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G.R. No. L-55300 March 15, 1990

FRANKLIN G. GACAL and CORAZON M. GACAL, the latter assisted by her
husband, FRANKLIN G. GACAL, petitioners,
vs.
PHILIPPINE AIR LINES, INC., and THE HONORABLE PEDRO SAMSON C.
ANIMAS, in his capacity as PRESIDING JUDGE of the COURT OF FIRST
INSTANCE OF SOUTH COTABATO, BRANCH I, respondents.
Vicente A. Mirabueno for petitioners.
Siguion Reyna, Montecillo & Ongsiako for private respondent.
PARAS, J.:
This is a, petition for review on certiorari of the decision of the Court of First
Instance of South Cotabato, Branch 1,* promulgated on August 26, 1980
dismissing three (3) consolidated cases for damages: Civil Case No. 1701, Civil
Case No. 1773 and Civil Case No. 1797 (Rollo, p. 35).
The facts, as found by respondent court, are as follows:
Plaintiffs Franklin G. Gacal and his wife, Corazon M. Gacal,
Bonifacio S. Anislag and his wife, Mansueta L. Anislag, and the
late Elma de Guzman, were then passengers boarding
defendant's BAC 1-11 at Davao Airport for a flight to Manila,
not knowing that on the same flight, Macalinog, Taurac
Pendatum known as Commander Zapata, Nasser Omar, Liling
Pusuan Radia, Dimantong Dimarosing and Mike Randa, all of
Marawi City and members of the Moro National Liberation
Front (MNLF), were their co-passengers, three (3) armed with
grenades, two (2) with .45 caliber pistols, and one with a .22
caliber pistol. Ten (10) minutes after take off at about 2:30 in
the afternoon, the hijackers brandishing their respective
firearms announced the hijacking of the aircraft and directed its
pilot to fly to Libya. With the pilot explaining to them especially
to its leader, Commander Zapata, of the inherent fuel
limitations of the plane and that they are not rated for
international flights, the hijackers directed the pilot to fly to
Sabah. With the same explanation, they relented and directed
the aircraft to land at Zamboanga Airport, Zamboanga City for
refueling. The aircraft landed at 3:00 o'clock in the afternoon of

May 21, 1976 at Zamboanga Airport. When the plane began to

taxi at the runway, it was met by two armored cars of the
military with machine guns pointed at the plane, and it stopped
there. The rebels thru its commander demanded that a DCaircraft take them to Libya with the President of the defendant
company as hostage and that they be given $375,000 and six
(6) armalites, otherwise they will blow up the plane if their
demands will not be met by the government and Philippine Air
Lines. Meanwhile, the passengers were not served any food
nor water and it was only on May 23, a Sunday, at about 1:00
o'clock in the afternoon that they were served 1/4 slice of a
sandwich and 1/10 cup of PAL water. After that, relatives of the
hijackers were allowed to board the plane but immediately after
they alighted therefrom, an armored car bumped the stairs.
That commenced the battle between the military and the
hijackers which led ultimately to the liberation of the surviving
crew and the passengers, with the final score of ten (10)
passengers and three (3) hijackers dead on the spot and three
(3) hijackers captured.
City Fiscal Franklin G. Gacal was unhurt. Mrs. Corazon M.
Gacal suffered injuries in the course of her jumping out of the
plane when it was peppered with bullets by the army and after
two (2) hand grenades exploded inside the plane. She was
hospitalized at General Santos Doctors Hospital, General
Santos City, for two (2) days, spending P245.60 for hospital
and medical expenses, Assistant City Fiscal Bonifacio S.
Anislag also escaped unhurt but Mrs. Anislag suffered a
fracture at the radial bone of her left elbow for which she was
hospitalized and operated on at the San Pedro Hospital, Davao
City, and therefore, at Davao Regional Hospital, Davao City,
spending P4,500.00. Elma de Guzman died because of that
battle. Hence, the action of damages instituted by the plaintiffs
demanding the following damages, to wit:
Civil Case No. 1701
City Fiscal Franklin G. Gacal and Mrs.
Corazon M. Gacal actual damages:
P245.60 for hospital and medical expenses
of Mrs Gacal; P8,995.00 for their personal
belongings which were lost and not

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recovered; P50,000.00 each for moral
damages; and P5,000.00 for attorney's fees,
apart from the prayer for an award of
exemplary damages (Record, pp. 4-6, Civil
Case No. 1701).

Similarly, the negotiations with the hijackers were a purely government matter
and a military operation, handled by and subject to the absolute and exclusive
jurisdiction of the military authorities. Hence, it concluded that the accident that
befell RP-C1161 was caused by fortuitous event, force majeure and other causes
beyond the control of the respondent Airline.

Civil Case No. 1773

The determinative issue in this case is whether or not hijacking or air piracy
during martial law and under the circumstances obtaining herein, is
a caso fortuito or force majeure which would exempt an aircraft from payment of
damages to its passengers whose lives were put in jeopardy and whose personal
belongings were lost during the incident.

xxx xxx xxx

Civil Case No. 1797
xxx xxx xxx
The trial court, on August 26, 1980, dismissed the complaints finding that all the
damages sustained in the premises were attributed to force majeure.
On September 12, 1980 the spouses Franklin G. Gacal and Corazon M. Gacal,
plaintiffs in Civil Case No. 1701, filed a notice of appeal with the lower court on
pure questions of law (Rollo, p. 55) and the petition for review oncertiorari was
filed with this Court on October 20, 1980 (Rollo, p. 30).
The Court gave due course to the petition (Rollo, p. 147) and both parties filed
their respective briefs but petitioner failed to file reply brief which was noted by
the Court in the resolution dated May 3, 1982 (Rollo, p. 183).
Petitioners alleged that the main cause of the unfortunate incident is the gross,
wanton and inexcusable negligence of respondent Airline personnel in their
failure to frisk the passengers adequately in order to discover hidden weapons in
the bodies of the six (6) hijackers. They claimed that despite the prevalence of
skyjacking, PAL did not use a metal detector which is the most effective means of
discovering potential skyjackers among the passengers (Rollo, pp. 6-7).
Respondent Airline averred that in the performance of its obligation to safely
transport passengers as far as human care and foresight can provide, it has
exercised the utmost diligence of a very cautious person with due regard to all
circumstances, but the security checks and measures and surveillance
precautions in all flights, including the inspection of baggages and cargo and
frisking of passengers at the Davao Airport were performed and rendered solely
by military personnel who under appropriate authority had assumed exclusive
jurisdiction over the same in all airports in the Philippines.

Under the Civil Code, common carriers are required to exercise extraordinary
diligence in their vigilance over the goods and for the safety of passengers
transported by them, according to all the circumstances of each case (Article
1733). They are presumed at fault or to have acted negligently whenever a
passenger dies or is injured (Philippine Airlines, Inc. v. National Labor Relations
Commission, 124 SCRA 583 [1983]) or for the loss, destruction or deterioration of
goods in cases other than those enumerated in Article 1734 of the Civil Code
(Eastern Shipping Lines, Inc. v. Intermediate Appellate Court, 150 SCRA 463
[1987]).
The source of a common carrier's legal liability is the contract of carriage, and by
entering into said contract, it binds itself to carry the passengers safely as far as
human care and foresight can provide. There is breach of this obligation if it fails
to exert extraordinary diligence according to all the circumstances of the case in
exercise of the utmost diligence of a very cautious person (Isaac v. Ammen
Transportation Co., 101 Phil. 1046 [1957]; Juntilla v. Fontanar, 136 SCRA 624
[1985]).
It is the duty of a common carrier to overcome the presumption of negligence
(Philippine National Railways v. Court of Appeals, 139 SCRA 87 [1985]) and it
must be shown that the carrier had observed the required extraordinary diligence
of a very cautious person as far as human care and foresight can provide or that
the accident was caused by a fortuitous event (Estrada v. Consolacion, 71 SCRA
523 [1976]). Thus, as ruled by this Court, no person shall be responsible for
those "events which could not be foreseen or which though foreseen were
inevitable. (Article 1174, Civil Code). The term is synonymous with caso
fortuito (Lasam v. Smith, 45 Phil. 657 [1924]) which is of the same sense as
"force majeure" (Words and Phrases Permanent Edition, Vol. 17, p. 362).

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In order to constitute a caso fortuito or force majeure that would exempt a person
from liability under Article 1174 of the Civil Code, it is necessary that the following
elements must concur: (a) the cause of the breach of the obligation must be
independent of the human will (the will of the debtor or the obligor); (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 (Lasam v. Smith, 45 Phil. 657 [1924]; Austria v. Court of Appeals,
39 SCRA 527 [1971]; Estrada v. Consolacion, supra; Vasquez v. Court of
Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144
SCRA 596 [1986]). Caso fortuito or force majeure, by definition, are extraordinary
events not foreseeable or avoidable, events that could not be foreseen, or which,
though foreseen, are inevitable. It is, therefore, not enough that the event should
not have been foreseen or anticipated, as is commonly believed, but it must be
one impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same (Republic v. Luzon
Stevedoring Corporation, 21 SCRA 279 [1967]).

Finally, there is no dispute that the fourth element has also been satisfied.
Consequently the existence of force majeure has been established exempting
respondent PAL from the payment of damages to its passengers who suffered
death or injuries in their persons and for loss of their baggages.
PREMISES CONSIDERED, the petition is hereby DISMISSED for lack of merit
and the decision of the Court of First Instance of South Cotabato, Branch I is
hereby AFFIRMED.
SO ORDERED.

Applying the above guidelines to the case at bar, the failure to transport
petitioners safely from Davao to Manila was due to the skyjacking incident staged
by six (6) passengers of the same plane, all members of the Moro National
Liberation Front (MNLF), without any connection with private respondent, hence,
independent of the will of either the PAL or of its passengers.
Under normal circumstances, PAL might have foreseen the skyjacking incident
which could have been avoided had there been a more thorough frisking of
passengers and inspection of baggages as authorized by R.A. No. 6235. But the
incident in question occurred during Martial Law where there was a military takeover of airport security including the frisking of passengers and the inspection of
their luggage preparatory to boarding domestic and international flights. In fact
military take-over was specifically announced on October 20, 1973 by General
Jose L. Rancudo, Commanding General of the Philippine Air Force in a letter to
Brig. Gen. Jesus Singson, then Director of the Civil Aeronautics Administration
(Rollo, pp. 71-72) later confirmed shortly before the hijacking incident of May 21,
1976 by Letter of Instruction No. 399 issued on April 28, 1976 (Rollo, p. 72).

G.R. No. L-82619 September 15, 1993

PHILIPPINE AIRLINES, INC., petitioner,
vs.
COURT OF APPEALS and PEDRO ZAPATOS, respondents.
Leighton R. Liazon for petitioner.

Otherwise stated, these events rendered it impossible for PAL to perform its
obligations in a nominal manner and obviously it cannot be faulted with
negligence in the performance of duty taken over by the Armed Forces of the
Philippines to the exclusion of the former.

Balmes L. Ocampo for private respondent.

BELLOSILLO, J.:

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This petition for review in certiorari seeks to annul and set aside the decision of
the then Intermediate Appellant Court, 1 now Court of Appeals, dated 28
February 1985, in AC-G.R. CV No. 69327 ("Pedro Zapatos v. Philippine Airlines,
Inc.") affirming the decision of the then Court of first Instance, now Regional Trial
Court, declaring Philippine Airlines, Inc., liable in damages for breach of contract.
On 25 November 1976, private respondent filed a complaint for damages for
breach of contract of carriage 2against Philippine Airlines, Inc. (PAL), before the
then Court of First Instance, now Regional Trial Court, of Misamis Occidental, at
Ozamiz City. According to him, on 2 August 1976, he was among the twenty-one
(21) passengers of PAL Flight 477 that took off from Cebu bound for Ozamiz City.
The routing of this flight was Cebu-Ozamiz-Cotabato. While on flight and just
about fifteen (15) minutes before landing at Ozamiz City, the pilot received a
radio message that the airport was closed due to heavy rains and inclement
weather and that he should proceed to Cotabato City instead.
Upon arrival at Cotabato City, the PAL Station Agent informed the passengers of
their options to return to Cebu on flight 560 of the same day and thence to
Ozamiz City on 4 August 1975, or take the next flight to Cebu the following day,
or remain at Cotabato and take the next available flight to Ozamiz City on 5
August 1975. 3 The Station Agent likewise informed them that Flight 560 bound
for Manila would make a stop-over at Cebu to bring some of the diverted
passengers; that there were only six (6) seats available as there were already
confirmed passengers for Manila; and, that the basis for priority would be the
check-in sequence at Cebu.
Private respondent chose to return to Cebu but was not accommodated because
he checked-in as passenger No. 9 on Flight 477. He insisted on being given
priority over the confirmed passengers in the accommodation, but the Station
Agent refused private respondent's demand explaining that the latter's
predicament was not due to PAL's own doing but to be a force majeure. 4
Private respondent tried to stop the departure of Flight 560 as his personal
belongings, including a package containing a camera which a certain Miwa from
Japan asked him to deliver to Mrs. Fe Obid of Gingoog City, were still on board.
His plea fell on deaf ears. PAL then issued to private respondent a free ticket to
Iligan city, which the latter received under protest. 5 Private respondent was left
at the airport and could not even hitch a ride in the Ford Fiera loaded with PAL
personnel. 6 PAL neither provided private respondent with transportation from the
airport to the city proper nor food and accommodation for his stay in Cotabato
City.
The following day, private respondent purchased a PAL ticket to Iligan City. He
informed PAL personnel that he would not use the free ticket because he was

filing a case against PAL. 7 In Iligan City, private respondent hired a car from the
airport to Kolambugan, Lanao del Norte, reaching Ozamiz City by crossing the
bay in a launch. 8 His personal effects including the camera, which were valued
at P2,000.00 were no longer recovered.
On 13 January 1977, PAL filed its answer denying that it unjustifiably refused to
accommodate private respondent.9 It alleged that there was simply no more seat
for private respondent on Flight 560 since there were only six (6) seats available
and the priority of accommodation on Flight 560 was based on the check-in
sequence in Cebu; that the first six (6) priority passengers on Flight 477 chose to
take Flight 560; that its Station Agent explained in a courteous and polite manner
to all passengers the reason for PAL's inability to transport all of them back to
Cebu; that the stranded passengers agreed to avail of the options and had their
respective tickets exchanged for their onward trips; that it was
only the private respondent who insisted on being given priority in the
accommodation; that pieces of checked-in baggage and had carried items of the
Ozamiz City passengers were removed from the aircraft; that the reason for their
pilot's inability to land at Ozamis City airport was because the runway was wet
due to rains thus posing a threat to the safety of both passengers and aircraft;
and, that such reason of force majeure was a valid justification for the pilot to
bypass Ozamiz City and proceed directly to Cotabato City.
On 4 June 1981, the trial court rendered its decision 10 the dispositive portion of
which states:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against
the defendant Philippine AirLines, Inc. ordering the latter to pay:
(1) As actual damages, the sum of Two Hundred Pesos (P200.00) representing
plaintiff's expenses for transportation, food and accommodation during his
stranded stay at Cotabato City; the sum of Forty-Eight Pesos (P48.00)
representing his flight fare from Cotabato City to Iligan city; the sum of Five
Hundred Pesos (P500.00) representing plaintiff's transportation expenses from
Iligan City to Ozamiz City; and the sum of Five Thousand Pesos (P5,000.00) as
loss of business opportunities during his stranded stay in Cotabato City;
(2) As moral damages, the sum of Fifty Thousand Pesos (P50,000.00) for
plaintiff's hurt feelings, serious anxiety, mental anguish and unkind and
discourteous treatment perpetrated by defendant's employees during his stay as
stranded passenger in Cotabato City;

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(3) As exemplary damages, the sum of Ten Thousand Pesos (P10,000.00) to set
a precedent to the defendant airline that it shall provide means to give comfort
and convenience to stranded passengers;

A I did not even notice that I was I think the last passenger or the last person out
of the PAL employees and army personnel that were left there. I did not notice
that when I was already outside of the building after our conversation.

(4) The sum of Three Thousand Pesos (P3,000.00) as attorney's fees;

Q What did you do next?

(5) To pay the costs of this suit.

A I banished (sic) because it seems that there was a war not far from the airport.
The sound of guns and the soldiers were plenty.

PAL appealed to the Court of Appeals which on 28 February 1985, finding no

reversible error, affirmed the judgment of the court a quo. 11
PAL then sought recourse to this Court by way of a petition for review on
certiorari 12 upon the following issues: (1) Can the Court of Appeals render a
decision finding petitioner (then defendant-appellant in the court below) negligent
and, consequently, liable for damages on a question of substance which was
neither raised on a question nor proved at the trial? (2) Can the Court of Appeals
award actual and moral damages contrary to the evidence and established
jurisprudence? 13
An assiduous examination of the records yields no valid reason for reversal of
the judgment on appeal; only a modification of its disposition.
In its petition, PAL vigorously maintains that private respondent's principal cause
of action was its alleged denial of private respondent's demand for priority over
the confirmed passengers on Flight 560. Likewise, PAL points out that the
complaint did not impute to PAL neglect in failing to attend to the needs of the
diverted passengers; and, that the question of negligence was not and never put
in issue by the pleadings or proved at the trial.
Contrary to the above arguments, private respondent's amended complaint
touched on PAL's indifference and inattention to his predicament. The pertinent
portion of the amended complaint 14 reads:
10. That by virtue of the refusal of the defendant through its agent in Cotabato to
accommodate (sic) and allow the plaintiff to take and board the plane back to
Cebu, and by accomodating (sic) and allowing passengers from Cotabato for
Cebu in his stead and place, thus forcing the plaintiff against his will, to be left
and stranded in Cotabato, exposed to the peril and danger of muslim rebels
plundering at the time, the plaintiff, as a consequence, (have) suffered mental
anguish, mental torture, social humiliation, bismirched reputation and wounded
feeling, all amounting to a conservative amount of thirty thousand (P30,000.00)
Pesos.
To substantiate this aspect of apathy, private respondent testified 15

Q After that what did you do?

A I tried to look for a transportation that could bring me down to the City of
Cotabato.
Q Were you able to go there?
A I was at about 7:00 o'clock in the evening more or less and it was a private
jeep that I boarded. I was even questioned why I and who am (sic) I then. Then I
explained my side that I am (sic) stranded passenger. Then they brought me
downtown at Cotabato.
Q During your conversation with the Manager were you not offered any vehicle or
transportation to Cotabato airport downtown?
A In fact I told him (Manager) now I am by-passed passenger here which is not
my destination what can you offer me. Then they answered, "it is not my fault. Let
us forget that."
Q In other words when the Manager told you that offer was there a vehicle
ready?
A Not yet. Not long after that the Ford Fiera loaded with PAL personnel was
passing by going to the City of Cotabato and I stopped it to take me a ride
because there was no more available transportation but I was not
accommodated.
Significantly, PAL did not seem to mind the introduction of evidence which
focused on its alleged negligence in caring for its stranded passengers. Wellsettled is the rule in evidence that the protest or objection against the admission
of evidence should be presented at the time the evidence is offered, and that the
proper time to make protest or objection to the admissibility of evidence is when
the question is presented to the witness or at the time the answer thereto is
given. 16 There being no objection, such evidence becomes property of the case
and all the parties are amenable to any favorable or unfavorable effects resulting
from the evidence. 17

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PAL instead attempted to rebut the aforequoted testimony. In the process, it
failed to substantiate its counter allegation for want of concrete proof 18

persons, with due regard for all the circumstances. 20 In Air France v.
Carrascoso, 21 we held that

Atty. Rubin O. Rivera PAL's counsel:

A contract to transport passengers is quite different in kind and degree from any
other contractual relation. And this, because of the relation which an air carrier
sustains with the public. Its business is mainly with the travelling public. It invites
people to avail of the comforts and advantages it offers. The contract of air
carriage, therefore, generates a relation attended with a public duty . . . .
( emphasis supplied).

Q You said PAL refused to help you when you were in Cotabato, is that right?
Private respondent:
A Yes.
Q Did you ask them to help you regarding any offer of transportation or of any
other matter asked of them?
A Yes, he (PAL PERSONNEL) said what is? It is not our fault.
Q Are you not aware that one fellow passenger even claimed that he was given
Hotel accommodation because they have no money?
xxx xxx xxx
A No, sir, that was never offered to me. I said, I tried to stop them but they were
already riding that PAL pick-up jeep, and I was not accommodated.
Having joined in the issue over the alleged lack of care it exhibited towards its
passengers, PAL cannot now turn around and feign surprise at the outcome of
the case. When issues not raised by the pleadings are tried by express or implied
consent of the parties, they shall be treated in all respects as if they had been
raised in the pleadings. 19
With regard to the award of damages affirmed by the appellate court, PAL argues
that the same is unfounded. It asserts that it should not be charged with the task
of looking after the passengers' comfort and convenience because the diversion
of the flight was due to a fortuitous event, and that if made liable, an added
burden is given to PAL which is over and beyond its duties under the contract of
carriage. It submits that granting arguendo that negligence exists, PAL cannot be
liable in damages in the absence of fraud or bad faith; that private respondent
failed to apprise PAL of the nature of his trip and possible business losses; and,
that private respondent himself is to be blamed for unreasonably refusing to use
the free ticket which PAL issued.
The contract of air carriage is a peculiar one. Being imbued with public interest,
the law requires common carriers to carry the passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious

The position taken by PAL in this case clearly illustrates its failure to grasp the
exacting standard required by law. Undisputably, PAL's diversion of its flight due
to inclement weather was a fortuitous event. Nonetheless, such occurrence did
not terminate PAL's contract with its passengers. Being in the business of air
carriage and the sole one to operate in the country, PAL is deemed equipped to
deal with situations as in the case at bar. What we said in one case once again
must be stressed, i.e., the relation of carrier and passenger continues until the
latter has been landed at the port of destination and has left the carrier's
premises. 22 Hence, PAL necessarily would still have to exercise extraordinary
diligence in safeguarding the comfort, convenience and safety of its stranded
passengers until they have reached their final destination. On this score, PAL
grossly failed considering the then ongoing battle between government forces
and Muslim rebels in Cotabato City and the fact that the private respondent was
a stranger to the place. As the appellate court correctly ruled
While the failure of plaintiff in the first instance to reach his destination at Ozamis
City in accordance with the contract of carriage was due to the closure of the
airport on account of rain and inclement weather which was radioed to defendant
15 minutes before landing, it has not been disputed by defendant airline that
Ozamis City has no all-weather airport and has to cancel its flight to Ozamis City
or by-pass it in the event of inclement weather. Knowing this fact, it becomes the
duty of defendant to provide all means of comfort and convenience to its
passengers when they would have to be left in a strange place in case of such
by-passing. The steps taken by defendant airline company towards this end has
not been put in evidence, especially for those 7 others who were not
accommodated in the return trip to Cebu, only 6 of the 21 having been so
accommodated. It appears that plaintiff had to leave on the next flight 2 days
later. If the cause of non-fulfillment of the contract is due to a fortuitous event, it
has to be the sole and only cause (Art. 1755 CC., Art. 1733 C.C.) Since part of
the failure to comply with the obligation of common carrier to deliver its
passengers safely to their destination lay in the defendant's failure to provide
comfort and convenience to its stranded passengers using extra-ordinary
diligence, the cause of non-fulfillment is not solely and exclusively due to

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fortuitous event, but due to something which defendant airline could have
prevented, defendant becomes liable to plaintiff. 23

A Yes, I was not informed of their decision, that they will only accommodate few
passengers.

While we find PAL remiss in its duty of extending utmost care to private
respondent while being stranded in Cotabato City, there is no sufficient basis to
conclude that PAL failed to inform him about his non-accommodation on Flight
560, or that it was inattentive to his queries relative thereto.

Q Aside from you there were many other stranded passengers?

On 3 August 1975, the Station Agent reported to his Branch Manager in Cotabato
City that
3. Of the fifteen stranded passengers two pax elected to take F478 on August 05,
three pax opted to take F442 August 03. The remaining ten (10) including subject
requested that they be instead accommodated (sic) on F446 CBO-IGN the
following day where they intended to take the surface transportation to OZC. Mr.
Pedro Zapatos had by then been very vocal and boiceterous (sic) at the counter
and we tactfully managed to steer him inside the Station Agent's office. Mr. Pedro
Zapatos then adamantly insisted that all the diverted passengers should have
been given priority over the originating passengers of F560 whether confirmed or
otherwise. We explained our policies and after awhile he seemed pacified and
thereafter took his ticket (in-lieued (sic) to CBO-IGN, COCON basis), at the
counter in the presence of five other passengers who were waiting for their
tickets too. The rest of the diverted pax had left earlier after being assured their
tickets will be ready the following day. 24
Aforesaid Report being an entry in the course of business is prima facie evidence
of the facts therein stated. Private respondent, apart from his testimony, did not
offer any controverting evidence. If indeed PAL omitted to give information about
the options available to its diverted passengers, it would have been deluged with
complaints. But, only private respondent complained

A I believed, yes.
Q And you want us to believe that PAL did not explain (to) any of these
passengers about the decision regarding those who will board the aircraft back to
Cebu?
A No, Sir.
Q Despite these facts Mr. Zapatos did any of the other passengers complained
(sic) regarding that incident?
xxx xxx xxx
A There were plenty of argument and I was one of those talking about my case.
Q Did you hear anybody complained (sic) that he has not been informed of the
decision before the plane left for Cebu?
A No. 25
Admittedly, private respondent's insistence on being given priority in
accommodation was unreasonable considering the fortuitous event and that
there was a sequence to be observed in the booking, i.e., in the order the
passengers checked-in at their port of origin. His intransigence in fact was the
main cause for his having to stay at the airport longer than was necessary.
Atty. Rivera:

Atty. Rivera (for PAL)

Q I understand from you Mr. Zapatos that at the time you were waiting at
Cotabato Airport for the decision of PAL, you were not informed of the decision
until after the airplane left is that correct?
A Yes.
COURT:
Q What do you mean by "yes"? You meant you were not informed?

Q And, you were saying that despite the fact that according to your testimony
there were at least 16 passengers who were stranded there in Cotabato airport
according to your testimony, and later you said that there were no other people
left there at that time, is that correct?
A Yes, I did not see anyone there around. I think I was the only civilian who was
left there.
Q Why is it that it took you long time to leave that place?
A Because I was arguing with the PAL personnel. 26

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Anent the plaint that PAL employees were disrespectful and inattentive toward
private respondent, the records are bereft of evidence to support the same. Thus,
the ruling of respondent Court of Appeals in this regard is without basis. 27 On
the contrary, private respondent was attended to not only by the personnel of
PAL but also by its Manager." 28
In the light of these findings, we find the award of moral damages of Fifty
Thousand Pesos (P50,000.00) unreasonably excessive; hence, we reduce the
same to Ten Thousand Pesos (P10,000.00). Conformably herewith, the award of
exemplary damages is also reduced to five Thousand Pesos (5,000.00). Moral
damages are not intended to enrich the private respondent. They are awarded
only to enable the injured party to obtain means, diversion or amusements that
will serve to alleviate the moral suffering he has undergone by reason of the
defendant's culpable action. 29
With regard to the award of actual damages in the amount of P5,000.00
representing private respondent's alleged business losses occasioned by his
stay at Cotabato City, we find the same unwarranted. Private respondent's
testimony that he had a scheduled business "transaction of shark liver oil
supposedly to have been consummated on August 3, 1975 in the morning" and
that "since (private respondent) was out for nearly two weeks I missed to buy
about 10 barrels of shark liver oil," 30 are purely speculative. Actual or
compensatory damages cannot be presumed but must be duly proved with
reasonable degree of certainty. A court cannot rely on speculation, conjecture or
guesswork as to the fact and amount of damages, but must depend upon
competent proof that they have suffered and on evidence of the actual amount
thereof. 31
WHEREFORE the decision appealed from is AFFIRMED with modification
however that the award of moral damages of Fifty Thousand Pesos (P50,000.00)
is reduced to Ten Thousand Pesos (P10,000.00) while the exemplary damages
of Ten Thousand Pesos (P10,000.00) is also reduced to Five Thousand Pesos
(P5,000.00). The award of actual damages in the amount Five Thousand Pesos
(P5,000.00) representing business losses occasioned by private respondent's
being stranded in Cotabato City is deleted.
SO ORDERED.

