case of TVI, while it acted as a private carrier for which it was under no duty to observe
extraordinary diligence, it was still required to observe ordinary diligence to ensure the proper and
careful handling, care and discharge of the carried goods.
Thus, Articles 1170 and 1173 of the Civil Code provide:
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.
ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of the
time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2202,
paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required.
Was the reasonable care and caution which an ordinarily prudent person would have used in the same
situation exercised by TVI?52
This Court holds not.
TVIs failure to promptly provide a tugboat did not only increase the risk that might have been
reasonably anticipated during the shipside operation, but was the proximate cause of the loss. A man
of ordinary prudence would not leave a heavily loaded barge floating for a considerable number of
hours, at such a precarious time, and in the open sea, knowing that the barge does not have any
power of its own and is totally defenseless from the ravages of the sea. That it was nighttime and,
therefore, the members of the crew of a tugboat would be charging overtime pay did not excuse TVI
from calling for one such tugboat.
As for petitioner, for it to be relieved of liability, it should, following Article 173953 of the Civil Code,
prove that it exercised due diligence to prevent or minimize the loss, before, during and after the
occurrence of the storm in order that it may be exempted from liability for the loss of the goods.
While petitioner sent checkers54 and a supervisor55 on board the vessel to counter-check the
operations of TVI, it failed to take all available and reasonable precautions to avoid the loss. After
noting that TVI failed to arrange for the prompt towage of the barge despite the deteriorating sea
conditions, it should have summoned the same or another tugboat to extend help, but it did not.
This Court holds then that petitioner and TVI are solidarily liable56 for the loss of the cargoes. The
following pronouncement of the Supreme Court is instructive:
The foundation of LRTAs liability is the contract of carriage and its obligation to indemnify the victim
arises from the breach of that contract by reason of its failure to exercise the high diligence required of
the common carrier. In the discharge of its commitment to ensure the safety of passengers, a carrier
may choose to hire its own employees or avail itself of the services of an outsider or an independent
firm to undertake the task. In either case, the common carrier is not relieved of its responsibilities under
the contract of carriage.
Should Prudent be made likewise liable? If at all, that liability could only be for tort under the provisions
of Article 2176 and related provisions, in conjunction with Article 2180 of the Civil Code. x x x [O]ne
might ask further, how then must the liability of the common carrier, on one hand, and an independent
contractor, on the other hand, be described? It would be solidary. A contractual obligation can be
22

CIVIL LAW REVIEW 2

breached by tort and when the same act or omission causes the injury, one resulting in culpa
contractual and the other in culpa aquiliana, Article 2194 of the Civil Code can well apply. In fine, a
liability for tort may arise even under a contract, where tort is that which breaches the contract. Stated
differently, when an act which constitutes a breach of contract would have itself constituted the source
of a quasi-delictual liability had no contract existed between the parties, the contract can be said to
have been breached by tort, thereby allowing the rules on tort to apply.57

G.R. No. 147324

As for Black Sea, its duty as a common carrier extended only from the time the goods were
surrendered or unconditionally placed in its possession and received for transportation until they were
delivered actually or constructively to consignee Little Giant.58

x-----------------------------x

Parties to a contract of carriage may, however, agree upon a definition of delivery that extends the
services rendered by the carrier. In the case at bar, Bill of Lading No. 2 covering the shipment provides
that delivery be made "to the port of discharge or so near thereto as she may safely get, always
afloat."59 The delivery of the goods to the consignee was not from "pier to pier" but from the shipside of
"M/V Alexander Saveliev" and into barges, for which reason the consignee contracted the services of
petitioner. Since Black Sea had constructively delivered the cargoes to Little Giant, through petitioner,
it had discharged its duty.60
In fine, no liability may thus attach to Black Sea.
Respecting the award of attorneys fees in an amount over P1,000,000.00 to Industrial Insurance, for
lack of factual and legal basis, this Court sets it aside. While Industrial Insurance was compelled to
litigate its rights, such fact by itself does not justify the award of attorneys fees under Article 2208 of
the Civil Code. For no sufficient showing of bad faith would be reflected in a partys persistence in a
case other than an erroneous conviction of the righteousness of his cause.61 To award attorneys fees
to a party just because the judgment is rendered in its favor would be tantamount to imposing a
premium on ones right to litigate or seek judicial redress of legitimate grievances. 62
On the award of adjustment fees: The adjustment fees and expense of divers were incurred by
Industrial Insurance in its voluntary but unsuccessful efforts to locate and retrieve the lost cargo. They
do not constitute actual damages.63
As for the court a quos award of interest on the amount claimed, the same calls for modification
following the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals64 that when the demand cannot
be reasonably established at the time the demand is made, the interest shall begin to run not from the
time the claim is made judicially or extrajudicially but from the date the judgment of the court is made
(at which the time the quantification of damages may be deemed to have been reasonably
ascertained).65
WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz Transport & Brokerage
Corporation, and Transport Venture Incorporation jointly and severally liable for the amount of
P5,246,113.11 with the MODIFICATION that interest at SIX PERCENT per annum of the amount due
should be computed from the promulgation on November 24, 1997 of the decision of the trial court.

May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,

vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.

GLOBE TELECOM, INC., petitioner,

vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.
Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27
February 2001, in CA-G.R. CV No. 63619.1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc.
(Globe), had been engaged in the coordination of the provision of various communication facilities for
the military bases of the United States of America (US) in Clark Air Base, Angeles, Pampanga and
Subic Naval Base in Cubi Point, Zambales. The said communication facilities were installed and
configured for the exclusive use of the US Defense Communications Agency (USDCA), and for
security reasons, were operated only by its personnel or those of American companies contracted by it
to operate said facilities. The USDCA contracted with said American companies, and the latter, in turn,
contracted with Globe for the use of the communication facilities. Globe, on the other hand, contracted
with local service providers such as the Philippine Communications Satellite Corporation (Philcomsat)
for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated
itself to establish, operate and provide an IBS Standard B earth station (earth station) within Cubi Point
for the exclusive use of the USDCA.2 The term of the contract was for 60 months, or five (5) years.3 In
turn, Globe promised to pay Philcomsat monthly rentals for each leased circuit involved.4
At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement
between the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was the
basis for the occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in
1991. Under Section 25, Article XVIII of the 1987 Constitution, foreign military bases, troops or
facilities, which include those located at the US Naval Facility in Cubi Point, shall not be allowed in the
Philippines unless a new treaty is duly concurred in by the Senate and ratified by a majority of the
votes cast by the people in a national referendum when the Congress so requires, and such new treaty
is recognized as such by the US Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA
made use of the same.

Costs against petitioner.

SO ORDERED.

On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its
decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its
Supplementary Agreements that was supposed to extend the term of the use by the US of Subic Naval
Base, among others.5 The last two paragraphs of the Resolution state:
FINDING that the Treaty constitutes a defective framework for the continuing relationship
between the two countries in the spirit of friendship, cooperation and sovereign equality:
Now, therefore, be it Resolved by the Senate, as it is hereby resolved, To express its
decision not to concur in the ratification of the Treaty of Friendship, Cooperation and
23

CIVIL LAW REVIEW 2

Security and its Supplementary Agreements, at the same time reaffirming its desire to
continue friendly relations with the government and people of the United States of America.6

On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:

On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government through
the US Embassy, notifying it of the Philippines termination of the RP-US Military Bases Agreement.
The Note Verbale stated that since the RP-US Military Bases Agreement, as amended, shall terminate
on 31 December 1992, the withdrawal of all US military forces from Subic Naval Base should be
completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the
earth station effective 08 November 1992 in view of the withdrawal of US military personnel from Subic
Naval Base after the termination of the RP-US Military Bases Agreement. Globe invoked as basis for
the letter of termination Section 8 (Default) of the Agreement, which provides:
Neither party shall be held liable or deemed to be in default for any failure to perform its
obligation under this Agreement if such failure results directly or indirectly from force
majeure or fortuitous event. Either party is thus precluded from performing its obligation until
such force majeure or fortuitous event shall terminate. For the purpose of this paragraph,
force majeure shall mean circumstances beyond the control of the party involved including,
but not limited to, any law, order, regulation, direction or request of the Government of the
Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war,
acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God.

1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand
Two Hundred Thirty Eight US Dollars (US$92,238.00) or its equivalent in
Philippine Currency (computed at the exchange rate prevailing at the time of
compliance or payment) representing rentals for the month of December 1992
with interest thereon at the legal rate of twelve percent (12%) per annum starting
December 1992 until the amount is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred
Thousand (P300,000.00) Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and
4. With costs against the defendant.
SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.

Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to know
its commitment to pay the stipulated rentals for the remaining terms of the Agreement even after
[Globe] shall have discontinue[d] the use of the earth station after November 08, 1992."7 Philcomsat
referred to Section 7 of the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the earth station after it has been put
into operation, a written notice shall be served to PHILCOMSAT at least sixty (60) days prior
to the expected date of termination. Notwithstanding the non-use of the earth station,
[Globe] shall continue to pay PHILCOMSAT for the rental of the actual number of T1 circuits
in use, but in no case shall be less than the first two (2) T1 circuits, for the remaining life of
the agreement. However, should PHILCOMSAT make use or sell the earth station subject to
this agreement, the obligation of [Globe] to pay the rental for the remaining life of the
agreement shall be at such monthly rate as may be agreed upon by the parties.8
After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November
1993 demanding payment of its outstanding obligations under the Agreement amounting to
US$4,910,136.00 plus interest and attorneys fees. However, Globe refused to heed Philcomsats
demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against
Globe, praying that the latter be ordered to pay liquidated damages under the Agreement, with legal
interest, exemplary damages, attorneys fees and costs of suit. The case was raffled to Branch 59 of
said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to
the termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of the
Treaty of Friendship and Cooperation, which events constituted force majeure under the Agreement.
Globe explained that the occurrence of said events exempted it from paying rentals for the remaining
period of the Agreement.

Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the
Treaty of Friendship, Cooperation and Security and its Supplementary Agreements constitutes force
majeure which exempts Globe from complying with its obligations under the Agreement; (2) Globe is
not liable to pay the rentals for the remainder of the term of the Agreement; and (3) Globe is not liable
to Philcomsat for exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the
earth station for December 1992 and of attorneys fees. It explained that it terminated Philcomsats
services on 08 November 1992; hence, it had no reason to pay for rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal
for lack of merit and affirming the trial courts finding that certain events constituting force majeure
under Section 8 the Agreement occurred and justified the non-payment by Globe of rentals for the
remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship,
Cooperation and Security, and its Supplementary Agreements, and the termination by the Philippine
Government of the RP-US Military Bases Agreement effective 31 December 1991 as stated in the
Philippine Governments Note Verbale to the US Government, are acts, directions, or requests of the
Government of the Philippines which constitute force majeure. In addition, there were circumstances
beyond the control of the parties, such as the issuance of a formal order by Cdr. Walter Corliss of the
US Navy, the issuance of the letter notification from ATT and the complete withdrawal of all US military
forces and personnel from Cubi Point, which prevented further use of the earth station under the
Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by
08 November 1992, it is still liable to pay rentals for the December 1992, amounting to US$92,238.00
plus interest, considering that the US military forces and personnel completely withdrew from Cubi
Point only on 31 December 1992.10
Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.
24

CIVIL LAW REVIEW 2

In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF
FORCE MAJEURE DIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN
ARTICLE 1174 OF THE CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE
TELECOM FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE SUBJECT
AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE
TELECOM IS NOT LIABLE TO PHILCOMSAT FOR RENTALS FOR THE REMAINING
TERM OF THE AGREEMENT, DESPITE THE CLEAR TENOR OF SECTION 7 OF THE
AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS
AWARD OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE
TELECOM IS NOT LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a
fortuitous event because the happening thereof was foreseeable. Although the Agreement was freely
entered into by both parties, Section 8 should be deemed ineffective because it is contrary to Article
1174 of the Civil Code. Philcomsat posits the view that the validity of the parties definition of force
majeure in Section 8 of the Agreement as "circumstances beyond the control of the party involved
including, but not limited to, any law, order, regulation, direction or request of the Government of the
Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war, acts of
public enemies, fire, floods, typhoons or other catastrophies or acts of God," should be deemed subject
to Article 1174 which defines fortuitous events as events which could not be foreseen, or which, though
foreseen, were inevitable.13
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for
the rental of the earth station for the entire term of the Agreement because it runs counter to what was
plainly stipulated by the parties in Section 7 thereof. Moreover, said ruling is inconsistent with the
appellate courts pronouncement that Globe is liable to pay rentals for December 1992 even though it
terminated Philcomsats services effective 08 November 1992, because the US military and personnel
completely withdrew from Cubi Point only in December 1992. Philcomsat points out that it was Globe
which proposed the five-year term of the Agreement, and that the other provisions of the Agreement,
such as Section 4.114 thereof, evince the intent of Globe to be bound to pay rentals for the entire fiveyear term.15
Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys fees
and exemplary damages.16
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary
to Article 1174 of the Civil Code because said provision does not prohibit parties to a contract from
providing for other instances when they would be exempt from fulfilling their contractual obligations.
Globe also claims that the termination of the RP-US Military Bases Agreement constitutes force
majeure and exempts it from complying with its obligations under the Agreement.17 On the issue of the
propriety of awarding attorneys fees and exemplary damages to Philcomsat, Globe maintains that
Philcomsat is not entitled thereto because in refusing to pay rentals for the remainder of the term of the
Agreement, Globe only acted in accordance with its rights.18

In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue
which is not cognizable by the Court in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R.
No.
147324 and required the parties to submit their respective memoranda.22
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by
Globe in G.R. No. 147334 and required both parties to submit their memoranda.23
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases,
reiterating their arguments in their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military
Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the
consequent withdrawal of US military forces and personnel from Cubi Point constitute force majeure
which would exempt Globe from complying with its obligation to pay rentals under its Agreement with
Philcomsat; (2) whether Globe is liable to pay rentals under the Agreement for the month of December
1992; and (3) whether Philcomsat is entitled to attorneys fees and exemplary damages.
No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the
petitions are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect
because the enumeration of events constituting force majeure therein unduly expands the concept of a
fortuitous event under Article 1174 of the Civil Code and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must
be unforeseen in order to exempt a party to a contract from complying with its obligations therein. It
insists that since the expiration of the RP-US Military Bases Agreement, the non-ratification of the
Treaty of Friendship, Cooperation and Security and the withdrawal of US military forces and personnel
from Cubi Point were not unforeseeable, but were possibilities known to it and Globe at the time they
entered into the Agreement, such events cannot exempt Globe from performing its obligation of paying
rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force
majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable,
but inevitable:
Art. 1174. Except in cases specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person
shall be responsible for those events which, could not be foreseen, or which, though
foreseen were inevitable.
A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as
floods or typhoons,24 or an "act of man," such as riots, strikes or wars.25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed
events constituting force majeure:

19

In G.R. No. 147334, Globe, the petitioner therein, contends that the Court of Appeals erred in finding
it liable for the amount of US$92,238.00, representing rentals for December 1992, since Philcomsats
services were actually terminated on 08 November 1992.20

1. Any law, order, regulation, direction or request of the Philippine Government;

25

CIVIL LAW REVIEW 2

2. Strikes or other labor difficulties;

3. Insurrection;

Subsequently, defendant [Globe] received a formal order from Cdr. Walter F. Corliss II
Commander USN dated July 31, 1992 and a notification from ATT dated July 29, 1992 to
terminate the provision of T1s services (via an IBS Standard B Earth Station) effective
November 08, 1992. Plaintiff [Philcomsat] was furnished with copies of the said order and
letter by the defendant on August 06, 1992.

4. Riots;
5. National emergencies;
6. War;

Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine
Government to the US Government are acts, direction or request of the Government of the
Philippines and circumstances beyond the control of the defendant. The formal order from
Cdr. Walter Corliss of the USN, the letter notification from ATT and the complete withdrawal
of all the military forces and personnel from Cubi Point in the year-end 1992 are also acts
and circumstances beyond the control of the defendant.

7. Acts of public enemies;

8. Fire, floods, typhoons or other catastrophies or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties.
There is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event
under Article 1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not run
counter to the law, morals, good customs, public order or public policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith."28 Courts cannot
stipulate for the parties nor amend their agreement where the same does not contravene law, morals,
good customs, public order or public policy, for to do so would be to alter the real intent of the parties,
and would run contrary to the function of the courts to give force and effect thereto.29
Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the
Agreement which Philcomsat and Globe freely agreed upon has the force of law between them. 30
In order that Globe may be exempt from non-compliance with its obligation to pay rentals under
Section 8, the concurrence of the following elements must be established: (1) the event must be
independent of the human will; (2) the occurrence must render it impossible for the debtor to fulfill the
obligation in a normal manner; and (3) the obligor must be free of participation in, or aggravation of, the
injury to the creditor.31
The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are
present in the instant case. Philcomsat and Globe had no control over the non-renewal of the term of
the RP-US Military Bases Agreement when the same expired in 1991, because the prerogative to ratify
the treaty extending the life thereof belonged to the Senate. Neither did the parties have control over
the subsequent withdrawal of the US military forces and personnel from Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its
Supplemental Agreements) under its Resolution No. 141. (Exhibit "2") on September 16,
1991 is beyond the control of the parties. This resolution was followed by the sending on
December 31, 1991 o[f] a "Note Verbale" (Exhibit "3") by the Philippine Government to the
US Government notifying the latter of the formers termination of the RP-US Military Bases
Agreement (as amended) on 31 December 1992 and that accordingly, the withdrawal of all
U.S. military forces from Subic Naval Base should be completed by said date.

Considering the foregoing, the Court finds and so holds that the afore-narrated
circumstances constitute "force majeure or fortuitous event(s) as defined under paragraph 8
of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the rentals
for the facility for the remaining term of the contract.
As a consequence of the termination of the RP-US Military Bases Agreement (as amended)
the continued stay of all US Military forces and personnel from Subic Naval Base would no
longer be allowed, hence, plaintiff would no longer be in any position to render the service it
was obligated under the Agreement. To put it blantly (sic), since the US military forces and
personnel left or withdrew from Cubi Point in the year end December 1992, there was no
longer any necessity for the plaintiff to continue maintaining the IBS facility. 32 (Emphasis
in the original.)
The aforementioned events made impossible the continuation of the Agreement until the end of its fiveyear term without fault on the part of either party. The Court of Appeals was thus correct in ruling that
the happening of such fortuitous events rendered Globe exempt from payment of rentals for the
remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat
cannot be compelled to perform its corresponding obligation under the Agreement. As noted by the
appellate court:
We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like
to charge GLOBE rentals for the balance of the lease term without there being any
corresponding telecommunications service subject of the lease. It will be grossly unfair and
iniquitous to hold GLOBE liable for lease charges for a service that was not and could not
have been rendered due to an act of the government which was clearly beyond GLOBEs
control. The binding effect of a contract on both parties is based on the principle that the
obligations arising from contracts have the force of law between the contracting parties, and
there must be mutuality between them based essentially on their equality under which it is
repugnant to have one party bound by the contract while leaving the other party free
therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357).33
With respect to the issue of whether Globe is liable for payment of rentals for the month of December
1992, the Court likewise affirms the appellate courts ruling that Globe should pay the same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992
pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually ceased
26

CIVIL LAW REVIEW 2

using the earth station subject of the Agreement was not established during the trial. 34 However, the
trial court found that the US military forces and personnel completely withdrew from Cubi Point only on
31 December 1992.35 Thus, until that date, the USDCA had control over the earth station and had the
option of using the same. Furthermore, Philcomsat could not have removed or rendered ineffective
said communication facility until after 31 December 1992 because Cubi Point was accessible only to
US naval personnel up to that time. Hence, the Court of Appeals did not err when it affirmed the trial
courts ruling that Globe is liable for payment of rentals until December 1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorneys
fees and exemplary damages.
The award of attorneys fees is the exception rather than the rule, and must be supported by factual,
legal and equitable justifications.36 In previously decided cases, the Court awarded attorneys fees
where a party acted in gross and evident bad faith in refusing to satisfy the other partys claims and
compelled the former to litigate to protect his rights;37 when the action filed is clearly unfounded,38 or
where moral or exemplary damages are awarded.39 However, in cases where both parties have
legitimate claims against each other and no party actually prevailed, such as in the present case where
the claims of both parties were sustained in part, an award of attorneys fees would not be warranted.40

In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an
architectural firm consulted by SBTC, verified Ferrer's claims for additional cost. A recommendation
was then made to settle Ferrer's claim but only for P200,000.00. SBTC, instead of paying the
recommended additional amount, denied ever authorizing payment of any amount beyond the original
contract price. SBTC likewise denied any liability for the additional cost based on Article IX of the
building contract which states:
If at any time prior to the completion of the work to be performed hereunder,
increase in prices of construction materials and/or labor shall supervene through
no fault on the part of the contractor whatsoever or any act of the government
and its instrumentalities which directly or indirectly affects the increase of the cost
of the project, OWNER shall equitably make the appropriate adjustment on
mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for
Ferrer and ordered defendants SBTC and Rosito C. Manhit to pay:
a) P259,417.23 for the increase in price of labor and materials plus 12% interest
thereon per annum from 15 August 1980 until fully paid;

Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party
acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In the present case, it was
not shown that Globe acted wantonly or oppressively in not heeding Philcomsats demands for
payment of rentals. It was established during the trial of the case before the trial court that Globe had
valid grounds for refusing to comply with its contractual obligations after 1992.

b) P24,000.00 as actual damages;

WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of
Appeals in CA-G.R. CV No. 63619 is AFFIRMED.

d) P20,000.00 as exemplary damages;

SO ORDERED.

c) P20,000.00 as moral damages;

e) attorney's fees equivalent to 25% of the principal amount due; and

f) costs of suit.
On appeal, the Court of Appeals affirmed the trial court decision.

G.R. No. 117009 October 11, 1995

In the present petition for review, petitioners assign the following errors to the appellate court:
SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners,
vs.
COURT OF APPEALS and YSMAEL C. FERRER, respondents.
In this petition for review under Rule 45 of the Rules of Court, petitioners seek a review and reversal of
the decision * of respondent Court of Appeals in CA-G.R. CV No. 40450, entitled "Ysmael C. Ferrer v.
Security Bank and Trust Company, et. al." dated 31 August 1994, which affirmed the decision ** of the
Regional Trial Court, Branch 63, Makati in Civil Case No. 42712, a complaint for breach of contract
with damages.
Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust
Company (SBTC) and Rosito C. Manhit to construct the building of SBTC in Davao City for the price of
P1,760,000.00. The contract dated 4 February 1980 provided that Ferrer would finish the construction
in two hundred (200) working days. Respondent Ferrer was able to complete the construction of the
building on 15 August 1980 (within the contracted period) but he was compelled by a drastic increase
in the cost of construction materials to incur expenses of about P300,000.00 on top of the original cost.
The additional expenses were made known to petitioner SBTC thru its Vice-President Fely Sebastian
and Supervising Architect Rudy de la Rama as early as March 1980. Respondent Ferrer made timely
demands for payment of the increased cost. Said demands were supported by receipts, invoices,
payrolls and other documents proving the additional expenses.

. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE

OF EVIDENCE SUFFICIENTLY PROVEN HIS CLAIM AGAINST THE
DEFENDANTS-APPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS
PROVISION OF THE CONSTRUCTION CONTRACT.
. . . IN DISREGARDING THE EXPRESS PROVISION OF THE
CONSTRUCTION CONTRACT, THE LOWER COURT VIOLATED
DEFENDANTS-APPELLANTS' CONSTITUTIONAL GUARANTY OF NON
IMPAIRMENT OF THE OBLIGATION OF CONTRACT. 1
Petitioners argue that under the aforequoted Article IX of the building contract, any increase in the
price of labor and/or materials resulting in an increase in construction cost above the stipulated
contract price will not automatically make petitioners liable to pay for such increased cost, as any
payment above the stipulated contract price has been made subject to the condition that the
"appropriate adjustment" will be made "upon mutual agreement of both parties". It is contended that
27

CIVIL LAW REVIEW 2

since there was no mutual agreement between the parties, petitioners' obligation to pay amounts
above the original contract price never materialized.

condition dependent on petitioner bank's sole will, since private respondent would naturally and
logically give consent to such an agreement which would allow him recovery of the increased cost.

Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the arguments raised by
petitioners. It is of note however that the pleadings filed with this Court by counsel for Ferrer hardly
refute the arguments raised by petitioners, as the contents of said pleadings are mostly quoted
portions of the decision of the Court of Appeals, devoid of adequate discussion of the merits of
respondent's case. The Court, to be sure, expects more diligence and legal know-how from lawyers
than what has been exhibited by counsel for respondent in the present case. Under these
circumstances, the Court had to review the entire records of this case to evaluate the merits of the
issues raised by the contending parties.

Further, it cannot be denied that petitioner bank derived benefits when private respondent completed
the construction even at an increased cost.

Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo debet lecupletari
(no man ought to be made rich out of another's injury) states:
Art. 22. Every person who through an act of performance by another, or any
other means, acquires or comes into possession of something at the expense of
the latter without just or legal ground, shall return the same to him.
The above-quoted article is part of the chapter of the Civil Code on Human Relations, the provisions of
which were formulated as "basic principles to be observed for the rightful relationship between human
beings and for the stability of the social order, . . . designed to indicate certain norms that spring from
the fountain of good conscience, . . . guides for human conduct [that] should run as golden threads
through society to the end that law may approach its supreme ideal which is the sway and dominance
of justice." 2

Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual
construction cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of
private respondent. Such unjust enrichment, as previously discussed, is not allowed by law.
Finally, with respect to the award of attorney's fees to respondent, the Court has previously held that,
"even with the presence of an agreement between the parties, the court may nevertheless reduce
attorney's fees though fixed in the contract when the amount thereof appears to be unconscionable or
unreasonable." 3 As previously noted, the diligence and legal know-how exhibited by counsel for
private respondent hardly justify an award of 25% of the principal amount due, which would be at least
P60,000.00. Besides, the issues in this case are far from complex and intricate. The award of
attorney's fees is thus reduced to P10,000.00.
WHEREFORE, with the above modification in respect of the amount of attorney's fees, the appealed
decision of the Court of Appeals in CA G.R. CV No. 40450 is AFFIRMED.
SO ORDERED.

In the present case, petitioners' arguments to support absence of liability for the cost of construction
beyond the original contract price are not persuasive.
Under the previously quoted Article IX of the construction contract, petitioners would make the
appropriate adjustment to the contract price in case the cost of the project increases through no fault of
the contractor (private respondent). Private respondent informed petitioners of the drastic increase in
construction cost as early as March 1980.
Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded
payment of P259,417.23, petitioner bank's Vice-President Rosito C. Manhit and the bank's
architectural consultant were directed by the bank to verify and compute private respondent's claims of
increased cost. A recommendation was then made to settle private respondent's claim for
P200,000.00. Despite this recommendation and several demands from private respondent, SBTC
failed to make payment. It denied authorizing anyone to make a settlement of private respondent's
claim and likewise denied any liability, contending that the absence of a mutual agreement made
private respondent's demand premature and baseless.
Petitioners' arguments are specious.
It is not denied that private respondent incurred additional expenses in constructing petitioner bank's
building due to a drastic and unexpected increase in construction cost. In fact, petitioner bank admitted
liability for increased cost when a recommendation was made to settle private respondent's claim for
P200,000.00. Private respondent's claim for the increased amount was adequately proven during the
trial by receipts, invoices and other supporting documents.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends
upon the sole will of the debtor. In the present case, the mutual agreement, the absence of which
petitioner bank relies upon to support its non-liability for the increased construction cost, is in effect a
28
CIVIL LAW REVIEW 2

G.R. No. 23769

September 16, 1925

SONG FO & COMPANY, plaintiff-appellee,

vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.

Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you
would pay us at the end of each month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain.
Yours very truly,

In the court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two
causes of action for breach of contract against the Hawaiian-Philippine Co., defendant, in which
judgment was asked for P70,369.50, with legal interest, and costs. In an amended answer and crosscomplaint, the defendant set up the special defense that since the plaintiff had defaulted in the
payment for the molasses delivered to it by the defendant under the contract between the parties, the
latter was compelled to cancel and rescind the said contract. The case was submitted for decision on a
stipulation of facts and the exhibits therein mentioned. The judgment of the trial court condemned the
defendant to pay to the plaintiff a total of P35,317.93, with legal interest from the date of the
presentation of the complaint, and with costs.
From the judgment of the Court of First Instance the defendant only has appealed. In this court it has
made the following assignment of errors: "I. The lower court erred in finding that appellant had agreed
to sell to the appellee 400,000, and not only 300,000, gallons of molasses. II. The lower court erred in
finding that the appellant rescinded without sufficient cause the contract for the sale of molasses
executed by it and the appellee. III. The lower court erred in rendering judgment in favor of the
appellee and not in favor of the appellant in accordance with the prayer of its answer and crosscomplaint. IV. The lower court erred in denying appellant's motion for a new trial." The specified errors
raise three questions which we will consider in the order suggested by the appellant.
1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000
gallons of molasses? The trial court found the former amount to be correct. The appellant
contends that the smaller amount was the basis of the agreement.
The contract of the parties is in writing. It is found principally in the documents, Exhibits F
and G. The First mentioned exhibit is a letter addressed by the administrator of the
Hawaiian-Philippine Co. to Song Fo & Company on December 13, 1922. It reads:

SILAY, OCC. NEGROS, P.I.

December 13, 1922

HAWAIIAN-PHILIPPINE COMPANY
BY R. C. PITCAIRN
Administrator.

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on
December 16, 1922. This letter reads:

December 16th, 1922.

Messrs. HAWAIIAN-PHILIPPINE CO.,

Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and
understood all their contents.
In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo
the one who visited your Central, but it was not for he was Mr. Song Heng, the
representative and the manager of Messrs. Song Fo & Co.
With reference to the contents of your letter dated the 13th inst. we confirm all the
arrangements you have stated and in order to make the contract clear, we hereby quote
below our old contract as amended, as per our new arrangements.
(a) Price, at 2 cents per gallon delivered at the central.

Messrs. SONG FO AND CO.

Iloilo, Iloilo.
DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited
this Central, we wish to state as follows:
He agreed to the delivery of 300,000 gallons of molasses at the same price as last year
under the same condition, and the same to start after the completion of our grinding season.
He requested if possible to let you have molasses during January, February and March or in
other words, while we are grinding, and we agreed with him that we would to the best of our
ability, altho we are somewhat handicapped. But we believe we can let you have 25,000
gallons during each of the milling months, altho it interfere with the shipping of our own and
planters sugars to Iloilo. Mr. Song Fo also asked if we could supply him with another
100,000 gallons of molasses, and we stated we believe that this is possible and will do our
best to let you have these extra 100,000 gallons during the next year the same to be taken
by you before November 1st, 1923, along with the 300,000, making 400,000 gallons in all.

(b) All handling charges and expenses at the central and at the dock at Mambaguid for our
account.
(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of
P48 for the round trip dock to central and central to dock. This service to be restricted to one
trip for the six tanks.
Yours very truly,

SONG FO & COMPANY

By __________________________
Manager.

We agree with appellant that the above quoted correspondence is susceptible of but one interpretation.
The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses.
29
CIVIL LAW REVIEW 2

The Hawaiian-Philippine Co. also believed it possible to accommodate Song Fo & Company by
supplying the latter company with an extra 100,000 gallons. But the language used with reference to
the additional 100,000 gallons was not a definite promise. Still less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider
itself obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter
written by the manager of Song Fo & Company on October 17, 1922, expressly mentions an
understanding between the parties of a contract for P300,000 gallons of molasses.
We sustain appellant's point of view on the first question and rule that the contract between the parties
provided for the delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000 gallons of
molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo &
Company? The trial judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo
(Mr. Song Heng) gave us to understand that you would pay us at the end of each month for molasses
delivered to you." In Exhibit G, we find Song Fo & Company stating that they understand the contents
of Exhibit F, and that they confirm all the arrangements you have stated, and in order to make the
contract clear, we hereby quote below our old contract as amended, as per our new arrangements. (a)
Price, at 2 cents per gallon delivered at the central." In connection with the portion of the contract
having reference to the payment for the molasses, the parties have agree on a table showing the date
of delivery of the molasses, the amount and date thereof, the date of receipt of account by plaintiff, and
date of payment. The table mentioned is as follows:

Date of delivery

Account and date thereof

Date of receipt of
account by
plaintiff

Date of payment

1923

1923

1922

Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills for each
delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo & Company dated April
2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the Hawaiian-Philippine Co. to
Song Fo & Company on April 2, 1923, by which the Hawaiian-Philippine Co. gave notice of the
termination of the contract, gave as the reason for the rescission, the breach by Song Fo & Company
of this condition: "You will recall that under the arrangements made for taking our molasses, you were
to meet our accounts upon presentation and at each delivery." Not far removed from this statement, is
the allegation of plaintiff in its complaint that "plaintiff agreed to pay defendant, at the end of each
month upon presentation accounts."
Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable
deduction is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of
accounts at the end of each month. Under this hypothesis, Song Fo & Company should have paid for
the molasses delivered in December, 1922, and for which accounts were received by it on January 5,
1923, not later than January 31 of that year. Instead, payment was not made until February 20, 1923.
All the rest of the molasses was paid for either on time or ahead of time.
The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the
contract should be treated as of the essence of the contract. Theoretically, agreeable to certain
conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had the right to
rescind the contract because of the breach of Song Fo & Company. But actually, there is here present
no outstanding fact which would legally sanction the rescission of the contract by the HawaiianPhilippine Co.
The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but
only for such breaches as are so substantial and fundamental as to defeat the object of the parties in
making the agreement. A delay in payment for a small quantity of molasses for some twenty days is
not such a violation of an essential condition of the contract was warrants rescission for nonperformance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it arose by
accepting payment of the overdue accounts and continuing with the contract. Thereafter, Song Fo &
Company was not in default in payment so that the Hawaiian-Philippine co. had in reality no excuse for
writing its letter of April 2, 1923, cancelling the contract. (Warner, Barnes & Co. vs. Inza [1922], 43
Phil., 505.)

Dec. 18

P206.16

Dec. 26/22

Jan. 5

Feb. 20

Dec. 29

206.16

Jan. 3/23

do

Do

We rule that the appellant had no legal right to rescind the contract of sale because of the failure of
Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We sustain
the finding of the trial judge in this respect.

Jan. 5

206.16

Jan. 9/23

Mar. 7 or 8

Mar. 31

3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract
imprudently breached by the Hawaiian-Philippine Co., what is the measure of damages? We again turn
to the facts as agreed upon by the parties.

Feb. 12

206.16

Mar. 12/23

do

Do

Feb. 27

206.16

do

do

Do

Mar. 5

206.16

do

do

Do

Mar. 16

206.16

Mar. 20/23

Apr. 2/23

Apr. 19

Mar. 24

206.16

Mar. 31/23

do

Do

Mar. 29

206.16

do

do

Do

1923

Some doubt has risen as to when Song Fo & Company was expected to make payments for the
molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on the
point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the

The first cause of action of the plaintiff is based on the greater expense to which it was put in being
compelled to secure molasses from other sources. Three hundred thousand gallons of molasses was
the total of the agreement, as we have seen. As conceded by the plaintiff, 55,006 gallons of molasses
were delivered by the defendant to the plaintiff before the breach. This leaves 244,994 gallons of
molasses undelivered which the plaintiff had to purchase in the open market. As expressly conceded
by the plaintiff at page 25 of its brief, 100,000 gallons of molasses were secured from the Central North
Negros Sugar Co., Inc., at two centavos a gallon. As this is the same price specified in the contract
between the plaintiff and the defendant, the plaintiff accordingly suffered no material loss in having to
make this purchase. So 244,994 gallons minus the 100,000 gallons just mentioned leaves as a result
144,994 gallons. As to this amount, the plaintiff admits that it could have secured it and more from the
Central Victorias Milling Company, at three and one-half centavos per gallon. In other words, the
plaintiff had to pay the Central Victorias Milling company one and one-half centavos a gallon more for
the molasses than it would have had to pay the Hawaiian-Philippine Co. Translated into pesos and
centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the conditions existing at the
central of the Hawaiian-Philippine Co. may have been different than those found at the Central North
30

CIVIL LAW REVIEW 2

Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as not alone through the delay
but through expenses of transportation and incidental expenses, the plaintiff may have been put to
greater cost in making the purchase of the molasses in the open market, we would concede under the
first cause of action in round figures P3,000.

2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00]

PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution of this
instrument, payment of which shall be secured by an irrevocable standby letter of credit to
be issued by any reputable local banking institution acceptable to the Vendor.

The second cause of action relates to lost profits on account of the breach of the contract. The only
evidence in the record on this question is the stipulation of counsel to the effect that had Mr. Song
Heng, the manager of Song Fo & Company, been called as a witness, he would have testified that the
plaintiff would have realized a profit of P14,948.43, if the contract of December 13, 1922, had been
fulfilled by the defendant. Indisputably, this statement falls far short of presenting proof on which to
make a finding as to damages.

xxxx

In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the
same line of thought as found in the decision of the trial court, which we have found to be
unsustainable. In the second place, had Mr. Song Heng taken the witness-stand and made the
statement attributed to him, it would have been insufficient proof of the allegations of the complaint,
and the fact that it is a part of the stipulation by counsel does not change this result. And lastly, the
testimony of the witness Song Heng, it we may dignify it as such, is a mere conclusion, not a proven
fact. As to what items up the more than P14,000 of alleged lost profits, whether loss of sales or loss of
customers, or what not, we have no means of knowing.
We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on the
first cause of action in the amount of P3,000 and on the second cause of action in no amount.
Appellant's assignments of error are accordingly found to be well taken in part and not well taken in
part.
Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have
and recover from the defendant the sum of P3,000, with legal interest form October 2, 1923, until
payment. Without special finding as to costs in either instance, it is so ordered.