G.R. No. 126389 July 10, 1998

SOUTHEASTERN COLLEGE INC., petitioner,

vs.
COURT OF APPEALS, JUANITA DE JESUS VDA. DE DIMAANO, EMERITA
DIMAANO, REMEDIOS DIMAANO, CONSOLACION DIMAANO and
MILAGROS DIMAANO, respondents.

PURISIMA, J.:
Petition for review under Rule 45 of the Rules of Court seeking to set aside the
Decision 1 promulgated on July 31, 1996, and Resolution 2 dated September 12,
1996 of the Court of Appeals 3 in CA-G.R. No. 41422, entitled "Juanita de Jesus
vda. de Dimaano, et al. vs. Southeastern College, Inc.", which reduced the moral
damages awarded below from P1,000,000.00 to P200,000.00. 4 The Resolution
under attack denied petitioner's motion for reconsideration.
Private respondents are owners of a house at 326 College Road, Pasay City,
while petitioner owns a four-storey school building along the same College Road.
On October 11, 1989, at about 6:30 in the morning, a powerful typhoon "Saling"
hit Metro Manila. Buffeted by very strong winds, the roof of petitioner's building
was partly ripped off and blown away, landing on and destroying portions of the
roofing of private respondents' house. After the typhoon had passed, an ocular
inspection of the destroyed building was conducted by a team of engineers
headed by the city building official, Engr. Jesus L. Reyna. Pertinent aspects of
the latter's Report 5 dated October 18, 1989 stated, as follows:
5. One of the factors that may have led to this calamitous event is the formation
of the building in the area and the general direction of the wind. Situated in the
peripheral lot is an almost U-shaped formation of 4-storey building. Thus, with the
strong winds having a westerly direction, the general formation of the building
becomes a big funnel-like structure, the one situated along College Road,
receiving the heaviest impact of the strong winds. Hence, there are portions of
the roofing, those located on both ends of the building, which remained intact
after the storm.
6. Another factor and perhaps the most likely reason for the dislodging of the
roofing structural trusses is the improper anchorage of the said trusses to the
roof beams. The 1/2' diameter steel bars embedded on the concrete roof beams
which serve as truss anchorage are not bolted nor nailed to the trusses. Still,
there are other steel bars which were not even bent to the trusses, thus, those
trusses are not anchored at all to the roof beams.

9
It then recommended that "to avoid any further loss and damage to lives, limbs
and property of persons living in the vicinity," the fourth floor of subject school
building be declared as a "structural hazard."
In their Complaint 6 before the Regional Trial Court of Pasay City, Branch 117, for
damages based on culpa aquiliana, private respondents alleged that the damage
to their house rendered the same uninhabitable, forcing them to stay temporarily
in others' houses. And so they sought to recover from petitioner P117,116.00, as
actual damages, P1,000,000.00, as moral damages, P300,000.00, as exemplary
damages and P100,000.00, for and as attorney's fees; plus costs.
In its Answer, petitioner averred that subject school building had withstood
several devastating typhoons and other calamities in the past, without its roofing
or any portion thereof giving way; that it has not been remiss in its responsibility
to see to it that said school building, which houses school children, faculty
members, and employees, is "in tip-top condition"; and furthermore, typhoon
"Saling" was "an act of God and therefore beyond human control" such that
petitioner cannot be answerable for the damages wrought thereby, absent any
negligence on its part.
The trial court, giving credence to the ocular inspection report to the effect that
subject school building had a "defective roofing structure," found that, while
typhoon "Saling" was accompanied by strong winds, the damage to private
respondents' houses "could have been avoided if the construction of the roof of
[petitioner's] building was not faulty." The dispositive portion of the lower court's
decision 7 reads, thus:
WHEREFORE, in view of the foregoing, the Court renders judgment (sic) in favor
of the plaintiff (sic) and against the defendants, (sic) ordering the latter to pay
jointly and severally the former as follows:
a) P117,116.00, as actual damages, plus litigation expenses;
b) P1,000,000.00 as moral damages;
c) P100,000.00 as attorney's fees;
d) Costs of the instant suit.
The claim for exemplary damages is denied for the reason that the defendants
(sic) did in a wanton fraudulent, reckless, oppressive or malevolent manner.
In its appeal to the Court of Appeals, petitioner assigned as errors, 8 that:
I

THE TRIAL COURT ERRED IN HOLDING THAT TYPHOON "SALING", AS AN

ACT OF GOD, IS NOT "THE SOLE AND ABSOLUTE REASON" FOR THE
RIPPING-OFF OF THE SMALL PORTION OF THE ROOF OF
SOUTHEASTERN'S FOUR (4) STOREY SCHOOL BUILDING.
II
THE TRIAL COURT ERRED IN HOLDING THAT "THE CONSTRUCTION OF
THE ROOF OF DEFENDANT'S SCHOOL BUILDING WAS FAULTY"
NOTWITHSTANDING THE ADMISSION THAT THERE WERE TYPHOONS
BEFORE BUT NOT AS GRAVE AS TYPHOON "SALING" WHICH IS THE
DIRECT AND PROXIMATE CAUSE OF THE INCIDENT.
III
THE TRIAL COURT ERRED IN AWARDING ACTUAL AND MORAL DAMAGES
AS WELL AS ATTORNEY'S FEES AND LITIGATION EXPENSES AND COSTS
OF SUIT TO DIMAANOS WHEN THEY HAVE NOT INCURRED ACTUAL
DAMAGES AT ALL AS DIMAANOS HAVE ALREADY SOLD THEIR PROPERTY,
AN INTERVENING EVENT THAT RENDERS THIS CASE MOOT AND
ACADEMIC.
IV
THE TRIAL COURT ERRED IN ORDERING THE ISSUANCE OF THE WRIT OF
EXECUTION INSPITE OF THE PERFECTION OF SOUTHEASTERN'S APPEAL
WHEN THERE IS NO COMPELLING REASON FOR THE ISSUANCE
THERETO.
As mentioned earlier, respondent Court of Appeals affirmed with modification the
trial court's disposition by reducing the award of moral damages from
P1,000,000.00 to P200,000.00. Hence, petitioner's resort to this Court, raising for
resolution the issues of:
1. Whether or not the award of actual damages [sic] to respondent Dimaanos on
the basis of speculation or conjecture, without proof or receipts of actual damage,
[sic] legally feasible or justified.
2. Whether or not the award of moral damages to respondent Dimaanos, with the
latter having suffered, actual damage has legal basis.
3. Whether or not respondent Dimaanos who are no longer the owner of the
property, subject matter of the case, during its pendency, has the right to pursue

10
their complaint against petitioner when the case was already moot and academic
by the sale of the property to third party.

intervention, or neglect, or failure to act the whole occurrence is hereby

humanized, and removed from the rules applicable to acts of God. 13

4. Whether or not the award of attorney's fees when the case was already moot
academic [sic] legally justified.

In the case under consideration, the lower court accorded full credence to the
finding of the investigating team that subject school building's roofing had "no
sufficient anchorage to hold it in position especially when battered by strong
winds." Based on such finding, the trial court imputed negligence to petitioner
and adjudged it liable for damages to private respondents.

5. Whether or not petitioner is liable for damage caused to others by typhoon

"Saling" being an act of God.
6. Whether or not the issuance of a writ of execution pending appeal, ex-parte or
without hearing, has support in law.
The pivot of inquiry here, determinative of the other issues, is whether the
damage on the roof of the building of private respondents resulting from the
impact of the falling portions of the school building's roof ripped off by the strong
winds of typhoon "Saling", was, within legal contemplation, due to fortuitous
event? If so, petitioner cannot be held liable for the damages suffered by the
private respondents. This conclusion finds support in Article 1174 of Civil Code,
which provides:
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.
The antecedent of fortuitous event or caso fortuito is found in the Partidas which
defines it as "an event which takes place by accident and could not have been
foreseen." 9 Escriche elaborates it as "an unexpected event or act of God which
could neither be foreseen nor resisted." 10 Civilist Arturo M. Tolentino adds that
"[f]ortuitous events may be produced by two general causes: (1) by nature, such
as earthquakes, storms, floods, epidemics, fires, etc. and (2) by the act of man,
such as an armed invasion, attack by bandits, governmental prohibitions,
robbery, etc." 11
In order that a fortuitous event may exempt a person from liability, it is necessary
that he be free from any previous negligence or misconduct by reason of which
the loss may have been occasioned. 12 An act of God cannot be invoked for the
protection of a person who has been guilty of gross negligence in not trying to
forestall its possible adverse consequences. When a person's negligence
concurs with an act of God in producing damage or injury to another, such
person is not exempt from liability by showing that the immediate or proximate
cause of the damages or injury was a fortuitous event. When the effect is found
to be partly the result of the participation of man whether it be from active

After a thorough study and evaluation of the evidence on record, this Court
believes otherwise, notwithstanding the general rule that factual findings by the
trail court, especially when affirmed by the appellate court, are binding and
conclusive upon this Court. 14 After a careful scrutiny of the records and the
pleadings submitted by the parties, we find exception to this rule and hold that
the lower courts misappreciated the evidence proffered.
There is no question that a typhoon or storm is a fortuitous event, a natural
occurrence which may be foreseen but is unavoidable despite any amount of
foresight, diligence or care. 15 In order to be exempt from liability arising from
any adverse consequence engendered thereby, there should have been no
human participation amounting to a negligent act. 16 In other words; the person
seeking exoneration from liability must not be guilty of negligence. Negligence,
as commonly understood, is conduct which naturally or reasonably creates
undue risk or harm to others. It may be the failure to observe that degree of care,
precaution, and vigilance which the circumstances justify demand, 17 or the
omission to do something which a prudent and reasonable man, guided by
considerations which ordinarily regulate the conduct of human affairs, would
do. 18 From these premises, we proceed to determine whether petitioner was
negligent, such that if it were not, the damage caused to private respondents'
house could have been avoided?
At the outset, it bears emphasizing that a person claiming damages for the
negligence of another has the burden of proving the existence of fault or
negligence causative of his injury or loss. The facts constitutive of negligence
must be affirmatively established by competent evidence, 19 not merely by
presumptions and conclusions without basis in fact. Private respondents, in
establishing the culpability of petitioner, merely relied on the aforementioned
report submitted by a team which made an ocular inspection of petitioner's
school building after the typhoon. As the term imparts, an ocularinspection is one
by means of actual sight or viewing. 20 What is visual to the eye through, is not
always reflective of the real cause behind. For instance, one who hears a
gunshot and then sees a wounded person, cannot always definitely conclude that
a third person shot the victim. It could have been self-inflicted or caused

11
accidentally by a stray bullet. The relationship of cause and effect must be clearly
shown.

anchored to its trusses, obviously, it could not have withstood long years and
several typhoons even stronger than "Saling."

In the present case, other than the said ocular inspection, no investigation was
conducted to determine the real cause of the partial unroofing of petitioner's
school building. Private respondents did not even show that the plans,
specifications and design of said school building were deficient and defective.
Neither did they prove any substantial deviation from the approved plans and
specifications. Nor did they conclusively establish that the construction of such
building was basically flawed. 21

In light of the foregoing, we find no clear and convincing evidence to sustain the
judgment of the appellate court. We thus hold that petitioner has not been shown
negligent or at fault regarding the construction and maintenance of its school
building in question and that typhoon "Saling" was the proximate cause of the
damage suffered by private respondents' house.

On the other hand, petitioner elicited from one of the witnesses of private
respondents, city building official Jesus Reyna, that the original plans and design
of petitioner's school building were approved prior to its construction. Engr.
Reyna admitted that it was a legal requirement before the construction of any
building to obtain a permit from the city building official (city engineer, prior to the
passage of the Building Act of 1977). In like manner, after construction of the
building, a certification must be secured from the same official attesting to the
readiness for occupancy of the edifice. Having obtained both building permit and
certificate of occupancy, these are, at the very least, prima facie evidence of the
regular and proper construction of subject school building. 22
Furthermore, when part of its roof needed repairs of the damage inflicted by
typhoon "Saling", the same city official gave the go-signal for such repairs
without any deviation from the original design and subsequently, authorized
the use of the entire fourth floor of the same building. These only prove that
subject building suffers from no structural defect, contrary to the report that its "Ushaped" form was "structurally defective." Having given his unqualified
imprimatur, the city building official is presumed to have properly performed his
duties 23 in connection therewith.
In addition, petitioner presented its vice president for finance and administration
who testified that an annual maintenance inspection and repair of subject school
building were regularly undertaken. Petitioner was even willing to present its
maintenance supervisor to attest to the extent of such regular inspection but
private respondents agreed to dispense with his testimony and simply stipulated
that it would be corroborative of the vice president's narration.
Moreover, the city building official, who has been in the city government service
since 1974, admitted in open court that no complaint regarding any defect on the
same structure has ever been lodged before his office prior to the institution of
the case at bench. It is a matter of judicial notice that typhoons are common
occurrences in this country. If subject school building's roofing was not firmly

With this disposition on the pivotal issue, private respondents' claim for actual
and moral damages as well as attorney's fees must fail. 24 Petitioner cannot be
made to answer for a purely fortuitous event. 25 More so because no bad faith or
willful act to cause damage was alleged and proven to warrant moral damages.
Private respondents failed to adduce adequate and competent proof of the
pecuniary loss they actually incurred.26 It is not enough that the damage be
capable of proof but must be actually proved with a reasonable degree of
certainty, pointing out specific facts that afford a basis for measuring whatever
compensatory damages are borne. 27 Private respondents merely submitted an
estimated amount needed for the repair of the roof their subject building. What is
more, whether the "necessary repairs" were caused ONLY by petitioner's alleged
negligence in the maintenance of its school building, or included the ordinary
wear and tear of the house itself, is an essential question that remains
indeterminable.
The Court deems unnecessary to resolve the other issues posed by petitioner.
As regards the sixth issue, however, the writ of execution issued on April 1, 1993
by the trial court is hereby nullified and set aside. Private respondents are
ordered to reimburse any amount or return to petitioner any property which they
may have received by virtue of the enforcement of said writ.
WHEREFORE, the petition is GRANTED and the challenged Decision is
REVERSED. The complaint of private respondents in Civil Case No. 7314 before
the trial court a quo is ordered DISMISSED and the writ of execution issued on
April 1, 1993 in said case is SET ASIDE. Accordingly, private respondents are
ORDERED to return to petitioner any amount or property received by them by
virtue of said writ. Costs against the private respondents.
SO ORDERED.
G.R. No. 147324

May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,

12
vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio
Corporation), respondents.
x-----------------------------x
GLOBE TELECOM, INC., petitioner,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.
DECISION
TINGA, J.:
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.
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 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 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 Verbalestated 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

13
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.
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:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

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;

7. DISCONTINUANCE OF SERVICE

3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and

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

4. With costs against the defendant.

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.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion
of which reads:

SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.
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

14
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.
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 MAJEUREDIFFERENT 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 five-year 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 G.R. No. 147334,19 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
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

15
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to
the Petition filed by Globe inG.R. No. 147334 and required both parties to submit
their memoranda.23

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 thereafter filed their respective Consolidated Memoranda

in the two cases, reiterating their arguments in their respective petitions.

Philcomsat and Globe agreed in Section 8 of the Agreement that the following
events shall be deemed events constituting force majeure:

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.

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

No reversible error was committed by the Court of Appeals in issuing the assailed
Decision; hence the petitions are denied.

6. War;

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.

2. Strikes or other labor difficulties;

3. Insurrection;
4. Riots;
5. National emergencies;

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

16
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. 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.
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.
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 five-year 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 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

17
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
Exemplary damages may be awarded in cases involving contracts or quasicontracts, 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.
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.
SO ORDERED.

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated
October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which
set aside the Decision dated August 31, 1998 of the Regional Trial Court, Branch
138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for
damages of Insurance Company of North America (respondent) against Gaisano
Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which
denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans.
Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing
trademarks owned by Levi Strauss & Co.. IMC and LSPI separately obtained
from respondent fire insurance policies with book debt endorsements. The
insurance policies provide for coverage on "book debts in connection with readymade clothing materials which have been sold or delivered to various customers
and dealers of the Insured anywhere in the Philippines."2 The policies defined
book debts as the "unpaid account still appearing in the Book of Account of the
Insured 45 days after the time of the loss covered under this Policy."3 The
policies also provide for the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from the
date of the covering invoice or actual delivery of the merchandise whichever shall
first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12)
days after the close of every calendar month all amount shown in their books of
accounts as unpaid and thus become receivable item from their customers and
dealers. x x x4
xxxx

G.R. No. 147839

June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

Petitioner is a customer and dealer of the products of IMC and LSPI. On

February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City,

18
owned by petitioner, was consumed by fire. Included in the items lost or
destroyed in the fire were stocks of ready-made clothing materials sold and
delivered by IMC and LSPI.

1. the amount of P2,119,205.60 representing the amount paid by the plaintiffappellant to the insured Inter Capitol Marketing Corporation, plus legal interest
from the time of demand until fully paid;

On February 4, 1992, respondent filed a complaint for damages against

petitioner. It alleges that IMC and LSPI filed with respondent their claims under
their respective fire insurance policies with book debt endorsements; that as of
February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of
ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims of IMC and LSPI and, by
virtue thereof, respondent was subrogated to their rights against petitioner; that
respondent made several demands for payment upon petitioner but these went
unheeded.5

2. the amount of P535,613.00 representing the amount paid by the plaintiffappellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time
of demand until fully paid.

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it
could not be held liable because the property covered by the insurance policies
were destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract
committed by it since the loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to it that they insured their
properties; that it never consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable settlement.7
Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire
was not attributable to the negligence of the petitioner; that it has not been
established that petitioner is the debtor of IMC and LSPI; that since the sales
invoices state that "it is further agreed that merely for purpose of securing the
payment of purchase price, the above-described merchandise remains the
property of the vendor until the purchase price is fully paid", IMC and LSPI
retained ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA
rendered its decision setting aside the decision of the RTC. The dispositive
portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED
and SET ASIDE and a new one is entered ordering defendant-appellee Gaisano
Cagayan, Inc. to pay:

With costs against the defendant-appellee.

SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements
of the nature, quantity and cost of the thing sold; that loss of the goods in the fire
must be borne by petitioner since the proviso contained in the sales invoices is
an exception under Article 1504 (1) of the Civil Code, to the general rule that if
the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at
the time the loss under the principle of res perit domino; that petitioner's
obligation to IMC and LSPI is not the delivery of the lost goods but the payment
of its unpaid account and as such the obligation to pay is not extinguished, even
if the fire is considered a fortuitous event; that by subrogation, the insurer has the
right to go against petitioner; that, being a fire insurance with book debt
endorsements, what was insured was the vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN
THE INSTANT CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO
PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS
AUTOMATIC SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN
FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case
cannot be deemed to be over credit since an insurance "on credit" belies not only
the nature of fire insurance but the express terms of the policies; that it was not

19
credit that was insured since respondent paid on the occasion of the loss of the
insured goods to fire and not because of the non-payment by petitioner of any
obligation; that, even if the insurance is deemed as one over credit, there was no
loss as the accounts were not yet due since no prior demands were made by
IMC and LSPI against petitioner for payment of the debt and such demands
came from respondent only after it had already paid IMC and LSPI under the fire
insurance policies.15
As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured fire
insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in
favor of respondent as no valid insurance could be maintained thereon by IMC
and LSPI since all risk had transferred to petitioner upon delivery of the goods;
that petitioner was not privy to the insurance contract or the payment between
respondent and its insured nor was its consent or approval ever secured; that
this lack of privity forecloses any real interest on the part of respondent in the
obligation to pay, limiting its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made
clothing materials was transferred upon delivery to petitioner, IMC and LSPI have
insurable interest over said goods as creditors who stand to suffer direct
pecuniary loss from its destruction by fire; that petitioner is liable for loss of the
ready-made clothing materials since it failed to overcome the presumption of
liability under Article 126516 of the Civil Code; that the fire was caused through
petitioner's negligence in failing to provide stringent measures of caution, care
and maintenance on its property because electric wires do not usually short
circuit unless there are defects in their installation or when there is lack of proper
maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be liable
to respondent for contracted lawyer's fees, litigation expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases
brought before it from the CA is limited to reviewing questions of law which
involves no examination of the probative value of the evidence presented by the
litigants or any of them.18 The Supreme Court is not a trier of facts; it is not its
function to analyze or weigh evidence all over again.19 Accordingly, findings of
fact of the appellate court are generally conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual
issues may be resolved by this Court, such as: (1) when the findings are
grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is

grave abuse of discretion; (4) when the judgment is based on a misapprehension

of facts; (5) when the findings of facts are conflicting; (6) when in making its
findings the CA went beyond the issues of the case, or its findings are contrary to
the admissions of both the appellant and the appellee; (7) when the findings are
contrary to the trial court; (8) when the findings are conclusions without citation of
specific evidence on which they are based; (9) when the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not disputed by the
respondent; (10) when the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence on record; and (11) when
the CA manifestly overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different conclusion.21 Exceptions
(4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner
claims that the CA erred in construing a fire insurance policy on book debts as
one covering the unpaid accounts of IMC and LSPI since such insurance applies
to loss of the ready-made clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction.22 In this case, the questioned
insurance policies provide coverage for "book debts in connection with readymade clothing materials which have been sold or delivered to various customers
and dealers of the Insured anywhere in the Philippines."23 ; and defined book
debts as the "unpaid account still appearing in the Book of Account of the Insured
45 days after the time of the loss covered under this Policy."24 Nowhere is it
provided in the questioned insurance policies that the subject of the insurance is
the goods sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are
to be understood literally just as they appear on the face of the contract.25 Thus,
what were insured against were the accounts of IMC and LSPI with petitioner
which remained unpaid 45 days after the loss through fire, and not the loss or
destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further
agreed that merely for purpose of securing the payment of the purchase price the
above described merchandise remains the property of the vendor until the
purchase price thereof is fully paid."26
The Court is not persuaded.

20
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until
the ownership therein is transferred to the buyer, but when the ownership therein
is transferred to the buyer the goods are at the buyer's risk whether actual
delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his
obligations under the contract, the goods are at the buyer's risk from the time of
such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its
debt, the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the
risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods. Unlike the
civil law concept of res perit domino, where ownership is the basis for
consideration of who bears the risk of loss, in property insurance, one's interest is
not determined by concept of title, but whether insured has substantial economic
interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the
insured." Parenthetically, under Section 14 of the same Code, an insurable
interest in property may consist in: (a) an existing interest; (b) an inchoate
interest founded on existing interest; or (c) an expectancy, coupled with an
existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance,
and neither the title nor a beneficial interest is requisite to the existence of such
an interest, it is sufficient that the insured is so situated with reference to the
property that he would be liable to loss should it be injured or destroyed by the
peril against which it is insured.29 Anyone has an insurable interest in property
who derives a benefit from its existence or would suffer loss from its
destruction.30Indeed, a vendor or seller retains an insurable interest in the
property sold so long as he has any interest therein, in other words, so long as
he would suffer by its destruction, as where he has a vendor's lien.31 In this

case, the insurable interest of IMC and LSPI pertain to the unpaid accounts
appearing in their Books of Account 45 days after the time of the loss covered by
the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event
under Article 117432 of the Civil Code is misplaced. As held earlier, petitioner
bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of
goods by fire but for petitioner's accounts with IMC and LSPI that remained
unpaid 45 days after the fire. Accordingly, petitioner's obligation is for the
payment of money. As correctly stated by the CA, where the obligation consists
in the payment of money, the failure of the debtor to make the payment even by
reason of a fortuitous event shall not relieve him of his liability.33 The rationale
for this is that the rule that an obligor should be held exempt from liability when
the loss occurs thru a fortuitous event only holds true when the obligation
consists in the delivery of a determinate thing and there is no stipulation holding
him liable even in case of fortuitous event. It does not apply when the obligation
is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind does not extinguish the
obligation." If the obligation is generic in the sense that the object thereof is
designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or destruction of
anything of the same kind even without the debtor's fault and before he has
incurred in delay will not have the effect of extinguishing the obligation.35 This
rule is based on the principle that the genus of a thing can never perish. Genus
nunquan perit.36 An obligation to pay money is generic; therefore, it is not
excused by fortuitous loss of any specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established
that petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim.
Exhibits "C" to "C-22"38 show that petitioner has an outstanding account with
IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher
evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed by
IMC in favor of respondent upon receipt of the insurance proceeds. All these
documents have been properly identified, presented and marked as exhibits in
court. The subrogation receipt, by itself, is sufficient to establish not only the

21
relationship of respondent as insurer and IMC as the insured, but also the
amount paid to settle the insurance claim. The right of subrogation accrues
simply upon payment by the insurance company of the insurance claim.41
Respondent's action against petitioner is squarely sanctioned by Article 2207 of
the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who
has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of
action. No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter
dated April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr.,
since it is not an admission of petitioner's unpaid account with LSPI. It only
confirms the loss of Levi's products in the amount of P535,613.00 in the fire that
razed petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no
subrogation receipt was offered in evidence. Thus, there is no evidence that
respondent has been subrogated to any right which LSPI may have against
petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's
case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated
October 11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in
CA-G.R. CV No. 61848 are AFFIRMED with the MODIFICATIONthat the order to
pay the amount of P535,613.00 to respondent is DELETED for lack of factual
basis.

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners,

vs.
LULU V. JORGE and CESAR JORGE, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr.
(petitioner Sicam) and Agencia deR.C. Sicam, Inc. (petitioner corporation)
seeking to annul the Decision1 of the Court of Appeals dated March 31, 2003,
and its Resolution2 dated August 8, 2003, in CA G.R. CV No. 56633.
It appears that on different dates from September to October 1987, Lulu V. Jorge
(respondent Lulu) pawned several pieces of jewelry with Agencia de R. C. Sicam
located at No. 17 Aguirre Ave., BF Homes Paraaque, Metro Manila, to secure a
loan in the total amount of P59,500.00.
On October 19, 1987, two armed men entered the pawnshop and took away
whatever cash and jewelry were found inside the pawnshop vault. The incident
was entered in the police blotter of the Southern Police District, Paraaque
Police Station as follows:
Investigation shows that at above TDPO, while victims were inside the
office, two (2) male unidentified persons entered into the said office with
guns drawn. Suspects(sic) (1) went straight inside and poked his gun
toward Romeo Sicam and thereby tied him with an electric wire while
suspects (sic) (2) poked his gun toward Divina Mata and Isabelita
Rodriguez and ordered them to lay (sic) face flat on the floor. Suspects
asked forcibly the case and assorted pawned jewelries items mentioned
above.

No pronouncement as to costs.
Suspects after taking the money and jewelries fled on board a Marson
Toyota unidentified plate number.3

SO ORDERED.