G.R. No. 126083

July 12, 2006

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S. Cortes),
petitioner,
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT CORPORATION,
respondents.
The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the Court of
Appeals in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision2 of the Regional Trial
Court of Makati, Branch 138, which rescinded the contract of sale entered into by petitioner Antonio
Cortes (Cortes) and private respondent Villa Esperanza Development Corporation (Corporation).
The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and
Cortes as seller, entered into a contract of sale over the lots covered by Transfer Certificate of Title
(TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-A, located at Baclaran, Paraaque, Metro
Manila. On various dates in 1983, the Corporation advanced to Cortes the total sum of P1,213,000.00.
Sometime in September 1983, the parties executed a deed of absolute sale containing the following
terms:3
1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO
MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine
Currency, less all advances paid by the Vendee to the Vendor in connection with the sale;

4. All expense for the registration of this document with the Register of Deeds concerned,
including the transfer tax, shall be divided equally between the Vendor and the Vendee.
Payment of the capital gains shall be exclusively for the account of the Vendor; 5%
commission of Marcosa Sanchez to be deducted upon signing of sale.4
Said Deed was retained by Cortes for notarization.
On January 14, 1985, the Corporation filed the instant case5 for specific performance seeking to
compel Cortes to deliver the TCTs and the original copy of the Deed of Absolute Sale. According to the
Corporation, despite its readiness and ability to pay the purchase price, Cortes refused delivery of the
sought documents. It thus prayed for the award of damages, attorney's fees and litigation expenses
arising from Cortes' refusal to deliver the same documents.
In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the three TCTs
were surrendered to the Corporation and it is the latter which refused to pay in full the agreed down
payment. He added that portion of the subject property is occupied by his lessee who agreed to vacate
the premises upon payment of disturbance fee. However, due to the Corporation's failure to pay in full
the sum of P2,200,000.00, he in turn failed to fully pay the disturbance fee of the lessee who now
refused to pay monthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding
balance plus interest and in the alternative, to cancel the sale and forfeit the P1,213,000.00 partial
down payment, with damages in either case.
On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to return
to the Corporation the amount of P1,213,000.00, plus interest. It ruled that pursuant to the contract of
the parties, the Corporation should have fully paid the amount of P2,200,000.00 upon the execution of
the contract. It stressed that such is the law between the parties because the Corporation failed to
present evidence that there was another agreement that modified the terms of payment as stated in
the contract. And, having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of
the Deed of Absolute Sale and the TCTs, rescission of the contract is proper.
In its motion for reconsideration, the Corporation contended that the trial court failed to consider their
agreement that it would pay the balance of the down payment when Cortes delivers the TCTs. The
motion was, however, denied by the trial court holding that the rescission should stand because the
Corporation did not act on the offer of Cortes' counsel to deliver the TCTs upon payment of the
balance of the down payment. Thus:
The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in the
decision sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed
that if [the Corporation] completes the down payment agreed upon and make arrangement
for the payment of the balances of the purchase price, [Cortes] would sign the Deed of Sale
and turn over the certificate of title to the [Corporation]. [The Corporation] did nothing to
comply with its undertaking under the agreement between the parties.
WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is
hereby DENIED.
SO ORDERED.7
31

CIVIL LAW REVIEW 2

On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to execute
a Deed of Absolute Sale conveying the properties and to deliver the same to the Corporation together
with the TCTs, simultaneous with the Corporation's payment of the balance of the purchase price of
P2,487,000.00. It found that the parties agreed that the Corporation will fully pay the balance of the
down payment upon Cortes' delivery of the three TCTs to the Corporation. The records show that no
such delivery was made, hence, the Corporation was not remiss in the performance of its obligation
and therefore justified in not paying the balance. The decretal portion thereof, provides:
WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The decision
appealed from is hereby REVERSED and SET ASIDE and a new judgment rendered
ordering [Cortes] to execute a deed of absolute sale conveying to [the Corporation] the
parcels of land subject of and described in the deed of absolute sale, Exhibit D.
Simultaneously with the execution of the deed of absolute sale and the delivery of the
corresponding owner's duplicate copies of TCT Nos. 31113-A, 31931-A and 32013-A of the
Registry of Deeds for the Province of Rizal, Metro Manila, District IV, [the Corporation] shall
pay [Cortes] the balance of the purchase price of P2,487,000.00. As agreed upon in
paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and conditions, "All
expenses for the registration of this document (the deed of sale) with the Register of Deeds
concerned, including the transfer tax, shall be divided equally between [Cortes and the
Corporation]. Payment of the capital gains shall be exclusively for the account of the
Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale." There is
no pronouncement as to costs.

The issue therefore is whether there is delay in the performance of the parties' obligation that would
justify the rescission of the contract of sale. To resolve this issue, we must first determine the true
agreement of the parties.
The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties, as
shown not necessarily by the terminology used in the contract but by their conduct, words, actions and
deeds prior to, during and immediately after executing the agreement. As such, therefore, documentary
and parol evidence may be submitted and admitted to prove such intention.10
In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay in full
the P2,200,000.00 down payment upon execution of the contract. However, as correctly noted by the
Court of Appeals, the transcript of stenographic notes reveal Cortes' admission that he agreed that the
Corporation's full payment of the sum of P2,200,000.00 would depend upon his delivery of the TCTs of
the three lots. In fact, his main defense in the Answer is that, he performed what is incumbent upon
him by delivering to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute Sale,
but the latter refused to pay in full the down payment.11 Pertinent portion of the transcript, reads:
[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not
been paid in full the agreed down payment?
A Well, the broker told me that the down payment will be given if I surrender the titles.

SO ORDERED.8
Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be
reinstated.
There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the parties.
Reciprocal obligations are those which arise from the same cause, and which each party is a debtor
and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously, so that the performance of one is conditioned upon
the simultaneous fulfillment of the other.9

Q Do you mean to say that the plaintiff agreed to pay in full the down payment of
P2,200,000.00 provided you surrender or entrust to the plaintiff the titles?
A Yes, sir.12
What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title of the
lots will be transferred in the name of the Corporation upon full payment of the P2,200,000.00 down
payment. Thus
ATTY. ANTARAN

Article 1191 of the Civil Code, states:

Q Of course, you have it transferred in the name of the plaintiff, the title?
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
xxxx
As to when said failure or delay in performance arise, Article 1169 of the same Code provides that
ART. 1169

A Upon full payment.

xxxx
ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down payment of
P2,200,000.00?

xxxx
A Yes, sir.13
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins. (Emphasis supplied)

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver the
TCTs to the Corporation in order to effect said transfer. Hence, the phrase "execution of this
instrument" 14 as appearing in the Deed of Absolute Sale, and which event would give rise to the
Corporation's obligation to pay in full the amount of P2,200,000.00, can not be construed as referring
solely to the signing of the deed. The meaning of "execution" in the instant case is not limited to the
signing of a contract but includes as well the performance or implementation or accomplishment of the
32

CIVIL LAW REVIEW 2

parties' agreement.15 With the transfer of titles as the corresponding reciprocal obligation of payment,
Cortes' obligation is not only to affix his signature in the Deed, but to set into motion the process that
would facilitate the transfer of title of the lots, i.e., to have the Deed notarized and to surrender the
original copy thereof to the Corporation together with the TCTs.

A Yes, sir.

Having established the true agreement of the parties, the Court must now determine whether Cortes
delivered the TCTs and the original Deed to the Corporation. The Court of Appeals found that Cortes
never surrendered said documents to the Corporation. Cortes testified that he delivered the same to
Manny Sanchez, the son of the broker, and that Manny told him that her mother, Marcosa Sanchez,
delivered the same to the Corporation.

Q How do you know that it was delivered to the plaintiff by the son of the broker?

COURT

A The broker told me that she delivered the title to the plaintiff.
ATTY. ANTARAN

Q Do you have any proof to show that you have indeed surrendered these titles to the
plaintiff?

Q Did she not show you any receipt that she delivered to [Mr.] Dragon17 the title without any
receipt?

A Yes, sir.
A I have not seen any receipt.
Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with
that receipt that you have mentioned?
A That is the receipt of the real estate broker when she received the titles.
Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is
that Manny Sanchez?

Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not.
It is only upon the allegation of the broker?
A Yes, sir.18
However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs. She also
denied knowledge of delivery thereof to her son, Manny, thus:

A That is the son of the broker.

xxxx
Q May we know the full name of the real estate broker?
A Marcosa Sanchez
xxxx
Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?
A That is what [s]he told me. She gave them to the plaintiff.
x x x x.16
ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?
xxxx
Q It is in the hands of the broker but there is no showing that it is in the hands of the
plaintiff?

Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he
allegedly gave you the title to the property in question, is it true?
A I did not receive the title.
Q He likewise said that the title was delivered to your son, do you know about that?
A I do not know anything about that.19
What further strengthened the findings of the Court of Appeals that Cortes did not surrender the
subject documents was the offer of Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of
Absolute Sale if the Corporation will pay the balance of the down payment. Indeed, if the said
documents were already in the hands of the Corporation, there was no need for Cortes' counsel to
make such offer.
Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same
together with the TCTs, the trial court erred in concluding that he performed his part in the contract of
sale and that it is the Corporation alone that was remiss in the performance of its obligation. Actually,
both parties were in delay. Considering that their obligation was reciprocal, performance thereof must
be simultaneous. The mutual inaction of Cortes and the Corporation therefore gave rise to a
compensation morae or default on the part of both parties because neither has completed their part in
their reciprocal obligation.20 Cortes is yet to deliver the original copy of the notarized Deed and the
TCTs, while the Corporation is yet to pay in full the agreed down payment of P2,200,000.00. This
mutual delay of the parties cancels out the effects of default,21 such that it is as if no one is guilty of
delay.22
We find no merit in Cortes' contention that the failure of the Corporation to act on the proposed
settlement at the pre-trial must be construed against the latter. Cortes argued that with his counsel's
33

CIVIL LAW REVIEW 2

offer to surrender the original Deed and the TCTs, the Corporation should have consigned the balance
of the down payment. This argument would have been correct if Cortes actually surrendered the Deed
and the TCTs to the Corporation. With such delivery, the Corporation would have been placed in
default if it chose not to pay in full the required down payment. Under Article 1169 of the Civil Code,
from the moment one of the parties fulfills his obligation, delay by the other begins. Since Cortes did
not perform his part, the provision of the contract requiring the Corporation to pay in full the down
payment never acquired obligatory force. Moreover, the Corporation could not be faulted for not
automatically heeding to the offer of Cortes. For one, its complaint has a prayer for damages which it
may not want to waive by agreeing to the offer of Cortes' counsel. For another, the previous
representation of Cortes that the TCTs were already delivered to the Corporation when no such
delivery was in fact made, is enough reason for the Corporation to be more cautious in dealing with
him.
The Court of Appeals therefore correctly ordered the parties to perform their respective obligation in
the contract of sale, i.e., for Cortes to, among others, deliver the necessary documents to the
Corporation and for the latter to pay in full, not only the down payment, but the entire purchase price.
And since the Corporation did not question the Court of Appeal's decision and even prayed for its
affirmance, its payment should rightfully consist not only of the amount of P987,000.00, representing
the balance of the P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining
balance in the P3,700,000.00 purchase price.
WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of Appeals in CAG.R. CV No. 47856, is AFFIRMED.
SO ORDERED.

G.R. No. L-32811 March 31, 1980

FELIPE C. ROQUE, petitioner,
vs.
NICANOR LAPUZ and THE COURT OF APPEALS, respondents.
Appeal by certiorari from the Resolution of the respondent court 1 dated October 12, 1970 in CA-G.R.
No. L-33998-R entitled "Felipe C. Roque, plaintiff-appellee, versus Nicanor Lapuz, defendantappellant" amending its original decision of April 23, 1970 which affirmed the decision of the Court of
First Instance of Rizal (Quezon City Branch) in Civil Case No. Q-4922 in favor of petitioner, and the
Resolution of the respondent court denying petitioner's motion for reconsideration.
The facts of this case are as recited in the decision of the Trial Court which was adopted and affirmed
by the Court of Appeals:
Sometime in 1964, prior to the approval by the National Planning Commission of
the consolidation and subdivision plan of plaintiff's property known as the
Rockville Subdivision, situated in Balintawak, Quezon City, plaintiff and
defendant entered into an agreement of sale covering Lots 1, 2 and 9, Block 1, of
said property, with an aggregate area of 1,200 square meters, payable in 120
equal monthly installments at the rate of P16.00, P15.00 per square meter,
respectively. In accordance with said agreement, defendant paid to plaintiff the
sum of P150.00 as deposit and the further sum of P740.56 to complete the
payment of four monthly installments covering the months of July, August,
September, and October, 1954. (Exhs. A and B). When the document Exhibit "A"
was executed on June 25, 1954, the plan covering plaintiff's property was merely

tentative, and the plaintiff referred to the proposed lots appearing in the tentative
plan.
After the approval of the subdivision plan by the Bureau of Lands on January 24,
1955, defendant requested plaintiff that he be allowed to abandon and substitute
Lots 1, 2 and 9, the subject matter of their previous agreement, with Lots 4 and
12, Block 2 of the approved subdivision plan, of the Rockville Subdivision, with a
total area of 725 square meters, which are corner lots, to which request plaintiff
graciously acceded.
The evidence discloses that defendant proposed to plaintiff modification of their
previous contract to sell because he found it quite difficult to pay the monthly
installments on the three lots, and besides the two lots he had chosen were
better lots, being corner lots. In addition, it was agreed that the purchase price of
these two lots would be at the uniform rate of P17.00 per square (meter) payable
in 120 equal monthly installments, with interest at 8% annually on the balance
unpaid. Pursuant to this new agreement, defendant occupied and possessed
Lots 4 and 12, Block 2 of the approved subdivision plan, and enclosed them,
including the portion where his house now stands, with barbed wires and adobe
walls.
However, aside from the deposit of P150.00 and the amount of P740.56 which
were paid under their previous agreement, defendant failed to make any further
payment on account of the agreed monthly installments for the two lots in
dispute, under the new contract to sell. Plaintiff demanded upon defendant not
only to pay the stipulated monthly installments in arrears, but also to make up-todate his payments, but defendant, instead of complying with the demands, kept
on asking for extensions, promising at first that he would pay not only the
installments in arrears but also make up-to-date his payment, but later on refused
altogether to comply with plaintiff's demands.
Defendant was likewise requested by the plaintiff to sign the corresponding
contract to sell in accordance with his previous commitment. Again, defendant
promised that he would sign the required contract to sell when he shall have
made up-to-date the stipulated monthly installments on the lots in question, but
subsequently backed out of his promise and refused to sign any contract in
noncompliance with what he had represented on several occasions. And plaintiff
relied on the good faith of defendant to make good his promise because
defendant is a professional and had been rather good to him (plaintiff).
On or about November 3, 1957, in a formal letter, plaintiff demanded upon
defendant to vacate the lots in question and to pay the reasonable rentals
thereon at the rate of P60.00 per month from August, 1955. (Exh. "B").
Notwithstanding the receipt of said letter, defendant did not deem it wise nor
proper to answer the same.
In reference to the mode of payment, the Honorable Court of Appeals found
Both parties are agreed that the period within which to pay the lots in question is
ten years. They however, disagree on the mode of payment. While the appellant
claims that he could pay the purchase price at any time within a period of ten
years with a gradual proportionate discount on the price, the appellee maintains
that the appellant was bound to pay monthly installments.
On this point, the trial court correctly held that
34

CIVIL LAW REVIEW 2

It is further argued by defendant that under the agreement to sell in question, he

has the right or option to pay the purchase price at anytime within a period of ten
years from 1954, he being entitled, at the same time, to a graduated reduction of
the price. The Court is constrained to reject this version not only because it is
contradicted by the weight of evidence but also because it is not consistent with
what is reasonable, plausible and credible. It is highly improbable to expect
plaintiff, or any real estate subdivision owner for that matter, to agree to a sale of
his land which would be payable anytime in ten years at the exclusive option of
the purchaser. There is no showing that defendant is a friend, a relative, or
someone to whom plaintiff had to be grateful, as would justify an assumption that
he would have agreed to extend to defendant such an extra- ordinary
concession. Furthermore, the context of the document, Exhibit "B", not to
mention the other evidences on records is indicative that the real intention of the
parties is for the payment of the purchase price of the lot in question on an equal
monthly installment basis for a period of ten years (Exhibits "A", "II", "J" and "K").
On January 22, 1960, petitioner Felipe C, Roque (plaintiff below) filed the complaint against defendant
Nicanor Lapuz (private respondent herein) with the Court of First Instance of Rizal, Quezon City
Branch, for rescission and cancellation of the agreement of sale between them involving the two lots in
question and prayed that judgment be rendered ordering the rescission and cancellation of the
agreement of sale, the defendant to vacate the two parcels of land and remove his house therefrom
and to pay to the plaintiff the reasonable rental thereof at the rate of P60.00 a month from August 1955
until such time as he shall have vacated the premises, and to pay the sum of P2,000.00 as attorney's
fees, costs of the suit and award such other relief or remedy as may be deemed just and equitable in
the premises.
Defendant filed a Motion to Dismiss on the ground that the complaint states no cause of action, which
motion was denied by the court. Thereafter, defendant filed his Answer alleging that he bought three
lots from the plaintiff containing an aggregate area of 1,200 sq. meters and previously known as Lots 1,
2 and 9 of Block 1 of Rockville Subdivision at P16.00, P15.00 and P15.00, respectively, payable at any
time within ten years. Defendant admits having occupied the lots in question.
As affirmative and special defenses, defendant alleges that the complaint states no cause of action;
that the present action for rescission has prescribed; that no demand for payment of the balance was
ever made; and that the action being based on reciprocal obligations, before one party may compel
performance, he must first comply what is incumbent upon him.
As counterclaim, defendant alleges that because of the acts of the plaintiff, he lost two lots containing
an area of 800 sq. meters and as a consequence, he suffered moral damages in the amount of
P200.000.00; that due to the filing of the present action, he suffered moral damages amounting to
P100,000.00 and incurred expenses for attorney's fees in the sum of P5,000.00.
Plaintiff filed his Answer to the Counterclaim and denied the material averments thereof.
After due hearing, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment in favor of plain. plaintiff and against
the defendant, as follows:
(a) Declaring the agreement of sale between plaintiff and defendant involving the
lots in question (Lots 4 and 12, Block 2 of the approved subdivision plan of the
Rockville Subdivision) rescinded, resolved and cancelled;

(b) Ordering defendant to vacate the said lots and to remove his house therefrom
and also to pay plaintiff the reasonable rental thereof at the rate of P60.00 per
month from August, 1955 until he shall have actually vacated the premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's
fees, as well as the costs of the suit. (Record on Appeal, p. 118)
(a) Declaring the agreement of sale between plaintiff and defendant involving the
lots in question (Lots 4 and 12, Block 2 of the approved subdivision plan of the
Rockville Subdivision) rescinded, resolved and cancelled;
(b) Ordering defendant to vacate the said lots and to remove his house therefrom
and also to pay plaintiff the reasonable rental thereof at the rate of P60.00 per
month from August, 1955 until he shall have actually vacated premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's
fees, as well as the costs of the suit. (Record on Appeal. p. 118)
Not satisfied with the decision of the trial court, defendant appealed to the Court of Appeals. The latter
court, finding the judgment appealed from being in accordance with law and evidence, affirmed the
same.
In its decision, the appellate court, after holding that the findings of fact of the trial court are fully
supported by the evidence, found and held that the real intention of the parties is for the payment of the
purchase price of the lots in question on an equal monthly installment basis for the period of ten years;
that there was modification of the original agreement when defendant actually occupied Lots Nos. 4
and 12 of Block 2 which were corner lots that commanded a better price instead of the original Lots
Nos. 1, 2 and 9, Block I of the Rockville Subdivision; that appellant's bare assertion that the agreement
is not rescindable because the appellee did not comply with his obligation to put up the requisite
facilities in the subdivision was insufficient to overcome the presumption that the law has been obeyed
by the appellee; that the present action has not prescribed since Article 1191 of the New Civil Code
authorizing rescission in reciprocal obligations upon noncompliance by one of the obligors is the
applicable provision in relation to Article 1149 of the New Civil Code; and that the present action was
filed within five years from the time the right of action accrued.
Defendant filed a Motion for Reconsideration of the appellate court's decision on the following grounds:
First Neither the pleadings nor the evidence, testimonial, documentary or
circumstantial, justify the conclusion as to the existence of an alleged subsequent
agreement novatory of the original contract admittedly entered into between the
parties:
Second There is nothing so unusual or extraordinary, as would render
improbable the fixing of ten ears as the period within which payment of the
stipulated price was to be payable by appellant;
Third Appellee has no right, under the circumstances on the case at bar, to
demand and be entitled to the rescission of the contract had with appellant;
Fourth Assuming that any action for rescission is availability to appellee, the
same, contrary to the findings of the decision herein, has prescribed;