G.R. No. 159617

August 8, 2007

Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing
her of the loss of her jewelry due to the robbery incident in the pawnshop. On
November 2, 1987, respondent Lulu then wrote a letter4 to petitioner Sicam
expressing disbelief stating that when the robbery happened, all jewelry pawned
were deposited with Far East Bank near the pawnshop since it had been the
practice that before they could withdraw, advance notice must be given to the

22
pawnshop so it could withdraw the jewelry from the bank. Respondent Lulu then
requested petitioner Sicam to prepare the pawned jewelry for withdrawal on
November 6, 1987 but petitioner Sicam failed to return the jewelry.
On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge,
filed a complaint against petitioner Sicam with the Regional Trial Court of Makati
seeking indemnification for the loss of pawned jewelry and payment of actual,
moral and exemplary damages as well as attorney's fees. The case was
docketed as Civil Case No. 88-2035.
Petitioner Sicam filed his Answer contending that he is not the real party-ininterest as the pawnshop was incorporated on April 20, 1987 and known
as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised due
care and diligence in the safekeeping of the articles pledged with it and could not
be made liable for an event that is fortuitous.
Respondents subsequently filed an Amended Complaint to include petitioner
corporation.
Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned
considering that he is not the real party-in-interest. Respondents opposed the
same. The RTC denied the motion in an Order dated November 8, 1989.5
After trial on the merits, the RTC rendered its Decision6 dated January 12, 1993,
dismissing respondents complaint as well as petitioners counterclaim. The RTC
held that petitioner Sicam could not be made personally liable for a claim arising
out of a corporate transaction; that in the Amended Complaint of respondents,
they asserted that "plaintiff pawned assorted jewelries in defendants' pawnshop";
and that as a consequence of the separate juridical personality of a corporation,
the corporate debt or credit is not the debt or credit of a stockholder.
The RTC further ruled that petitioner corporation could not be held liable for the
loss of the pawned jewelry since it had not been rebutted by respondents that the
loss of the pledged pieces of jewelry in the possession of the corporation was
occasioned by armed robbery; that robbery is a fortuitous event which exempts
the victim from liability for the loss, citing the case of Austria v. Court of
Appeals;7 and that the parties transaction was that of a pledgor and pledgee and
under Art. 1174 of the Civil Code, the pawnshop as a pledgee is not responsible
for those events which could not be foreseen.

Respondents appealed the RTC Decision to the CA. In a Decision dated March
31, 2003, the CA reversed the RTC, the dispositive portion of which reads as
follows:
WHEREFORE, premises considered, the instant Appeal is GRANTED,
and the Decision dated January 12, 1993,of the Regional Trial Court of
Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering the
appellees to pay appellants the actual value of the lost jewelry
amounting to P272,000.00, and attorney' fees of P27,200.00.8
In finding petitioner Sicam liable together with petitioner corporation, the CA
applied the doctrine of piercing the veil of corporate entity reasoning that
respondents were misled into thinking that they were dealing with the pawnshop
owned by petitioner Sicam as all the pawnshop tickets issued to them bear the
words "Agencia de R.C. Sicam"; and that there was no indication on the
pawnshop tickets that it was the petitioner corporation that owned the pawnshop
which explained why respondents had to amend their complaint impleading
petitioner corporation.
The CA further held that the corresponding diligence required of a pawnshop is
that it should take steps to secure and protect the pledged items and should take
steps to insure itself against the loss of articles which are entrusted to its custody
as it derives earnings from the pawnshop trade which petitioners failed to do;
that Austria is not applicable to this case since the robbery incident happened in
1961 when the criminality had not as yet reached the levels attained in the
present day; that they are at least guilty of contributory negligence and should be
held liable for the loss of jewelries; and that robberies and hold-ups are
foreseeable risks in that those engaged in the pawnshop business are expected
to foresee.
The CA concluded that both petitioners should be jointly and severally held liable
to respondents for the loss of the pawned jewelry.
Petitioners motion for reconsideration was denied in a Resolution dated August
8, 2003.
Hence, the instant petition for review with the following assignment of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED
ITSELF TO REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN
FACT IT REPRODUCED AS ITS OWN WITHOUT IN THE MEANTIME
ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN

23
THEIR BRIEF, WHICH ARGUMENT WAS PALPABLY
UNSUSTAINABLE.

they can only store the pawned articles in a vault inside the pawnshop
premises and no other place;

THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED

ITSELF TO REVERSAL BY THIS HONORABLE COURT, WHEN IT
AGAIN ADOPTED UNCRITICALLY (BUT WITHOUT
ACKNOWLEDGING IT) THE SUBMISSIONS OF THE RESPONDENTS
IN THEIR BRIEF WITHOUT ADDING ANYTHING MORE THERETO
DESPITE THE FACT THAT THE SAID ARGUMENT OF THE
RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN VIEW OF
UNREBUTTED EVIDENCE ON RECORD.9

(2) Petitioners were adjudged negligent as they did not take insurance
against the loss of the pledged jelweries, but it is judicial notice that due
to high incidence of crimes, insurance companies refused to cover
pawnshops and banks because of high probability of losses due to
robberies;

Anent the first assigned error, petitioners point out that the CAs finding that
petitioner Sicam is personally liable for the loss of the pawned jewelries is "a
virtual and uncritical reproduction of the arguments set out on pp. 5-6 of the
Appellants brief."10
Petitioners argue that the reproduced arguments of respondents in their
Appellants Brief suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of their Amended
Complaint that Agencia de R.C. Sicam, Inc. is the present owner of
Agencia de R.C. Sicam Pawnshop, and therefore, the CA cannot rule
against said conclusive assertion of respondents;
(2) The issue resolved against petitioner Sicam was not among those
raised and litigated in the trial court; and
(3) By reason of the above infirmities, it was error for the CA to have
pierced the corporate veil since a corporation has a personality distinct
and separate from its individual stockholders or members.
Anent the second error, petitioners point out that the CA finding on their
negligence is likewise an unedited reproduction of respondents brief which had
the following defects:
(1) There were unrebutted evidence on record that petitioners had
observed the diligence required of them, i.e, they wanted to open a vault
with a nearby bank for purposes of safekeeping the pawned articles but
was discouraged by the Central Bank (CB) since CB rules provide that

(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 4546), the victim of robbery was exonerated from liability for the sum of
money belonging to others and lost by him to robbers.
Respondents filed their Comment and petitioners filed their Reply thereto. The
parties subsequently submitted their respective Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact
reproductions of the arguments raised in respondents (appellants) brief filed with
the CA, we find the same to be not fatally infirmed. Upon examination of the
Decision, we find that it expressed clearly and distinctly the facts and the law on
which it is based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to justify the
adoption of the arguments put forth by one of the parties, as long as these are
legally tenable and supported by law and the facts on records.11
Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of
errors of law committed by the appellate court. Generally, the findings of fact of
the appellate court are deemed conclusive and we are not duty-bound to analyze
and calibrate all over again the evidence adduced by the parties in the court a
quo.12 This rule, however, is not without exceptions, such as where the factual
findings of the Court of Appeals and the trial court are conflicting or
contradictory13 as is obtaining in the instant case.
However, after a careful examination of the records, we find no justification to
absolve petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and adjudged petitioner
Sicam liable together with petitioner corporation. The rule is that the veil of
corporate fiction may be pierced when made as a shield to perpetrate fraud

24
and/or confuse legitimate issues. 14 The theory of corporate entity was not meant
to promote unfair objectives or otherwise to shield them.15
Notably, the evidence on record shows that at the time respondent Lulu pawned
her jewelry, the pawnshop was owned by petitioner Sicam himself. As correctly
observed by the CA, in all the pawnshop receipts issued to respondent Lulu in
September 1987, all bear the words "Agencia de R. C. Sicam," notwithstanding
that the pawnshop was allegedly incorporated in April 1987. The receipts issued
after such alleged incorporation were still in the name of "Agencia de R. C.
Sicam," thus inevitably misleading, or at the very least, creating the wrong
impression to respondents and the public as well, that the pawnshop was owned
solely by petitioner Sicam and not by a corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his letter16 dated October 15,
1987 addressed to the Central Bank, expressly referred to petitioner Sicam as
the proprietor of the pawnshop notwithstanding the alleged incorporation in April
1987.
We also find no merit in petitioners' argument that since respondents had alleged
in their Amended Complaint that petitioner corporation is the present owner of the
pawnshop, the CA is bound to decide the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or
written, made by a party in the course of the proceedings in the same case, does
not require proof. The admission may be contradicted only by showing that it was
made through palpable mistake or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon the party
making it and does not require proof, admits of two exceptions, to wit: (1) when it
is shown that such admission was made through palpable mistake, and (2) when
it is shown that no such admission was in fact made. The latter exception
allows one to contradict an admission by denying that he made such an
admission.17
The Committee on the Revision of the Rules of Court explained the second
exception in this wise:
x x x if a party invokes an "admission" by an adverse party, but cites the
admission "out of context," then the one making the "admission" may
show that he made no "such" admission, or that his admission was
taken out of context.

x x x that the party can also show that he made no "such

admission", i.e., not in the sense in which the admission is made
to appear.
That is the reason for the modifier "such" because if the rule simply
states that the admission may be contradicted by showing that "no
admission was made," the rule would not really be providing for a
contradiction of the admission but just a denial.18 (Emphasis supplied).
While it is true that respondents alleged in their Amended Complaint that
petitioner corporation is the present owner of the pawnshop, they did so only
because petitioner Sicam alleged in his Answer to the original complaint filed
against him that he was not the real party-in-interest as the pawnshop was
incorporated in April 1987. Moreover, a reading of the Amended Complaint in its
entirety shows that respondents referred to both petitioner Sicam and petitioner
corporation where they (respondents) pawned their assorted pieces of jewelry
and ascribed to both the failure to observe due diligence commensurate with the
business which resulted in the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss
Amended Complaint, insofar as petitioner Sicam is concerned, averred as
follows:
Roberto C. Sicam was named the defendant in the original complaint
because the pawnshop tickets involved in this case did not show that
the R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his
Answer, he admitted the allegations in paragraph 1 and 2 of the
Complaint. He merely added "that defendant is not now the real party in
interest in this case."
It was defendant Sicam's omission to correct the pawnshop tickets used
in the subject transactions in this case which was the cause of the
instant action. He cannot now ask for the dismissal of the complaint
against him simply on the mere allegation that his pawnshop business is
now incorporated. It is a matter of defense, the merit of which can only
be reached after consideration of the evidence to be presented in due
course.19
Unmistakably, the alleged admission made in respondents' Amended Complaint
was taken "out of context" by petitioner Sicam to suit his own purpose.
Ineluctably, the fact that petitioner Sicam continued to issue pawnshop receipts

25
under his name and not under the corporation's name militates for the piercing of
the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing
the veil of corporate fiction of petitioner corporation, as it was not an issue raised
and litigated before the RTC.
Petitioner Sicam had alleged in his Answer filed with the trial court that he was
not the real party-in-interest because since April 20, 1987, the pawnshop
business initiated by him was incorporated and known as Agencia deR.C. Sicam.
In the pre-trial brief filed by petitioner Sicam, he submitted that as far as he was
concerned, the basic issue was whether he is the real party in interest against
whom the complaint should be directed.20 In fact, he subsequently moved for the
dismissal of the complaint as to him but was not favorably acted upon by the trial
court. Moreover, the issue was squarely passed upon, although erroneously, by
the trial court in its Decision in this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as
he is concerned for the reason that he cannot be made personally liable
for a claim arising from a corporate transaction.
This Court sustains the contention of the defendant Roberto C. Sicam,
Jr. The amended complaint itself asserts that "plaintiff pawned assorted
jewelries in defendant's pawnshop." It has been held that " as a
consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the stockholder, nor is
the stockholder's debt or credit that of a corporation.21
Clearly, in view of the alleged incorporation of the pawnshop, the issue of
whether petitioner Sicam is personally liable is inextricably connected with the
determination of the question whether the doctrine of piercing the corporate veil
should or should not apply to the case.
The next question is whether petitioners are liable for the loss of the pawned
articles in their possession.
Petitioners insist that they are not liable since robbery is a fortuitous event and
they are not negligent at all.
We are not persuaded.

Article 1174 of the Civil Code provides:

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.
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable. It is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one impossible to
foresee or to avoid. The mere difficulty to foresee the happening is not
impossibility to foresee the same. 22
To constitute a fortuitous event, the following elements must concur: (a) the
cause of the unforeseen and unexpected occurrence or of the failure of the
debtor to comply with obligations must be independent of human will; (b) it must
be impossible to foresee the event that constitutes the caso fortuito or, if it can be
foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal manner; and,
(d) the obligor must be free from any participation in the aggravation of the injury
or loss. 23
The burden of proving that the loss was due to a fortuitous event rests on him
who invokes it.24 And, in order for a fortuitous event to exempt one from liability, it
is necessary that one has committed no negligence or misconduct that may have
occasioned the loss. 25
It has been held that an act of God cannot be invoked to protect a person who
has failed to take steps to forestall the possible adverse consequences of such a
loss. One's negligence may have concurred with an act of God in producing
damage and injury to another; nonetheless, showing that the immediate or
proximate cause of the damage or injury was a fortuitous event would not exempt
one from liability. When the effect is found to be partly the result of a person's
participation -- whether by active intervention, neglect or failure to act -- the
whole occurrence is humanized and removed from the rules applicable to acts of
God. 26
Petitioner Sicam had testified that there was a security guard in their pawnshop
at the time of the robbery. He likewise testified that when he started the
pawnshop business in 1983, he thought of opening a vault with the nearby bank
for the purpose of safekeeping the valuables but was discouraged by the Central

26
Bank since pawned articles should only be stored in a vault inside the pawnshop.
The very measures which petitioners had allegedly adopted show that to them
the possibility of robbery was not only foreseeable, but actually foreseen and
anticipated. Petitioner Sicams testimony, in effect, contradicts petitioners
defense of fortuitous event.
Moreover, petitioners failed to show that they were free from any negligence by
which the loss of the pawned jewelry may have been occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not
foreclose the possibility of negligence on the part of herein petitioners. In Co v.
Court of Appeals,27 the Court held:
It is not a defense for a repair shop of motor vehicles to escape liability
simply because the damage or loss of a thing lawfully placed in its
possession was due to carnapping. Carnapping per se cannot be
considered as a fortuitous event. The fact that a thing was unlawfully
and forcefully taken from another's rightful possession, as in
cases of carnapping, does not automatically give rise to a
fortuitous event. To be considered as such, carnapping entails
more than the mere forceful taking of another's property. It must be
proved and established that the event was an act of God or was
done solely by third parties and that neither the claimant nor the
person alleged to be negligent has any participation. In
accordance with the Rules of Evidence, the burden of proving that
the loss was due to a fortuitous event rests on him who invokes it
which in this case is the private respondent. However, other than
the police report of the alleged carnapping incident, no other evidence
was presented by private respondent to the effect that the incident was
not due to its fault. A police report of an alleged crime, to which only
private respondent is privy, does not suffice to establish the carnapping.
Neither does it prove that there was no fault on the part of private
respondent notwithstanding the parties' agreement at the pre-trial that
the car was carnapped. Carnapping does not foreclose the possibility of
fault or negligence on the part of private respondent.28
Just like in Co, petitioners merely presented the police report of the Paraaque
Police Station on the robbery committed based on the report of petitioners'
employees which is not sufficient to establish robbery. Such report also does not
prove that petitioners were not at fault.

On the contrary, by the very evidence of petitioners, the CA did not err in finding
that petitioners are guilty of concurrent or contributory negligence as provided in
Article 1170 of the Civil Code, to wit:
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.29
Article 2123 of the Civil Code provides that with regard to pawnshops and other
establishments which are engaged in making loans secured by pledges, the
special laws and regulations concerning them shall be observed, and subsidiarily,
the provisions on pledge, mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code, provides that
the creditor shall take care of the thing pledged with the diligence of a good
father of a family. This means that petitioners must take care of the pawns the
way a prudent person would as to his own property.
In this connection, Article 1173 of the Civil Code further provides:
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 time and of the
place. When negligence shows bad faith, the provisions of Articles 1171
and 2201, 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.
We expounded in Cruz v. Gangan30 that negligence is the omission to do
something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do; or the doing of
something which a prudent and reasonable man would not do.31 It is want of care
required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise
reasonable care and caution that an ordinarily prudent person would have used
in the same situation. Petitioners were guilty of negligence in the operation of
their pawnshop business. Petitioner Sicam testified, thus:

27
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.
Q. Then how come that the robbers were able to enter the premises
when according to you there was a security guard?
A. Sir, if these robbers can rob a bank, how much more a pawnshop.
Q. I am asking you how were the robbers able to enter despite the fact
that there was a security guard?
A. At the time of the incident which happened about 1:00 and 2:00
o'clock in the afternoon and it happened on a Saturday and everything
was quiet in the area BF Homes Paraaque they pretended to pawn an
article in the pawnshop, so one of my employees allowed him to come
in and it was only when it was announced that it was a hold up.

prevent any untoward incident or to ensure that no suspicious individuals were

allowed to enter the premises. In fact, it is even doubtful that there was a security
guard, since it is quite impossible that he would not have noticed that the robbers
were armed with caliber .45 pistols each, which were allegedly poked at the
employees.33 Significantly, the alleged security guard was not presented at all to
corroborate petitioner Sicam's claim; not one of petitioners' employees who were
present during the robbery incident testified in court.
Furthermore, petitioner Sicam's admission that the vault was open at the time of
robbery is clearly a proof of petitioners' failure to observe the care, precaution
and vigilance that the circumstances justly demanded. Petitioner Sicam testified
that once the pawnshop was open, the combination was already off. Considering
petitioner Sicam's testimony that the robbery took place on a Saturday afternoon
and the area in BF Homes Paraaque at that time was quiet, there was more
reason for petitioners to have exercised reasonable foresight and diligence in
protecting the pawned jewelries. Instead of taking the precaution to protect them,
they let open the vault, providing no difficulty for the robbers to cart away the
pawned articles.
We, however, do not agree with the CA when it found petitioners negligent for not
taking steps to insure themselves against loss of the pawned jewelries.

Q. Did you come to know how the vault was opened?

A. When the pawnshop is official (sic) open your honor the pawnshop is
partly open. The combination is off.

Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for
Pawnshops, which took effect on July 13, 1973, and which was issued pursuant
to Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that
pawns pledged must be insured, to wit:

Q. No one open (sic) the vault for the robbers?

A. No one your honor it was open at the time of the robbery.
Q. It is clear now that at the time of the robbery the vault was open the
reason why the robbers were able to get all the items pawned to you
inside the vault.

Sec. 17. Insurance of Office Building and Pawns- The place of business
of a pawnshop and the pawns pledged to it must be insured against
fire and against burglary as well as for the latter(sic), by an insurance
company accredited by the Insurance Commissioner.
However, this Section was subsequently amended by CB Circular No. 764 which
took effect on October 1, 1980, to wit:

A. Yes sir.32
revealing that there were no security measures adopted by petitioners in the
operation of the pawnshop. Evidently, no sufficient precaution and vigilance were
adopted by petitioners to protect the pawnshop from unlawful intrusion. There
was no clear showing that there was any security guard at all. Or if there was
one, that he had sufficient training in securing a pawnshop. Further, there is no
showing that the alleged security guard exercised all that was necessary to

Sec. 17 Insurance of Office Building and Pawns The office

building/premises and pawns of a pawnshop must be insured against
fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted. Obviously,
the Central Bank considered it not feasible to require insurance of pawned
articles against burglary.

28
The robbery in the pawnshop happened in 1987, and considering the abovequoted amendment, there is no statutory duty imposed on petitioners to insure
the pawned jewelry in which case it was error for the CA to consider it as a factor
in concluding that petitioners were negligent.
Nevertheless, the preponderance of evidence shows that petitioners failed to
exercise the diligence required of them under the Civil Code.
The diligence with which the law requires the individual at all times to govern his
conduct varies with the nature of the situation in which he is placed and the
importance of the act which he is to perform.34 Thus, the cases ofAustria v. Court
of Appeals,35 Hernandez v. Chairman, Commission on Audit36 and Cruz v.
Gangan37 cited by petitioners in their pleadings, where the victims of robbery
were exonerated from liability, find no application to the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds
to be sold on commission basis, but which Abad failed to subsequently return
because of a robbery committed upon her in 1961. The incident became the
subject of a criminal case filed against several persons. Austria filed an action
against Abad and her husband (Abads) for recovery of the pendant or its value,
but the Abads set up the defense that the robbery extinguished their obligation.
The RTC ruled in favor of Austria, as the Abads failed to prove robbery; or, if
committed, that Maria Abad was guilty of negligence. The CA, however, reversed
the RTC decision holding that the fact of robbery was duly established and
declared the Abads not responsible for the loss of the jewelry on account of a
fortuitous event. We held that for the Abads to be relieved from the civil liability of
returning the pendant under Art. 1174 of the Civil Code, it would only be sufficient
that the unforeseen event, the robbery, took place without any concurrent fault on
the debtors part, and this can be done by preponderance of evidence; that to be
free from liability for reason of fortuitous event, the debtor must, in addition to the
casus itself, be free of any concurrent or contributory fault or negligence.38
We found in Austria that under the circumstances prevailing at the time the
Decision was promulgated in 1971, the City of Manila and its suburbs had a high
incidence of crimes against persons and property that rendered travel after
nightfall a matter to be sedulously avoided without suitable precaution and
protection; that the conduct of Maria Abad in returning alone to her house in the
evening carrying jewelry of considerable value would have been negligence per
se and would not exempt her from responsibility in the case of robbery. However
we did not hold Abad liable for negligence since, the robbery happened ten years
previously; i.e., 1961, when criminality had not reached the level of incidence
obtaining in 1971.

In contrast, the robbery in this case took place in 1987 when robbery was already
prevalent and petitioners in fact had already foreseen it as they wanted to deposit
the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where
no negligence was committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of
the Ternate Beach Project of the Philippine Tourism in Cavite. In the morning of
July 1, 1983, a Friday, he went to Manila to encash two checks covering the
wages of the employees and the operating expenses of the project. However for
some reason, the processing of the check was delayed and was completed at
about 3 p.m. Nevertheless, he decided to encash the check because the project
employees would be waiting for their pay the following day; otherwise, the
workers would have to wait until July 5, the earliest time, when the main office
would open. At that time, he had two choices: (1) return to Ternate, Cavite that
same afternoon and arrive early evening; or (2) take the money with him to his
house in Marilao, Bulacan, spend the night there, and leave for Ternate the
following day. He chose the second option, thinking it was the safer one. Thus, a
little past 3 p.m., he took a passenger jeep bound for Bulacan. While the jeep
was on Epifanio de los Santos Avenue, the jeep was held up and the money kept
by Hernandez was taken, and the robbers jumped out of the jeep and ran.
Hernandez chased the robbers and caught up with one robber who was
subsequently charged with robbery and pleaded guilty. The other robber who
held the stolen money escaped. The Commission on Audit found Hernandez
negligent because he had not brought the cash proceeds of the checks to his
office in Ternate, Cavite for safekeeping, which is the normal procedure in the
handling of funds. We held that Hernandez was not negligent in deciding to
encash the check and bringing it home to Marilao, Bulacan instead of Ternate,
Cavite due to the lateness of the hour for the following reasons: (1) he was
moved by unselfish motive for his co-employees to collect their wages and
salaries the following day, a Saturday, a non-working, because to encash the
check on July 5, the next working day after July 1, would have caused discomfort
to laborers who were dependent on their wages for sustenance; and (2) that
choosing Marilao as a safer destination, being nearer, and in view of the
comparative hazards in the trips to the two places, said decision seemed logical
at that time. We further held that the fact that two robbers attacked him in broad
daylight in the jeep while it was on a busy highway and in the presence of other
passengers could not be said to be a result of his imprudence and negligence.
Unlike in Hernandez where the robbery happened in a public utility, the robbery
in this case took place in the pawnshop which is under the control of petitioners.
Petitioners had the means to screen the persons who were allowed entrance to
the premises and to protect itself from unlawful intrusion. Petitioners had failed to

29
exercise precautionary measures in ensuring that the robbers were prevented
from entering the pawnshop and for keeping the vault open for the day, which
paved the way for the robbers to easily cart away the pawned articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological
Education and Skills Development Authority (TESDA), boarded the Light Rail
Transit (LRT) from Sen. Puyat Avenue to Monumento when her handbag was
slashed and the contents were stolen by an unidentified person. Among those
stolen were her wallet and the government-issued cellular phone. She then
reported the incident to the police authorities; however, the thief was not located,
and the cellphone was not recovered. She also reported the loss to the Regional
Director of TESDA, and she requested that she be freed from accountability for
the cellphone. The Resident Auditor denied her request on the ground that she
lacked the diligence required in the custody of government property and was
ordered to pay the purchase value in the total amount of P4,238.00. The COA
found no sufficient justification to grant the request for relief from accountability.
We reversed the ruling and found that riding the LRT cannot per se be
denounced as a negligent act more so because Cruzs mode of transit was
influenced by time and money considerations; that she boarded the LRT to be
able to arrive in Caloocan in time for her 3 pm meeting; that any prudent and
rational person under similar circumstance can reasonably be expected to do the
same; that possession of a cellphone should not hinder one from boarding the
LRT coach as Cruz did considering that whether she rode a jeep or bus, the risk
of theft would have also been present; that because of her relatively low position
and pay, she was not expected to have her own vehicle or to ride a taxicab; she
did not have a government assigned vehicle; that placing the cellphone in a bag
away from covetous eyes and holding on to that bag as she did is ordinarily
sufficient care of a cellphone while traveling on board the LRT; that the records
did not show any specific act of negligence on her part and negligence can never
be presumed.
Unlike in the Cruz case, the robbery in this case happened in petitioners'
pawnshop and they were negligent in not exercising the precautions justly
demanded of a pawnshop.

G.R. No. 177921

December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO

AND TIUOH YAN, SPOUSES GUILLERMO AND MERCEDES DYCHIAO, AND
SPOUSES VICENTE AND FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated February
12, 2007 and the Resolution3dated May 10, 2007 of the Court of Appeals (CA) in
CA-G.R. CV No. 86896 which reversed and set aside the Decision4 dated
January 17, 2006 of the Regional Trial Court of Makati, Branch 57 (RTC) in Civil
Case No. 00-1563, thereby ordering petitioners Metro Concast Steel Corporation
(Metro Concast), Spouses Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo
and Mercedes Dychiao, and Spouses Vicente and Filomena Duchiao (individual
petitioners) to solidarily pay respondent Allied Bank Corporation (Allied Bank) the
aggregate amount ofP51,064,094.28, with applicable interests and penalty
charges.
The Facts
On various dates and for different amounts, Metro Concast, a corporation duly
organized and existing under and by virtue of Philippine laws and engaged in the
business of manufacturing steel,5 through its officers, herein individual
petitioners, obtained several loans from Allied Bank. These loan transactions
were covered by a promissory note and separate letters of credit/trust receipts,
the details of which are as follows:

WHEREFORE, except for the insurance aspect, the Decision of the Court of
Appeals dated March 31, 2003 and its Resolution dated August 8, 2003,
are AFFIRMED.

<<Reference: http://www.scribd.com/doc/196404620/177921>>

Costs against petitioners.

December 13, 1996 Promissory Note No. 96-213016

SO ORDERED.