35
CIVIL LAW REVIEW 2

Fifth Assumming further that appellee's action for rescission, if any, has not
yet prescribed, the same is at least barred by laches;
Sixth Assuming furthermore that a cause of action for rescission exists,
appellant should nevertheless be entitled to tile fixing of a period within which to
comply with his obligation; and
Seventh At all events, the affirmance of the judgment for the payment of
rentals on the premises from August, 1955 and he taxing of attorney's fees
against appellant are not warranted b the circumstances at bar. (Rollo, pp. 87-88)
Acting on the Motion for Reconsideration, the Court of Appeals sustained the sixth ground raised by
the appellant, that assuming that a cause of action for rescission exists, he should nevertheless be
entitled to the fixing of a period within which to comply with his obligation. The Court of Appeals,
therefore, amended its original decision in the following wise and manner:
WHEREFORE, our decision dated April 23, 1970 is hereby amended in the
sense that the defendant Nicanor Lapuz is hereby granted a period of ninety (90)
days from entry hereof within which to pay the balance of the purchase price in
the amount of P11,434,44 with interest thereon at the rate of 8% per annum from
August 17, 1955 until fully paid. In the event that the defendant fails to comply
with his obligation as above stated within the period fixed herein, our original
judgment stands.
Petitioner Roque, as plaintiff-appellee below, filed a Motion for Reconsideration; the Court of Appeals
denied it. He now comes and appeals to this Court on a writ of certiorari.
The respondent Court of Appeals rationalizes its amending decision by considering that the house
presently erected on the land subject of the contract is worth P45,000.00, which improvements
introduced by defendant on the lots subject of the contract are very substantial, and thus being the
case, "as a matter of justice and equity, considering that the removal of defendant's house would
amount to a virtual forfeiture of the value of the house, the defendant should be granted a period within
which to fulfill his obligations under the agreement." Cited as authorities are the cases of Kapisanan
Banahaw vs. Dejarme and Alvero, 55 Phil. 338, 344, where it is held that the discretionary power of the
court to allow a period within which a person in default may be permitted to perform the stipulation
upon which the claim for resolution of the contract is based should be exercised without hesitation in a
case where a virtual forfeiture of valuable rights is sought to be enforced as an act of mere reprisal for
a refusal of the debtor to submit to a usurious charge, and the case of Puerto vs. Go Ye Pin, 47 O.G.
264, holding that to oust the defendant from the lots without giving him a chance to recover what his
father and he himself had spent may amount to a virtual forfeiture of valuable rights.
As further reasons for allowing a period within which defendant could fulfill his obligation, the
respondent court held that there exists good reasons therefor, having in mind that which affords
greater reciprocity of rights (Ramos vs. Blas, 51 O.G. 1920); that after appellant had testified that
plaintiff failed to comply with his part of the contract to put up the requisite facilities in the subdivision,
plaintiff did not introduce any evidence to rebut defendant's testimony but simply relied. upon the
presumption that the law has been obeyed, thus said presumption had been successfully rebutted as
Exhibit "5-D" shows that the road therein shown is not paved The Court, however, concedes that
plaintiff's failure to comply with his obligation to put up the necessary facilities in the subdivision will not
deter him from asking f r the rescission of the agreement since this obligation is not correlative with
defendant's obligation to buy the property.
Petitioner assails the decision of the Court of Appeals for the following alleged errors:

I. The Honorable Court of Appeals erred in applying paragraph 3, Article 1191 of

the Civil Code which refers to reciprocal obligations in general and, pursuant
thereto, in granting respondent Lapuz a period of ninety (90) days from entry of
judgment within which to pay the balance of the purchase price.
II. The Honorable Court of Appeals erred in not holding that Article 1592 of the
same Code, which specifically covers sales of immovable property and which
constitutes an exception to the third paragraph of Article 1191 of said Code, is
applicable to the present case.
III. The Honorable Court of Appeals erred in not holding that respondent Lapuz
cannot avail of the provisions of Article 1191, paragraph 3 of the Civil Code
aforesaid because he did not raise in his answer or in any of the pleadings he
filed in the trial court the question of whether or not he is entitled, by reason of a
just cause, to a fixing of a new period.
IV. Assuming arguendo that the agreement entered into by and between
petitioner and respondent Lapuz was a mere promise to sell or contract to sell,
under which title to the lots in question did not pass from petitioner to respondent,
still the Honorable Court of Appeals erred in not holding that aforesaid
respondent is not entitled to a new period within which to pay petitioner the
balance of P11,434.44 interest due on the purchase price of P12.325.00 of the
lots.
V. Assuming arguendo that paragraph 3, Article 1191 of the Civil Code is
applicable and may be availed of by respondent, the Honorable Court of Appeals
nonetheless erred in not declaring that aid respondent has not shown the
existence of a just cause which would authorize said Court to fix a new period
within which to pay the balance aforesaid.
VI. The Honorable Court of Appeals erred in reconsidering its original decision
promulgated on April 23, 1970 which affirmed the decision of the trial court.
The above errors may, however, be synthesized into one issue and that is, whether private respondent
is entitled to the Benefits of the third paragraph of Article 1191, New Civil Code, for the fixing of period
within which he should comply with what is incumbent upon him, and that is to pay the balance of
P11,434,44 with interest thereon at the rate of 8% 1et annum from August 17, 1955 until fully paid
since private respondent had paid only P150.00 as deposit and 4 months intallments amounting to
P740.46, or a total of P890.46, the total price of the two lots agreed upon being P12,325.00.
For his part, petitioner maintains that respondent is not entitled to the Benefits of paragraph 3, Article
1191, NCC and that instead, Article 1592 of the New Civil Code which specifically covers sales of
immovable property and which constitute an exception to the third paragraph of Art. 1191 of aid Code,
is the applicable law to the case at bar.
In resolving petitioner's assignment of errors, it is well that We lay clown the oda provisions and
pertinent rulings of the Supreme Court bearing on the crucial issue of whether Art. 1191, paragraph 3
of the New Civil Code applies to the case at Bar as held by the appellate court and supported by the
private respondent, or Art. 1592 of the same Code which petitioner strongly argues in view of the
peculiar facts and circumstances attending this case. Article 1191, New Civil Code, provides:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one at the obligors should not comply with hat is incumbent upon him

36
CIVIL LAW REVIEW 2

The injured partner may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law.
Article 1592 also provides:
Art. 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the
rescission of the contract shall of right take place, the vendee may pay, even
after the expiration of the period, as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act. After the
demand, the court may not grant him a new term.
The controlling and latest jurisprudence is established and settled in the celebrated case of Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-25885, January
31, 1972, 43 SCRA 93, originally decided in 1972, reiterated in the Resolution on Motion to Reconsider
dated August 18, 1972, 46 SCRA 381 and emphatically repeated in the Resolution on Second Motion
for Reconsideration promulgated November 16, 1978, 86 SCRA 309, which once more denied
Maritimes Second Motion for Reconsideration of October 7, 1972. In the original decision, the Supreme
Court speaking thru Justice J.B.L. Reyes said:
Under the circumstances, the action of Maritime in suspending payments to
Myers Corporation was a breach of contract tainted with fraud or malice (dolo),
as distinguished from mere negligence (culpa), "dolo" being succinctly defined as
a "conscious and intention design to evade the normal fulfillment of existing
obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and
therefore incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3,
page 129; Diaz Pairo, Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give it
further time to make payment and thereby erase the default or breach that it had
deliberately incurred. Thus the lower court committed no error in refusing to
extend the periods for payment. To do otherwise would be to sanction a
deliberate and reiterated infringement of the contractual obligations incurred by
Maritime, an attitude repugnant to the stability and obligatory force of contracts.
The decision reiterated the rule pointed out by the Supreme Court in Manuel vs. Rodriguez, 109 Phil.
1, p. 10, that:
In contracts to sell, where ownership is retained by the seller and is not to pass
until the fun payment of the price, such payment, as we said is a positive
suspensive condition, the failure of which is not a breach, casual or serious, but
simply an event that prevented the obligation of the vendor to convey title from
acquiring binding i force in accordance with Article 1117 of the Old Civil Code. To
argue that there was only a casual breach is to proceed from the assumption that
the contract is one of absolute sale, where non-payment is a resolutory condition,
which is not the case." Continuing, the Supreme Court declared:

... appellant overlooks that its contract with appellee Myers s not the ordinary
sale envisaged by Article 1592, transferring ownership simultaneously with the
delivery of the real property sold, but one in which the vendor retained ownership
of the immovable object of the sale, merely undertaking to convey it provided the
buyer strictly complied with the terms of the contract (see paragraph [d], ante
page 5). In suing to recover possession of the building from Maritime appellee
Myers is not after the resolution or setting aside of the contract and the
restoration of the parties to the status quo ante as contemplated by Article 1592,
but precisely enforcing the Provisions of the agreement that it is no longer
obligated to part with the ownership or possession of the property because
Maritime failed to comply with the specific condition precedent, which is to pay
the installments as they fell due.
The distinction between contracts of sale and contracts to sell with reserved title
has been recognized by this Court in repeated decisions upholding the power of
promisors under contracts to sell in case of failure of the other party to complete
payment, to extrajudicially terminate the operation of the contract, refuse
conveyance and retain the sums or installments already received, where such
rights are expressly provided for, as in the case at bar.
In the Resolution denying the first Motion for Reconsideration, 46 SCRA 381, the Court again speaking
thru Justice J.B.L. Reyes, reiterated the rule that in a contract to sell, the full payment of the price
through the punctual performance of the monthly payments is a condition precedent to the execution of
the final sale 4nd to the transfer of the property from the owner to the proposed buyer; so that there will
be no actual sale until and unless full payment is made.
The Court further ruled that in seeking to oust Maritime for failure to pay the price as agreed upon,
Myers was not rescinding (or more properly, resolving) the contract but precisely enforcing it according
to its expressed terms. In its suit, Myers was not seeking restitution to it of the ownership of the thing
sold (since it was never disposed of), such restoration being the logical consequence of the fulfillment
of a resolutory condition, expressed or implied (Art. 1190); neither was it seeking a declaration that its
obligation to sell was extinguished. What is sought was a judicial declaration that because the
suspensive condition (full and punctual payment) had not been fulfilled, its obligation to sell to Maritime
never arose or never became effective and, therefore, it (Myers) was entitled to repossess the property
object of the contract, possession being a mere incident to its right of ownership.
The decision also stressed that "there can be no rescission or resolution of an obligation as yet nonexistent, because the suspensive condition did not happen. Article 1592 of the New Civil Code (Art.
1504 of Old Civil Code) requiring demand by suit or notarial act in case the vendor of realty wants to
rescind does not apply to a contract to sell or promise to sell, where title remains with the vendor until
fulfillment to a positive condition, such as full payment of the price." (Manuel vs, Rodriguez, 109 Phil. 9)
Maritime's Second Motion for Reconsideration was denied in the Resolution of the Court dated
November 16, 1978, 86 SCRA 305, where the governing law and precedents were briefly summarized
in the strong and emphatic language of Justice Teehankee, thus:
(a) The contract between the parties was a contract to sell or conditional sale
with title expressly reserved in the vendor Myers Building Co., Inc. Myers until the
suspensive condition of full and punctual payment of the full price shall have
been met on pain of automatic cancellation of the contract upon failure to pay
any of the monthly installments when due and retention of the sums theretofore
paid as rentals. When the vendee, appellant Maritime, willfully and in bad faith
failed since March, 1961 to pay the P5,000. monthly installments
notwithstanding that it was punctually collecting P10,000. monthly rentals from
the lessee Luzon Brokerage Co., Myers was entitled, as it did in law and fact, to
enforce the terms of the contract to sell and to declare the same terminated and
cancelled.
37

CIVIL LAW REVIEW 2

(b) Article 1592 (formerly Article 1504) of the new Civil Code is not applicable to
such contracts to self or conditional sales and no error was committed by the trial
court in refusing to extend the periods for payment.
(c) As stressed in the Court's decision, "it is irrelevant whether appellant
Maritime's infringement of its contract was casual or serious" for as pointed out in
Manuel vs. Rodriguez, '(I)n contracts to self. whether ownership is retained by
the seller and is not to pass until the full payment of the price, such payment, as
we said, is a positive suspensive condition, the failure of which is not a breach,
casual or serious, but simply an event that prevented the obligation of the vendor
to convey title from acquiring binding force ...
(d) It should be noted, however, that Maritimes breach was far from casual but a
most serious breach of contract ...
(e) Even if the contract were considered an unconditional sale so that Article
1592 of the Civil Code could be deemed applicable, Myers' answer to the
complaint for interpleaded in the court below constituted a judicial demand for
rescission of the contract and by the very provision of the cited codal article, 'after
the demand, the court may not grant him a new term for payment; and
(f) Assumming further that Article 1191 of the new Civil Code governing
rescission of reciprocal obligations could be applied (although Article 1592 of the
same Code is controlling since it deals specifically with sales of real property),
said article provides that '(T)he court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period' and there exists to "just
cause" as shown above for the fixing of a further period. ...
Under the first and second assignments of error which petitioner jointly discusses, he argues that the
agreement entered into between him and the respondent is a perfected contract of purchase and sale
within the meaning of Article 1475 of the New Civil Code which provides that "the contract of sale is
perfected at the moment there is a meeting of minds upon the thing which is the object of the contract
and upon the price. From that moment, the parties may reciprocally demand performance, subject to
the provisions of the law governing the form of contract."

shown in Exh. "A" and the payment of the 4- months installment made by respondent corresponding to
July, 1954 to October, 1954 in the sum of P740.56 as shown in Exh. "B". Neither is there any writing or
document evidencing the modified agreement when the 3 lots were changed to Lots 4 and 12 with a
reduced area of 725 sq. meters, which are corner lots. This absence of a formal deed of conveyance is
a very strong indication that the parties did not intend immediate transfer of ownership and title, but
only a transfer after full payment of the price. Parenthetically, We must say that the standard printed
contracts for the sale of the lots in the Rockville Subdivision on a monthly installment basis showing the
terms and conditions thereof are immaterial to the case at bar since they have not been signed by
either of the parties to this case.
Upon the law and jurisprudence hereinabove cited and considering the nature of the transaction or
agreement between petitioner and respondent which We affirm and sustain to be a contract to sell, the
following resolutions of petitioner's assignment of errors necessarily arise, and so We hold that:
1. The first and second assignments of errors are without
merit.
The overwhelming weight of authority culminating in the Luzon Brokerage vs. Maritime cases has laid
down the rule that Article 1592 of the New Civil Code does not apply to a contract to sell where title
remains with the vendor until full payment of the price as in the case at bar. This is the ruling in Caridad
Estates vs. Santero, 71 Phil. 120; Aldea vs. Inquimboy 86 Phil. 1601; Jocon vs. Capitol Subdivision,
Inc., L-6573, Feb. 28, 1955; Miranda vs. Caridad Estates, L-2077 and Aspuria vs. Caridad Estates, L2121 Oct. 3, 1950, all reiterated in Manuel vs. Rodriguez, et al. 109 Phil. 1, L-13435, July 27, 1960. We
agree with the respondent Court of Appeals that Art, 1191 of the New Civil Code is the applicable
provision where the obligee, like petitioner herein, elects to rescind or cancel his obligation to deliver
the ownership of the two lots in question for failure of the respondent to pay in fun the purchase price
on the basis of 120 monthly equal installments, promptly and punctually for a period of 10 years.
2. We hold that respondent as obligor is not entitled to the benefits of paragraph 3 of Art. 1191, NCC
Having been in default, he is not entitled to the new period of 90 days from entry of judgment within
which to pay petitioner the balance of P11,434.44 with interest due on the purchase price of
P12,325.00 for the two lots.

Under the findings of facts by the appellate court, it appears that the two lots subject of the agreement
between the parties herein were delivered by the petitioner to the private respondent who took
possession thereof and occupied the same and thereafter built his house thereon, enclosing the lots
with adobe stone walls and barbed wires. But the property being registered under the Land
Registration Act, it is the act of registration of the Deed of Sale which could legally effect the transfer of
title of ownership to the transferee, pursuant to Section 50 of Act 496. (Manuel vs. Rodriguez, et al.,
109 Phil. 1; Buzon vs. Lichauco, 13 Phil. 354; Tuazon vs. Raymundo, 28 Phil. 635: Worcestor vs.
Ocampo, 34 Phil. 646). Hence, We hold that the contract between the petitioner and the respondent
was a contract to sell where the ownership or title is retained by the seller and is not to pass until the
full payment of the price, such payment being a positive suspensive condition and failure of which is
not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force.

Respondent a paid P150.00 as deposit under Exh. "A" and P740.56 for the 4-months installments
corresponding to the months of July to October, 1954. The judgment of the lower court and the Court
of Appeals held that respondent was under the obligation to pay the purchase price of the lots m
question on an equal monthly installment basis for a period of ten years, or 120 equal monthly
installments. Beginning November, 1954, respondent began to default in complying with his obligation
and continued to do so for the remaining 116 monthly interest. His refusal to pay further installments on
the purchase price, his insistence that he had the option to pay the purchase price any time in ten
years inspire of the clearness and certainty of his agreement with the petitioner as evidenced further by
the receipt, Exh. "B", his dilatory tactic of refusing to sign the necessary contract of sale on the pretext
that he will sign later when he shall have updated his monthly payments in arrears but which he never
attempted to update, and his failure to deposit or make available any amount since the execution of
Exh "B" on June 28, 1954 up to the present or a period of 26 years, are all unreasonable and
unjustified which altogether manifest clear bad faith and malice on the part of respondent puzzle
making inapplicable and unwarranted the benefits of paragraph 3, Art. 1191, N.C.C. To allow and grant
respondent an additional period for him to pay the balance of the purchase price, which balance is
about 92% of the agreed price, would be tantamount to excusing his bad faith and sanctioning the
deliberate infringement of a contractual obligation that is repugnant and contrary to the stability,
security and obligatory force of contracts. Moreover, respondent's failure to pay the succeeding 116
monthly installments after paying only 4 monthly installments is a substantial and material breach on
his part, not merely casual, which takes the case out of the application of the benefits of pa paragraph
3, Art. 1191, N.C.C.

In the case at bar, there is no writing or document evidencing the agreement originally entered into
between petitioner and private respondent except the receipt showing the initial deposit of P150.00 as

At any rate, the fact that respondent failed to comply with the suspensive condition which is the full
payment of the price through the punctual performance of the monthly payments rendered petitioner's

Petitioner contends that "(n)othing in the decision of the courts below would show that ownership of the
property remained with plaintiff for so long as the installments have not been fully paid. Which yields
the conclusion that, by the delivery of the lots to defendant, ownership likewise was transferred to the
latter." (Brief for the Petitioner, p. 15) And he concludes that the sale was consummated by the delivery
of the two lots, the subject thereof, by him to the respondent.

38
CIVIL LAW REVIEW 2

obligation to sell ineffective and, therefore, petitioner was entitled to repossess the property object of
the contract, possession being a mere incident to his right of ownership (Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc., et al. 46 SCRA 381).
3. We further rule that there exists no just cause authorizing the fixing of a new period within which
private respondent may pay the balance of the purchase price. The equitable grounds or
considerations which are the basis of the respondent court in the fixing of an additional period because
respondent had constructed valuable improvements on the land, that he has built his house on the
property worth P45,000.00 and placed adobe stone walls with barbed wires around, do not warrant the
fixing of an additional period. We cannot sanction this claim for equity of the respondent for to grant the
same would place the vendor at the mercy of the vendee who can easily construct substantial
improvements on the land but beyond the capacity of the vendor to reimburse in case he elects to
rescind the contract by reason of the vendee's default or deliberate refusal to pay or continue paying
the purchase price of the land. Under this design, strategem or scheme, the vendee can cleverly and
easily "improve out" the vendor of his land.
More than that, respondent has not been honest, fair and reciprocal with the petitioner, hence it would
not be fair and reasonable to the petitioner to apply a solution that affords greater reciprocity of rights
which the appealed decision tried to effect between the parties. As matters stand, respondent has
been enjoying the possession and occupancy of the land without paying the other 116 monthly
installments as they fall due. The scales of justice are already tipped in respondent,s favor under the
amended decision of the respondent court. It is only right that We strive and search for the application
of the law whereby every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith (Art. 19, New Civil
Code)
In the case at bar, respondent has not acted in good faith. With malice and deliberate intent, he has
twisted the clear import of his agreement with the petitioner in order to suit his ends and delay the
fulfillment of his obligation to pay the land he had enjoyed for the last 26 years, more than twice the
period of ten years that he obliged himself to complete payment of the price.
4. Respondent's contention that petitioner has not complied with his obligation to put up the necessary
facilities in the Rockville Subdivision is not sufficient nor does it constitute good reason to justify the
grant of an additional period of 90 days from entry of judgment within which respondent may pay the
balance of the purchase price agreed upon. The Judgment of the appellate court concedes that
petitioner's failure to comply with his obligation to put up the necessary facilities in the subdivision will
not deter him from asking for the rescission of the agreement since his obligation is not correlative with
respondent's obligation to buy the property. Since this is so conceded, then the right of the petitioner to
rescind the agreement upon the happening or in the event that respondent fails or defaults in any of
the monthly installments would be rendered nugatory and ineffective. The right of rescission would
then depend upon an extraneous consideration which the law does not contemplate.
Besides, at the rate the two lots were sold to respondent with a combined area of 725 sq. meters at the
uniform price of P17.00 per sq. meter making a total price of P12,325.00, it is highly doubtful if not
improbable that aside from his obligation to deliver title and transfer ownership to the respondent as a
reciprocal obligation to that of the respondent in paying the price in full and promptly as the
installments fall due, petitioner would have assumed the additional obligation "to provide the
subdivision with streets ... provide said streets with street pavements concrete curbs and gutters,
fillings as required by regulations, adequate drainage facilities, tree plantings, adequate water facilities"
as required under Ordinance No. 2969 of Quezon City approved on May 11, 1956 (Answer of
Defendant, Record on Appeal, pp. 35-36) which was two years after the agreement in question was
entered into June, 1y54.
The fact remains, however, that respondent has not protested to the petitioner nor to the authorities
concerned the alleged failure of petitioner to put up and provide such facilities in the subdivision
because he knew too well that he has paid only the aggregate sum of P890.56 which represents more
or less 7% of the agreed price of P12,325.00 and that he has not paid the real estate taxes assessed

by the government on his house erected on the property under litigation. Neither has respondent made
any allegation in his Answer and in all his pleadings before the court up to the promulgation of the
Resolution dated October 12, 1970 by the Court of Appeals, to the effect that he was entitled to a new
period within which to comply with his obligation, hence the Court could not proceed to do so unless
the Answer is first amended. (Gregorio Araneta, Inc. vs. Philippine Sugar Estates Development Co.,
Ltd., G.R. No. L-22558, May 31, 1967, 20 SCRA 330, 335). It is quite clear that it is already too late in
the day for respondent to claim an additional period within which to comply with his obligation.
Precedents there are in Philippine jurisprudence where the Supreme Court granted the buyer of real
property additional period within which to complete payment of the purchase price on grounds of equity
and justice as in (1) J.M. Tuazon Co., Inc. vs. Javier, 31 SCRA 829 where the vendee religiously
satisfied the monthly installments for eight years and paid a total of P4,134.08 including interests on
the principal obligation of only P3,691.20, the price of the land; after default, the vendee was willing to
pay all arrears, in fact offered the same to the vendor; the court granted an additional period of 60 days
-from receipt of judgment for the vendee to make all installment in arrears plus interest; (2) in Legarda
Hermanos vs. Saldaa, 55 SCRA 324, the Court ruled that where one purchase, from a subdivision
owner two lots and has paid more than the value of one lot, the former is entitled to a certificate of title
to one lot in case of default.
On the other hand there are also cases where rescission was not granted and no new or additional
period was authorized. Thus, in Caridad Estates vs. Santero, 71 Phil. 114, the vendee paid, totalling
P7,590.00 or about 25% of the purchase price of P30,000.00 for the three lots involved and when the
vendor demanded revocation upon the vendee's default two years after, the vendee offered to pay the
arears in check which the vendor refused; and the Court sustained the revocation and ordered the
vendee ousted from the possession of the land. In Ayala y Cia vs. Arcache, 98 Phil. 273, the total price
of the land was P457,404.00 payable in installments; the buyer initially paid P100,000.00 or about 25%
of the agreed price; the Court ordered rescission in view of the substantial breach and granted no
extension to the vendee to comply with his obligation.
The doctrinal rulings that "a slight or casual breach of contract is not a ground for rescission. It must be
so substantial and fundamental to defeat the object of the parties" (Gregorio Araneta Inc. vs. Tuazon
de Paterno, L-2886, August 22, 1962; Villanueva vs. Yulo, L-12985, Dec. 29,1959); that "where time is
not of the essence of t agreement, a slight delay on the part of one party in the performance of his
obligation is not a sufficient ground for the rescission of the agreement"( Biando vs. Embestro L-11919,
July 27, 1959; cases cited in Notes appended to Universal Foods Corporation vs. Court of Appeals, 33
SCRA 1), convince and persuade Us that in the case at bar where the breach, delay or default was
committed as early as in the payment of the fifth monthly installment for November, 1954, that such
failure continued and persisted the next month and every month thereafter in 1955, 1956, 1957 and
year after year to the end of the ten-year period in 1964 (10 years is respondent's contention) and even
to this time, now more than twice as long a time as the original period without respondent adding, or
even offering to add a single centavo to the sum he had originally paid in 1954 which represents a
mere 7% of the total price agreed upon, equity and justice may not be invoked and applied. One who
seeks equity and justice must come to court with clean hands, which can hardly be said of the private
respondent.
One final point, on the supposed substantial improvements erected on the land, respondent's house.
To grant the period to the respondent because of the substantial value of his house is to make the land
an accessory to the house. This is unjust and unconscionable since it is a rule in Our Law that
buildings and constructions are regarded as mere accessories to the land which is the principal,
following the Roman maxim "omne quod solo inadeficatur solo cedit" (Everything that is built on the soil
yields to the soil).
Pursuant to Art. 1191, New Civil Code, petitioner is entitled to rescission with payment of damages
which the trial court and the appellate court, in the latter's original decision, granted in the form of rental
at the rate of P60.00 per month from August, 1955 until respondent shall have actually vacated the
premises, plus P2,000.00 as attorney's fees. We affirm the same to be fair and reasonable. We also
sustain the right of the petitioner to the possession of the land, ordering thereby respondent to vacate
the same and remove his house therefrom.
39

CIVIL LAW REVIEW 2

WHEREFORE, IN VIEW OF THE FOREGOING, the Resolution appealed from dated October 12,
1970 is hereby REVERSED. The decision of the respondent court dated April 23, 1970 is hereby
REINSTATED and AFFIRMED, with costs against private respondent.
SO ORDERED.

although under the subdivision plan, the area of the property was only 218 square meters. The vendee
obliged herself to pay the said amount, to wit:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00 to be paid upon the signing of
this instrument; and the balance of P14,100.00 to be paid upon the delivery of the corresponding
Certificate of Title in the name of the VENDEE.
Under the deed of absolute sale, the parties further agreed as follows:

G.R. No. 127206. September 12, 2003

PERLA PALMA GIL, VICENTE HIZON, JR., and ANGEL PALMA GIL, petitioners,
vs.
HON. COURT OF APPEALS, HEIRS OF EMILIO MATULAC, CONSTANCIO MAGLANA, AGAPITO
PACETES & The REGISTER OF DEEDS OF DAVAO CITY, respondents.
For review on appeal by certiorari are the Decision of the Court of Appeals in CA-G.R. CV. No. 43188
promulgated on March 19, 1996, and its Resolution dated October 17, 1996, denying the petitioners
Motion for Reconsideration of the said decision.
The appealed decision affirmed in toto the judgment of the Regional Trial Court, Davao City, Branch
16, in Civil Case No. 15,356 which dismissed the complaint of the herein petitioners.
The Antecedents
Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel Villarica, were the coowners of a parcel of commercial land with an area of 829 square meters, identified as Lot No. 59-C,
covered by Transfer Certificate of Title (TCT) No. 432 located in Davao City. The spouses Angel and
Nieves Villarica had constructed a two-storey commercial building on the property. On October 13,
1953, Concepcion filed a complaint against her sister Nieves with the then Court of First Instance of
Davao City, docketed as Civil Case No. 1160 for specific performance, to compel the defendant to
cede and deliver to her an undivided portion of the said property with an area of 256.2 square meters.
After due proceedings, the court rendered judgment on April 7, 1954 in favor of Concepcion, ordering
the defendant to deliver to the plaintiff an undivided portion of the said property with an area of 256.2
square meters:
A la vista de los datos expuestos, el Juzgado dicta sentencia condenando a la demanda, Nieves
Palma Gil de Villarica, cumpla con los terminos del documento (Exh. A) ordenando a aquella que
otogue los documentos necesarios traspasando a favor de la demandante (CONCEPCION PALMA
GIL), 256 metros cuadrados con 20 centimetros del Lote No. 56-C descrito mas particularmente en el
Certificado de Titulo No. 432.
Nieves appealed to the Court of Appeals which affirmed the assailed decision. In due course, the
decision became final and executory. On motion of the plaintiff (Concepcion), the court issued a writ of
execution. Nieves, however, refused to execute the requisite deed in favor of her sister. On April 27,
1956, the court issued an order authorizing ex-officio Sheriff Eriberto Unson to execute the requisite
deed of transfer to the plaintiff over an undivided portion of the property with a total area of 256.2
square meters. Instead of doing so, the sheriff had the property subdivided into four lots namely, Lot
59-C-1, with an area of 218 square meters; Lot 59-C-2, with an area of 38 square meters; Lot 59-C-3,
with an area of 14 square meters; and Lot 59-C-4, with an area of 560 square meters, all covered by a
subdivision plan. The sheriff thereafter executed a Deed of Transfer to Concepcion over Lot 59-C-1
and Lot 59-C-2 with a total area of 256.2 square meters.
On October 24, 1956, Concepcion executed a deed of absolute sale over Lot 59-C-1 in favor of
Iluminada Pacetes. In the said deed, the area of Lot 59-C-1 appeared as 256 square meters

2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the
signing of this agreement, undertake and work for the issuance of the corresponding Certificate of Title
of the said Lot No. 59-C-1 in her favor with the proper government office or offices, to the end that the
same can be duly transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE
shall collect and receive any and all rentals and such other income from the land above-described for
her own account and benefit, this right of the VENDEE to begin from December 1, 1956.
In the meantime, Nieves filed a motion in Civil Case No. 1160 to compel the sheriff to report on his
compliance with the courts Order dated April 27, 1956. The motion was denied. A motion for
reconsideration of the denial met the same fate. Nieves appealed to the Court of Appeals, which
appeal was docketed as CA-G.R. No. 22438-R.
In a parallel development, Concepcion filed a complaint for unlawful detainer against the spouses
Angel and Nieves Villarica with the Municipal Trial Court docketed as Civil Case No. 2246. On October
4, 1956, the court rendered judgment in favor of the plaintiff and against the defendants, the decretal
portion of which reads as follows:
From the foregoing, it is indeed evident and clear that the herein defendants have been unlawfully
withholding possession of the land from the plaintiff, and hereby finds in favor of the plaintiff, and
against the defendants, ordering the latter to vacate the premises described in the complaint, removing
whatever improvements they have constructed thereon. The defendants are further judged to pay the
plaintiff the amount of ONE HUNDRED FIFTY PESOS (P150.00) a month from the time of the filing of
this complaint until the lot is finally vacated in concept of rentals, deprived of the plaintiff due to the
unlawful possession of the defendants, and to pay the costs of this suit.
The decision became final and executory but the plaintiff did not file any motion for a writ of execution.
The spouses Angel and Nieves Villarica filed a complaint on October 24, 1956 against the sheriff and
Concepcion with the Court of First Instance of Davao City, docketed as Civil Case No. 2151 for the
nullification of the deed of transfer executed by the sheriff.
On December 21, 1956, Iluminada Pacetes filed a motion to intervene in Civil Case No. 2151, as
vendee of the property subject of the case, which was granted by the court. She then filed a motion to
dismiss the complaint. The court granted the motion. Nieves appealed to the Court of Appeals which
appeal was docketed as CA-G.R. No. 22008-R. Nieves appeals in Civil Cases Nos. 1160 and 2151
were certified by the CA to this Court, docketed as G.R. No. L-15799 and G.R. No. L-15801.
On the basis of the deed of transfer executed by Sheriff Iriberto A. Unson, the Register of Deeds
issued TCT No. 7450 over Lot 59-C-1 and 59-C-2 on July 17, 1957 in the name of Concepcion, with a
total area of 256.2 square meters. However, the latter failed to transfer title to the property to and under
the name of Iluminada Pacetes. Consequently, the latter did not remit the balance of the purchase
price of the property to Concepcion.
40

CIVIL LAW REVIEW 2

In the interim, the spouses Angel and Nieves Villarica executed a real estate mortgage over Lot 59-C-4
in favor of Prudential Bank as security for a loan. On August 4, 1959, Concepcion died intestate and
was survived by Nieves Villarica and her nephews and nieces. Iluminada filed a motion in Civil Case
No. 1160 for her substitution as party-plaintiff in lieu of the deceased Concepcion. On August 2, 1961,
the court issued an order granting the motion.
On August 31, 1961, this Court rendered judgment in G.R. Nos. L-15799 and L-15801 setting aside the
deed of transfer executed by the sheriff in favor of Concepcion Palma Gil, and remanding the records
to the trial court for further proceedings. In compliance with the Decision of this Court in G.R. No. L15801, the trial court conducted further proceedings in Civil Case No. 1160 and discovered that the
defendant had mortgaged Lot 59-C-4 to the Prudential Bank. Consequently, the court issued an order
on February 17, 1964, declaring that the defendant had waived the benefits of the Decision of the
Court on August 31, 1961 in G.R. No. L-15801; thus, the conveyance of the property made by
Concepcion in favor of Iluminada on October 24, 1956 must stand. Nieves filed a motion for the
reconsideration of the said order but the court denied the same in an Order dated February 29, 1964.
Nieves appealed the order to the CA which dismissed the appeal for her failure to file a record on
appeal. Nieves filed a petition for review with this Court docketed as G.R. No. L-28363.
More than five years having elapsed without the decision in Civil Case No. 2246 being enforced,
Iluminada filed a complaint docketed as Civil Case No. 4413 in the Court of First Instance of Davao
City, for the revival and execution of the decision of the Municipal Trial Court in Civil Case No. 2246
(the unlawful detainer case). The plaintiff therein averred that, as Concepcions successor-in-interest,
she acquired the right of action to enforce the decision in Civil Case No. 2246. The defendants, on the
other hand, averred that Iluminada had not yet paid the balance of the purchase price of Lot 59-C-1;
hence, she had not acquired title over the lot and the right to evict the defendant. The deed of absolute
sale executed by Concepcion in favor of the plaintiff was an executory, not an executed deed. On
January 26, 1965, the court rendered judgment in favor of the defendants and dismissed the complaint.
The decretal portion reads:
IN VIEW OF THE FOREGOING, the Court believes that the plaintiff herein has not been properly and
legally subrogated to the rights and action of deceased Concepcion Palma Gil and, hence, for these
reasons the Court dismisses this case without pronouncement as to costs.

7450 under the name of Concepcion. The spouses prayed that judgment be rendered in their favor
after due proceedings thus:
PRAYER
PREMISES CONSIDERED, it is most respectfully prayed that:
1.

During the pendency of this case, Defendant be ordered:

a.

To refrain from collecting rentals from the tenants or occupants of the building
erected in said Lot 59-C-1; in that the tenants be directed to pay their rental to
the plaintiff;

b.

To demolish her aforesaid building of strong materials and vacate the premises
of Lot 59-C-1 and Lot 59-C-2.

2.

After hearing, Defendant be ordered to:

a.

Pay the Plaintiffs the amount consisting of compensation for the use of the land
they have been depribed (sic) of to receive and enjoy since October 24, 1956
due to the unwarranted and illegal occupation of the said lots by defendant;

b.

Pay Plaintiffs moral and exemplary damages in such amount as the Honorable
Court may fix considering the facts and the law;

c.

Pay Plaintiffs such expenses of litigation as may be proven during the trial, and

d.

Pay Plaintiffs expenses for services of counsel they had to incurr (sic) in this
complaint.

3.

OTHER RELIEFS consonant with justice and equity are prayed for.

The counterclaim is also hereby ordered dismissed.

On March 16, 1966, Iluminada Pacetes and Agapito Pacetes executed a deed of absolute sale over
Lot 59-C-1 and Lot 59-C-2 in favor of Constancio B. Maglana for P110,000.00, covered by TCT No.
7450. The spouses-vendors undertook to secure title over the lots under the name of the vendee within
ninety days.
On May 15, 1974, this Court denied the petition for certiorari filed by Nieves in G.R. No. L-28363. The
Court, in part, ruled:
But while the issue at bar exclusively involves the timeliness of the appeal of the petitioners to the
Court of Appeals, this Court has nonetheless examined and analyzed the substantive aspects of this
case and is satisfied that the ORDERS of the trial court complained of are morally just.
Accordingly, the instant appeal is dismissed and the resolution of the Court of Appeals dated July 31,
1967 and its resolution dated October 18, 1967 are affirmed.
The decision of the Court became final and executory.
On May 5, 1975, the spouses Agapito and Iluminada Pacetes filed a complaint against Nieves in the
Court of First Instance of Davao City, docketed as Civil Case No. 8836 for the recovery of possession
of Lot 59-C-1 and Lot 59-C-2. The Pacetes spouses claimed that Lot 59-C-2 was included in TCT No.