P2,000,000.00 November 7, 1995 Trust Receipt No. 96-2023657

Date Document Amount

30
P608,603.04 May 13, 1996 Trust Receipt No. 96-9605228
P3,753,777.40 May 24, 1996 Trust Receipt No. 96-9605249
P4,602,648.08 March 21, 1997 Trust Receipt No. 97-20472410
P7,289,757.79 June 7, 1996 Trust Receipt No. 96-20328011
P17,340,360.73 July 26, 1995 Trust Receipt No. 95-20194312
P670,709.24 August 31, 1995 Trust Receipt No. 95-20205313
P313,797.41 November 16, 1995 Trust Receipt No. 96-20243914
P13,015,109.87 July 3, 1996 Trust Receipt No. 96-20355215
P401,608.89 June 20, 1995 Trust Receipt No. 95-20171016
P750,089.25 December 13, 1995 Trust Receipt No. 96-37908917
P92,919.00 December 13, 1995 Trust Receipt No. 96/20258118
P224,713.58
The interest rate under Promissory Note No. 96-21301 was pegged at 15.25%
per annum (p.a.), with penalty charge of 3% per month in case of default; while
the twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a.
and 1% penalty charge. By way of security, the individual petitioners executed
several Continuing Guaranty/Comprehensive Surety Agreements19 in favor of
Allied Bank. Petitioners failed to settle their obligations under the aforementioned
promissory note and trust receipts, hence, Allied Bank, through counsel, sent
them demand letters,20 all dated December 10, 1998, seeking payment of the
total amount of P51,064,093.62, but to no avail. Thus, Allied Bank was prompted
to file a complaint for collection of sum of money21 (subject complaint) against
petitioners before the RTC, docketed as Civil Case No. 00-1563. In their
second22 Amended Answer,23petitioners admitted their indebtedness to Allied
Bank but denied liability for the interests and penalties charged, claiming to have
paid the total sum of P65,073,055.73 by way of interest charges for the period
covering 1992 to 1997.24

They also alleged that the economic reverses suffered by the Philippine economy
in 1998 as well as the devaluation of the peso against the US dollar contributed
greatly to the downfall of the steel industry, directly affecting the business of
Metro Concast and eventually leading to its cessation. Hence, in order to settle
their debts with Allied Bank, petitioners offered the sale of Metro Concasts
remaining assets, consisting of machineries and equipment, to Allied Bank, which
the latter, however, refused. Instead, Allied Bank advised them to sell the
equipment and apply the proceeds of the sale to their outstanding obligations.
Accordingly, petitioners offered the equipment for sale, but since there were no
takers, the equipment was reduced into ferro scrap or scrap metal over the
years. In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta
Camiling (Camiling), expressed interest in buying the scrap metal. During the
negotiations with Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a
member of Allied Banks legal department, acted as the latters agent. Eventually,
with the alleged conformity of Allied Bank, through Atty. Saw, a Memorandum of
Agreement25 dated November 8, 2002 (MoA) was drawn between Metro
Concast, represented by petitioner Jose Dychiao, and Peakstar, through
Camiling, under which Peakstar obligated itself to purchase the scrap metal for a
total consideration ofP34,000,000.00, payable as follows:
(a) P4,000,000.00 by way of earnest money P2,000,000.00 to be paid in cash
and the other P2,000,000.00 to be paid in two (2) post-dated checks
of P1,000,000.00 each;26 and
(b) the balance of P30,000,000.00 to be paid in ten (10) monthly installments
of P3,000,000.00, secured by bank guarantees from Bankwise, Inc. (Bankwise)
in the form of separate post-dated checks.27
Unfortunately, Peakstar reneged on all its obligations under the MoA. In this
regard, petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank must be
considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions of
payment proposed by Peakstar, petitioners must therefore be deemed to have
settled their obligations to Allied Bank. To bolster their defense, petitioner Jose
Dychiao (Jose Dychiao) testified28 during trial that it was Atty. Saw himself who
drafted the MoA and subsequently received29 the P2,000,000.00 cash and the
two (2) Bankwise post-dated checks worthP1,000,000.00 each from Camiling.
However, Atty. Saw turned over only the two (2) checks and P1,500,000.00 in
cash to the wife of Jose Dychiao.30

31
Claiming that the subject complaint was falsely and maliciously filed, petitioners
prayed for the award of moral damages in the amount of P20,000,000.00 in favor
of Metro Concast and at least P25,000,000.00 for each individual
petitioner, P25,000,000.00 as exemplary damages, P1,000,000.00 as attorneys
fees, P500,000.00 for other litigation expenses, including costs of suit.
The RTC Ruling
After trial on the merits, the RTC, in a Decision31 dated January 17, 2006,
dismissed the subject complaint, holding that the "causes of action sued upon
had been paid or otherwise extinguished." It ruled that since Allied Bank was duly
represented by its agent, Atty. Saw, in all the negotiations and transactions with
Peakstar considering that Atty. Saw

It also added that "[i]n the final analysis, the aforesaid checks and receipts were
signed by [Atty.] Saw either as representative of [petitioners] or as partner of the
latters legal counsel, and not in anyway as representative of [Allied Bank]."36
Consequently, the CA granted the appeal and directed petitioners to solidarily
pay Allied Bank their corresponding obligations under the aforementioned
promissory note and trust receipts, plus interests, penalty charges and attorneys
fees. Petitioners sought reconsideration37 which was, however, denied in a
Resolution38 dated May 10, 2007. Hence, this petition.
The Issue Before the Court

(a) drafted the MoA,

At the core of the present controversy is the sole issue of whether or not the loan
obligations incurred by the petitioners under the subject promissory note and
various trust receipts have already been extinguished.

(b) accepted the bank guarantee issued by Bankwise, and

The Courts Ruling

(c) was apprised of developments regarding the sale and disposition of the scrap
metal then it stands to reason that the MoA between Metro Concast and
Peakstar was binding upon said bank.

Article 1231 of the Civil Code states that obligations are extinguished either by
payment or performance, the loss of the thing due, the condonation or remission
of the debt, the confusion or merger of the rights of creditor and debtor,
compensation or novation.

The CA Ruling
Allied Bank appealed to the CA which, in a Decision32 dated February 12, 2007,
reversed and set aside the ruling of the RTC, ratiocinating that there was "no
legal basis in fact and in law to declare that when Bankwise reneged its
guarantee under the [MoA], herein [petitioners] should be deemed to be
discharged from their obligations lawfully incurred in favor of [Allied Bank]."33
The CA examined the MoA executed between Metro Concast, as seller of the
ferro scrap, and Peakstar, as the buyer thereof, and found that the same did not
indicate that Allied Bank intervened or was a party thereto. It also pointed out the
fact that the post-dated checks pursuant to the MoA were issued in favor of Jose
Dychiao. Likewise, the CA found no sufficient evidence on record showing that
Atty. Saw was duly and legally authorized to act for and on behalf of Allied Bank,
opining that the RTC was "indulging in hypothesis and speculation"34 when it
made a contrary pronouncement. While Atty. Saw received the earnest money
from Peakstar, the receipt was signed by him on behalf of Jose Dychiao.35

In the present case, petitioners essentially argue that their loan obligations to
Allied Bank had already been extinguished due to Peakstars failure to perform
its own obligations to Metro Concast pursuant to the MoA. Petitioners classify
Peakstars default as a form of force majeure in the sense that they have, beyond
their control, lost the funds they expected to have received from the Peakstar
(due to the MoA) which they would, in turn, use to pay their own loan obligations
to Allied Bank. They further state that Allied Bank was equally bound by Metro
Concasts MoA with Peakstar since its agent, Atty. Saw, actively represented it
during the negotiations and execution of the said agreement. Petitioners
arguments are untenable. At the outset, the Court must dispel the notion that the
MoA would have any relevance to the performance of petitioners obligations to
Allied Bank. The MoA is a sale of assets contract, while petitioners obligations to
Allied Bank arose from various loan transactions. Absent any showing that the
terms and conditions of the latter transactions have been, in any way, modified or
novated by the terms and conditions in the MoA, said contracts should be treated
separately and distinctly from each other, such that the existence, performance
or breach of one would not depend on the existence, performance or breach of
the other. In the foregoing respect, the issue on whether or not Allied Bank
expressed its conformity to the assets sale transaction between Metro Concast

32
and Peakstar (as evidenced by the MoA) is actually irrelevant to the issues
related to petitioners loan obligations to the bank. Besides, as the CA pointed
out, the fact of Allied Banks representation has not been proven in this case and
hence, cannot be deemed as a sustainable defense to exculpate petitioners from
their loan obligations to Allied Bank. Now, anent petitioners reliance on force
majeure, suffice it to state that Peakstars breach of its obligations to Metro
Concast arising from the MoA cannot be classified as a fortuitous event under
jurisprudential formulation. As discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable. It is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one impossible to
foresee or to avoid. The mere difficulty to foresee the happening is not
impossibility to foresee the same. To constitute a fortuitous event, the following
elements must concur: (a) the cause of the unforeseen and unexpected
occurrence or of the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the event that
constitutes the caso fortuito or, if it can be foreseen, it must be impossible to
avoid; (c) the occurrence must be such as to render it impossible for the
debtor to fulfill obligations in a normal manner; and (d) the obligor must be
free from any participation in the aggravation of the injury or loss.40 (Emphases
supplied)
While it may be argued that Peakstars breach of the MoA was unforseen by
petitioners, the same us clearly not "impossible"to foresee or even an event
which is independent of human will." Neither has it been shown that said
occurrence rendered it impossible for petitioners to pay their loan obligations to
Allied Bank and thus, negates the formers force majeure theory altogether. In
any case, as earlier stated, the performance or breach of the MoA bears no
relation to the performance or breach of the subject loan transactions, they being
separate and distinct sources of obligations. The fact of the matter is that
petitioners loan obligations to Allied Bank remain subsisting for the basic reason
that the former has not been able to prove that the same had already been
paid41 or, in any way, extinguished. In this regard, petitioners liability, as adjudged
by the CA, must perforce stand. Considering, however, that Allied Banks extrajudicial demand on petitioners appears to have been made only on December
10, 1998, the computation of the applicable interests and penalty charges should
be reckoned only from such date.
WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007
and Resolution dated May 10, 2007 of the Court of Appeals in CA-G.R. CV No.
86896 are hereby AFFIRMED with MODIFICATION reckoning the applicable

interests and penalty charges from the date of the extrajudicial demand or on
December 10, 1998. The rest of the appellate courts dispositions stand.
SO ORDERED.

G.R. No. 110053 October 16, 1995

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS, CELEBRADA MANGUBAT and ABNER
MANGUBAT, respondents.

REGALADO, J.:
This appeal by certiorari sprouted from the judgment of respondent Court of
Appeals promulgated on September 9, 1992 in CA-G.R. CV No. 28311, and its
resolution dated April 7, 1993 denying petitioner's motion for
reconsideration. 1 Said adjudgments, in turn, were rooted in the factual
groundwork of this case which is laid out hereunder.
On July 20, 1981, herein petitioner Development Bank of the Philippines (DBP)
executed a "Deed of Absolute Sale" in favor of respondent spouses Celebrada
and Abner Mangubat over a parcel of unregistered land identified as Lot 1, PSU142380, situated in the Barrio of Toytoy, Municipality of Garchitorena, Province of
Camarines Sur, containing an area of 55.5057 hectares, more or less.

33
The land, covered only by a tax declaration, is known to have been originally
owned by one Presentacion Cordovez, who, on February 4, 1937, donated it to
Luciano Sarmiento. On June 8, 1964, Luciano Sarmiento sold the land to
Pacifico Chica.
On April 27, 1965, Pacifico Chica mortgaged the land to DBP to secure a loan of
P6,000.00. However, he defaulted in the payment of the loan, hence DBP caused
the extrajudicial foreclosure of the mortgage. In the auction sale held on
September 9, 1970, DBP acquired the property as the highest bidder and was
issued a certificate of sale on September 17, 1970 by the sheriff. The certificate
of sale was entered in the Book of Unregistered Property on September 23,
1970. Pacifico Chica failed to redeem the property, and DBP consolidated its
ownership over the same.
On October 14, 1980, respondent spouses offered to buy the property for
P18,599.99. DBP made a counter-offer of P25,500.00 which was accepted by
respondent spouses. The parties further agreed that payment was to be made
within six months thereafter for it to be considered as cash payment. On July 20,
1981, the deed of absolute sale, which is now being assailed herein, was
executed by DBP in favor of respondent spouses. Said document contained a
waiver of the seller's warranty against eviction. 2
Thereafter, respondent spouses applied for an industrial tree planting loan with
DBP. The latter required the former to submit a certification from the Bureau of
Forest Development that the land is alienable and disposable. However, on
October 29, 1981, said office issued a certificate attesting to the fact that the said
property was classified as timberland, hence not subject to disposition. 3
The loan application of respondent spouses was nevertheless eventually
approved by DBP in the sum of P140,000.00, despite the aforesaid certification
of the bureau, on the understanding of the parties that DBP would work for the
release of the land by the former Ministry of Natural Resources. To secure
payment of the loan, respondent spouses executed a real estate mortgage over
the land on March 17, 1982, which document was registered in the Registry of
Deeds pursuant to Act No. 3344.
The loan was then released to respondent spouses on a staggered basis. After a
substantial sum of P118,540.00 had been received by private respondents, they
asked for the release of the remaining amount of the loan. It does not appear that
their request was acted upon by DBP, ostensibly because the release of the land
from the then Ministry of Natural Resources had not been obtained.

On July 7, 1983, respondent spouses, as plaintiffs, filed a complaint against DBP

in the trial court 4 seeking the annulment of the subject deed of absolute sale on
the ground that the object thereof was verified to be timberland and, therefore, is
in law an inalienable part of the public domain. They also alleged that petitioner,
as defendant therein, acted fraudulently and in bad faith by misrepresenting itself
as the absolute owner of the land and in incorporating the waiver of warranty
against eviction in the deed of sale. 5
In its answer, DBP contended that it was actually the absolute owner of the land,
having purchased it for value at an auction sale pursuant to an extrajudicial
foreclosure of mortgage; that there was neither malice nor fraud in the sale of the
land under the terms mutually agreed upon by the parties; that
assuming arguendo that there was a flaw in its title, DBP can not be held liable
for anything inasmuch as respondent spouses had full knowledge of the extent
and nature of DBP's rights, title and interest over the land.
It further averred that the annulment of the sale and the return of the purchase
price to respondent spouses would redound to their benefit but would result in
petitioner's prejudice, since it had already released P118,540.00 to the former
while it would be left without any security for the P140,000.00 loan; and that in
the remote possibility that the land is reverted to the public domain, respondent
spouses should be made to immediately pay, jointly and severally, the total
amount of P118,540.00 with interest at 15% per annum, plus charges and other
expenses. 6
On May 25, 1990, the trial court rendered judgment annulling the subject deed of
absolute sale and ordering DBP to return the P25,500.00 purchase price, plus
interest; to reimburse to respondent spouses the taxes paid by them, the cost of
the relocation survey, incidental expenses and other damages in the amount of
P50,000.00; and to further pay them attorney's fees and litigation expenses in the
amount of P10,000.00, and the costs of suit. 7
In its recourse to the Court of Appeals, DBP raised the following assignment of
errors:
1. The trial court erred in declaring the deed of absolute sale
executed between the parties canceled and annulled on the
ground that therein defendant-appellant had no title over the
property subject of the sale.
2. The trial court erred in finding that defendant-appellant DBP
acted fraudulently and in bad faith or that it had

34
misrepresented facts since it had prior knowledge that subject
property was part of the public domain at the time of sale to
therein plaintiffs-appellees.
3. The trial court erred in finding said plaintiffs-appellees'
waiver of warranty against eviction void.
4. The trial court erred awarding to therein plaintiffs-appellees
damages arising from an alleged breach of contract.
5. The trial court erred in not ordering said plaintiffs-appellees
to pay their loan obligation to defendant-appellant DBP in the
amount of P118,540. 8
As substantially stated at the outset, respondent Court of Appeals rendered
judgment modifying the disposition of the court below by deleting the award for
damages, attorney's fees, litigation expenses and the costs, but affirming the
same in all its other aspects. 9 On April 7, 1993, said appellate court also denied
petitioner's motion for reconsideration. 10
Not satisfied therewith, DBP interposed the instant petition for review
on certiorari, raising the following issues:
1. Whether or not private respondent spouses Celebrada and
Abner Mangubat should be ordered to pay petitioner DBP their
loan obligation due under the mortgage contract executed
between them and DBP; and
2. Whether or not petitioner should reimburse respondent
spouses the purchase price of the property and the amount of
P11,980.00 for taxes and expenses for the relocation Survey. 11
Considering that neither party questioned the legality and correctness of the
judgment of the court a quo, as affirmed by respondent court, ordering the
annulment of the deed of absolute sale, such decreed nullification of the
document has already achieved finality. We only need
The Court of Appeals, after an extensive discussion, found that there had been
no bad faith on the part of either party, and this r, therefore, to dwell on the effects
of that declaration of nullity.emains uncontroverted as a fact in the case at bar.
Correspondingly, respondent court correctly applied the rule that if both parties

have no fault or are not guilty, the restoration of what was given by each of them
to the other is consequently in order. 12 This is because the declaration of nullity
of a contract which is void ab initio operates to restore things to the state and
condition in which they were found before the execution thereof. 13
We also find ample support for said propositions in American jurisprudence. The
effect of an application of the aforequoted rule with respect to the right of a party
to recover the amount given as consideration has been passed upon in the case
of Leather Manufacturers National Bank vs. Merchants National Bank 14 where it
was held that: "Whenever money is paid upon the representation of the receiver
that he has either a certain title in property transferred in consideration of the
payment or a certain authority to receive the money paid, when in fact he has no
such title or authority, then, although there be no fraud or intentional
misrepresentation on his part, yet there is no consideration for the payment, the
money remains, in equity and good conscience, the property of the payer and
may be recovered back by him."
Therefore, the purchaser is entitled to recover the money paid by him where the
contract is set aside by reason of the mutual material mistake of the parties as to
the identity or quantity of the land sold. 15 And where a purchaser recovers the
purchase money from a vendor who fails or refuses to deliver the title, he is
entitled as a general rule to interest on the money paid from the time of
payment. 16
A contract which the law denounces as void is necessarily no contract whatever,
and the acts of the parties in an effort to create one can in no wise bring about a
change of their legal status. The parties and the subject matter of the contract
remain in all particulars just as they did before any act was performed in relation
thereto. 17
An action for money had and received lies to recover back money paid on a
contract, the consideration of which has failed. 18 As a general rule, if one buys
the land of another, to which the latter is supposed to have a good title, and, in
consequence of facts unknown alike to both parties, he has no title at all, equity
will cancel the transaction and cause the purchase money to be restored to the
buyer, putting both parties in status quo. 19
Thus, on both local and foreign legal principles, the return by DBP to respondent
spouses of the purchase price, plus corresponding interest thereon, is ineluctably
called for.

35
Petitioner likewise contends that the trial court and respondent Court of Appeals
erred in ordering the reimbursement of taxes and the cost of the relocation
survey, there being no factual or legal basis therefor. It argues that private
respondents merely submitted a "list of damages" allegedly incurred by them,
and not official receipts of expenses for taxes and said survey. Furthermore, the
same list has allegedly not been identified or even presented at any stage of the
proceedings, since it was vigorously objected to by DBP.

obligation, for even an obligation that is unsupported by any security of the

debtor may also be enforced by means of an ordinary action. Where a mortgage
is not valid, as where it is executed by one who is not the owner of the
property, 24 or the consideration of the contract is simulated 25 or false, 26 the
principal obligation which it guarantees is not thereby rendered null and void.
That obligation matures and becomes demandable in accordance with the
stipulations pertaining to it.

Contrary to the claim of petitioner, the list of damages was presented in the trial
court and was correspondingly marked as "Exhibit P." 20 The said exhibit was,
thereafter, admitted by the trial court but only as part of the testimonial
evidence for private respondents, as stated in its Order dated August 16, 1988. 21

Under the foregoing circumstances, what is lost is only the right to foreclose the
mortgage as a special remedy for satisfying or settling the indebtedness which is
the principal obligation. In case of nullity, the mortgage deed remains as
evidence or proof of a personal obligation of the debtor, and the amount due to
the creditor may be enforced in an ordinary personal action. 27

However, despite that admission of the said list of damages as evidence, we

agree with petitioner that the same cannot constitute sufficient legal basis for an
award of P4,000.00 and P7,980.00 as reimbursement for land taxes and
expenses for the relocation survey, respectively. The list of damages was
prepared extrajudicially by respondent spouses by themselves without any
supporting receipts as bases thereof or to substantiate the same. That list, per
se, is necessarily self-serving and, on that account, should have been declared
inadmissible in evidence as the factum probans.
In order that damages may be recovered, the best evidence obtainable by the
injured party must be presented. Actual or compensatory damages cannot be
presumed, but must be duly proved, and so proved with a reasonable degree of
certainty. A court cannot rely on speculation, conjecture or guesswork as to the
fact and amount of damages, but must depend upon competent proof that they
have been suffered and on evidence of the actual amount thereof. If the proof is
flimsy and unsubstantial, no damages will be awarded. 22
Turning now to the issue of whether or not private respondents should be made
to pay petitioner their loan obligation amounting to P118,540.00, we answer in
the affirmative.
In its legal context, the contract of loan executed between the parties is entirely
different and discrete from the deed of sale they entered into. The annulment of
the sale will not have an effect on the existence and demandability of the loan.
One who has received money as a loan is bound to pay to the creditor an equal
amount of the same kind and quality. 23
The fact that the annulment of the sale will also result in the invalidity of the
mortgage does not have an effect on the validity and efficacy of the principal

It was likewise incorrect for the Court of Appeals to deny the claim of petitioner
for payment of the loan on the ground that it failed to present the promissory note
therefor. While respondent court also made the concession that its judgment was
accordingly without prejudice to the filing by petitioner of a separate action for the
collection of that amount, this does not detract from the adverse effects of that
erroneous ruling on the proper course of action in this case.
The fact is that a reading of the mortgage contract 28 executed by respondent
spouses in favor of petitioner, dated March 17, 1982, will readily show that it
embodies not only the mortgage but the complete terms and conditions of the
loan agreement as well. The provisions of said contract, specifically paragraphs
16 and 28 thereof, are so precise and clear as to thereby render unnecessary the
introduction of the promissory note which would merely serve the same purpose.
Furthermore, respondent Celebrada Mangubat expressly acknowledged in her
testimony that she and her husband are indebted to petitioner in the amount of
P118,000.00, more or less. 29 Admissions made by the parties in the pleadings or
in the course of the trial or other proceedings do not require proof and can not be
contradicted unless previously shown to have been made through palpable
mistake. 30
Thus, the mortgage contract which embodies the terms and conditions of the
loan obligation of respondent spouses, as well as respondent Celebrada
Mangubat's admission in open court, are more than adequate evidence to
sustain petitioner's claim for payment of private respondents' aforestated
indebtedness and for the adjudication of DBP's claim therefor in the very same
action now before us.

36
It is also worth noting that the adjustment and allowance of petitioner's demand
by counterclaim or set-off in the present action, rather than by another
independent action, is favored or encouraged by law. Such a practice serves to
avoid circuitry of action, multiplicity of suits, inconvenience, expense, and
unwarranted consumption of the time of the court. The trend of judicial decisions
is toward a liberal extension of the right to avail of counterclaims or set-offs. 31
The rules on counterclaim are designed to achieve the disposition of a whole
controversy of the conflicting claims of interested parties at one time and in one
action, provided all parties can be brought before the court and the matter
decided without prejudicing the rights of any party. 32
WHEREFORE, the judgment appealed from is hereby MODIFIED, by deleting
the award of P11,980.00 as reimbursement for taxes and expenses for the
relocation survey, and ordering respondent spouses Celebrada and Abner
Mangubat to pay petitioner Development Bank of the Philippines the amount of
P118,540.00, representing the total amount of the loan released to them, with
interest of 15% per annum plus charges and other expenses in accordance with
their mortgage contract. In all other respects, the said judgment of respondent
Court of Appeals is AFFIRMED.
SO ORDERED.

G.R. No. 112127 July 17, 1995

CENTRAL PHILIPPINE UNIVERSITY, petitioner,
vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ,
CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND REMARENE
LOPEZ, respondents.

BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of
the decision of the Court of Appeals which reversed that of the Regional Trial
Court of Iloilo City directing petitioner to reconvey to private respondents the
property donated to it by their predecessor-in-interest.

Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of
the Board of Trustees of the Central Philippine College (now Central Philippine
University [CPU]), executed a deed of donation in favor of the latter of a parcel of
land identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a
portion of Lot No. 3174-B, for which Transfer Certificate of Title No. T-3910-A was
issued in the name of the donee CPU with the following annotations copied from
the deed of donation
1. The land described shall be utilized by the CPU exclusively
for the establishment and use of a medical college with all its
buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third
party nor in any way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS",
and the said college shall be under obligation to erect a
cornerstone bearing that name. Any net income from the land
or any of its parks shall be put in a fund to be known as the
"RAMON LOPEZ CAMPUS FUND" to be used for
improvements of said campus and erection of a building
thereon. 1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez,
Sr., filed an action for annulment of donation, reconveyance and damages
against CPU alleging that since 1939 up to the time the action was filed the latter
had not complied with the conditions of the donation. Private respondents also
argued that petitioner had in fact negotiated with the National Housing Authority
(NHA) to exchange the donated property with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the
action had prescribed; that it did not violate any of the conditions in the deed of
donation because it never used the donated property for any other purpose than
that for which it was intended; and, that it did not sell, transfer or convey it to any
third party.
On 31 May 1991, the trial court held that petitioner failed to comply with the
conditions of the donation and declared it null and void. The court a quo further
directed petitioner to execute a deed of the reconveyance of the property in favor
of the heirs of the donor, namely, private respondents herein.

37
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the
annotations at the back of petitioner's certificate of title were resolutory conditions
breach of which should terminate the rights of the donee thus making the
donation revocable.
The appellate court also found that while the first condition mandated petitioner
to utilize the donated property for the establishment of a medical school, the
donor did not fix a period within which the condition must be fulfilled, hence, until
a period was fixed for the fulfillment of the condition, petitioner could not be
considered as having failed to comply with its part of the bargain. Thus, the
appellate court rendered its decision reversing the appealed decision and
remanding the case to the court of origin for the determination of the time within
which petitioner should comply with the first condition annotated in the certificate
of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the
quoted annotations in the certificate of title of petitioner are onerous obligations
and resolutory conditions of the donation which must be fulfilled non-compliance
of which would render the donation revocable; (b) in holding that the issue of
prescription does not deserve "disquisition;" and, (c) in remanding the case to the
trial court for the fixing of the period within which petitioner would establish a
medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth
in the deed of donation executed by Don Ramon Lopez, Sr., gives us no
alternative but to conclude that his donation was onerous, one executed for a
valuable consideration which is considered the equivalent of the donation itself,
e.g., when a donation imposes a burden equivalent to the value of the donation.
A gift of land to the City of Manila requiring the latter to erect schools, construct a
children's playground and open streets on the land was considered an onerous
donation. 3 Similarly, where Don Ramon Lopez donated the subject parcel of land
to petitioner but imposed an obligation upon the latter to establish a medical
college thereon, the donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes the condition. Thus,
when a person donates land to another on the condition that the latter would
build upon the land a school, the condition imposed was not a condition
precedent or a suspensive condition but a resolutory one. 4 It is not correct to say
that the schoolhouse had to be constructed before the donation became
effective, that is, before the donee could become the owner of the land,

otherwise, it would be invading the property rights of the donor. The donation had
to be valid before the fulfillment of the condition. 5 If there was no fulfillment or
compliance with the condition, such as what obtains in the instant case, the
donation may now be revoked and all rights which the donee may have acquired
under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private
respondents is unavailing.
The condition imposed by the donor, i.e., the building of a medical
school upon the land donated, depended upon the exclusive will of the
donee as to when this condition shall be fulfilled. When petitioner
accepted the donation, it bound itself to comply with the condition
thereof. Since the time within which the condition should be fulfilled
depended upon the exclusive will of the petitioner, it has been held that
its absolute acceptance and the acknowledgment of its obligation
provided in the deed of donation were sufficient to prevent the statute of
limitations from barring the action of private respondents upon the
original contract which was the deed of donation. 6
Moreover, the time from which the cause of action accrued for the revocation of
the donation and recovery of the property donated cannot be specifically
determined in the instant case. A cause of action arises when that which should
have been done is not done, or that which should not have been done is
done. 7 In cases where there is no special provision for such computation,
recourse must be had to the rule that the period must be counted from the day on
which the corresponding action could have been instituted. It is the legal
possibility of bringing the action which determines the starting point for the
computation of the period. In this case, the starting point begins with the
expiration of a reasonable period and opportunity for petitioner to fulfill what has
been charged upon it by the donor.
The period of time for the establishment of a medical college and the necessary
buildings and improvements on the property cannot be quantified in a specific
number of years because of the presence of several factors and circumstances
involved in the erection of an educational institution, such as government laws
and regulations pertaining to education, building requirements and property
restrictions which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and
circumstances it can be inferred that a period was intended, the general rule
provided in Art. 1197 of the Civil Code applies, which provides that the courts

38
may fix the duration thereof because the fulfillment of the obligation itself cannot
be demanded until after the court has fixed the period for compliance therewith
and such period has arrived. 8
This general rule however cannot be applied considering the different set of
circumstances existing in the instant case. More than a reasonable period of fifty
(50) years has already been allowed petitioner to avail of the opportunity to
comply with the condition even if it be burdensome, to make the donation in its
favor forever valid. But, unfortunately, it failed to do so. Hence, there is no more
need to fix the duration of a term of the obligation when such procedure would be
a mere technicality and formality and would serve no purpose than to delay or
lead to an unnecessary and expensive multiplication of suits. 9 Moreover, under
Art. 1191 of the Civil Code, when one of the obligors cannot comply with what is
incumbent upon him, the obligee may seek rescission and the court shall decree
the same unless there is just cause authorizing the fixing of a period. In the
absence of any just cause for the court to determine the period of the
compliance, there is no more obstacle for the court to decree the rescission
claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous
one, doubts referring to incidental circumstances of a gratuitous contract should
be resolved in favor of the least transmission of rights and interests.10 Records
are clear and facts are undisputed that since the execution of the deed of
donation up to the time of filing of the instant action, petitioner has failed to
comply with its obligation as donee. Petitioner has slept on its obligation for an
unreasonable length of time. Hence, it is only just and equitable now to declare
the subject donation already ineffective and, for all purposes, revoked so that
petitioner as donee should now return the donated property to the heirs of the
donor, private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May
1991 is REINSTATED and AFFIRMED, and the decision of the Court of Appeals
of 18 June 1993 is accordingly MODIFIED. Consequently, petitioner is directed to
reconvey to private respondents Lot No. 3174-B-1 of the subdivision plan Psd1144 covered by Transfer Certificate of Title No. T-3910-A within thirty (30) days
from the finality of this judgment.
Costs against petitioner.
SO ORDERED.

G.R. No. 96053 March 3, 1993

JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA, EVELYN
GALICIA, JUAN GALICIA, JR. and RODRIGO GALICIA, petitioners,
vs.
COURT OF APPEALS and ALBRIGIDO LEYVA, respondents.
Facundo T. Bautista for petitioners.
Jesus T. Garcia for private respondent.

MELO, J.:
The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr., prior to
his demise in 1979, and Celerina Labuguin, in favor of Albrigido Leyva involving
the undivided one-half portion of a piece of land situated at Poblacion, Guimba,
Nueva Ecija for the sum of P50,000.00 under the following terms:
1. The sum of PESOS: THREE THOUSAND (P3,000.00) is
HEREBY acknowledged to have been paid upon the execution
of this agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall
be paid within ten (10) days from and after the execution of this
agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00)
represents the VENDORS' indebtedness with the Philippine
Veterans Bank which is hereby assumed by the VENDEE; and
4. The balance of PESOS: TWENTY SEVEN THOUSAND
(P27,000.00.) shall be paid within one (1) year from and after
the execution of this instrument. (p. 53, Rollo)
is the subject matter of the present litigation between the heirs of Juan Galicia,
Sr. who assert breach of the conditions as against private respondent's claim
anchored on full payment and compliance with the stipulations thereof.

39
The court of origin which tried the suit for specific performance filed by private
respondent on account of the herein petitioners' reluctance to abide by the
covenant, ruled in favor of the vendee (p. 64, Rollo) while respondent court
practically agreed with the trial court except as to the amount to be paid to
petitioners and the refund to private respondent are concerned (p. 46, Rollo).
There is no dispute that the sum of P3,000.00 listed as first installment was
received by Juan Galicia, Sr. According to petitioners, of the P10,000.00 to be
paid within ten days from execution of the instrument, only P9,707.00 was
tendered to, and received by, them on numerous occasions from May 29, 1975,
up to November 3, 1979. Concerning private respondent's assumption of the
vendors' obligation to the Philippine Veterans Bank, the vendee paid only the
sum of P6,926.41 while the difference the indebtedness came from Celerina
Labuguin (p. 73, Rollo). Moreover, petitioners asserted that not a single centavo
of the P27,000.00 representing the remaining balance was paid to them.
Because of the apprehension that the heirs of Juan Galicia, Sr. are disavowing
the contract inked by their predecessor, private respondent filed the complaint for
specific performance.
In addressing the issue of whether the conditions of the instrument were
performed by herein private respondent as vendee, the Honorable Godofredo
Rilloraza, Presiding Judge of Branch 31 of the Regional Trial Court, Third Judicial
Region stationed at Guimba, Nueva Ecija, decided to uphold private
respondent's theory on the basis of constructive fulfillment under Article 1186 and
estoppel through acceptance of piecemeal payments in line with Article 1235 of
the Civil Code.
Anent the P10,000.00 specified as second installment, the lower court counted
against the vendors the candid statement of Josefina Tayag who sat on the
witness stand and made the admission that the check issued as payment thereof
was nonetheless paid on a staggered basis when the check was dishonored
(TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p. 66, Rollo). Regarding the
third condition, the trial court noted that plaintiff below paid more than P6,000.00
to the Philippine Veterans Bank but Celerina Labuguin, the sister and co-vendor
of Juan Galicia, Sr. paid P3,778.77 which circumstance was construed to be a
ploy under Article 1186 of the Civil Code that "prematurely prevented plaintiff
from paying the installment fully" and "for the purpose of withdrawing the title to
the lot". The acceptance by petitioners of the various payments even beyond the
periods agreed upon, was perceived by the lower court as tantamount to faithful
performance of the obligation pursuant to Article 1235 of the Civil Code.
Furthermore, the trial court noted that private respondent consigned P18,520.00,

an amount sufficient to offset the remaining balance, leaving the sum of

P1,315.00 to be credited to private respondent.
On September 12, 1984, judgment was rendered:
1. Ordering the defendants heirs of Juan Galicia, to execute
the Deed of Sale of their undivided ONE HALF (1/2) portion of
Lot No. 1130, Guimba Cadastre, covered by TCT No. NT120563, in favor of plaintiff Albrigido Leyva, with an equal
frontage facing the national road upon finality of judgment; that,
in their default, the Clerk of Court II, is hereby ordered to
execute the deed of conveyance in line with the provisions of
Section 10, Rule 39 of the Rules of Court;
2. Ordering the defendants, heirs of Juan Galicia, jointly and
severally to pay attorney's fees of P6,000.00 and the further
sum of P3,000.00 for actual and compensatory damages;
3. Ordering Celerina Labuguin and the other defendants herein
to surrender to the Court the owner's duplicate of TCT No. NT120563, province of Nueva Ecija, for the use of plaintiff in
registering the portion, subject matter of the instant suit;
4. Ordering the withdrawal of the amount of P18,520.00 now
consigned with the Court, and the amount of P17,204.75 be
delivered to the heirs of Juan Galicia as payment of the
balance of the sale of the lot in question, the defendants herein
after deducting the amount of attorney's fees and damages
awarded to the plaintiff hereof and the delivery to the plaintiff of
the further sum of P1,315.25 excess or over payment and,
defendants to pay the cost of the suit. (p. 69, Rollo)
and following the appeal interposed with respondent court, Justice Dayrit with
whom Justices Purisima and Aldecoa, Jr. concurred, modified the fourth
paragraph of the decretal portion to read:
4. Ordering the withdrawal of the amount of P18,500.00 now
consigned with the Court, and that the amount of P16,870.52
be delivered to the heirs of Juan Galicia, Sr. as payment to the
unpaid balance of the sale, including the reimbursement of the
amount paid to Philippine Veterans Bank, minus the amount of
attorney's fees and damages awarded in favor of plaintiff. The

40
excess of P1,649.48 will be returned to plaintiff. The costs
against defendants. (p. 51, Rollo)
As to how the foregoing directive was arrived at, the appellate court declared:
With respect to the fourth condition stipulated in the contract,
the period indicated therein is deemed modified by the parties
when the heirs of Juan Galicia, Sr. accepted payments without
objection up to November 3, 1979. On the basis of receipts
presented by appellee commencing from August 8, 1975 up to
November 3, 1979, a total amount of P13,908.25 has been
paid, thereby leaving a balance of P13,091.75. Said unpaid
balance plus the amount reimbursable to appellant in the
amount of P3,778.77 will leave an unpaid total of P16,870.52.
Since appellee consigned in court the sum of P18,500.00, he is
entitled to get the excess of P1,629.48. Thus, when the heirs of
Juan Galicia, Sr. (obligees) accepted the performance,
knowing its incompleteness or irregularity and without
expressing any protest or objection, the obligation is deemed
fully complied with (Article 1235, Civil Code). (p. 50, Rollo)
Petitioners are of the impression that the decision appealed from, which agreed
with the conclusions of the trial court, is vulnerable to attack via the recourse
before Us on the principal supposition that the full consideration of the agreement
to sell was not paid by private respondent and, therefore, the contract must be
rescinded.
The suggestion of petitioners that the covenant must be cancelled in the light of
private respondent's so-called breach seems to overlook petitioners' demeanor
who, instead of immediately filing the case precisely to rescind the instrument
because of non-compliance, allowed private respondent to effect numerous
payments posterior to the grace periods provided in the contract. This apathy of
petitioners who even permitted private respondent to take the initiative in filing
the suit for specific performance against them, is akin to waiver or abandonment
of the right to rescind normally conferred by Article 1191 of the Civil Code. As
aptly observed by Justice Gutierrez, Jr. inAngeles vs. Calasanz (135 SCRA 323
[1985]; 4 Paras, Civil Code of the Philippines Annotated, Twelfth Ed. [1989], p.
203:
. . . We agree with the plaintiffs-appellees that when the
defendants-appellants, instead of availing of their alleged right
to rescind, have accepted and received delayed payments of

installments, though the plaintiffs-appellees have been in

arrears beyond the grace period mentioned in paragraph 6 of
the contract, the defendants-appellants have waived, and are
now estopped from exercising their alleged right of
rescission . . .
In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818;
cited in 4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a
similar opinion was expressed to the effect that:
In a perfected contract of sale of land under an agreed
schedule of payments, while the parties may mutually oblige
each other to compel the specific performance of the monthly
amortization plan, and upon failure of the buyer to make the
payment, the seller has the right to ask for a rescission of the
contract under Art. 1191 of the Civil Code, this shall be deemed
waived by acceptance of posterior payments.
Both the trial and appellate courts were, therefore, correct in sustaining the claim
of private respondent anchored on estoppel or waiver by acceptance of delayed
payments under Article 1235 of the Civil Code in that:
When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied
with.
considering that the heirs of Juan Galicia, Sr. accommodated private respondent
by accepting the latter's delayed payments not only beyond the grace periods but
also during the pendency of the case for specific performance (p. 27,
Memorandum for petitioners; p. 166, Rollo). Indeed, the right to rescind is not
absolute and will not be granted where there has been substantial compliance by
partial payments (4 Caguioa, Comments and Cases on Civil Law, First Ed. [1968]
p. 132). By and large, petitioners' actuation is susceptible of but one construction
that they are now estopped from reneging from their commitment on account
of acceptance of benefits arising from overdue accounts of private respondent.
Now, as to the issue of whether payments had in fact been made, there is no
doubt that the second installment was actually paid to the heirs of Juan Galicia,
Sr. due to Josefina Tayag's admission in judicio that the sum of P10,000.00 was
fully liquidated. It is thus erroneous for petitioners to suppose that "the evidence
in the records do not support this conclusion" (p. 18, Memorandum for

41
Petitioners; p. 157, Rollo). A contrario, when the court of origin, as well as the
appellate court, emphasized the frank representation along this line of Josefina
Tayag before the trial court (TSN, September l, 1983, pp. 3-4; p. 5, Decision in
CA-G.R. CV No. 13339, p. 50, Rollo; p. 3, Decision in Civil Case No. 681-G, p.
66, Rollo), petitioners chose to remain completely mute even at this stage
despite the opportunity accorded to them, for clarification. Consequently, the
prejudicial aftermath of Josefina Tayag's spontaneous reaction may no longer be
obliterated on the basis of estoppel (Article 1431, Civil Code;Section 4, Rule 129;
Section 2(a), Rule 131, Revised Rules on Evidence).
Insofar as the third item of the contract is concerned, it may be recalled that
respondent court applied Article 1186 of the Civil Code on constructive fulfillment
which petitioners claim should not have been appreciated because they are the
obligees while the proviso in point speaks of the obligor. But, petitioners must
concede that in a reciprocal obligation like a contract of purchase, (Ang vs. Court
of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p. 201), both parties are
mutually obligors and also obligees (4 Padilla, supra, at p. 197), and any of the
contracting parties may, upon non-fulfillment by the other privy of his part of the
prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). In
short, it is puerile for petitioners to say that they are the only obligees under the
contract since they are also bound as obligors to respect the stipulation in
permitting private respondent to assume the loan with the Philippine Veterans
Bank which petitioners impeded when they paid the balance of said loan. As
vendors, they are supposed to execute the final deed of sale upon full payment
of the balance as determined hereafter.
Lastly, petitioners argue that there was no valid tender of payment nor
consignation of the sum of P18,520.00 which they acknowledge to have been
deposited in court on January 22, 1981 five years after the amount of P27,000.00
had to be paid (p. 23, Memorandum for Petitioners; p. 162, Rollo). Again this
suggestion ignores the fact that consignation alone produced the effect of
payment in the case at bar because it was established below that two or more
heirs of Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil
Code; pp. 4-5, Decision in Civil Case No. 681-G; pp. 67-68, Rollo). Moreover,
petitioners did not bother to refute the evidence on hand that, aside from the
P18,520.00 (not P18,500.00 as computed by respondent court) which was
consigned, private respondent also paid the sum of P13,908.25 (Exhibits "F" to
"CC"; p. 50, Rollo). These two figures representing private respondent's payment
of the fourth condition amount to P32,428.25, less the P3,778.77 paid by
petitioners to the bank, will lead us to the sum of P28,649.48 or a refund of
P1,649.48 to private respondent as overpayment of the P27,000.00 balance.

WHEREFORE, the petition is hereby DISMISSED and the decision appealed

from is hereby AFFIRMED with the slight modification of Paragraph 4 of the
dispositive thereof which is thus amended to read:
4. ordering the withdrawal of the sum of P18,520.00 consigned
with the Regional Trial Court, and that the amount of
P16,870.52 be delivered by private respondent with legal rate
of interest until fully paid to the heirs of Juan Galicia, Sr. as
balance of the sale including reimbursement of the sum paid to
the Philippine Veterans Bank, minus the attorney's fees and
damages awarded in favor of private respondent. The excess
of P1,649.48 shall be returned to private respondent also with
legal interest until fully paid by petitioners. With costs against
petitioners.
SO ORDERED.

G.R. No. 139523

May 26, 2005

SPS. FELIPE AND LETICIA CANNU, petitioners,

vs.
SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME MORTGAGE
FINANCE CORPORATION, respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari which seeks to set aside the
decision1 of the Court of Appeals dated 30 September 1998 which affirmed with
modification the decision of Branch 135 of the Regional Trial Court (RTC) of
Makati City, dismissing the complaint for Specific Performance and Damages
filed by petitioners, and its Resolution2 dated 22 July 1999 denying petitioners
motion for reconsideration.
A complaint3 for Specific Performance and Damages was filed by petitionersspouses Felipe and Leticia Cannu against respondents-spouses Gil and
Fernandina Galang and the National Home Mortgage Finance Corporation

42
(NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case
was docketed as Civil Case No. 93-2069.
The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune
Savings & Loan Association forP173,800.00 to purchase a house and lot located
at Pulang Lupa, Las Pias, with an area of 150 square meters covered by
Transfer Certificate of Title (TCT) No. T-8505 in the names of respondentsspouses. To secure payment, a real estate mortgage was constituted on the said
house and lot in favor of Fortune Savings & Loan Association. In early 1990,
NHMFC purchased the mortgage loan of respondents-spouses from Fortune
Savings & Loan Association for P173,800.00.
Respondent Fernandina Galang authorized4 her attorney-in-fact, Adelina R.
Timbang, to sell the subject house and lot.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to
assume the balance of the mortgage obligations with the NHMFC and with CERF
Realty5 (the Developer of the property).
Of the P120,000.00, the following payments were made by petitioners:

Thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation10 dated 20 August 1990
was made and entered into by and between spouses Fernandina and Gil Galang
(vendors) and spouses Leticia and Felipe Cannu (vendees) over the house and
lot in question which contains, inter alia, the following:
NOW, THEREFORE, for and in consideration of the sum of TWO
HUNDRED FIFTY THOUSAND PESOS (P250,000.00), Philippine
Currency, receipt of which is hereby acknowledged by the Vendors and
the assumption of the mortgage obligation, the Vendors hereby sell,
cede and transfer unto the Vendees, their heirs, assigns and successor
in interest the above-described property together with the existing
improvement thereon.
It is a special condition of this contract that the Vendees shall assume
and continue with the payment of the amortization with the National
Home Mortgage Finance Corporation Inc. in the outstanding balance
ofP_______________, as of __________ and shall comply with and
abide by the terms and conditions of the mortgage document dated Feb.
27, 1989 and identified as Doc. No. 82, Page 18, Book VII, S. of 1989 of
Notary Public for Quezon City Marites Sto. Tomas Alonzo, as if the
Vendees are the original signatories.
Petitioners immediately took possession and occupied the house and lot.

Date

Amount Paid
Petitioners made the following payments to the NHMFC:

July 19, 1990

P40,000.006
Date

March 13, 1991

April 6, 1991

November 28, 1991

Total

Amount

Receipt No.

15,000.007
July 9, 1990

P 14,312.47 D-50398611

March 12, 1991

8,000.00 D-72947812

February 4, 1992

10,000.00 D-99912713

March 31, 1993

6,000.00 E-56374914

15,000.008

5,000.009

P75,000.00

43

April 19, 1993

10,000.00 E-58243215

April 27, 1993

7,000.00 E-61832616

P 55,312.47

Petitioners paid the "equity" or second mortgage to CERF Realty.17

Despite requests from Adelina R. Timbang and Fernandina Galang to pay the
balance of P45,000.00 or in the alternative to vacate the property in question,
petitioners refused to do so.
In a letter18 dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T.
Arzaga, Vice President, Fund Management Group of the NHMFC, that the
ownership rights over the land covered by TCT No. T-8505 in the names of
respondents-spouses had been ceded and transferred to her and her husband
per Deed of Sale with Assumption of Mortgage, and that they were obligated to
assume the mortgage and pay the remaining unpaid loan balance. Petitioners
formal assumption of mortgage was not approved by the NHMFC.19
Because the Cannus failed to fully comply with their obligations, respondent
Fernandina Galang, on 21 May 1993, paid P233,957.64 as full payment of her
remaining mortgage loan with NHMFC.20
Petitioners opposed the release of TCT No. T-8505 in favor of respondentsspouses insisting that the subject property had already been sold to them.
Consequently, the NHMFC held in abeyance the release of said TCT.
Thereupon, a Complaint for Specific Performance and Damages was filed
asking, among other things, that petitioners (plaintiffs therein) be declared the
owners of the property involved subject to reimbursements of the amount made
by respondents-spouses (defendants therein) in preterminating the mortgage
loan with NHMFC.
Respondent NHMFC filed its Answer.21 It claimed that petitioners have no cause
of action against it because they have not submitted the formal requirements to
be considered assignees and successors-in-interest of the property under
litigation.

In their Answer,22 respondents-spouses alleged that because of petitionersspouses failure to fully pay the consideration and to update the monthly
amortizations with the NHMFC, they paid in full the existing obligations with
NHMFC as an initial step in the rescission and annulment of the Deed of Sale
with Assumption of Mortgage. In their counterclaim, they maintain that the acts of
petitioners in not fully complying with their obligations give rise to rescission of
the Deed of Sale with Assumption of Mortgage with the corresponding damages.
After trial, the lower court rendered its decision ratiocinating:
On the basis of the evidence on record, testimonial and documentary,
this Court is of the view that plaintiffs have no cause of action either
against the spouses Galang or the NHMFC. Plaintiffs have admitted on
record they failed to pay the amount of P45,000.00 the balance due to
the Galangs in consideration of the Deed of Sale With Assumption of
Mortgage Obligation (Exhs. "C" and "3"). Consequently, this is a breach
of contract and evidently a failure to comply with obligation arising from
contracts. . . In this case, NHMFC has not been duly informed due to
lack of formal requirements to acknowledge plaintiffs as legal
assignees, or legitimate tranferees and, therefore, successors-ininterest to the property, plaintiffs should have no legal personality to
claim any right to the same property.23
The decretal portion of the decision reads:
Premises considered, the foregoing complaint has not been proven
even by preponderance of evidence, and, as such, plaintiffs have no
cause of action against the defendants herein. The above-entitled case
is ordered dismissed for lack of merit.
Judgment is hereby rendered by way of counterclaim, in favor of
defendants and against plaintiffs, to wit:
1. Ordering the Deed of Sale With Assumption of Mortgage Obligation
(Exhs. "C" and "3") rescinded and hereby declared the same as nullified
without prejudice for defendants-spouses Galang to return the partial
payments made by plaintiffs; and the plaintiffs are ordered, on the other
hand, to return the physical and legal possession of the subject property
to spouses Galang by way of mutual restitution;
2. To pay defendants spouses Galang and NHMFC, each the amount of
P10,000.00 as litigation expenses, jointly and severally;
3. To pay attorneys fees to defendants in the amount of P20,000.00,
jointly and severally; and

44
4. The costs of suit.
5. No moral and exemplary damages awarded.24
A Motion for Reconsideration25 was filed, but same was denied. Petitioners
appealed the decision of the RTC to the Court of Appeals. On 30 September
1998, the Court of Appeals disposed of the appeal as follows:

Performance or payment may be effected not by tender of payment

alone but by both tender and consignation. It is consignation which is
essential in order to extinguish plaintiffs-appellants obligation to pay the
balance of the purchase price.
In addition, plaintiffs-appellants failed to comply with their obligation to
pay the monthly amortizations due on the mortgage.

Obligations arising from contract have the force of law between the
contracting parties and should be complied in good faith. The terms of a
written contract are binding on the parties thereto.

In the span of three (3) years from 1990 to 1993, plaintiffs-appellants

made only six payments. The payments made by plaintiffs-appellants
are not even sufficient to answer for the arrearages, interests and
penalty charges.

Plaintiffs-appellants therefore are under obligation to pay defendantsappellees spouses Galang the sum of P250,000.00, and to assume the
mortgage.

On account of these circumstances, the rescission of the Contract of

Sale is warranted and justified.

Records show that upon the execution of the Contract of Sale or on July
19, 1990 plaintiffs-appellants paid defendants-appellees spouses
Galang the amount of only P40,000.00.
The next payment was made by plaintiffs-appellants on March 13, 1991
or eight (8) months after the execution of the contract. Plaintiffsappellants paid the amount of P5,000.00.

...
WHEREFORE, foregoing considered, the appealed decision is hereby
AFFIRMED with modification. Defendants-appellees spouses Galang
are hereby ordered to return the partial payments made by plaintiffappellants in the amount of P135,000.00.
No pronouncement as to cost.26

The next payment was made on April 6, 1991 for P15,000.00 and on
November 28, 1991, for another P15,000.00.
From 1991 until the present, no other payments were made by plaintiffsappellants to defendants-appellees spouses Galang.
Out of the P250,000.00 purchase price which was supposed to be paid
on the day of the execution of contract in July, 1990 plaintiffs-appellants
have paid, in the span of eight (8) years, from 1990 to present, the
amount of only P75,000.00. Plaintiffs-appellants should have paid the
P250,000.00 at the time of the execution of contract in 1990. Eight (8)
years have already lapsed and plaintiffs-appellants have not yet
complied with their obligation.
We consider this breach to be substantial.
The tender made by plaintiffs-appellants after the filing of this case, of
the Managerial Check in the amount of P278,957.00 dated January 24,
1994 cannot be considered as an effective mode of payment.

The motion for reconsideration27 filed by petitioners was denied by the Court of
Appeals in a Resolution28 dated 22 July 1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:
1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD
THAT PETITIONERS BREACH OF THE OBLIGATION WAS
SUBSTANTIAL.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN
EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL
COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY
AMORTIZATION WITH NHMFC.
3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED
TO CONSIDER THE OTHER FACTS AND CIRCUMSTANCES THAT
MILITATE AGAINST RESCISSION.

45
4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED
TO CONSIDER THAT THE ACTION FOR RESCISSION IS
SUBSIDIARY.29
Before discussing the errors allegedly committed by the Court of Appeals, it must
be stated a priori that the latter made a misappreciation of evidence regarding
the consideration of the property in litigation when it relied solely on the Deed of
Sale with Assumption of Mortgage executed by the respondents-spouses Galang
and petitioners-spouses Cannu.
As above-quoted, the consideration for the house and lot stated in the Deed of
Sale with Assumption of Mortgage is P250,000.00, plus the assumption of the
balance of the mortgage loan with NHMFC. However, after going over the record
of the case, more particularly the Answer of respondents-spouses, the evidence
shows the consideration therefor is P120,000.00, plus the payment of the
outstanding loan mortgage with NHMFC, and of the "equity" or second mortgage
with CERF Realty (Developer of the property).30
Nowhere in the complaint and answer of the petitioners-spouses Cannu and
respondents-spouses Galang shows that the consideration is "P250,000.00." In
fact, what is clear is that of the P120,000.00 to be paid to the latter,
only P75,000.00 was paid to Adelina Timbang, the spouses Galangs attorney-infact. This debunks the provision in the Deed of Sale with Assumption of Mortgage
that the amount of P250,000.00 has been received by petitioners.
Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the
true intent and agreement of the parties regarding its consideration, the same
should not be fully relied upon. The foregoing facts lead us to hold that the case
on hand falls within one of the recognized exceptions to the parole evidence rule.
Under the Rules of Court, a party may present evidence to modify, explain or add
to the terms of the written agreement if he puts in issue in his pleading, among
others, its failure to express the true intent and agreement of the parties
thereto.31
In the case at bar, when respondents-spouses enumerated in their Answer the
terms and conditions for the sale of the property under litigation, which is different
from that stated in the Deed of Sale with Assumption with Mortgage, they already
put in issue the matter of consideration. Since there is a difference as to what the
true consideration is, this Court has admitted evidence aliunde to explain such
inconsistency. Thus, the Court has looked into the pleadings and testimonies of
the parties to thresh out the discrepancy and to clarify the intent of the parties.
As regards the computation32 of petitioners as to the breakdown of
the P250,000.00 consideration, we find the same to be self-serving and
unsupported by evidence.