On May 10, 1977, Nieves Villarica executed a lease agreement with Virginia Jorge and Anita Vergara
over Lots 59-C-1 and 59-C-2. The lessees took actual possession of the leased property.
In their Answer to the complaint in Civil Case No. 8836, the defendants averred, by way of defense,
that the complaint was barred by the decision of the CFI in Civil Case No. 4413, which ruled that the
Deed of Absolute Sale executed by Concepcion in favor of Iluminada was merely an executory, but not
an executed contract. After the plaintiffs had rested their case, the defendants filed a motion to dismiss
(demurrer to evidence). On October 29, 1975, the court issued an order dismissing the complaint on
the ground that the action was barred by the decision of the court in Civil Case No. 4413. Thus,
Virginia Jorge and Anita Vergara continued to be in physical possession of the property.
In the meantime, on August 8, 1977, Iluminada consigned with the court in Civil Case No. 1160 the
amount of P11,983.00 only as payment of the purchase price of the property. Iluminada was issued
receipts for the amount. As successor-in-interest of Concepcion, she likewise filed a motion for
execution in Civil Case No. 1160 for the eviction of the defendant Nieves Villarica and all those acting
for and in her behalf. The court issued an order on August 19, 1977 granting the motion. The
defendants filed a motion for reconsideration of the order claiming that Iluminada was not a party to the
case which the court denied on September 2, 1977. The defendant filed another motion for
reconsideration which was likewise denied on September 16, 1977. The defendant filed a petition for
certiorari with the Court of Appeals docketed as CA-G.R. No. 62957-R, which petition was dismissed
41

CIVIL LAW REVIEW 2

on August 26, 1980. The CA ruled that Iluminada Pacetes was the real party-in-interest as the vendee
of the property. The defendant filed a petition with this Court docketed as G.R. No. L-56399.
In the meantime, Iluminada filed a petition with the RTC docketed as Miscellaneous Case No. 4715 for
the issuance of an owners duplicate of TCT No. 7450. On March 22, 1978, the court granted the
petition and ordered the Register of Deeds to issue an owners duplicate of the said title under the
name of Concepcion Gil. Iluminada presented the said order and the deed of absolute sale executed
by Concepcion in her favor. On May 9, 1978, the Register of Deeds issued TCT No. 61514 over Lot
59-C-1, with an area of 218 square meters, in the name of Iluminada Pacetes.

defendant spouses Agapito and Iluminada Pacetes failed to pay the balance of the purchase price of
the property during the lifetime of Concepcion; hence, what was embodied in the said deed was not
fulfilled by the vendee. Consequently, the sale is null and void.
The plaintiffs prayed for the issuance of a temporary restraining order and a writ of preliminary
injunction to enjoin the defendant Emilio Matulac from continuing with the construction of a building on
the property. The plaintiffs likewise prayed that after due proceedings, judgment be rendered in their
favor and against the defendants, thus:
WHEREFORE, in view of the aforecited reasons it is most respectfully prayed that:

On April 21, 1980, TCT No. 73412 was issued by the Register of Deeds of Davao City in favor of
Constancio Maglana over Lot 59-C-1 only. The next day, Constancio Maglana executed a deed of sale
not only over Lot 59-C-1 but also Lot 59-C-2, in favor of Emilio Matulac for the purchase price of
P150,000.00. On the basis of the said deed, the Register of Deeds issued TCT No. 80631 to and
under the name of Emilio Matulac over the two lots.
In the meantime, Angel Villarica had died on April 20, 1974. On July 7, 1981, his heirs, including his
widow Nieves, executed an Extra-Judicial Settlement of Estate of Deceased in which the latter waived,
ceded and transferred to her children Teresita Magpantay, Antero P.G. Villarica, Zenaida V. Alovera,
Emperatriz V. Garcia, Napoleon P.G. Villarica and Rupendo P.G. Villarica her rights and interests over
the property covered by TCT No. 7450.
On January 13, 1982, this Court affirmed the resolution of the Court of Appeals, in CA-G.R. No. 62975R and dismissed the petition for certiorari in G.R. No. L-56399, thus, paving the way for the execution
of the decision of the trial court in Civil Case No. 1160, per its Order dated August 19, 1977. Emilio
Matulac filed a motion for the issuance of a writ of execution. The Court granted the motion on
February 18, 1982. Nieves filed a motion for the reconsideration of the order which the court denied in
its Order dated March 17, 1982. Virginia Jorge and Anita Vergara, the lessees, filed a motion for
reconsideration but the court denied the motion. Nonetheless, the lessees were allowed to stay in the
property until April 9, 1982. However, the lessees refused to vacate the property after said date.
On April 10, 1982, Emilio Matulac filed a motion in Civil Case No. 1160 for the issuance of a writ of
execution and an order of demolition. On April 20, 1982, the trial court issued an order granting the
motion for a writ of execution on April 30, 1982. The court also issued a special order for the demolition
of the buildings on the property. The buildings on the property, including the properties owned by
Virginia Jorge and Anita Vergara, were demolished on June 14, 1982. Emilio Matulac thereafter
commenced the construction of a building thereon. The defendant Nieves Villarica, in the meantime,
filed a motion in Civil Case No. 1160 to annul the proceedings, including the writ of execution issued by
the court, and the issuance of a restraining order.
For their part, Virginia Jorge and Anita Vergara filed a petition for certiorari with this Court docketed as
G.R. No. L-60690 for the nullification of the aforesaid orders and the writ of demolition issued by the
trial court in Civil Case No. 1160.
Three of the surviving heirs of Concepcion Gil, namely, Perla Palma Gil, Vicente Hizon, Jr. and Angel
Palma Gil, through their first cousin, Atty. Vicente Villarica, one of Nieves Villaricas children, filed on
June 17, 1982, a complaint against Emilio Matulac, Constancio Maglana, Agapito Pacetes, and the
Register of Deeds, with the Court of First Instance, docketed as Civil Case No. 15,356 for the
cancellation of the deed of sale executed by Concepcion in favor of Iliminada Pacetes; the deed of sale
executed by the latter in favor of Constancio Maglana; the deed of sale executed by the latter in favor
of Emilio Matulac, as well as TCT Nos. 61514, 73412 and 80631 under the respective names of the
vendees.
The plaintiffs alleged, inter alia, that the deed of absolute sale executed by Concepcion in favor of
Iluminada over Lots 59-C-1 and 59-C-2 was a contract to sell, an executory contract, as declared by
the Court of First Instance in Civil Cases Nos. 4413 and 8836, and not an executed contract; the

1)
An order be rendered immediately enjoining defendant Matulac from
doing further work in the construction of the building and enjoining him from
entering the premises and the land subject of this complaint and after trial making
the injunction above-mentioned permanent, ordering the removal of any structure
and other construction within the plaintiffs above-described property and
thereafter, upon said defendants failure to do so authorizing plaintiffs to order said
removal at defendants expense.
2)

Judgment be rendered ordering:

a. Defendant Register of Deeds to cancel TCT No. T-61514, T-73412 and T-80631
and issued (sic) a new Transfer Certificate of Title in the name of the abovementioned heirs of the late Concepcion Palma Gil nullifying the deeds of sale,
Annexes B, C, and D hereof;
b. Defendants Pacetes, Maglana and Matulac jointly and solidarily liable to
plaintiffs for moral and exemplary damages as may be granted by this Honorable
Court and the amount of P25,000.00 as attorneys fees; and
c. Litigation expenses and other reliefs as may be justified under this case.
In his answer to the complaint, defendant Emilio Matulac interposed the following special and
affirmative defenses: (a) he is the lawful owner of the property; (b) the action is barred by the Decision
of this Court in G.R. No. L-56399; (c) the plaintiffs are estopped from assailing the sale to him of the
property; and (d) he is a purchaser in good faith.
On November 29, 1982, the court issued an order in Civil Case No. 1160, denying the motion for the
nullification of the proceedings and for a writ of preliminary injunction. Nieves filed a motion for
reconsideration of the order. On February 18, 1983, the court issued an order denying the motion.
Nieves filed a petition with the Court of Appeals for the nullification of the same.
In the meantime, Emilio Matulac died intestate and was substituted by his heirs Sonia Matulac,
Josephine Matulac and Gregorio Matulac. A petition was filed with the RTC of Davao City for the
settlement of his estate docketed as SP-No. 2747. The Court appointed Sonia Matulac as
administratrix of the estate.
The CA rendered a decision granting the petition and ordering the trial court to conduct further
proceedings to implement the August 19, 1977 Order. Sonia Matulac filed a petition for review on
certiorari with this Court docketed as G.R. No. 85538 for the nullification of the decision of the CA.
On November 24, 1989, this Court rendered a Decision dismissing the petition in G.R. No. L-60690.
This Court said:
42

CIVIL LAW REVIEW 2

When We dismissed on September 16, 1974, the petition for certiorari filed by defendants questioning
the orders, dated December 7, 1961 and December 17, 1964, in effect We had confirmed the sale by
plaintiff in Civil case No. 1160, Concepcion Palma Gil, of Lot 59-C-1 and 59-C-2 to Illuminada Pacetes
and affirmed the ruling of the trial court that defendants had waived the benefit of Our Resolution
rendered on August 31, 1961.
Meanwhile, one of the plaintiffs, Perla Palma Gil in Civil Case No. 15,356, was appointed by the court
as administratrix of the estate of Concepcion on December 29, 1989, and filed in the said case a
motion to intervene as plaintiff in her capacity as administratrix in behalf of all the heirs of Concepcion.
The heirs of Emilio Matulac opposed the motion considering that they, and not the estate of
Concepcion, owned the subject property; thus the claim of the plaintiff should be filed in SP-No. 2747.
On April 7, 1990, the said motion was denied by the trial court. The said court declared:
Being already a plaintiff together with the other plaintiffs in thise (sic) case, said intervention by plaintiff
Perla Palma Gil is not absolutely necessary and imperative. It would only delay the early disposition of
the case if allowed.
On January 8, 1990, this Court dismissed the petition in G.R. No. 85538. The petitioners filed a motion
for reconsideration and on July 2, 1992, this Court granted the motion and reversed the decision of the
CA. This Court ruled in the said case as follows:
When Concepcion Palma Gil, plaintiff in Civil Case No. 1160 sold the land in question to Iluminada
Pacetes on October 24, 1956, the latter became the new owner of the property. By virtue of the order
of substitution issued by the court, said new owner (Pacetes) became a formal party---the party
plaintiff. As the new party plaintiff, Pacetes had the right to move for the issuance of a writ of execution,
which was correctly granted by the trial court in the questioned Order dated August 19, 1977.
The subsequent transfers of the property from Pacetes to Maglana, and then from Maglana to herein
movant Matulac, was acquired pendente lite. The latter (Matulac) as the latest owner of the property,
was, as aptly put by the trial court, subrogated to all the rights and obligations of Pacetes. He is thus
the party who now has a substantial interest in the property. Matulac is a real party-in- interest
subrogated to all the rights of Iluminada Pacetes, including the right to the issuance of a writ of
execution in his name. Hence, the questioned orders of the lower court dated November 29, 1982 and
February 18, 1983 as well as the Writ of Possession issued pursuant to the aforementioned orders are
valid. They do not in any way run counter to the order of the lower court dated August 19, 1977, which
granted the motion for execution filed by Pacetes, who, as earlier pointed out, was succeeded in all his
rights and interests, by herein petitioner, Matulac.
Although the dispositive portion of the judgment rendered in Civil Case No. 1160 did not award the
parties their respective shares in the property, the power of the court to issue the order of execution
cannot be limited to what is stated in the dispositive portion of the judgment. As held in Paylago vs.
Nicolas (189 SCRA 728 [1990]), the body of the decision must be consulted in case of ambiguity in the
dispositive portion. Hence, in Jorge vs. Consolacion (supra), we ruled that the execution of the
judgment cannot be limited to its dispositive portion, considering the continued failure of the defendant
Nieves Palma Gil-Villarica, to comply with what was required of her in the judgment. Respondents
deprived petitioner Concepcion Palma Gil and her successors-in-interest of their legal right to possess
the land. (Underscoring supplied)
On June 11, 1993, the trial court rendered judgment in Civil Case No. 15,356 in favor of the
defendants. The trial court ruled that this Court had affirmed, in G.R. No. 85538 and G.R. No. L-60690,
the sales of the property from Concepcion Palma Gil to Iluminada Pacetes, then to Constancio
Maglana and to Emilio Matulac; hence, the trial court was barred by the rulings of this Court. The
plaintiffs appealed to the CA with the following assignment of errors:
I.

The trial court erred in not holding that Iluminada Pacetes had no right to sell or
transfer the two (2) parcels of land to Constancio Maglana;

II.

That the trial court erred in not declaring the sale of the properties in question
from Iluminada Pacetes to Constancio Maglana, thence, from Constancio
Maglana to Emilio Matulac NULL and VOID;

III.

That the trial court erred in dismissing the complaint;

IV.

That the trial court erred in not ordering the cancellation of transfer Certificate of
Title No. T-80631 in the name of Emilio Matulac and the issuance of a new title in
the name of Concepcion Palma Gil;

V.

That the trial court erred in not holding the appellees liable for damages to the
appellants.

In the meantime, on June 29, 1994, the estate of Emilio Matulac executed a deed of sale of real estate
in which the estate sold Lots 59-C-1 and 59-C-2 and the building thereon to the Prudential Education
Plan, Inc. for P7,000,000.00. On March 19, 1996, the CA rendered a decision affirming the decision
assailed therein and dismissing the appeal. The CA ruled that the deed of absolute sale executed by
Concepcion in favor of Iluminada Pacetes was a deed of absolute sale over Lots 59-C-1 and 59-C-2,
under which the ownership over the property subject thereof was transferred to the vendee. Moreover,
the validity of the sales of the subject lots by Concepcion to Iluminada, by the latter to Constancio
Maglana, and by the latter to Emilio Matulac, had been confirmed by this Court in G.R. No. L-60690
and G.R. No. 85538. Although Iluminada paid the balance of the purchase price of the property only
on August 8, 1977, the payment was still timely, in light of Article 1592 of the New Civil Code. Besides,
the property had already been sold to the respondents Constancio Maglana and Emilio Matulac.
The appellants, now petitioners in this case, assert that private respondents Agapito and Iluminada
Pacetes failed to pay the balance of the purchase price in the amount of P14,100.00. They did consign
and deposit the amount of P11,983.00, but only on August 8, 1977, twenty one years from the
execution of the Deed of Absolute Sale in favor of the said spouses, without the latter instituting an
action for the cancellation of their obligation. According to the petitioners, the consignation made by
Iluminada Pacetes of the amount did not produce any legal effect. Furthermore, private respondents
Constancio Maglana and Emilio Matulac were not purchasers in good faith because at the time they
purchased the respective properties, the two-storey building constructed by the spouses Angel and
Nieves Villarica on the said property was still existing. Hence, the decision of the CA should be
reversed and set aside.
In their Comment on the petition, private respondents Constancio Maglana and Agapito Pacetes
averred that the action of the petitioners in the court a quo was barred by the Decision of this Court in
G.R. No. L-60690 on November 24, 1989.
THE RULING OF THE COURT
The petition is denied due course.
We note that the petitioners failed to implead all the compulsory heirs of the deceased Concepcion Gil
in their complaint. When she died intestate, Concepcion Gil, a spinster, was survived by her sister
Nieves, and her nephews and nieces, three of whom are the petitioners herein.
Upon Concepcions demise, all her rights and interests over her properties, and the rights and
obligations under the Deed of Absolute Sale executed in favor of Iluminada Pacetes, were transmitted
to her sister, and her nephews and nieces by way of succession, a mode of acquiring the property,
rights and obligation of the decedent to the extent of the value of the inheritance of the heirs. The heirs
stepped into the shoes of the decedent upon the latters death.

43
CIVIL LAW REVIEW 2

In their complaint, the petitioners alleged that:

7. That upon the death of the late Concepcion Palma Gil, her heirs namely: A. Children of the
deceased Pilar Palma Gil Rodriguez; B. Children of the deceased Asuncion Palma Gil Hizon one of
whom is plaintiff Vicente Hizon, Jr.; C. Nieves Palma Gil Villarica; D. David Palma Gil one of whom is
plaintiff Angel Palma Gil; E. Perla Palma Gil; and F. Children of the deceased Jose Palma Gil, ipso
facto became co-owners of the said subject property by operation of law;

Q
Since June 16, 1982 up to the present the other heirs did not do anything to be included in
the complaint?
ATTY. QUITAIN:
The best evidence would be the motion for intervention and it would seem that compaero
is contending that there is a need to include all heirs. Under the civil law on property even one coowner may file a case.

When she testified, petitioner Palma Gil stated that:

ATTY. GALLARDO:
With the Courts permission.
Q

You said that you are one of the 3 plaintiffs in this case?

Yes, sir.

Q
Now, aside from these 3 plaintiffs who are supposed to be the heirs of the late Concepcion
Palma Gil, there are also other heirs who were not included as plaintiffs in this case?
A
Yes, because that time when they demolished the building and I accompanied Atty. Villarica
at the site where they had the demolition, we found out that during the confrontation that we have to
hurry and file the case right away. So we were not able to contact all the heirs and I have contacted . .
.since 3 of us were there during the demolition, so we decided that I will be one, and Angel Palma Gil
was also there and also Vicente Hizon Jr. whom I contacted at the Apo View Hotel and I contacted also
Julian Rodriguez, another cousin thru telephone and he told us to go ahead and file the case. We
cannot get all the heirs. We cannot gather all of them and we will have a hard time asking them to sign,
so we just filed the case.
Q
You are telling the court that the other heirs were not included because they were not
available to sign the complaint?
A

They were not there during the demolition.

When was the case filed?

June 14, the demolition was on June 14, 1982.

Although the petitioners sought leave from the trial court to amend their complaint to implead the
intestate estate of the deceased Concepcion Gil through her administratrix Perla Palma Gil, as party
plaintiff, the trial court denied the petitioners plea. The petitioners manifested to the trial court that they
would assign the denial of their plea as one of the assigned errors in case of appeal to the CA. They
failed to do so. The petitioners were duty bound to implead all their cousins as parties-plaintiffs;
otherwise, the trial court could not validly grant relief as to the present parties and as to those who
were not impleaded
Being indispensable parties, the absence of the surviving sister, nephews and nieces of the decedent
in the complaint as parties-plaintiffs, and in this case, as parties-petitioners, renders all subsequent
actions of the trial court null and void for want of authority to act, not only as to the absent parties, but
even as to those present. Hence, the petition at bar should be dismissed.
Even if we were to brush aside this procedural lapse and delve into the merits of the case, a denial in
due course is inevitable.
Article 1191 in tandem with Article 1592 of the New Civil Code are central to the issues at bar. Under
the last paragraph of Article 1169 of the New Civil Code, in reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his obligation, delay in the other
begins. Thus, reciprocal obligations are to be performed simultaneously so that the performance of
one is conditioned upon the simultaneous fulfillment of the other. The right of rescission of a party to an
obligation under Article 1191 of the New Civil Code is predicated on a breach of faith by the other party
that violates the reciprocity between them.
That the deed of absolute sale executed by Concepcion Gil in favor of Iluminada Pacetes is an
executory contract and not an executed contract is a settled matter. In a perfected contract of sale of
realty, the right to rescind the said contract depends upon the fulfillment or non-fulfillment of the
prescribed condition. We ruled that the condition pertains in reality to the compliance by one party of
an undertaking the fulfillment of which would give rise to the demandability of the reciprocal obligation
pertaining to the other party. The reciprocal obligation envisaged would normally be, in the case of the
vendee, the payment by the vendee of the agreed purchase price and in the case of the vendor, the
fulfillment of certain express warranties.

ATTY. QUITAIN:

It appears in the complaint that it was filed sometime on June 16, 1982?

In another case, we ruled that the non-payment of the purchase price of property constitutes a very
good reason to rescind a sale for it violates the very essence of the contract of sale. In Central Bank of
the Philippines v. Bichara, we held that the non-payment of the purchase price of property is a
resolutory condition for which the remedy is either rescission or specific performance under Article
1191 of the New Civil Code. This is true for reciprocal obligations where the obligation is a resolutory
condition of the other. The vendee is entitled to retain the purchase price or a part of the purchase
price of realty if the vendor fails to perform any essential obligation of the contract. Such right is
premised on the general principles of reciprocal obligations.

We had it on June 14 the demolition, and we filed it right away because we were in a hurry.

In this case, Concepcion Gil sold Lot 59-C-1 to Iluminada Pacetes for P21,600.00 payable as follows:

The best evidence would be the complaint, Your Honor.

ATTY. GALLARDO:

44
CIVIL LAW REVIEW 2

1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00, to be paid upon the signing of
this instrument; and the balance of P14,100.00, to be paid upon the delivery of the corresponding
Certificate of Title in the name of the VENDEE.
Concepcion Gil obliged herself to transfer title over the property to and under the name of the vendee
within 120 days from the execution of the deed.
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the
signing of this agreement, undertake and work for the issuance of the corresponding Certificate of Title
of the said Lot No. 59-C-1 in her favor with the proper government office or offices, to the end that the
same can be duly transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE
shall collect and receive any and all rentals and such other income from the land above-described for
her own account and benefit, this right of the VENDEE to begin from December 1, 1956.
That it is further stipulated that this contract shall be binding upon the heirs, executors and
administrators of the respective parties hereof.