On the first assigned error, petitioners argue that the Court erred when it ruled
that their breach of the obligation was substantial.
Settled is the rule that rescission or, more accurately, resolution,33 of a party to an
obligation under Article 119134is predicated on a breach of faith by the other party
that violates the reciprocity between them.35 Article 1191 reads:
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.
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.
Rescission will not be permitted for a slight or casual breach of the contract.
Rescission may be had only for such breaches that are substantial and
fundamental as to defeat the object of the parties in making the agreement.36The
question of whether a breach of contract is substantial depends upon the
attending circumstances37 and not merely on the percentage of the amount not
paid.
In the case at bar, we find petitioners failure to pay the remaining balance
of P45,000.00 to be substantial. Even assuming arguendo that only said amount
was left out of the supposed consideration of P250,000.00, or eighteen (18%)
percent thereof, this percentage is still substantial. Taken together with the fact
that the last payment made was on 28 November 1991, eighteen months before
the respondent Fernandina Galang paid the outstanding balance of the mortgage
loan with NHMFC, the intention of petitioners to renege on their obligation is
utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate Court,38 petitioners
ask that they be granted additional time to complete their obligation. Under the
facts of the case, to give petitioners additional time to comply with their obligation
will be putting premium on their blatant non-compliance of their obligation. They
had all the time to do what was required of them (i.e., pay the P45,000.00
balance and to properly assume the mortgage loan with the NHMFC), but still
they failed to comply. Despite demands for them to pay the balance, no
payments were made.39
The fact that petitioners tendered a Managers Check to respondents-spouses
Galang in the amount of P278,957.00 seven months after the filing of this case is

46
of no moment. Tender of payment does not by itself produce legal payment,
unless it is completed by consignation.40 Their failure to fulfill their obligation gave
the respondents-spouses Galang the right to rescission.
Anent the second assigned error, we find that petitioners were not religious in
paying the amortization with the NHMFC. As admitted by them, in the span of
three years from 1990 to 1993, their payments covered only thirty months.41 This,
indeed, constitutes another breach or violation of the Deed of Sale with
Assumption of Mortgage. On top of this, there was no formal assumption of the
mortgage obligation with NHMFC because of the lack of approval by the
NHMFC42 on account of petitioners non-submission of requirements in order to
be considered as assignees/successors-in-interest over the property covered by
the mortgage obligation.43
On the third assigned error, petitioners claim there was no clear evidence to
show that respondents-spouses Galang demanded from them a strict and/or
faithful compliance of the Deed of Sale with Assumption of Mortgage.
We do not agree.
There is sufficient evidence showing that demands were made from petitioners to
comply with their obligation. Adelina R. Timbang, attorney-in-fact of respondentsspouses, per instruction of respondent Fernandina Galang, made constant
follow-ups after the last payment made on 28 November 1991, but petitioners did
not pay.44Respondent Fernandina Galang stated in her Answer45 that upon her
arrival from America in October 1992, she demanded from petitioners the
complete compliance of their obligation by paying the full amount of the
consideration (P120,000.00) or in the alternative to vacate the property in
question, but still, petitioners refused to fulfill their obligations under the Deed of
Sale with Assumption of Mortgage. Sometime in March 1993, due to the fact that
full payment has not been paid and that the monthly amortizations with the
NHMFC have not been fully updated, she made her intentions clear with
petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with
Assumption of Mortgage.
We likewise rule that there was no waiver on the part of petitioners to demand
the rescission of the Deed of Sale with Assumption of Mortgage. The fact that
respondents-spouses accepted, through their attorney-in-fact, payments in
installments does not constitute waiver on their part to exercise their right to
rescind the Deed of Sale with Assumption of Mortgage. Adelina Timbang merely
accepted the installment payments as an accommodation to petitioners since
they kept on promising they would pay. However, after the lapse of considerable
time (18 months from last payment) and the purchase price was not yet fully
paid, respondents-spouses exercised their right of rescission when they paid the
outstanding balance of the mortgage loan with NHMFC. It was only after
petitioners stopped paying that respondents-spouses moved to exercise their
right of rescission.

Petitioners cite the case of Angeles v. Calasanz46 to support their claim that
respondents-spouses waived their right to rescind. We cannot apply this case
since it is not on all fours with the case before us. First, in Angeles, the breach
was only slight and casual which is not true in the case before us. Second,
in Angeles, the buyer had already paid more than the principal obligation, while in
the instant case, the buyers (petitioners) did not pay P45,000.00 of the
P120,000.00 they were obligated to pay.
We find petitioners statement that there is no evidence of prejudice or damage to
justify rescission in favor of respondents-spouses to be unfounded. The damage
suffered by respondents-spouses is the effect of petitioners failure to fully comply
with their obligation, that is, their failure to pay the remaining P45,000.00 and to
update the amortizations on the mortgage loan with the NHMFC. Petitioners
have in their possession the property under litigation. Having parted with their
house and lot, respondents-spouses should be fully compensated for it, not only
monetarily, but also as to the terms and conditions agreed upon by the parties.
This did not happen in the case before us.
Citing Seva v. Berwin & Co., Inc.,47 petitioners argue that no rescission should be
decreed because there is no evidence on record that respondent Fernandina
Galang is ready, willing and able to comply with her own obligation to restore to
them the total payments they made. They added that no allegation to that effect
is contained in respondents-spouses Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with the case on hand.
In the former, the failure of one party to perform his obligation was the fault of the
other party, while in the case on hand, failure on the part of petitioners to perform
their obligation was due to their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is "[i]t (referring to
the right to rescind or resolve) can be demanded only if the plaintiff is ready,
willing and able to comply with his own obligation, and the other is not." In other
words, if one party has complied or fulfilled his obligation, and the other has not,
then the former can exercise his right to rescind. In this case, respondentsspouses complied with their obligation when they gave the possession of the
property in question to petitioners. Thus, they have the right to ask for the
rescission of the Deed of Sale with Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code,
maintain that the Court of Appeals erred when it failed to consider that the action
for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.

47
The subsidiary character of the action for rescission applies to contracts
enumerated in Articles 138148 of the Civil Code. The contract involved in the case
before us is not one of those mentioned therein. The provision that applies in the
case at bar is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v.
Court of Appeals,49 rescission under Article 1191 was distinguished from
rescission under Article 1381. Justice J.B.L. Reyes said:
. . . The rescission on account of breach of stipulations is not predicated
on injury to economic interests of the party plaintiff but on the breach of
faith by the defendant, that violates the reciprocity between the parties.
It is not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to fulfill
his promises when the other violates his. As expressed in the old Latin
aphorism: "Non servanti fidem, non est fides servanda." Hence, the
reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison d tre as well as the measure of the
right to rescind. Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesion enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to
cases under Article 1191.
From the foregoing, it is clear that rescission ("resolution" in the Old Civil Code)
under Article 1191 is a principal action, while rescission under Article 1383 is a
subsidiary action. The former is based on breach by the other party that violates
the reciprocity between the parties, while the latter is not.
In the case at bar, the reciprocity between the parties was violated when
petitioners failed to fully pay the balance of P45,000.00 to respondents-spouses
and their failure to update their amortizations with the NHMFC.
Petitioners maintain that inasmuch as respondents-spouses Galang were not
granted the right to unilaterally rescind the sale under the Deed of Sale with
Assumption of Mortgage, they should have first asked the court for the rescission
thereof before they fully paid the outstanding balance of the mortgage loan with
the NHMFC. They claim that such payment is a unilateral act of rescission which
violates existing jurisprudence.

In Tan v. Court of Appeals,50 this court said:

. . . [T]he power to rescind obligations is implied in reciprocal ones in
case one of the obligors should not comply with what is incumbent upon
him is clear from a reading of the Civil Code provisions. However, it is
equally settled that, in the absence of a stipulation to the contrary, this
power must be invoked judicially; it cannot be exercised solely on a
partys own judgment that the other has committed a breach of the
obligation. Where there is nothing in the contract empowering the
petitioner to rescind it without resort to the courts, the petitioners action
in unilaterally terminating the contract in this case is unjustified.
It is evident that the contract under consideration does not contain a provision
authorizing its extrajudicial rescission in case one of the parties fails to comply
with what is incumbent upon him. This being the case, respondents-spouses
should have asked for judicial intervention to obtain a judicial declaration of
rescission. Be that as it may, and considering that respondents-spouses Answer
(with affirmative defenses) with Counterclaim seeks for the rescission of the
Deed of Sale with Assumption of Mortgage, it behooves the court to settle the
matter once and for all than to have the case re-litigated again on an issue
already heard on the merits and which this court has already taken cognizance
of. Having found that petitioners seriously breached the contract, we, therefore,
declare the same is rescinded in favor of respondents-spouses.
As a consequence of the rescission or, more accurately, resolution of the Deed of
Sale with Assumption of Mortgage, it is the duty of the court to require the parties
to surrender whatever they may have received from the other. The parties should
be restored to their original situation.51
The record shows petitioners paid respondents-spouses the amount of
P75,000.00 out of the P120,000.00 agreed upon. They also made payments to
NHMFC amounting to P55,312.47. As to the petitioners alleged payment to
CERF Realty of P46,616.70, except for petitioner Leticia Cannus bare allegation,
we find the same not to be supported by competent evidence. As a general rule,
one who pleads payment has the burden of proving it.52 However, since it has
been admitted in respondents-spouses Answer that petitioners shall assume the
second mortgage with CERF Realty in the amount of P35,000.00, and that
Adelina Timbang, respondents-spouses very own witness, testified53 that same
has been paid, it is but proper to return this amount to petitioners. The three
amounts total P165,312.47 -- the sum to be returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of Appeals is
hereby AFFIRMED with MODIFICATION. Spouses Gil and Fernandina Galang
are hereby ordered to return the partial payments made by petitioners in the
amount of P165,312.47. With costs.
SO ORDERED.

48
of P17,800 was agreed to be paid in the following manner: P1,500 as
downpayment upon execution of the Contract to Sell, and the balance to be paid
in equal monthly installments of P150 on or before the last day of each month
until fully paid.
It was also stipulated in the contract that respondent could immediately occupy
the house and lot; that in case of default in the payment of any of the installments
for 90 days after its due date, the contract would be automatically rescinded
without need of judicial declaration, and that all payments made and all
improvements done on the premises by respondent would be considered as
rentals for the use and occupation of the property or payment for damages
suffered, and respondent was obliged to peacefully vacate the premises and
deliver the possession thereof to the vendor.
FIRST DIVISION
G.R. No. 147695

September 13, 2007

MANUEL C. PAGTALUNAN, petitioner,

vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.
DECISION

Petitioner claimed that respondent paid only P12,950. She allegedly stopped
paying after December 1979 without any justification or explanation. Moreover, in
a "Kasunduan"1 dated November 18, 1979, respondent borrowedP3,000 from
Patricio payable in one year either in one lump sum payment or by installments,
failing which the balance of the loan would be added to the principal subject of
the monthly amortizations on the land.
Lastly, petitioner asserted that when respondent ceased paying her installments,
her status of buyer was automatically transformed to that of a lessee. Therefore,
she continued to possess the property by mere tolerance of Patricio and,
subsequently, of petitioner.

AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court of
the Court of Appeals (CA) Decision promulgated on October 30, 2000 and its
Resolution dated March 23, 2001 denying petitioners motion for reconsideration.
The Decision of the CA affirmed the Decision of the Regional Trial Court (RTC) of
Malolos, Bulacan, dated June 25, 1999 dismissing the case of unlawful detainer
for lack of merit.

On the other hand, respondent alleged that she paid her monthly installments
religiously, until sometime in 1980 when Patricio changed his mind and offered to
refund all her payments provided she would surrender the house. She refused.
Patricio then started harassing her and began demolishing the house portion by
portion. Respondent admitted that she failed to pay some installments after
December 1979, but that she resumed paying in 1980 until her balance dwindled
to P5,650. She claimed that despite several months of delay in payment, Patricio
never sued for ejectment and even accepted her late payments.

The facts are as follows:

On July 19, 1974, Patricio Pagtalunan (Patricio), petitioners stepfather and
predecessor-in-interest, entered into a Contract to Sell with respondent, wife of
Patricios former mechanic, Teodoro Manzano, whereby the former agreed to
sell, and the latter to buy, a house and lot which formed half of a parcel of land,
covered by Transfer Certificate of Title (TCT) No. T-10029 (now TCT No.
RT59929 [T-254773]), with an area of 236 square meters. The consideration

Respondent also averred that on September 14, 1981, she and Patricio signed
an agreement (Exh. 2) whereby he consented to the suspension of respondents
monthly payments until December 1981. However, even before the lapse of said
period, Patricio resumed demolishing respondents house, prompting her to
lodge a complaint with the Barangay Captain who advised her that she could
continue suspending payment even beyond December 31, 1981 until Patricio

49
returned all the materials he took from her house. This Patricio failed to do until
his death.
Respondent did not deny that she still owed Patricio P5,650, but claimed that she
did not resume paying her monthly installment because of the unlawful acts
committed by Patricio, as well as the filing of the ejectment case against her. She
denied having any knowledge of the Kasunduan of November 18, 1979.
Patricio and his wife died on September 17, 1992 and on October 17, 1994,
respectively. Petitioner became their sole successor-in-interest pursuant to a
waiver by the other heirs. On March 5, 1997, respondent received a letter from
petitioners counsel dated February 24, 1997 demanding that she vacate the
premises within five days on the ground that her possession had become
unlawful. Respondent ignored the demand. The Punong Barangay failed to settle
the dispute amicably.
On April 8, 1997, petitioner filed a Complaint for unlawful detainer against
respondent with the Municipal Trial Court (MTC) of Guiguinto, Bulacan praying
that, after hearing, judgment be rendered ordering respondent to immediately
vacate the subject property and surrender it to petitioner; forfeiting the amount
of P12,950 in favor of petitioner as rentals; ordering respondent to pay petitioner
the amount of P3,000 under the Kasunduan and the amount of P500 per month
from January 1980 until she vacates the property, and to pay petitioner attorneys
fees and the costs.
On December 22, 1998, the MTC rendered a decision in favor of petitioner. It
stated that although the Contract to Sell provides for a rescission of the
agreement upon failure of the vendee to pay any installment, what the contract
actually allows is properly termed a resolution under Art. 1191 of the Civil Code.
The MTC held that respondents failure to pay not a few installments caused the
resolution or termination of the Contract to Sell. The last payment made by
respondent was on January 9, 1980 (Exh. 71). Thereafter, respondents right of
possession ipso facto ceased to be a legal right, and became possession by
mere tolerance of Patricio and his successors-in-interest. Said tolerance ceased
upon demand on respondent to vacate the property.
The dispositive portion of the MTC Decision reads:
Wherefore, all the foregoing considered, judgment is hereby rendered,
ordering the defendant:

a. to vacate the property covered by Transfer Certificate of Title

No. T-10029 of the Register of Deeds of Bulacan (now TCT
No. RT-59929 of the Register of Deeds of Bulacan), and to
surrender possession thereof to the plaintiff;
b. to pay the plaintiff the amount of P113,500 representing
rentals from January 1980 to the present;
c. to pay the plaintiff such amount of rentals, at P500/month,
that may become due after the date of judgment, until she
finally vacates the subject property;
d. to pay to the plaintiff the amount of P25,000 as attorneys
fees.
SO ORDERED.2
On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999,
reversed the decision of the MTC and dismissed the case for lack of merit.
According to the RTC, the agreement could not be automatically rescinded since
there was delivery to the buyer. A judicial determination of rescission must be
secured by petitioner as a condition precedent to convert the possession de
facto of respondent from lawful to unlawful.
The dispositive portion of the RTC Decision states:
WHEREFORE, judgment is hereby rendered reversing the decision of
the Municipal Trial Court of Guiguinto, Bulacan and the ejectment case
instead be dismissed for lack of merit.3
The motion for reconsideration and motion for execution filed by petitioner were
denied by the RTC for lack of merit in an Order dated August 10, 1999.
Thereafter, petitioner filed a petition for review with the CA.
In a Decision promulgated on October 30, 2000, the CA denied the petition and
affirmed the Decision of the RTC. The dispositive portion of the Decision reads:
WHEREFORE, the petition for review on certiorari is Denied. The
assailed Decision of the Regional Trial Court of Malolos, Bulacan dated

50
25 June 1999 and its Order dated 10 August 1999 are hereby
AFFIRMED.
SO ORDERED. 4
The CA found that the parties, as well as the MTC and RTC failed to advert to
and to apply Republic Act (R.A.) No. 6552, more commonly referred to as the
Maceda Law, which is a special law enacted in 1972 to protect buyers of real
estate on installment payments against onerous and oppressive conditions.
The CA held that the Contract to Sell was not validly cancelled or rescinded
under Sec. 3 (b) of R.A. No. 6552, and recognized respondents right to continue
occupying unmolested the property subject of the contract to sell.
The CA denied petitioners motion for reconsideration in a Resolution dated
March 23, 2001.
Hence, this petition for review on certiorari.
Petitioner contends that:
A. Respondent Dela Cruz must bear the consequences of her deliberate
withholding of, and refusal to pay, the monthly payment. The Court of
Appeals erred in allowing Dela Cruz who acted in bad faith from
benefiting under the Maceda Law.
B. The Court of Appeals erred in resolving the issue on the applicability
of the Maceda Law, which issue was not raised in the proceedings a
quo.
C. Assuming arguendo that the RTC was correct in ruling that the MTC
has no jurisdiction over a rescission case, the Court of Appeals erred in
not remanding the case to the RTC for trial.5
Petitioner submits that the Maceda Law supports and recognizes the right of
vendors of real estate to cancel the sale outside of court, without need for a
judicial declaration of rescission, citing Luzon Brokerage Co., Inc., v. Maritime
Building Co., Inc.6
Petitioner contends that respondent also had more than the grace periods
provided under the Maceda Law within which to pay. Under Sec. 37 of the said

law, a buyer who has paid at least two years of installments has a grace period of
one month for every year of installment paid. Based on the amount of P12,950
which respondent had already paid, she is entitled to a grace period of six
months within which to pay her unpaid installments after December, 1979.
Respondent was given more than six months from January 1980 within which to
settle her unpaid installments, but she failed to do so. Petitioners demand to
vacate was sent to respondent in February 1997.
There is nothing in the Maceda Law, petitioner asserts, which gives the buyer a
right to pay arrearages after the grace periods have lapsed, in the event of an
invalid demand for rescission. The Maceda Law only provides that actual
cancellation shall take place after 30 days from receipt of the notice of
cancellation or demand for rescission and upon full payment of the cash
surrender value to the buyer.
Petitioner contends that his demand letter dated February 24, 1997 should be
considered the notice of cancellation since the demand letter informed
respondent that she had "long ceased to have any right to possess the premises
in question due to [her] failure to pay without justifiable cause." In support of his
contention, he citedLayug v. Intermediate Appellate Court8 which held that "the
additional formality of a demand on [the sellers] part for rescission by notarial act
would appear, in the premises, to be merely circuitous and consequently
superfluous." He stated that in Layug, the seller already made a written demand
upon the buyer.
In addition, petitioner asserts that whatever cash surrender value respondent is
entitled to have been applied and must be applied to rentals for her use of the
house and lot after December, 1979 or after she stopped payment of her
installments.
Petitioner argues that assuming Patricio accepted respondents delayed
installments in 1981, such act cannot prevent the cancellation of the Contract to
Sell. Installments after 1981 were still unpaid and the applicable grace periods
under the Maceda Law on the unpaid installments have long lapsed. Respondent
cannot be allowed to hide behind the Maceda Law. She acted with bad faith and
must bear the consequences of her deliberate withholding of and refusal to make
the monthly payments.
Petitioner also contends that the applicability of the Maceda Law was never
raised in the proceedings below; hence, it should not have been applied by the
CA in resolving the case.

51
The Court is not persuaded.
The CA correctly ruled that R.A No. 6552, which governs sales of real estate on
installment, is applicable in the resolution of this case.
This case originated as an action for unlawful detainer. Respondent is alleged to
be illegally withholding possession of the subject property after the termination of
the Contract to Sell between Patricio and respondent. It is, therefore, incumbent
upon petitioner to prove that the Contract to Sell had been cancelled in
accordance with R.A. No. 6552.
The pertinent provision of R.A. No. 6552 reads:

installment by the buyer, which is simply an event that prevents the obligation of
the vendor to convey title from acquiring binding force.10 The Court agrees with
petitioner that the cancellation of the Contract to Sell may be done outside the
court particularly when the buyer agrees to such cancellation.
However, the cancellation of the contract by the seller must be in accordance
with Sec. 3 (b) of R.A. No. 6552, which requires a notarial act of rescission and
the refund to the buyer of the full payment of the cash surrender value of the
payments on the property. Actual cancellation of the contract takes place after 30
days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.

Sec. 3. In all transactions or contracts involving the sale or financing of

real estate on installment payments, including residential condominium
apartments but excluding industrial lots, commercial buildings and sales
to tenants under Republic Act Numbered Thirty-eight hundred forty-four
as amended by Republic Act Numbered Sixty-three hundred eightynine, where the buyer has paid at least two years of installments, the
buyer is entitled to the following rights in case he defaults in the
payment of succeeding installments:

Based on the records of the case, the Contract to Sell was not validly cancelled
or rescinded under Sec. 3 (b) of R.A. No. 6552.

(a) To pay, without additional interest, the unpaid installments due within
the total grace period earned by him, which is hereby fixed at the rate of
one month grace period for every one year of installment payments
made: Provided, That this right shall be exercised by the buyer only
once in every five years of the life of the contract and its extensions, if
any.

Petitioner contends that he has complied with the requirements of cancellation

under Sec. 3 (b) of R.A. No. 6552. He asserts that his demand letter dated
February 24, 1997 should be considered as the notice of cancellation or demand
for rescission by notarial act and that the cash surrender value of the payments
on the property has been applied to rentals for the use of the house and lot after
respondent stopped payment after January 1980.

(b) If the contract is cancelled, the seller shall refund to the

buyer the cash surrender value of the payments on the
property equivalent to fifty percent of the total payments made and,
after five years of installments, an additional five percent every year but
not to exceed ninety percent of the total payments made: Provided,
That the actual cancellation of the contract shall take place after
thirty days from receipt by the buyer of the notice of cancellation
or the demand for rescission of the contract by a notarial act and
upon full payment of the cash surrender value to the buyer.9

The Court, however, finds that the letter11 dated February 24, 1997, which was
written by petitioners counsel, merely made formal demand upon respondent to
vacate the premises in question within five days from receipt thereof since she
had "long ceased to have any right to possess the premises x x x due to [her]
failure to pay without justifiable cause the installment payments x x x."

R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection Act,"
recognizes in conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon non-payment of an

First, Patricio, the vendor in the Contract to Sell, died on September 17, 1992
without canceling the Contract to Sell.
Second, petitioner also failed to cancel the Contract to Sell in accordance with
law.

Clearly, the demand letter is not the same as the notice of cancellation or
demand for rescission by a notarial actrequired by R.A No. 6552. Petitioner
cannot rely on Layug v. Intermediate Appellate Court12 to support his contention
that the demand letter was sufficient compliance. Layug held that "the additional
formality of a demand on [the sellers] part for rescission by notarial act would
appear, in the premises, to be merely circuitous and consequently superfluous"
since the seller therein filed an action for annulment of contract, which is a

52
kindred concept of rescission by notarial act.13 Evidently, the case of unlawful
detainer filed by petitioner does not exempt him from complying with the said
requirement.

The third issue is disregarded since petitioner assails an inexistent ruling of the
RTC on the lack of jurisdiction of the MTC over a rescission case when the
instant case he filed is for unlawful detainer.

In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender
value of the payments on the property to the buyer before cancellation of the
contract. The provision does not provide a different requirement for contracts to
sell which allow possession of the property by the buyer upon execution of the
contract like the instant case. Hence, petitioner cannot insist on compliance with
the requirement by assuming that the cash surrender value payable to the buyer
had been applied to rentals of the property after respondent failed to pay the
installments due.

WHEREFORE, the Decision of the Court of Appeals dated October 30, 2000
sustaining the dismissal of the unlawful detainer case by the RTC
is AFFIRMED with the following MODIFICATIONS:

There being no valid cancellation of the Contract to Sell, the CA correctly

recognized respondents right to continue occupying the property subject of the
Contract to Sell and affirmed the dismissal of the unlawful detainer case by the
RTC.
The Court notes that this case has been pending for more than ten years. Both
parties prayed for other reliefs that are just and equitable under the premises.
Hence, the rights of the parties over the subject property shall be resolved to
finally dispose of that issue in this case.
Considering that the Contract to Sell was not cancelled by the vendor, Patricio,
during his lifetime or by petitioner in accordance with R.A. No. 6552 when
petitioner filed this case of unlawful detainer after 22 years of continuous
possession of the property by respondent who has paid the substantial amount
of P12,300 out of the purchase price of P17,800, the Court agrees with the CA
that it is only right and just to allow respondent to pay her arrears and settle the
balance of the purchase price.
For respondents delay in the payment of the installments, the Court, in its
discretion, and applying Article 220914of the Civil Code, may award interest at the
rate of 6% per annum15 on the unpaid balance considering that there is no
stipulation in the Contract to Sell for such interest. For purposes of computing the
legal interest, the reckoning period should be the filing of the complaint for
unlawful detainer on April 8, 1997.
16

Based on respondents evidence of payments made, the MTC found that

respondent paid a total of P12,300 out of the purchase price of P17,800. Hence,
respondent still has a balance of P5,500, plus legal interest at the rate of 6% per
annum on the unpaid balance starting April 8, 1997.

1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay petitioner

Manuel C. Pagtalunan the balance of the purchase price in the amount
of Five Thousand Five Hundred Pesos (P5,500) plus interest at 6% per
annum from April 8, 1997 up to the finality of this judgment, and
thereafter, at the rate of 12% per annum;
2. Upon payment, petitioner Manuel C. Pagtalunan shall execute a
Deed of Absolute Sale of the subject property and deliver the certificate
of title in favor of respondent Rufina Dela Cruz Vda. de Manzano; and
3. In case of failure to pay within 60 days from finality of this Decision,
respondent Rufina Dela Cruz Vda. de Manzano shall immediately
vacate the premises without need of further demand, and the
downpayment and installment payments of P12,300 paid by her shall
constitute rental for the subject property.
No costs.
SO ORDERED.

SECOND DIVISION
G.R. No. 179965

February 20, 2013

NICOLAS P. DIEGO, Petitioner,

vs.
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.
DECISION

53
DEL CASTILLO, J.:
It is settled jurisprudence, to the point of being elementary, that an agreement
which stipulates that the seller shall execute a deed of sale only upon or after tl1ll
payment of the purchase price is a contract to sell, not a contract of sale.
In Reyes v. Tuparan, 1 this Court declared in categorical terms that "[w]here the
vendor promises to execute a deed of absolute sale upon the completion
by the vendee of the payment of the price, the contract is only a contract to
sell. The aforecited stipulation shows that the vendors reserved title to the
subject property until full payment of the purchase price."
In this case, it is not disputed as in tact both parties agreed that the deed of sale
shall only be executed upon payment of the remaining balance of the purchase
price. Thus, pursuant to the above stated jurisprudence, we similarly declare that
the transaction entered into by the parties is a contract to sell.
Before us is a Petition for Review on Certiorari2 questioning the June 29, 2007
Decision3 and the October 3, 2007 Resolution4 of the Court of Appeals (CA) in
CA-G.R. CV No. 86512, which affirmed the April 19, 2005 Decision5 of the
Regional Trial Court (RTC), Branch 40, of Dagupan City in Civil Case No. 9902971-D.
Factual Antecedents
In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo,
respondent herein, entered into an oral contract to sell covering Nicolass share,
fixed at P500,000.00, as co-owner of the familys Diego Building situated in
Dagupan City. Rodolfo made a downpayment of P250,000.00. It was agreed that
the deed of sale shall be executed upon payment of the remaining balance
of P250,000.00. However, Rodolfo failed to pay the remaining balance.
Meanwhile, the building was leased out to third parties, but Nicolass share in the
rents were not remitted to him by herein respondent Eduardo, another brother of
Nicolas and designated administrator of the Diego Building. Instead, Eduardo
gave Nicolass monthly share in the rents to Rodolfo. Despite demands and
protestations by Nicolas, Rodolfo and Eduardo failed to render an accounting
and remit his share in the rents and fruits of the building, and Eduardo continued
to hand them over to Rodolfo.
Thus, on May 17, 1999, Nicolas filed a Complaint6 against Rodolfo and Eduardo
before the RTC of Dagupan City and docketed as Civil Case No. 99-02971-D.
Nicolas prayed that Eduardo be ordered to render an accounting of all the

transactions over the Diego Building; that Eduardo and Rodolfo be ordered to
deliver to Nicolas his share in the rents; and that Eduardo and Rodolfo be held
solidarily liable for attorneys fees and litigation expenses.
Rodolfo and Eduardo filed their Answer with Counterclaim7 for damages and
attorneys fees. They argued that Nicolas had no more claim in the rents in the
Diego Building since he had already sold his share to Rodolfo. Rodolfo admitted
having remitted only P250,000.00 to Nicolas. He asserted that he would pay the
balance of the purchase price to Nicolas only after the latter shall have executed
a deed of absolute sale.
Ruling of the Regional Trial Court
After trial on the merits, or on April 19, 2005, the trial court rendered its
Decision8 dismissing Civil Case No. 99-02971-D for lack of merit and ordering
Nicolas to execute a deed of absolute sale in favor of Rodolfo upon payment by
the latter of the P250,000.00 balance of the agreed purchase price. It made the
following interesting pronouncement:
It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego
Building, x x x. As a co-owner, he is entitled to [his] share in the rentals of the
said building. However, plaintiff [had] already sold his share to defendant Rodolfo
Diego in the amount of P500,000.00 and in fact, [had] already received a partial
payment in the purchase price in the amount of P250,000.00. Defendant
Eduardo Diego testified that as per agreement, verbal, of the plaintiff and
defendant Rodolfo Diego, the remaining balance of P250,000.00 will be paid
upon the execution of the Deed of Absolute Sale. It was in the year 1997
when plaintiff was being required by defendant Eduardo Diego to sign the Deed
of Absolute Sale. Clearly, defendant Rodolfo Diego was not yet in default as the
plaintiff claims which cause [sic] him to refuse to sign [sic] document. The
contract of sale was already perfected as early as the year 1993 when plaintiff
received the partial payment, hence, he cannot unilaterally revoke or rescind the
same. From then on, plaintiff has, therefore, ceased to be a co-owner of the
building and is no longer entitled to the fruits of the Diego Building.
Equity and fairness dictate that defendant [sic] has to execute the necessary
document regarding the sale of his share to defendant Rodolfo Diego.
Correspondingly, defendant Rodolfo Diego has to perform his obligation as per
their verbal agreement by paying the remaining balance of P250,000.00.9
To summarize, the trial court ruled that as early as 1993, Nicolas was no longer
entitled to the fruits of his aliquot share in the Diego Building because he had

54
"ceased to be a co-owner" thereof. The trial court held that when Nicolas
received the P250,000.00 downpayment, a "contract of sale" was perfected.
Consequently, Nicolas is obligated to convey such share to Rodolfo, without right
of rescission. Finally, the trial court held that theP250,000.00 balance from
Rodolfo will only be due and demandable when Nicolas executes an absolute
deed of sale.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT

THERE WAS NO PERFECTED CONTRACT OF SALE BETWEEN PETITIONER
NICOLAS DIEGO AND RESPONDENT RODOLFO DIEGO OVER NICOLASS
SHARE OF THE BUILDING BECAUSE THE SUSPENSIVE CONDITION HAS
NOT YET BEEN FULFILLED.
II

Ruling of the Court of Appeals

Nicolas appealed to the CA which sustained the trial courts Decision in toto. The
CA held that since there was a perfected contract of sale between Nicolas and
Rodolfo, the latter may compel the former to execute the proper sale document.
Besides, Nicolass insistence that he has since rescinded their agreement in
1997 proved the existence of a perfected sale. It added that Nicolas could not
validly rescind the contract because: "1) Rodolfo ha[d] already made a partial
payment; 2) Nicolas ha[d] already partially performed his part regarding the
contract; and 3) Rodolfo opposes the rescission."10
The CA then proceeded to rule that since no period was stipulated within which
Rodolfo shall deliver the balance of the purchase price, it was incumbent upon
Nicolas to have filed a civil case to fix the same. But because he failed to do so,
Rodolfo cannot be considered to be in delay or default.
Finally, the CA made another interesting pronouncement, that by virtue of the
agreement Nicolas entered into with Rodolfo, he had already transferred his
ownership over the subject property and as a consequence, Rodolfo is legally
entitled to collect the fruits thereof in the form of rentals. Nicolas remaining right
is to demand payment of the balance of the purchase price, provided that he first
executes a deed of absolute sale in favor of Rodolfo.
Nicolas moved for reconsideration but the same was denied by the CA in its
Resolution dated October 3, 2007.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE

CONTRACT OF SALE BETWEEN PETITIONER AND RESPONDENT
RODOLFO DIEGO REMAINS LEGALLY BINDING AND IS NOT RESCINDED
GIVING MISPLACED RELIANCE ON PETITIONER NICOLAS STATEMENT
THAT THE SALE HAS NOT YET BEEN REVOKED.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PETITIONER NICOLAS DIEGO ACTED LEGALLY AND CORRECTLY WHEN
HE UNILATERALLY RESCINDED AND REVOKED HIS AGREEMENT OF SALE
WITH RESPONDENT RODOLFO DIEGO CONSIDERING RODOLFOS
MATERIAL, SUBSTANTIAL BREACH OF THE CONTRACT.
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER HAS NO MORE RIGHTS OVER HIS SHARE IN THE BUILDING,
DESPITE THE FACT THAT THERE WAS AS YET NO PERFECTED CONTRACT
OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO DIEGO
AND THERE WAS YET NO TRANSFER OF OWNERSHIP OF PETITIONERS
SHARE TO RODOLFO DUE TO THE NON-FULFILLMENT BY RODOLFO OF
THE SUSPENSIVE CONDITION UNDER THE CONTRACT.
V

Hence, this Petition.

Issues
The Petition raises the following errors that must be rectified:
I

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT

RESPONDENT RODOLFO HAS UNJUSTLY ENRICHED HIMSELF AT THE
EXPENSE OF PETITIONER BECAUSE DESPITE NOT HAVING PAID THE
BALANCE OF THE PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS
NOT YET ACQUIRED OWNERSHIP OVER THE SHARE OF PETITIONER
NICOLAS, HE HAS ALREADY BEEN APPROPRIATING FOR HIMSELF AND
FOR HIS PERSONAL BENEFIT THE SHARE OF THE INCOME OF THE

55
BUILDING AND THE PORTION OF THE BUILDING ITSELF WHICH WAS DUE
TO AND OWNED BY PETITIONER NICOLAS.

the P250,000.00 downpayment, he "vanished like thin air and hibernated in the
USA, he being an American citizen,"14 only to come back claiming that the said
amount was a mere loan.

VI
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING
ACTUAL DAMAGES, ATTORNEYS FEES AND LITIGATION EXPENSES TO
THE PETITIONER DESPITE THE FACT THAT PETITIONERS RIGHTS HAD
BEEN WANTONLY VIOLATED BY THE RESPONDENTS.11
Petitioners Arguments

They add that the Petition is a mere rehash and reiteration of the petitioners
arguments below, which are deemed to have been sufficiently passed upon and
debunked by the appellate court.
Our Ruling
The Court finds merit in the Petition.

In his Petition, the Supplement12 thereon, and Reply,13 Nicolas argues that,
contrary to what the CA found, there was no perfected contract of sale even
though Rodolfo had partially paid the price; that in the absence of the third
element in a sale contract the price there could be no perfected sale; that
failing to pay the required price in full, Nicolas had the right to rescind the
agreement as an unpaid seller.

The contract entered into by Nicolas and Rodolfo was a contract to sell.

Nicolas likewise takes exception to the CA finding that Rodolfo was not in default
or delay in the payment of the agreed balance for his (Nicolass) failure to file a
case to fix the period within which payment of the balance should be made. He
believes that Rodolfos failure to pay within a reasonable time was a substantial
and material breach of the agreement which gave him the right to unilaterally and
extrajudicially rescind the agreement and be discharged of his obligations as
seller; and that his repeated written demands upon Rodolfo to pay the balance
granted him such rights.

There is no dispute that in 1993, Rodolfo agreed to buy Nicolass share in the
Diego Building for the price ofP500,000.00. There is also no dispute that of the
total purchase price, Rodolfo paid, and Nicolas received,P250,000.00.
Significantly, it is also not disputed that the parties agreed that the remaining
amount ofP250,000.00 would be paid after Nicolas shall have executed a deed of
sale.

Nicolas further claims that based on his agreement with Rodolfo, there was to be
no transfer of title over his share in the building until Rodolfo has effected full
payment of the purchase price, thus, giving no right to the latter to collect his
share in the rentals.
Finally, Nicolas bewails the CAs failure to award damages, attorneys fees and
litigation expenses for what he believes is a case of unjust enrichment at his
expense.
Respondents Arguments
Apart from echoing the RTC and CA pronouncements, respondents accuse the
petitioner of "cheating" them, claiming that after the latter received

a) The stipulation to execute a deed of sale upon full payment of the

purchase price is a unique and distinguishing characteristic of a contract
to sell. It also shows that the vendor reserved title to the property until full
payment.

This stipulation, i.e., to execute a deed of absolute sale upon full payment of the
purchase price, is a unique and distinguishing characteristic of a contract to
sell. In Reyes v. Tuparan,15 this Court ruled that a stipulation in the
contract, "[w]here the vendor promises to execute a deed of absolute sale
upon the completion by the vendee of the payment of the price," indicates
that the parties entered into a contract to sell. According to this Court, this
particular provision is tantamount to a reservation of ownership on the part of the
vendor. Explicitly stated, the Court ruled that the agreement to execute a deed of
sale upon full payment of the purchase price"shows that the vendors reserved
title to the subject property until full payment of the purchase price." 16
In Tan v. Benolirao,17 this Court, speaking through Justice Brion, ruled that the
parties entered into a contract to sell as revealed by the following stipulation:

56
d) That in case, BUYER has complied with the terms and conditions of this
contract, then the SELLERS shall execute and deliver to the BUYER the
appropriate Deed of Absolute Sale;18
The Court further held that "[j]urisprudence has established that where the
seller promises to execute a deed of absolute sale upon the completion by
the buyer of the payment of the price, the contract is only a contract to
sell."19
b) The acknowledgement receipt signed by Nicolas as well as the
contemporaneous acts of the parties show that they agreed on a contract
to sell, not of sale. The absence of a formal deed of conveyance is
indicative of a contract to sell.
In San Lorenzo Development Corporation v. Court of Appeals,20 the facts show
that spouses Miguel and Pacita Lu (Lu) sold a certain parcel of land to Pablo
Babasanta (Pablo). After several payments, Pablo wrote Lu demanding "the
execution of a final deed of sale in his favor so that he could effect full payment
of the purchase price."21 To prove his allegation that there was a perfected
contract of sale between him and Lu, Pablo presented a receipt signed by Lu
acknowledging receipt of P50,000.00 as partial payment.22
However, when the case reached this Court, it was ruled that the transaction
entered into by Pablo and Lu was only a contract to sell, not a contract of sale.
The Court held thus:
The receipt signed by Pacita Lu merely states that she accepted the sum of fifty
thousand pesos (P50,000.00) from Babasanta as partial payment of 3.6 hectares
of farm lot situated in Sta. Rosa, Laguna. While there is no stipulation that the
seller reserves the ownership of the property until full payment of the price which
is a distinguishing feature of a contract to sell, the subsequent acts of the parties
convince us that the Spouses Lu never intended to transfer ownership to
Babasanta except upon full payment of the purchase price.
Babasantas letter dated 22 May 1989 was quite telling. He stated therein that
despite his repeated requests for the execution of the final deed of sale in his
favor so that he could effect full payment of the price, Pacita Lu allegedly refused
to do so. In effect, Babasanta himself recognized that ownership of the
property would not be transferred to him until such time as he shall have
effected full payment of the price. Moreover, had the sellers intended to
transfer title, they could have easily executed the document of sale in its
required form simultaneously with their acceptance of the partial payment,

but they did not. Doubtlessly, the receipt signed by Pacita Lu should legally
be considered as a perfected contract to sell.23
In the instant case, records show that Nicolas signed a mere
receipt24 acknowledging partial payment ofP250,000.00 from Rodolfo. It states:
July 8, 1993
Received the amount of [P250,000.00] for 1 share of Diego Building as partial
payment for Nicolas Diego.
(signed)
Nicolas Diego25
As we ruled in San Lorenzo Development Corporation v. Court of Appeals,26 the
parties could have executed a document of sale upon receipt of the partial
payment but they did not. This is thus an indication that Nicolas did not intend to
immediately transfer title over his share but only upon full payment of the
purchase price. Having thus reserved title over the property, the contract entered
into by Nicolas is a contract to sell. In addition, Eduardo admitted that he and
Rodolfo repeatedly asked Nicolas to sign the deed of sale27 but the latter refused
because he was not yet paid the full amount. As we have ruled in San Lorenzo
Development Corporation v. Court of Appeals,28 the fact that Eduardo and
Rodolfo asked Nicolas to execute a deed of sale is a clear recognition on their
part that the ownership over the property still remains with Nicolas. In fine, the
totality of the parties acts convinces us that Nicolas never intended to transfer
the ownership over his share in the Diego Building until the full payment of the
purchase price. Without doubt, the transaction agreed upon by the parties was a
contract to sell, not of sale.
In Chua v. Court of Appeals,29 the parties reached an impasse when the seller
wanted to be first paid the consideration before a new transfer certificate of title
(TCT) is issued in the name of the buyer. Contrarily, the buyer wanted to secure
a new TCT in his name before paying the full amount. Their agreement was
embodied in a receipt containing the following terms: "(1) the balance
of P10,215,000.00 is payable on or before 15 July 1989; (2) the capital gains tax
is for the account of x x x; and (3) if [the buyer] fails to pay the balance x x x the
[seller] has the right to forfeit the earnest money x x x."30 The case eventually
reached this Court. In resolving the impasse, the Court, speaking
through Justice Carpio, held that "[a] perusal of the Receipt shows that the true
agreement between the parties was a contract to sell."31 The Court noted that
"the agreement x x x was embodied in a receipt rather than in a deed of sale,

57
ownership not having passed between them."32 The Court thus concluded
that "[t]he absence of a formal deed of conveyance is a strong indication
that the parties did not intend immediate transfer of ownership, but only a
transfer after full payment of the purchase price."33 Thus, the "true agreement
between the parties was a contract to sell."34
In the instant case, the parties were similarly embroiled in an impasse. The
parties agreement was likewise embodied only in a receipt. Also, Nicolas did not
want to sign the deed of sale unless he is fully paid. On the other hand, Rodolfo
did not want to pay unless a deed of sale is duly executed in his favor. We thus
say, pursuant to our ruling in Chua v. Court of Appeals35 that the agreement
between Nicolas and Rodolfo is a contract to sell.
This Court cannot subscribe to the appellate courts view that Nicolas
should first execute a deed of absolute sale in favor of Rodolfo, before the latter
can be compelled to pay the balance of the price. This is patently ridiculous, and
goes against every rule in the book. This pronouncement virtually places the
prospective seller in a contract to sell at the mercy of the prospective buyer, and
sustaining this point of view would place all contracts to sell in jeopardy of being
rendered ineffective by the act of the prospective buyers, who naturally would
demand that the deeds of absolute sale be first executed before they pay the
balance of the price. Surely, no prospective seller would accommodate.
In fine, "the need to execute a deed of absolute sale upon completion of
payment of the price generally indicates that it is a contract to sell, as it
implies the reservation of title in the vendor until the vendee has completed
the payment of the price."36 In addition, "[a] stipulation reserving ownership in
the vendor until full payment of the price is x x x typical in a contract to
sell."37 Thus, contrary to the pronouncements of the trial and appellate courts, the
parties to this case only entered into a contract to sell; as such title cannot legally
pass to Rodolfo until he makes full payment of the agreed purchase price.
c) Nicolas did not surrender or deliver title or possession to Rodolfo.
Moreover, there could not even be a surrender or delivery of title or possession to
the prospective buyer Rodolfo. This was made clear by the nature of the
agreement, by Nicolass repeated demands for the return of all rents unlawfully
and unjustly remitted to Rodolfo by Eduardo, and by Rodolfo and Eduardos
repeated demands for Nicolas to execute a deed of sale which, as we said
before, is a recognition on their part that ownership over the subject property still
remains with Nicolas.

Significantly, when Eduardo testified, he claimed to be knowledgeable about the

terms and conditions of the transaction between Nicolas and Rodolfo. However,
aside from stating that out of the total consideration ofP500,000.00, the amount
of P250,000.00 had already been paid while the remaining P250,000.00 would
be paid after the execution of the Deed of Sale, he never testified that there was
a stipulation as regards delivery of title or possession.38
It is also quite understandable why Nicolas belatedly demanded the payment of
the rentals. Records show that the structural integrity of the Diego Building was
severely compromised when an earthquake struck Dagupan City in 1990.39 In
order to rehabilitate the building, the co-owners obtained a loan from a
bank.40 Starting May 1994, the property was leased to third parties and the
rentals received were used to pay off the loan.41 It was only in 1996, or after
payment of the loan that the co-owners started receiving their share in the
rentals.42 During this time, Nicolas was in the USA but immediately upon his
return, he demanded for the payment of his share in the rentals which Eduardo
remitted to Rodolfo. Failing which, he filed the instant Complaint. To us, this
bolsters our findings that Nicolas did not intend to immediately transfer title over
the property.
It must be stressed that it is anathema in a contract to sell that the prospective
seller should deliver title to the property to the prospective buyer pending the
latters payment of the price in full. It certainly is absurd to assume that in the
absence of stipulation, a buyer under a contract to sell is granted ownership of
the property even when he has not paid the seller in full. If this were the case,
then prospective sellers in a contract to sell would in all likelihood not be paid the
balance of the price.
This ponente has had occasion to rule that "[a] contract to sell is one where the
prospective seller reserves the transfer of title to the prospective buyer until the
happening of an event, such as full payment of the purchase price. What the
seller obliges himself to do is to sell the subject property only when the entire
amount of the purchase price has already been delivered to him. In other words,
the full payment of the purchase price partakes of a suspensive condition, the
nonfulfillment of which prevents the obligation to sell from arising and thus,
ownership is retained by the prospective seller without further remedies by the
prospective buyer. It does not, by itself, transfer ownership to the buyer."43
The contract to sell is terminated or cancelled.
Having established that the transaction was a contract to sell, what happens now
to the parties agreement?

58
The remedy of rescission is not available in contracts to sell.44 As explained
in Spouses Santos v. Court of Appeals:45
In view of our finding in the present case that the agreement between the parties
is a contract to sell, it follows that the appellate court erred when it decreed that a
judicial rescission of said agreement was necessary. This is because there was
no rescission to speak of in the first place. As we earlier pointed out, in a contract
to sell, title remains with the vendor and does not pass on to the vendee until the
purchase price is paid in full. Thus, in a contract to sell, the payment of the
purchase price is a positive suspensive condition. Failure to pay the price agreed
upon is not a mere breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an obligatory force. This is
entirely different from the situation in a contract of sale, where non-payment of
the price is a negative resolutory condition. The effects in law are not identical. In
a contract of sale, the vendor has lost ownership of the thing sold and cannot
recover it, unless the contract of sale is rescinded and set aside. In a contract to
sell, however, the vendor remains the owner for as long as the vendee has not
complied fully with the condition of paying the purchase price. If the vendor
should eject the vendee for failure to meet the condition precedent, he
is enforcing the contract and not rescinding it. When the petitioners in the instant
case repossessed the disputed house and lot for failure of private respondents to
pay the purchase price in full, they were merely enforcing the contract and not
rescinding it. As petitioners correctly point out, the Court of Appeals erred when it
ruled that petitioners should have judicially rescinded the contract pursuant to
Articles 1592 and 1191 of the Civil Code. Article 1592 speaks of non-payment of
the purchase price as a resolutory condition. It does not apply to a contract to
sell. As to Article 1191, it is subordinated to the provisions of Article 1592 when
applied to sales of immovable property. Neither provision is applicable in the
present case.46
Similarly, we held in Chua v. Court of Appeals47 that "Article 1592 of the Civil
Code permits the buyer to 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 notarial act. However, Article 1592 does not apply to a contract to
sell where the seller reserves the ownership until full payment of the price,"48 as
in this case.1wphi1
Applying the above jurisprudence, we hold that when Rodolfo failed to fully pay
the purchase price, the contract to sell was deemed terminated or cancelled.49 As
we have held in Chua v. Court of Appeals,50 "[s]ince the agreement x x x is a
mere contract to sell, the full payment of the purchase price partakes of a
suspensive condition. The non-fulfillment of the condition prevents the

obligation to sell from arising and ownership is retained by the seller

without further remedies by the buyer." Similarly, we held in Reyes v.
Tuparan51 that "petitioners obligation to sell the subject properties becomes
demandable only upon the happening of the positive suspensive condition, which
is the respondents full payment of the purchase price.Without respondents full
payment, there can be no breach of contract to speak of because petitioner
has no obligation yet to turn over the title. Respondents failure to pay in full
the purchase price in full is not the breach of contract contemplated under Article
1191 of the New Civil Code but rather just an event that prevents the petitioner
from being bound to convey title to respondent." Otherwise stated, Rodolfo has
no right to compel Nicolas to transfer ownership to him because he failed to pay
in full the purchase price. Correlatively, Nicolas has no obligation to transfer his
ownership over his share in the Diego Building to Rodolfo.52
Thus, it was erroneous for the CA to rule that Nicolas should have filed a case to
fix the period for Rodolfos payment of the balance of the purchase price. It was
not Nicolass obligation to compel Rodolfo to pay the balance; it was Rodolfos
duty to remit it.
It would appear that after Nicolas refused to sign the deed as there was yet no
full payment, Rodolfo and Eduardo hired the services of the Daroya Accounting
Office "for the purpose of estimating the amount to which [Nicolas] still owes
[Rodolfo] as a consequence of the unconsummated verbal agreement regarding
the formers share in the co-ownership of [Diego Building] in favor of the
latter."53 According to the accountants report, after Nicolas revoked his
agreement with Rodolfo due to non-payment, the downpayment of P250,000.00
was considered a loan of Nicolas from Rodolfo.54 The accountant opined that
the P250,000.00 should earn interest at 18%.55Nicolas however objected as
regards the imposition of interest as it was not previously agreed upon. Notably,
the contents of the accountants report were not disputed or rebutted by the
respondents. In fact, it was stated therein that "[a]ll the bases and assumptions
made particularly in the fixing of the applicable rate of interest have been
discussed with [Eduardo]."56
We find it irrelevant and immaterial that Nicolas described the termination or
cancellation of his agreement with Rodolfo as one of rescission. Being a layman,
he is understandably not adept in legal terms and their implications. Besides, this
Court should not be held captive or bound by the conclusion reached by the
parties. The proper characterization of an action should be based on what the
law says it to be, not by what a party believed it to be. "A contract is what the law
defines it to be x x x and not what the contracting parties call it."57

59
On the other hand, the respondents additional submission that Nicolas
cheated them by "vanishing and hibernating" in the USA after receiving
Rodolfos P250,000.00 downpayment, only to come back later and claim that the
amount he received was a mere loan cannot be believed. How the respondents
could have been cheated or disadvantaged by Nicolass leaving is beyond
comprehension. If there was anybody who benefited from Nicolass perceived
"hibernation", it was the respondents, for they certainly had free rein over
Nicolass interest in the Diego Building. Rodolfo put off payment of the balance of
the price, yet, with the aid of Eduardo, collected and appropriated for himself the
rents which belonged to Nicolas.
Eduardo is solidarily liable with Rodolfo as regards the share of Nicolas in
the rents.
For his complicity, bad faith and abuse of authority as the Diego Building
administrator, Eduardo must be held solidarily liable with Rodolfo for all that
Nicolas should be entitled to from 1993 up to the present, or in respect of actual
damages suffered in relation to his interest in the Diego Building. Eduardo was
the primary cause of Nicolass loss, being directly responsible for making and
causing the wrongful payments to Rodolfo, who received them under obligation
to return them to Nicolas, the true recipient.1wphi1 As such, Eduardo should be
principally responsible to Nicolas as well. Suffice it to state that 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; and every
person who, contrary to law, wilfully or negligently causes damage to another,
shall indemnify the latter for the same.58
Attorneys fees and other costs.
"Although attorneys fees are not allowed in the absence of stipulation, the court
can award the same when the defendants act or omission has compelled the
plaintiff to incur expenses to protect his interest or where the defendant acted in
gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just
and demandable claim."59 In the instant case, it is beyond cavil that petitioner
was constrained to file the instant case to protect his interest because of
respondents unreasonable and unjustified refusal to render an accounting and to
remit to the petitioner his rightful share in rents and fruits in the Diego Building.
Thus, we deem it proper to award to petitioner attorneys fees in the amount
of P50,000.00,60 as well as litigation expenses in the amount ofP20,000.00 and
the sum of P1,000.00 for each court appearance by his lawyer or lawyers, as
prayed for.