Although the vendee consigned with the Court only the amount of P11,983.00, P2,017.00 short of the
purchase price of P14,000.00, it cannot be claimed that Concepcion was an unpaid seller because
under the deed of sale, she was still obligated to transfer the property in the name of the vendee, which
she failed to do so. According to Article 1167 of the New Civil Code:
Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been poorly done be undone. (1098)
The vendee (Iluminada) had to obtain the owners duplicate of TCT No. 7450 and thereafter secure its
transfer in her name. Pursuant to Article 1167, the expenses incurred by the vendee should be
charged against the amount of P2,617.00 due to the heirs of Concepcion Gil as the vendors
successors-in-interest.
In sum, the decision of the CA affirming the decision of the RTC dismissing the complaint of the
petitioners is affirmed.
IN LIGHT OF ALL THE FOREGOING, the petition for review is DENIED for lack of merit.

And I, CONCEPCION PALMA GIL, with all the personal circumstances above-stated, hereby confirm
all the terms and conditions stipulated in this instrument.

SO ORDERED.

The vendee paid the downpayment of P7,500.00. By the terms of the contract, the obligation of the
vendee to pay the balance of the purchase price ensued only upon the issuance of the certificate of
title by the Register of Deeds over the property sold to and under the name of the vendee, and the
delivery thereof by the vendor Concepcion Gil to the latter. Concepcion failed to secure a certificate of
title over the property. When she died intestate on August 4, 1959, her obligation to deliver the said title
to the vendee devolved upon her heirs, including the petitioners. The said heirs, including the
petitioners failed to do so, despite the lapse of eighteen years since Concepcions death.
Iluminada was not yet obliged on August 8, 1977 to pay the balance of the purchase price of the
property, but as a sign of good faith, she nevertheless consigned the amount of P11,983.00, part of the
balance of the purchase price of P14,000.00, with the court in Civil Case No. 1160. The court accepted
the consignation and she was issued receipts therefor. Still, the heirs of Concepcion Gil, including the
petitioners, failed to deliver the said title to the vendee. Iluminada was compelled to file, at her
expense, a petition with the RTC docketed as Miscellaneous Case No. 4715 for the issuance of an
owners duplicate of TCT No. 7450 covering the property sold which was granted by the court on
March 22, 1978. It was only on May 9, 1978 that Iluminada managed to secure TCT No. 61514 over
the property under her name. Upon the failure of the heirs to comply with the decedents prestation,
Iluminada Pacetes was impelled to resort to legal means to protect her rights and interests.
The petitioners, as successors-in-interest of the vendor, are not the injured parties entitled to a
rescission of the deed of absolute sale. It was Concepcions heirs, including the petitioners, who were
obliged to deliver to the vendee a certificate of title over the property under the latters name, free from
all liens and encumbrances within 120 days from the execution of the deed of absolute sale on October
24, 1956, but had failed to comply with the obligation.
The consignation by the vendee of the purchase price of the property is sufficient to defeat the right of
the petitioners to demand for a rescission of the said deed of absolute sale.
It bears stressing that when the vendee consigned part of the purchase price with the Court and
secured title over the property in her name, the heirs of Concepcion, including the petitioners, had not
yet sent any notarial demand for the rescission of the deed of absolute sale to the vendee, or filed any
action for the rescission of the said deed with the appropriate court.
45
CIVIL LAW REVIEW 2

G.R. No. 135528

July 14, 2004

SPOUSES ORLANDO A. RAYOS and MERCEDES T. RAYOS, petitioners,

vs.
THE COURT OF APPEALS and SPOUSES ROGELIO and VENUS MIRANDA, respondents.
This is a petition for review on certiorari of the Decision1 of the Court of Appeals2 in CA-G.R. CV No.
46727 which affirmed the Decision3 of the Regional Trial Court of Makati, Branch 62, in Civil Case No.
15639 for specific performance and damages, and Civil Case No. 15984 for sum of money and
damages.

1. You will pay me P700.00 as filing fee and other miscellaneous expenses which
I personally received from you this morning;
2. Award to you of any amount in terms of moral, exemplary or actual and other
forms of damages shall accrue to you in the amount of 70% thereof;
3. 30% of the award to you in the concept of No. 2 hereof shall pertain to me as
my contingent fee;
4. All attorney's fees that the court shall award to me or by the management of
TMBC if they agree to extrajudicially settle shall pertain exclusively to me;

The two (2) cases stemmed from the following antecedent facts:
5. Execution of judgment expenses shall be for your account;
On December 24, 1985, petitioner Orlando A. Rayos, a practicing lawyer, and his wife, petitioner
Mercedes T. Rayos, secured a short-term loan from the Philippine Savings Bank (PSB) payable within
a period of one (1) year in quarterly installments of P29,190.28, the first quarterly payment to start on
March 24, 1986. The loan was evidenced by a promissory note which the petitioners executed on
December 24, 1985.4 To secure the payment of the loan, the petitioners-spouses executed, on the
same date, a Real Estate Mortgage over their property covered by Transfer Certificate of Title (TCT)
No. 100156 located in Las Pias, Metro Manila.5
On December 26, 1985, the petitioners, as vendors, and the respondents, Spouses Miranda, as
vendees, executed a Deed of Sale with Assumption of Mortgage over the subject property for the price
of P214,000.00. However, on January 29, 1986, the petitioners-spouses, likewise, executed a Contract
to Sell the said property in favor of the respondents for P250,000.00 with the following condition:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of
Absolute Sale in favor of the BUYER that the payment of capital gains tax shall be for the
account of the SELLER and that documentary stamps, transfer tax, registration expenses
for the transfer of title including the notarization and preparation of this Contract and
subsequent documents if any are to be executed, real estate taxes from January 1, 1986
and other miscellaneous expenses shall be for the account of the BUYER; the SELLER
hereby represents that all association dues has been paid but that subsequent to the
execution of this Contract the payment of the same shall devolve upon the BUYER. 6
The petitioners obliged themselves to execute a deed of absolute sale over the property in favor of the
respondents upon the full payment of the purchase price thereof.
Respondent Rogelio Miranda filed an application dated May 4, 1986 with the PSB to secure the
approval of his assumption of the petitioners' obligation on the loan, and appended thereto a General
Information sheet.7 Respondent Rogelio Miranda stated therein that he was the Acting Municipal
Treasurer of Las Pias and had an unpaid account with the Manila Banking Corporation in the amount
of P18,777.31. The PSB disapproved his application. Nevertheless, respondent Rogelio Miranda paid
the first quarterly installment on the petitioners' loan on March 21, 1986 in the amount of P29,190.28.
The said amount was paid for the account of the petitioners. Respondent Rogelio Miranda, likewise,
paid the second quarterly installment in the amount of P29,459.00 on June 23, 1986, also for the
account of the petitioners.8
In the meantime, respondent Rogelio Miranda secured the services of petitioner Orlando Rayos as his
counsel in a suit he filed against the Manila Banking Corporation, relative to a loan from the bank in the
amount of P100,000.00. Both parties agreed to the payment of attorney's fees, as follows:
Our agreement is as follows:

6. Should the case be appealed, my contingent fee shall increase by 10% if the
appeal is to the Intermediate Appellate Court on questions of facts and law, and if
appealed from there to the Supreme Court, then another 10% shall accrue to
me.9
On May 14, 1986, petitioner Orlando Rayos filed respondent Rogelio Miranda's complaint against the
bank with the Regional Trial Court of Makati, docketed as Civil Case No. 13670.10 In the meantime, the
latter paid the third quarterly installment on the PSB loan account amounting to P29,215.66, for which
the bank issued a receipt for the account of the petitioners.
The parties executed a Compromise Agreement in Civil Case No. 13670 in which they agreed that
each party shall pay for the respective fees of their respective counsels.11 The trial court rendered
judgment on October 23, 1986 based on the said compromise agreement. 12 Petitioner Orlando Rayos
demanded the payment of attorney's fees in the amount of P5,631.93, but respondent Rogelio Miranda
refused to pay.
On November 12, 1986, petitioner Orlando Rayos wrote to respondent Rogelio Miranda and enclosed
a copy of his motion in Civil Case No. 13670 for the annotation of his attorney's lien at the dorsal
portion of the latter's title used as security for the loan with the Manila Banking Corporation. 13 The
respondent opposed the motion, claiming that the petitioner agreed to render professional services on
a contingent basis.14
Petitioner Orlando Rayos again wrote respondent Rogelio Miranda on November 30, 1986, reminding
the latter of the last quarterly payment of his loan with the PSB. He also advised the respondent to
thereafter request the bank for the cancellation of the mortgage on his property and to receive the
owner's duplicate of his title over the same. Petitioner Orlando Rayos also wrote that their dispute over
his attorney's fees in Civil Case No. 13670 should be treated differently.15
Petitioner Orlando Rayos then received a Letter dated November 27, 1986 from the PSB, reminding
him that his loan with the bank would mature on December 24, 1986, and that it expected him to pay
his loan on or before the said date.16 Fearing that the respondents would not be able to pay the
amount due, petitioner Orlando Rayos paid P27,981.4117 to the bank on December 12, 1986, leaving
the balance of P1,048.04. In a Letter dated December 18, 1986, the petitioner advised the PSB not to
turn over to the respondents the owner's duplicate of the title over the subject property, even if the
latter paid the last quarterly installment on the loan, as they had not assumed the payment of the
same.18
On December 24, 1986, respondent Rogelio Miranda arrived at the PSB to pay the last installment on
the petitioners' loan in the amount of P29,223.67. He informed the bank that the petitioners had
executed a deed of sale with assumption of mortgage in their favor, and that he was paying the
46

CIVIL LAW REVIEW 2

balance of the loan, conformably to said deed. On the other hand, the bank informed the respondent
that it was not bound by said deed, and showed petitioner Orlando Rayos' Letter dated December 18,
1986. The respondent was also informed that the petitioners had earlier paid the amount of P27,981.41
on the loan. The bank refused respondent Rogelio Miranda's offer to pay the loan, and confirmed its
refusal in a Letter dated December 24, 1986.19
On even date, respondent Rogelio Miranda wrote the PSB, tendering the amount of P29,223.67 and
enclosed Interbank Check No. 01193344 payable to PSB.20 Thereafter, on December 29, 1986, the
petitioners paid the balance of their loan with the bank in the amount of P1,081.39 and were issued a
receipt therefor.21 On January 2, 1987, the PSB wrote respondent Rogelio Miranda that it was returning
his check.22
On January 2, 1987, respondent Rogelio Miranda filed a complaint against the petitioners and the PSB
for damages with a prayer for a writ of preliminary attachment with the RTC of Makati. The case was
docketed as Civil Case No. 15639 and raffled to Branch 61 of the court. The respondent alleged inter
alia that the petitioners and the PSB conspired to prevent him from paying the last quarterly payment of
the petitioners' loan with the bank, despite the existence of the deed of sale with assumption of
mortgage executed by him and the petitioners, and in refusing to turn over the owner's duplicate of
TCT No. 100156, thereby preventing the transfer of the title to the property in his name. Respondent
Rogelio Miranda prayed that:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and
against defendants, ordering the latter, jointly and severally, as follows:
(a) To pay to plaintiff the sum of P267,197.33, with legal interest from date of demand, as
actual or compensatory damages representing the unreturned price of the land;

In the meantime, the PSB executed on January 8, 1987 a Release of Real Estate Mortgage in favor of
the petitioners,26 and released the owner's duplicate of title of TCT No. 100156.27 On January 17,
1987, petitioner Orlando Rayos wrote respondent Rogelio Miranda, reiterating his stance in his Letters
of January 3 and 5, 1987.
In the meantime, the petitioners received the complaint in Civil Case No. 15639 and filed their Answer
with Counterclaim in which they alleged that:
14. That plaintiff has no cause of action against defendants Rayos, the latter are willing to
deliver the title sought by plaintiff under the terms set out in their letters dated January 3, 5,
17, and 20, hereto marked as Annexes "1," "1-A," "1-B" and "1-C;"28
Petitioner Orlando Rayos filed a complaint on February 1, 1987 against respondent Rogelio Miranda
with the Regional Trial Court of Makati, docketed as Civil Case No. 15984 for Specific Performance
with Damages for the collection of the amount of P29,223.67 which he had paid to the PSB on
December 12 and 19, 1986, and his attorney's fees in Civil Case No. 13670. The trial court
consolidated the cases in Branch 62 of the RTC.
Respondent Rogelio Miranda filed an Amended Complaint in Civil Case No. 15639 for specific
performance with damages, impleading the officers of the PSB as parties-defendants. He alleged that
of the purchase price of the property of P214,000.00, he had paid the entirety thereof to the petitioners,
and that petitioner Orlando Rayos acted unethically in trying to collect P5,631.93 from him as his
attorney's fees in Civil Case No. 13670, and in having such claim annotated at the dorsal portion of his
title over the property he mortgaged to the Manila Banking Corporation.
Respondent Rogelio Miranda prayed that, after due proceedings, judgment be rendered in his favor,
thus:

(b) To pay to plaintiff the sum of P500,000.00 as consequential damages;

(c) To pay to plaintiff the sum of P1,000,000.00 as moral damages;
(d) To pay to plaintiff the sum of P100,000.00 as exemplary damages by way of example or
correction for the public good;

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and

against defendants, as follows:
(a) Ordering defendants spouses Orlando A. Rayos and Mercedes T. Rayos to deliver
forthwith to plaintiff the Owner's Duplicate of Transfer Certificate of Title No. 100156,
Registry of Deeds for Pasay City;

(e) To pay to plaintiff the sum of P100,000.00 for and as attorney's fees;
(f) To pay for the costs of suit; and
(g) That a Writ of Attachment be issued against the properties of defendant Rayos spouses
as security for the satisfaction of any judgment that may be recovered.
PLAINTIFF FURTHER PRAYS for such other remedies and relief as are just or equitable in
the premises.23
The trial court granted the respondent's plea for a writ of preliminary attachment on a bond of
P260,000.00. After posting the requisite bond, the respondent also filed a criminal complaint against
petitioner Orlando Rayos for estafa with the Office of the Provincial Prosecutor of Makati, docketed as
I.S. No. 87-150. He, likewise, filed a complaint for disbarment in this Court against petitioner Orlando
Rayos, docketed as Administrative Case No. 2974. Unaware of the said complaint, the petitioner wrote
the respondent on January 3, 1986 that as soon as his payment to the PSB of P29,223.67 was
refunded, the owner's duplicate of the title would be released to him.24 On January 5, 1986, petitioner
Orlando Rayos wrote respondent Rogelio Miranda, reiterating that he would release the title in
exchange for his cash settlement of P29,421.41.25 The respondent failed to respond.

(b) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P1,000,000.00
as moral damages;
(c) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P867,197.33 as
exemplary damages by way of example or correction for the public good;
(d) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P100,000.00 for
and as attorney's fees;
(e) Ordering defendants, jointly, to pay the costs of suit; and
(f) Ordering the issuance of a Writ of Attachment against the properties of defendants Rayos
spouses as security for the satisfaction of any judgment that may be recovered.
PLAINTIFF further prays for such other remedies and relief as are just or equitable in the
premises.29

47
CIVIL LAW REVIEW 2

In the meantime, petitioner Orlando Rayos filed an Amended Complaint in Civil Case No. 15984
impleading his wife and that of respondent Rogelio Miranda as parties to the case. On March 4, 1987,
the trial court issued an Order granting the petitioners' motion in Civil Case No. 15639 for the discharge
of the attachment on their property.30 The court also denied the respondents' motion for
reconsideration of the Order of the court. The respondents, thereafter, filed a petition for review with
the Court of Appeals for the nullification of the said Order.

Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela, Raul Totanes, and Belinda Lim, are
likewise dismissed for insufficiency of evidence.

On July 9, 1987, the public prosecutor dismissed the charge of estafa against petitioner Orlando
Rayos.31 The respondents appealed the resolution to the Department of Justice.

II. In Civil Case No. 15984, this Court orders Defendant Rogelio Miranda to pay to Plaintiff
Orlando Rayos the sum of P4,133.19 at 12% interest per annum, from the date of the filing
of the complaint on Feb. 11, 1987 until fully paid.

On May 26, 1987, the PSB and its officers filed their Answer in Civil Case No. 15639, and alleged the
following by way of special and/or affirmative defenses, thus:

No costs in both cases.

27. The application for the plaintiff to assume the mortgage loan of the defendants Spouses
Rayos was not approved, and it was NOT even recommended by the Marketing Group of
defendant PSBank for approval by its Top Management, because the credit standing of the
plaintiff was found out to be not good;
28. The acceptance of the payments made by the plaintiff for three (3) amortizations on the
loan of defendants Spouses Rayos was merely allowed upon the insistence of the plaintiff,
which payments were duly and accordingly receipted, and said acceptance was in
accordance with the terms of the Real Estate Mortgage executed by the defendants
Spouses Rayos in favor of the defendant PSBank and is also allowed by law;32
The parties in Civil Case No. 15639 agreed to submit the case for the trial court's decision on the basis
of their pleadings and their respective affidavits. In a Resolution dated July 26, 1988, then
Undersecretary of Justice Silvestre Bello III affirmed the Public Prosecutor's resolution in I.S. No. 87150.33
On January 30, 1989, the petitioners sold the property to Spouses Mario and Enriqueta Ercia for
P144,000.00. The said spouses were not impleaded as parties-defendants in Civil Case No. 15639. On
May 18, 1989, the petitioners filed an amended complaint in Civil Case No. 15984, appending thereto a
copy of the Contract to Sell in favor of the respondents. The trial court admitted the said complaint.
On November 15, 1989, this Court rendered its Decision dismissing the complaint for disbarment
against Rayos.34
On January 29, 1993, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
I. (a) In Civil Case No. 15639, this Court orders plaintiff Rogelio Miranda to refund to
spouses Orlando and Mercedes T. Rayos the total sum of P29,069.45, Rayos paid to PS
Bank as the last amortization and as release of mortgage fee, without any interest; and
upon receipt of the sum of P29,069.45 from Rogelio Miranda, Spouses Orlando and
Mercedes T. Rayos shall deliver to Rogelio Miranda Transfer Certificate of Title No. 100156
of the Registry of Deeds of Pasay City; and, deliver to Rogelio Miranda the possession of
the parcel of land described in the said title;
(b) Dismissing the complaint for damages of Plaintiff Rogelio Miranda against Spouses
Orlando and Remedios (sic) T. Rayos, Philippine Savings Bank, Jose Araullo, Cesar I.
Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela, Raul T. Totanes, and Belinda Lim,
for insufficiency of evidence; while the counterclaims of PS Bank, Jose Araullo, Cesar

(c) The counterclaims of Spouses Orlando and Mercedes T. Rayos will be treated in Civil
Case No. 15984;

SO ORDERED.35
The petitioners appealed the decision to the Court of Appeals contending that:
I. THE COURT A QUO COMMITTED A GRAVE ERROR IN NOT FINDING THAT
ROGELIO A. MIRANDA COMMITTED A BREACH OF CONTRACT IN NOT PAYING THE
FULL CONTINGENT FEE OF 30% IN WRITING IN THE MANILABANK CASE AND
BECAUSE OF THAT BREACH, HE CANNOT NOW DEMAND SPECIFIC PERFORMANCE
AND THE COURT A QUO SHOULD HAVE LEFT THE PARTIES AS THEY ARE;
II. THE COURT A QUO SIMILARLY COMMITTED AN ERROR IN NOT FINDING THAT
THE DECISION IN "SEVA VS. ALFREDO BERWIN & CO. & MEDEL" IS APPLICABLE
FOUR SQUARE WHEREBY HE WHO BREACHES HIS CONTRACT IS NOT ENTITLED
TO SPECIFIC PERFORMANCE;36
On July 27, 1998, the Court of Appeals rendered judgment affirming with modification the decision of
the RTC, thus:
WHEREFORE, premises considered, the appealed decision of the Regional Trial Court of
Makati City, is hereby AFFIRMED, with the modification abovestated.37
The petitioners filed the instant petition, and ascribed the following errors on the appellate court:
I. THE COURT OF APPEALS (CA) COMMITTED AN ERROR IN NOT FINDING THAT THE
PRIVATE RESPONDENT MIRANDA COMMITTED THE FIRST BREACH FOR FAILURE
TO ASSUME THE LOAN THUS HE FAILED TO SURROGATE (sic) HIMSELF TO PSB.
II. THE CA COMMITTED AN ERROR IN FINDING THAT PETITIONERS PRE-EMPTED
PRIVATE RESPONDENT MIRANDA IN DEPOSITING THE LAST AMORTIZATION WHEN
MIRANDA HAD NO LEGAL STANDING WITH PSB DUE TO THE LATTER'S NONAPPROVAL OF THE ASSUMPTION OF THE LOAN.
III. THE CA COMMITTED AN ERROR IN FINDING BOTH PARTIES GUILTY OF FIRST
VIOLATING THE OBLIGATIONS INCUMBENT UPON THEM EVEN INFERRING THAT
PETITIONERS COMMITTED THE BREACH FIRST BUT LATER CONCLUDING THAT
THE BREACH WAS COMMITTED BY BOTH PARTIES. IT DID NOT MAKE A CORRECT
ASSESSMENT OF WHO ACTUALLY COMMITTED THE FIRST BREACH.
IV. THE CA COMMITTED AN ERROR IN NOT ALLOWING THE OFFSET IF ITS
DECISION STOOD OF THE AMOUNT OF P4,133.19 PLUS 12% INT. P.A. FROM THE
48

CIVIL LAW REVIEW 2

FILING OF THE COMPLAINT (CV 15984), THUS, ENTIRELY DISREGARDING THE

DECISION OF THE TRIAL COURT IN SAID CASE ALLOWING ONLY THE DECISION IN
CV 15639.
V. THE CA COMMITTED AN ERROR IN NOT APPLYING THE DECSION (sic) LAID
DOWN IN "SEVA VS. ALFRED BERWIN & CO. AND MEDEL" THAT A PERSON HIMSELF
AT FAULT CANNOT ENFORCE SPECIFIC PERFORMANCE.38
The petitioners assert that the Court of Appeals erred in not finding that the respondents first
committed a breach of their contract to sell upon their failure to pay the amount due for the last
quarterly installment of their loan from the PSB. The petitioners fault the Court of Appeals for not
relying on the resolution of Undersecretary Silvestre Bello III affirming the dismissal of the criminal
complaint for estafa in I.S. No. 87-150, as cited by this Court in its decision in Miranda v. Rayos,39
where it was also held that petitioner Orlando Rayos paid the last quarterly installment because he
thought that the respondents would not be able to pay the same. The petitioners argue that they had
no other alternative but to pay the last quarterly installment due on their loan with the PSB, considering
that they received a demand letter from the bank on November 28, 1986, coupled by its denial of the
respondents' request to assume the payment of the loan. They insist that they did not block the
respondents' payment of the balance of the loan with the bank. The petitioners contend that even if the
parties committed a breach of their respective obligations under the contract to sell, it behooved the
Court of Appeals to apply Article 1192 of the Civil Code in the instant case, which reads:
The power to rescind obligation is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

a general principle of law that no one may be permitted to change his mind or disavow and
go back upon his own acts, or to proceed contrary thereto, to the prejudice of the other
party. In a regime of law and order, repudiation of an agreement validly entered into cannot
be made without any ground or reason in law or in fact for such repudiation.
In the same way that the Rayos spouses must respect their contract with the Mirandas for
the sale of real property and assumption of mortgage, Rogelio Miranda has to recognize his
obligations under his agreement to pay contingent attorney's fees to Orlando Rayos.40
The Court of Appeals erred in so ruling.
The findings and disquisitions of the Court of Appeals cannot prevail over our findings in Miranda v.
Rayos,41 a case which involves the same parties, and where we held that the petitioners cannot be
faulted for paying the amortization due for the last quarterly installment on their loan with the PSB:
It is difficult to imagine that complainant would be so nave as to be totally unaware of the
provisions of the original contract between the PSB and the spouses Rayos. He is a degree
holder (A.B. Pre-Law and B.S.C.) and Acting Municipal Treasurer of Las Pias. In short, he
is not an ordinary layman. As a buyer with a knowledge of law, it was unnatural for him to
read the provisions of the real estate mortgage wherein it is provided, among others, that
the sale of the property covered by the mortgage does not in any manner relieve the
mortgagor of his obligation but that "on the contrary, both the vendor and the vendee, or the
party in whose favor the alienation or encumbrance is made shall be, jointly and severally,
liable for said mortgage obligations." There is every reason to believe that it was pursuant to
the said provision in the real estate mortgage that complainant tried to assume the loan
obligation of the Rayoses by filling up and submitted the loan application (page 30, records)
sent by Orland Rayos. By signing the loan application and the general information sheet
(page 31, records) in connection with said application, complainant showed that he knew
that there was a need to formally apply to the bank in order for him to assume the mortgage.
We find respondent spouses' version that when complainant's application to assume the
mortgage loan was disapproved he begged that he be allowed to pay the quarterly
amortization credible, owing to the fact that complainant made the payments for the account
of the Rayoses. Hence, complainant knew that since his application to the PSB was not
approved, there was no substitution of parties and so he had to pay for the account of
respondent spouses as shown by the receipts issued by the PSB.

The petition has no merit.

The assailed ruling of the Court of Appeals reads:
After due study, the Court finds that there was no basis in fact and law for the appellants to
usurp the payment of the last amortization on the mortgage upon the parcel of land it had
conveyed to the Mirandas. Even if the appellants wanted to keep their good credit standing,
they should not have preempted Miranda in paying the final amortization. There is no
sufficient showing that Miranda was in danger of defaulting on the said payment. In fact, it
appears that he approached the bank to tender payment, but he was refused by the bank,
because he was beaten to the draw, so to speak, by the appellants. Appellants were able to
do so because, for some reasons, the Mirandas' assumption of the mortgage has not been
approved by the bank. In doing so, the appellants had unilaterally cancelled the deed of sale
with assumption of mortgage, without the consent of the Mirandas. This conduct by the
appellants is, to say the least, injudicious as under Article 1308 of the Civil Code, contracts
must bind both contracting parties and their validity or compliance cannot be left to the will
of one of them.
Just as nobody can be forced to enter into a contract, in the same manner, once a contract
is entered into, no party can renounce it unilaterally or without the consent of the other. It is

As for the charge that Rayos paid the last installment to block complainant from getting the
title and transferring the same to his name, respondents' version is more satisfactory and
convincing. Respondent Orland Rayos paid the last amortization when it became apparent
that complainant would not be able to give the payment on the due date as he was still
trying to sell his Lancer car. Even if complainant was able to pay the last installment of the
mortgage loan, the title would not be released to him as he knew very well that his
application to assume the mortgage was disapproved and he had no personality as far as
PSB was concerned.42
Contrary to the ruling of the Court of Appeals, the petitioners did not unilaterally cancel their contract to
sell with the respondents when they paid the total amount of P29,062.80 to the PSB in December
1986.43 In fact, the petitioners wrote the respondents on January 3, 5 and 17, 1987, that they were
ready to execute the deed of absolute sale and turn over the owner's duplicate of TCT No. 100156
upon the respondents' remittance of the amount of P29,223.67. The petitioners reiterated the same
stance in their Answer with Counterclaim in Civil Case No. 15639. The petitioners cannot, likewise, be
faulted for refusing to execute a deed of absolute sale over the property in favor of the respondents,
and in refusing to turn over the owner's duplicate of TCT No. 100156 unless the respondents refunded
the said amount. The respondents were obliged under the contract to sell to pay the said amount to the
PSB as part of the purchase price of the property. On the other hand, it cannot be argued by the
49

CIVIL LAW REVIEW 2

petitioners that the respondents committed a breach of their obligation when they refused to refund the
said amount.
It bears stressing that the petitioners and the respondents executed two interrelated contracts, viz: the
Deed of Sale with Assumption of Mortgage dated December 26, 1985, and the Contract to Sell dated
January 29, 1986. To determine the intention of the parties, the two contracts must be read and
interpreted together.44 Under the two contracts, the petitioners bound and obliged themselves to
execute a deed of absolute sale over the property and transfer title thereon to the respondents after the
payment of the full purchase price of the property, inclusive of the quarterly installments due on the
petitioners' loan with the PSB:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of
Absolute Sale in favor of the BUYER that the payment of capital gains tax shall be for the
account of the SELLER and that documentary stamps, transfer tax, registration expenses
for the transfer of title including the notarization and preparation of this Contract and
subsequent documents if any are to be executed, real estate taxes from January 1, 1986
and other miscellaneous expenses shall be for the account of the BUYER; the SELLER
hereby represents that all association dues has been paid but that subsequent to the
execution of this Contract the payment of the same shall devolve upon the BUYER.45
Construing the contracts together, it is evident that the parties executed a contract to sell and not a
contract of sale. The petitioners retained ownership without further remedies by the respondents46 until
the payment of the purchase price of the property in full. Such payment is a positive suspensive
condition, failure of which is not really a breach, serious or otherwise, but an event that prevents the
obligation of the petitioners to convey title from arising, in accordance with Article 1184 of the Civil
Code.47 In Lacanilao v. Court of Appeals,48 we held that:
It is well established that where the seller promised to execute a deed of absolute sale upon
completion of payment of the purchase price by the buyer, the agreement is a contract to
sell. In contracts to sell, where ownership is retained by the seller until payment of the price
in full, such payment is a positive suspensive condition, failure of which is not really a
breach but an event that prevents the obligation of the vendor to convey title in accordance
with Article 1184 of the Civil Code.
The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the
obligation of the petitioners to sell and deliver the title to the property, rendered the contract to sell
ineffective and without force and effect.49 The parties stand as if the conditional obligation had never
existed. Article 1191 of the New Civil Code will not apply because it presupposes an obligation already
extant.50 There can be no rescission of an obligation that is still non-existing, the suspensive condition
not having happened.51
However, the respondents may reinstate the contract to sell by paying the P29,223.67, and the
petitioners may agree thereto and accept the respondents' late payment.52 In this case, the petitioners
had decided before and after the respondents filed this complaint in Civil Case No. 15639 to accept the
payment of P29,223.67, to execute the deed of absolute sale over the property and cause the transfer
of the title of the subject property to the respondents. The petitioners even filed its amended complaint
in Civil Case No. 15984 for the collection of the said amount. The Court of Appeals cannot, thus, be
faulted for affirming the decision of the trial court and ordering the petitioners to convey the property to
the respondents upon the latter's payment of the amount of P29,223.67, provided that the property has
not been sold to a third-party who acted in good faith.
IN VIEW OF ALL THE FOREGOING, the petition is DENIED DUE COURSE. The Decision of the
Court of Appeals in CA-G.R. CV No. 46727 is AFFIRMED, except as to the factual finding that the
petitioners "usurped the payment of the last amortization on the mortgage upon the parcel of land."
Costs against the petitioners. SO ORDERED.

G.R. No. 185440

July 13, 2011

VICELET LALICON and VICELEN LALICON, Petitioners,

vs.
NATIONAL HOUSING AUTHORITY, Respondent.
This case is about (a) the right of the National Housing Authority to seek annulment of sales made by
housing beneficiaries of lands they bought from it within the prohibited period and (b) the distinction
between actions for rescission instituted under Article 1191 of the Civil Code and those instituted under
Article 1381 of the same code.
The Facts and the Case
On November 25, 1980 the National Housing Authority (NHA) executed a Deed of Sale with Mortgage
over a Quezon City lot1 in favor of the spouses Isidro and Flaviana Alfaro (the Alfaros). In due time, the
Quezon City Registry of Deeds issued Transfer Certificate of Title (TCT) 277321 in the name of the
Alfaros. The deed of sale provided, among others, that the Alfaros could sell the land within five years
from the date of its release from mortgage without NHAs prior written consent. Thus:
x x x. 5. Except by hereditary succession, the lot herein sold and conveyed, or any part thereof, cannot
be alienated, transferred or encumbered within five (5) years from the date of release of herein
mortgage without the prior written consent and authority from the VENDOR-MORTGAGEE (NHA). x x
x.2 (Emphasis supplied)
The mortgage and the restriction on sale were annotated on the Alfaros title on April 14, 1981.
About nine years later or on November 30, 1990, while the mortgage on the land subsisted, the Alfaros
sold the same to their son, Victor Alfaro, who had taken in a common-law wife, Cecilia, with whom he
had two daughters, petitioners Vicelet and Vicelen Lalicon (the Lalicons). Cecilia, who had the means,
had a house built on the property and paid for the amortizations. After full payment of the loan or on
March 21, 1991 the NHA released the mortgage. Six days later or on March 27 Victor transferred
ownership of the land to his illegitimate daughters.
About four and a half years after the release of the mortgage or on October 4, 1995, Victor registered
the November 30, 1990 sale of the land in his favor, resulting in the cancellation of his parents title.
The register of deeds issued TCT 140646 in Victors name. On December 14, 1995 Victor mortgaged
the land to Marcela Lao Chua, Rosa Sy, Amparo Ong, and Ida See. Subsequently, on February 14,
1997 Victor sold the property to Chua, one of the mortgagees, resulting in the cancellation of his TCT
140646 and the issuance of TCT N-172342 in Chuas name.
A year later or on April 10, 1998 the NHA instituted a case before the Quezon City Regional Trial Court
(RTC) for the annulment of the NHAs 1980 sale of the land to the Alfaros, the latters 1990 sale of the
land to their son Victor, and the subsequent sale of the same to Chua, made in violation of NHA rules
and regulations.
On February 12, 2004 the RTC rendered a decision in the case. It ruled that, although the Alfaros
clearly violated the five-year prohibition, the NHA could no longer rescind its sale to them since its right
to do so had already prescribed, applying Article 1389 of the New Civil Code. The NHA and the
Lalicons, who intervened, filed their respective appeals to the Court of Appeals (CA).
On August 1, 2008 the CA reversed the RTC decision and found the NHA entitled to rescission. The
CA declared TCT 277321 in the name of the Alfaros and all subsequent titles and deeds of sale null
and void. It ordered Chua to reconvey the subject land to the NHA but the latter must pay the Lalicons
50

CIVIL LAW REVIEW 2

the full amount of their amortization, plus interest, and the value of the improvements they constructed
on the property.
The Issues Presented
The issues in this case are:
1. Whether or not the CA erred in holding that the Alfaros violated their contract with the
NHA;
2. Whether or not the NHAs right to rescind has prescribed; and
3. Whether or not the subsequent buyers of the land acted in good faith and their rights,
therefore, cannot be affected by the rescission.
The Rulings of the Court
First. The contract between the NHA and the Alfaros forbade the latter from selling the land within five
years from the date of the release of the mortgage in their favor.3 But the Alfaros sold the property to
Victor on November 30, 1990 even before the NHA could release the mortgage in their favor on March
21, 1991. Clearly, the Alfaros violated the five-year restriction, thus entitling the NHA to rescind the
contract.
The Lalicons contend, however, that the Alfaros did not violate the five-year restriction against resale
since what the contract between the parties barred was a transfer of the property within five years from
the release of the mortgage, not a transfer of the same prior to such release.
But the Lalicons are trying to be clever. The restriction clause is more of a condition on the sale of the
property to the Alfaros rather than a condition on the mortgage constituted on it. Indeed, the prohibition
against resale remained even after the land had been released from the mortgage. The five-year
restriction against resale, counted from the release of the property from the NHA mortgage, measures
out the desired hold that the government felt it needed to ensure that its objective of providing cheap
housing for the homeless is not defeated by wily entrepreneurs.
The Lalicons claim that the NHA unreasonably ignored their letters that asked for consent to the resale
of the subject property. They also claim that their failure to get NHAs prior written consent was not
such a substantial breach that warranted rescission.
But the NHA had no obligation to grant the Lalicons request for exemption from the five-year restriction
as to warrant their proceeding with the sale when such consent was not immediately forthcoming. And
the resale without the NHAs consent is a substantial breach. The essence of the governments
socialized housing program is to preserve the beneficiarys ownerships for a reasonable length of time,
here at least within five years from the time he acquired it free from any encumbrance.

party to rescission. Resolution grants the injured party the option to pursue, as principal actions, either
a rescission or specific performance of the obligation, with payment of damages in either case.
Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code,
which is a subsidiary action, not based on a partys breach of obligation.4 The four-year prescriptive
period provided in Article 1389 applies to rescissions under Article 1381.
Here, the NHA sought annulment of the Alfaros sale to Victor because they violated the five-year
restriction against such sale provided in their contract. Thus, the CA correctly ruled that such violation
comes under Article 1191 where the applicable prescriptive period is that provided in Article 1144
which is 10 years from the time the right of action accrues.1avvphi1 The NHAs right of action accrued
on February 18, 1992 when it learned of the Alfaros forbidden sale of the property to Victor. Since the
NHA filed its action for annulment of sale on April 10, 1998, it did so well within the 10-year prescriptive
period.
Third. The Court also agrees with the CA that the Lalicons and Chua were not buyers in good faith.
Since the five-year prohibition against alienation without the NHAs written consent was annotated on
the propertys title, the Lalicons very well knew that the Alfaros sale of the property to their father,
Victor, even before the release of the mortgage violated that prohibition.
As regards Chua, she and a few others with her took the property by way of mortgage from Victor in
1995, well within the prohibited period. Chua knew, therefore, based on the annotated restriction on the
property, that Victor had no right to mortgage the property to her group considering that the Alfaros
could not yet sell the same to him without the NHAs consent. Consequently, although Victor later sold
the property to Chua after the five-year restriction had lapsed, Chua cannot claim lack of awareness of
the illegality of Victors acquisition of the property from the Alfaros.
Lastly, since mutual restitution is required in cases involving rescission under Article 1191, 5 the NHA
must return the full amount of the amortizations it received for the property, plus the value of the
improvements introduced on the same, with 6% interest per annum from the time of the finality of this
judgment. The Court will no longer dwell on the matter as to who has a better right to receive the
amount from the NHA: the Lalicons, who paid the amortizations and occupied the property, or Chua,
who bought the subject lot from Victor and obtained for herself a title to the same, as this matter was
not raised as one of the issues in this case. Chuas appeal to the Court in a separate case6 having
been denied due course and NHA failing to file its own petition for review, the CA decision ordering the
restitution in favor of the Lalicons has now become final and binding against them.
WHEREFORE, the Court AFFIRMS the Decision of the Court of Appeals in CA-G.R. CV 82298 dated
August 1, 2008.
SO ORDERED.

Second. Invoking the RTC ruling, the Lalicons claim that under Article 1389 of the Civil Code the
"action to claim rescission must be commenced within four years" from the time of the commission of
the cause for it.
But an action for rescission can proceed from either Article 1191 or Article 1381. It has been held that
Article 1191 speaks of rescission in reciprocal obligations within the context of Article 1124 of the Old
Civil Code which uses the term "resolution." Resolution applies only to reciprocal obligations such that
a breach on the part of one party constitutes an implied resolutory condition which entitles the other
51
CIVIL LAW REVIEW 2