WHEREFORE, premises considered, the Petition is GRANTED. The June 29,

2007 Decision and October 3, 2007 Resolution of the Court of Appeals in CAG.R. CV No. 86512, and the April 19, 2005 Decision of the Dagupan City
Regional Trial Court, Branch 40 in Civil Case No. 99-02971-D, are
hereby ANNULLED and SET ASIDE.
The Court further decrees the following:
1. The oral contract to sell between petitioner Nicolas P. Diego and
respondent Rodolfo P. Diego isDECLARED terminated/cancelled;
2. Respondents Rodolfo P. Diego and Eduardo P. Diego
are ORDERED to surrender possession and control, as the case may
be, of Nicolas P. Diegos share in the Diego Building. Respondents are
further commanded to return or surrender to the petitioner the
documents of title, receipts, papers, contracts, and all other documents
in any form or manner pertaining to the latters share in the building,
which are deemed to be in their unauthorized and illegal possession;
3. Respondents Rodolfo P. Diego and Eduardo P. Diego
are ORDERED to immediately render an accounting of all the
transactions, from the period beginning 1993 up to the present,
pertaining to Nicolas P. Diegos share in the Diego Building, and
thereafter commanded to jointly and severally remit to the petitioner all
rents, monies, payments and benefits of whatever kind or nature
pertaining thereto, which are hereby deemed received by them during
the said period, and made to them or are due, demandable and
forthcoming during the said period and from the date of this Decision,
with legal interest from the filing of the Complaint;
4. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED,
immediately and without further delay upon receipt of this Decision, to
solidarily pay the petitioner attorneys fees in the amount ofP50,000.00;
litigation expenses in the amount of P20,000.00 and the sum
of P1,000.00 per counsel for each court appearance by his lawyer or
lawyers;
5. The payment of P250,000.00 made by respondent Rodolfo P. Diego,
with legal interest from the filing of the Complaint, shall be APPLIED, by
way of compensation, to his liabilities to the petitioner and to answer for
all damages and other awards and interests which are owing to the
latter under this Decision; and

60
6. Respondents counterclaim is DISMISSED.
SO ORDERED.

Sps. Fajardo filed before the Housing and Land Use Regulatory Board-Expanded
National Capital Region Field Office (HLURBENCRFO) a complaint8 for specific
performance or rescission of contract with damages against GPI and the
members of its Board of Directors namely, Jose C. Go, Evelyn Go, Lourdes G.
Ortiga, George Go, and Vicente Go (individual petitioners), docketed as HLURB
Case No. REM-050306-13319.

SECOND DIVISION
G.R. No. 201167

February 27, 2013

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G.

ORTIGA, GEORGE GO, and VICENTE GO, Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of
Court is the July 22, 2011 Decision1and February 29, 2012 Resolution2 of the
Court of Appeals (CA) in CA-G.R. SP No. 112981, which affirmed with
modification the August 27, 2009 Decision3 of the Office of the President (OP).
The Facts
On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo (Sps.
Fajardo) entered into a Contract to Sell4 (contract) with petitioner-corporation
Gotesco Properties, Inc. (GPI) for the purchase of a 100-square meter lot
identified as Lot No. 13, Block No.6, Phase No. IV of Evergreen Executive
Village, a subdivision project owned and developed by GPI located at Deparo
Road, Novaliches, Caloocan City. The subject lot is a portion of a bigger lot
covered by Transfer Certificate of Title (TCT) No. 2442205 (mother title).
Under the contract, Sps. Fajardo undertook to pay the purchase price
of P126,000.00 within a 10-year period, including interest at the rate of nine
percent (9%) per annum. GPI, on the other hand, agreed to execute a final deed
of sale (deed) in favor of Sps. Fajardo upon full payment of the stipulated
consideration. However, despite its full payment of the purchase price on January
17, 20006 and subsequent demands,7 GPI failed to execute the deed and to
deliver the title and physical possession of the subject lot. Thus, on May 3, 2006,

Sps. Fajardo averred that GPI violated Section 209 of Presidential Decree No.
95710 (PD 957) due to its failure to construct and provide water facilities,
improvements, infrastructures and other forms of development including water
supply and lighting facilities for the subdivision project. They also alleged that
GPI failed to provide boundary marks for each lot and that the mother title
including the subject lot had no technical description and was even levied upon
by the Bangko Sentral ng Pilipinas (BSP) without their knowledge. They thus
prayed that GPI be ordered to execute the deed, to deliver the corresponding
certificate of title and the physical possession of the subject lot within a
reasonable period, and to develop Evergreen Executive Village; or in the
alternative, to cancel and/or rescind the contract and refund the total payments
made plus legal interest starting January 2000.
For their part, petitioners maintained that at the time of the execution of the
contract, Sps. Fajardo were actually aware that GPI's certificate of title had no
technical description inscribed on it. Nonetheless, the title to the subject lot was
free from any liens or encumbrances.11 Petitioners claimed that the failure to
deliver the title to Sps. Fajardo was beyond their control12 because while GPI's
petition for inscription of technical description (LRC Case No. 4211) was
favorably granted13 by the Regional Trial Court of Caloocan City, Branch 131
(RTC-Caloocan), the same was reversed14 by the CA; this caused the delay in
the subdivision of the property into individual lots with individual titles. Given the
foregoing incidents, petitioners thus argued that Article 1191 of the Civil Code
(Code) the provision on which Sps. Fajardo anchor their right of rescission
remained inapplicable since they were actually willing to comply with their
obligation but were only prevented from doing so due to circumstances beyond
their control. Separately, petitioners pointed out that BSP's adverse claim/levy
which was annotated long after the execution of the contract had already been
settled.
The Ruling of the HLURB-ENCRFO
On February 9, 2007, the HLURB-ENCRFO issued a Decision15 in favor of Sps.
Fajardo, holding that GPIs obligation to execute the corresponding deed and to
deliver the transfer certificate of title and possession of the subject lot arose and

61
thus became due and demandable at the time Sps. Fajardo had fully paid the
purchase price for the subject lot. Consequently, GPIs failure to meet the said
obligation constituted a substantial breach of the contract which perforce
warranted its rescission. In this regard, Sps. Fajardo were given the option to
recover the money they paid to GPI in the amount of P168,728.83, plus legal
interest reckoned from date of extra-judicial demand in September 2002 until fully
paid. Petitioners were likewise held jointly and solidarily liable for the payment of
moral and exemplary damages, attorney's fees and the costs of suit.

A. Sps. Fajardos right to rescind

The Ruling of the HLURB Board of Commissioners

Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the
lot or unit to the buyer upon full payment of the lot or unit. No fee, except
those required for the registration of the deed of sale in the Registry of Deeds,
shall be collected for the issuance of such title. In the event a mortgage over the
lot or unit is outstanding at the time of the issuance of the title to the buyer, the
owner or developer shall redeem the mortgage or the corresponding portion
thereof within six months from such issuance in order that the title over any fully
paid lot or unit may be secured and delivered to the buyer in accordance
herewith. (Emphasis supplied.)

On appeal, the HLURB Board of Commissioners affirmed the above ruling in its
August 3, 2007 Decision,16 finding that the failure to execute the deed and to
deliver the title to Sps. Fajardo amounted to a violation of Section 25 of PD 957
which therefore, warranted the refund of payments in favor of Sps. Fajardo.
The Ruling of the OP
On further appeal, the OP affirmed the HLURB rulings in its August 27, 2009
Decision.17 In so doing, it emphasized the mandatory tenor of Section 25 of PD
957 which requires the delivery of title to the buyer upon full payment and found
that GPI unjustifiably failed to comply with the same.
The Ruling of the CA
On petition for review, the CA affirmed the above rulings with modification, fixing
the amount to be refunded to Sps. Fajardo at the prevailing market value of the
property18 pursuant to the ruling in Solid Homes v. Tan (Solid Homes).19
The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the contract
considering that GPI's inability to comply therewith was due to reasons beyond
its control and thus, should not be held liable to refund the payments they had
received. Further, since the individual petitioners never participated in the acts
complained of nor found to have acted in bad faith, they should not be held liable
to pay damages and attorney's fees.
The Court's Ruling
The petition is partly meritorious.

It is settled that in a contract to sell, the seller's obligation to deliver the

corresponding certificates of title is simultaneous and reciprocal to the buyer's full
payment of the purchase price.20 In this relation, Section 25 of PD 957, which
regulates the subject transaction, imposes on the subdivision owner or developer
the obligation to cause the transfer of the corresponding certificate of title to the
buyer upon full payment, to wit:

In the present case, Sps. Fajardo claim that GPI breached the contract due to its
failure to execute the deed of sale and to deliver the title and possession over the
subject lot, notwithstanding the full payment of the purchase price made by Sps.
Fajardo on January 17, 200021 as well as the latters demand for GPI to comply
with the aforementioned obligations per the letter22 dated September 16, 2002.
For its part, petitioners proffer that GPI could not have committed any breach of
contract considering that its purported non-compliance was largely impelled by
circumstances beyond its control i.e., the legal proceedings concerning the
subdivision of the property into individual lots. Hence, absent any substantial
breach, Sps. Fajardo had no right to rescind the contract.
The Court does not find merit in petitioners contention.
A perusal of the records shows that GPI acquired the subject property on March
10, 1992 through a Deed of Partition and Exchange23 executed between it and
Andres Pacheco (Andres), the former registered owner of the property. GPI was
issued TCT No. 244220 on March 16, 1992 but the same did not bear any
technical description.24 However, no plausible explanation was advanced by the
petitioners as to why the petition for inscription (docketed as LRC Case No.
4211) dated January 6, 2000,25 was filed only after almost eight (8) years from
the acquisition of the subject property.

62
Neither did petitioners sufficiently explain why GPI took no positive action to
cause the immediate filing of a new petition for inscription within a reasonable
time from notice of the July 15, 2003 CA Decision which dismissed GPIs earlier
petition based on technical defects, this notwithstanding Sps. Fajardo's full
payment of the purchase price and prior demand for delivery of title. GPI filed the
petition before the RTC-Caloocan, Branch 122 (docketed as LRC Case No. C5026) only on November 23, 2006,26 following receipt of the letter27 dated
February 10, 2006 and the filing of the complaint on May 3, 2006, alternatively
seeking refund of payments. While the court a quodecided the latter petition for
inscription in its favor,28 there is no showing that the same had attained finality or
that the approved technical description had in fact been annotated on TCT No.
244220, or even that the subdivision plan had already been approved.
Moreover, despite petitioners allegation29 that the claim of BSP had been settled,
there appears to be no cancellation of the annotations30 in GPIs favor. Clearly,
the long delay in the performance of GPI's obligation from date of demand on
September 16, 2002 was unreasonable and unjustified. It cannot therefore be
denied that GPI substantially breached its contract to sell with Sps. Fajardo
which thereby accords the latter the right to rescind the same pursuant to Article
1191 of the Code, viz:
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.
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.
B. Effects of rescission
At this juncture, it is noteworthy to point out that rescission does not merely
terminate the contract and release the parties from further obligations to each
other, but abrogates the contract from its inception and restores the parties to
their original positions as if no contract has been made.31 Consequently, mutual

restitution, which entails the return of the benefits that each party may have
received as a result of the contract, is thus required.32To be sure, it has been
settled that the effects of rescission as provided for in Article 1385 of the Code
are equally applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article
1191.1wphi1 This means bringing the parties back to their original status prior to
the inception of the contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price with
its interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith.
In this case, indemnity for damages may be demanded from the person causing
the loss.
This Court has consistently ruled that this provision applies to rescission
under Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states that "rescission
creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest," the Court finds no
justification to sustain petitioners position that said Article 1385 does not apply to
rescission under Article 1191. x x x33 (Emphasis supplied; citations omitted.)
In this light, it cannot be denied that only GPI benefited from the contract, having
received full payment of the contract price plus interests as early as January 17,
2000, while Sps. Fajardo remained prejudiced by the persisting non-delivery of
the subject lot despite full payment. As a necessary consequence, considering
the propriety of the rescission as earlier discussed, Sps. Fajardo must be able to
recover the price of the property pegged at its prevailing market value consistent
with the Courts pronouncement in Solid Homes,34 viz:

63
Indeed, there would be unjust enrichment if respondents Solid Homes, Inc. &
Purita Soliven are made to pay only the purchase price plus interest. It is definite
that the value of the subject property already escalated after almost two decades
from the time the petitioner paid for it. Equity and justice dictate that the
injured party should be paid the market value of the lot, otherwise,
respondents Solid Homes, Inc. & Purita Soliven would enrich themselves at
the expense of herein lot owners when they sell the same lot at the present
market value. Surely, such a situation should not be countenanced for to do so
would be contrary to reason and therefore, unconscionable. Over time, courts
have recognized with almost pedantic adherence that what is inconvenient or
contrary to reason is not allowed in law. (Emphasis supplied.)
On this score, it is apt to mention that it is the intent of PD 957 to protect the
buyer against unscrupulous developers, operators and/or sellers who reneged on
their obligations.35 Thus, in order to achieve this purpose, equity and justice
dictate that the injured party should be afforded full recompense and as such, be
allowed to recover the prevailing market value of the undelivered lot which had
been fully paid for.1wphi1

WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012
Resolution of the Court of Appeals in CA-G.R. SP No. 112981 are
hereby AFFIRMED WITH MODIFICATION, absolving individual petitioners Jose
C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go from personal
liability towards respondent-spouses Eugenio and Angelina Fajardo.
SO ORDERED.

FIRST DIVISION
G.R. No. 188986

GALILEO A. MAGLASANG, doing business under the name GL

Enterprises, Petitioner,
vs.
NORTHWESTERN INC., UNIVERSITY, Respondent.
DECISION

C. Moral and exemplary damages, attorneys fees and costs of suit

Furthermore, the Court finds that there is proper legal basis to accord moral and
exemplary damages and attorney's fees, including costs of suit. Verily, GPIs
unjustified failure to comply with its obligations as above-discussed caused Sps.
Fajardo serious anxiety, mental anguish and sleepless nights, thereby justifying
the award of moral damages. In the same vein, the payment of exemplary
damages remains in order so as to prevent similarly minded subdivision
developers to commit the same transgression. And finally, considering that Sps.
Fajardo were constrained to engage the services of counsel to file this suit, the
award of attorneys fees must be likewise sustained.
D. Liability of individual Petitioners
However, the Court finds no basis to hold individual petitioners solidarily liable
with petitioner GPI for the payment of damages in favor of Sps. Fajardo since it
was not shown that they acted maliciously or dealt with the latter in bad faith.
Settled 1s the rule that in the absence of malice and bad faith, as in this case,
officers of the corporation cannot be made personally liable for liabilities of the
corporation which, by legal fiction, has a personality separate and distinct from its
officers, stockholders, and members.36

March 20, 2013

SERENO, CJ.:
Before this Court is a Rule 45 Petition, seeking a review of the 27 July 2009
Court of Appeals (CA) Decision in CA-G.R. CV No. 88989,1 which modified the
Regional Trial Court (RTC) Decision of 8 January 2007 in Civil Case No. Q-0453660.2 The CA held that petitioner substantially breached its contracts with
respondent for the installation of an integrated bridge system (IBS).
The antecedent .facts are as follows:3
On 10 June 2004, respondent Northwestern University (Northwestern), an
educational institution offering maritime-related courses, engaged the services of
a Quezon City-based firm, petitioner GL Enterprises, to install a new IBS in
Laoag City. The installation of an IBS, used as the students training laboratory,
was required by the Commission on Higher Education (CHED) before a school
could offer maritime transportation programs.4
Since its IBS was already obsolete, respondent required petitioner to supply and
install specific components in order to form the most modern IBS that would be
acceptable to CHED and would be compliant with the standards of the
International Maritime Organization (IMO). For this purpose, the parties executed
two contracts.

64
The first contract partly reads:5
That in consideration of the payment herein mentioned to be made by the First
Party (defendant), the Second Party agrees to furnish, supply, install and
integrate the most modern INTEGRATED BRIDGE SYSTEM located at
Northwestern University MOCK BOAT in accordance with the general conditions,
plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:

That in consideration of the payment herein mentioned to be made by the First

Party (defendant), the Second Party agrees to furnish, supply, install & integrate
the most modern INTEGRATED BRIDGE SYSTEM located at Northwestern
University MOCK BOAT in accordance with the general conditions, plans and
specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
1. ARPA RADAR SIMULATION ROOM

INTEGRATED BRIDGE SYSTEM

A. 2-RADAR SYSTEM

xxxx
2. GMDSS SIMULATION ROOM

B. OVERHEAD CONSOLE MONITORING SYSTEM

C. ENGINE TELEGRAPH SYSTEM

xxxx
TOTAL COST: PhP 270,000.00
(Emphasis in the original)

D. ENGINE CONTROL SYSTEM

E. WEATHER CONTROL SYSTEM
F. ECDIS SYSTEM

Common to both contracts are the following provisions: (1) the IBS and its
components must be compliant with the IMO and CHED standard and with
manuals for simulators/major equipment; (2) the contracts may be terminated if
one party commits a substantial breach of its undertaking; and (3) any dispute
under the agreement shall first be settled mutually between the parties, and if
settlement is not obtained, resort shall be sought in the courts of law.

G. STEERING WHEEL SYSTEM

H. BRIDGE CONSOLE

TOTAL COST:
LESS: OLD MARITIME
EQUIPMENT TRADE-IN VALUE
DISCOUNT
PROJECT COST (MATERIALS & INSTALLATION)
(Emphasis in the original)
The second contract essentially contains the same terms and conditions as
follows:6

Subsequently, Northwestern paid P1 million as down payment to GL Enterprises.

The former then assumed possession of Northwesterns old IBS as trade-in
payment for its service. Thus, the balance of the contract price remained
at P1.97 million.7
Php 3,800,000.00
Two months after the execution of the contracts, GL Enterprises technicians
delivered various materials to the project site. However, when they started
installing the components, respondent halted the operations. GL Enterprises then
asked for an explanation.8
1,000,000.00
Northwestern justified the work stoppage upon its finding that the delivered
equipment were substandard.9 It explained further that GL Enterprises violated
PhP 2,700,000.00
the terms and conditions of the contracts, since the delivered components (1)
were old; (2) did not have instruction manuals and warranty certificates; (3)
contained indications of being reconditioned machines; and (4) did not meet the
IMO and CHED standards. Thus, Northwestern demanded compliance with the
agreement and suggested that GL Enterprises meet with the formers
representatives to iron out the situation.

65
Instead of heeding this suggestion, GL Enterprises filed on 8 September 2004 a
Complaint10 for breach of contract and prayed for the following sums: P1.97
million, representing the amount that it would have earned, had Northwestern not
stopped it from performing its tasks under the two contracts; at least P100,000 as
moral damages; at least P100,000 by way of exemplary damages; at
least P100,000 as attorneys fees and litigation expenses; and cost of suit.
Petitioner alleged that Northwestern breached the contracts by ordering the work
stoppage and thus preventing the installation of the materials for the IBS.
Northwestern denied the allegation. In its defense, it asserted that since the
equipment delivered were not in accordance with the specifications provided by
the contracts, all succeeding works would be futile and would entail unnecessary
expenses. Hence, it prayed for the rescission of the contracts and made a
compulsory counterclaim for actual, moral, and exemplary damages, and
attorneys fees.

determined that GL Enterprises was the one guilty of substantial breach and
liable for attorneys fees.
The CA appreciated that since the parties essentially sought to have an IBS
compliant with the CHED and IMO standards, it was GL Enterprises delivery of
defective equipment that materially and substantially breached the contracts.
Although the contracts contemplated a completed project to be evaluated by
CHED, Northwestern could not just sit idly by when it was apparent that the
components delivered were substandard.
The CA held that Northwestern only exercised ordinary prudence to prevent the
inevitable rejection of the IBS delivered by GL Enterprises. Likewise, the
appellate court disregarded petitioners excuse that the equipment delivered
might not have been the components intended to be installed, for it would be
contrary to human experience to deliver equipment from Quezon City to Laoag
City with no intention to use it.

The RTC held both parties at fault. It found that Northwestern unduly halted the
operations, even if the contracts called for a completed project to be evaluated by
the CHED. In turn, the breach committed by GL Enterprises consisted of the
delivery of substandard equipment that were not compliant with IMO and CHED
standards as required by the agreement.

This time, applying Article 1191 of the Civil Code, the CA declared the rescission
of the contracts. It then proceeded to affirm the RTCs order of mutual restitution.
Additionally, the appellate court granted P50,000 to Northwestern by way of
attorneys fees.

Invoking the equitable principle that "each party must bear its own loss," the trial
court treated the contracts as impossible of performance without the fault of
either party or as having been dissolved by mutual consent. Consequently, it
ordered mutual restitution, which would thereby restore the parties to their
original positions as follows:11

Before this Court, petitioner rehashes all the arguments he had raised in the
courts a quo.12 He maintains his prayer for actual damages equivalent to the
amount that he would have earned, had respondent not stopped him from
performing his tasks under the two contracts; moral and exemplary damages;
attorneys fees; litigation expenses; and cost of suit.

Accordingly, plaintiff is hereby ordered to restore to the defendant all the

equipment obtained by reason of the First Contract and refund the downpayment
of P1,000,000.00 to the defendant; and for the defendant to return to the plaintiff
the equipment and materials it withheld by reason of the non-continuance of the
installation and integration project. In the event that restoration of the old
equipment taken from defendant's premises is no longer possible, plaintiff is
hereby ordered to pay the appraised value of defendant's old equipment
at P1,000,000.00. Likewise, in the event that restoration of the equipment and
materials delivered by the plaintiff to the defendant is no longer possible,
defendant is hereby ordered to pay its appraised value at P1,027,480.00.

Hence, the pertinent issue to be resolved in the instant appeal is whether the CA
gravely erred in (1) finding substantial breach on the part of GL Enterprises; (2)
refusing petitioners claims for damages, and (3) awarding attorneys fees to
Northwestern.

Moreover, plaintiff is likewise ordered to restore and return all the equipment
obtained by reason of the Second Contract, or if restoration or return is not
possible, plaintiff is ordered to pay the value thereof to the defendant.
SO ORDERED.
Aggrieved, both parties appealed to the CA. With each of them pointing a finger
at the other party as the violator of the contracts, the appellate court ultimately

RULING OF THE COURT

Substantial Breaches of the Contracts
Although the RTC and the CA concurred in ordering restitution, the courts a quo,
however, differed on the basis thereof. The RTC applied the equitable principle of
mutual fault, while the CA applied Article 1191 on rescission.
The power to rescind the obligations of the injured party is implied in reciprocal
obligations, such as in this case. On this score, the CA correctly applied Article
1191, which provides thus:

66
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.
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.
The two contracts require no less than substantial breach before they can be
rescinded. Since the contracts do not provide for a definition of substantial
breach that would terminate the rights and obligations of the parties, we apply the
definition found in our jurisprudence.

reconditioned machines; and, all told, (4) might not have met the IMO and CHED
standards. Highlighting the defects of the delivered materials, the CA quoted
respondents testimonial evidence as follows:16
Q: In particular which of these equipment of CHED requirements were not
complied with?
A: The Radar Ma'am, because they delivered only 10-inch PPI, that is the
monitor of the Radar. That is 16-inch and the gyrocompass with two (2) repeaters
and the history card. The gyrocompass - there is no marker, there is no model,
there is no serial number, no gimbal, no gyroscope and a bulb to work it properly
to point the true North because it is very important to the Cadets to learn where is
the true North being indicated by the Master Gyrocompass.
xxxx

This Court defined in Cannu v. Galang13 that substantial, unlike slight or casual
breaches of contract, are fundamental breaches that defeat the object of the
parties in entering into an agreement, since the law is not concerned with trifles.14

Q: Mr. Witness, one of the defects you noted down in this history card is that the
master gyrocompass had no gimbals, gyroscope and balls and was replaced with
an ordinary electric motor. So what is the Implication of this?

The question of whether a breach of contract is substantial depends upon the

attending circumstances.15

A: Because those gimbals, balls and the gyroscope it let the gyrocompass to
work so it will point the true North but they being replaced with the ordinary motor
used for toys so it will not indicate the true North.

In the case at bar, the parties explicitly agreed that the materials to be delivered
must be compliant with the CHED and IMO standards and must be complete with
manuals. Aside from these clear provisions in the contracts, the courts a quo
similarly found that the intent of the parties was to replace the old IBS in order to
obtain CHED accreditation for Northwesterns maritime-related courses.
According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as
amended by CMO No. 13, Series of 2005, any simulator used for simulatorbased training shall be capable of simulating the operating capabilities of the
shipboard equipment concerned. The simulation must be achieved at a level of
physical realism appropriate for training objectives; include the capabilities,
limitations and possible errors of such equipment; and provide an interface
through which a trainee can interact with the equipment, and the simulated
environment.
Given these conditions, it was thus incumbent upon GL Enterprises to supply the
components that would create an IBS that would effectively facilitate the learning
of the students.
However, GL Enterprises miserably failed in meeting its responsibility. As
contained in the findings of the CA and the RTC, petitioner supplied substandard
equipment when it delivered components that (1) were old; (2) did not have
instruction manuals and warranty certificates; (3) bore indications of being

Q: So what happens if it will not indicate the true North?

A: It is very big problem for my cadets because they must, to learn into school
where is the true North and what is that equipment to be used on board.
Q: One of the defects is that the steering wheel was that of an ordinary
automobile. And what is the implication of this?
A: Because. on board Maam, we are using the real steering wheel and the
cadets will be implicated if they will notice that the ship have the same steering
wheel as the car so it is not advisable for them.
Q:. And another one is that the gyrocompass repeater was only refurbished and it
has no serial number. What is wrong with that?
A: It should be original Maam because this gyro repeater, it must to repeat also
the true North being indicated by the Master Gyro Compass so it will not work
properly, I dont know it will work properly. (Underscoring supplied)
Evidently, the materials delivered were less likely to pass the CHED standards,
because the navigation system to be installed might not accurately point to the

67
true north; and the steering wheel delivered was one that came from an
automobile, instead of one used in ships. Logically, by no stretch of the
imagination could these form part of the most modern IBS compliant with the
IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that the equipment it
delivered was substandard. However, it reiterates its rejected excuse that
Northwestern should have made an assessment only after the completion of the
IBS.17 Thus, petitioner stresses that it was Northwestern that breached the
agreement when the latter halted the installation of the materials for the IBS,
even if the parties had contemplated a completed project to be evaluated by
CHED. However, as aptly considered by the CA, respondent could not just "sit
still and wait for such day that its accreditation may not be granted by CHED due
to the apparent substandard equipment installed in the bridge system."18 The
appellate court correctly emphasized that, by that time, both parties would have
incurred more costs for nothing.
Additionally, GL Enterprises reasons that, based on the contracts, the materials
that were hauled all the way from Quezon City to Laoag City under the custody of
the four designated installers might not have been the components to be
used.19 Without belaboring the point, we affirm the conclusion of the CA and the
RTC that the excuse is untenable for being contrary to human experience.20
Given that petitioner, without justification, supplied substandard components for
the new IBS, it is thus clear that its violation was not merely incidental, but
directly related to the essence of the agreement pertaining to the installation of
an IBS compliant with the CHED and IMO standards.

As between the parties, substantial breach can clearly be attributed to GL

Enterprises.1wphi1 Consequently, it is not the injured party who can claim
damages under Article 1170 of the Civil Code. For this reason, we concur in the
result of the CA's Decision denying petitioner actual damages in the form of lost
earnings, as well as moral and exemplary damages.
With respect to attorney's fees, Article 2208 of the Civil Code allows the grant
thereof when the court deems it just and equitable that attorney's fees should be
recovered. An award of attorney's fees is proper if one was forced to litigate and
incur expenses to protect one's rights and interest by reason of an unjustified act
or omission on the part of the party from whom the award is sought.23
Since we affirm the CA's finding that it was not Northwestern but GL Enterprises
that breached the contracts without justification, it follows that the appellate court
correctly awarded attorneys fees to respondent. Notably, this litigation could
have altogether been avoided if petitioner heeded respondent's suggestion to
amicably settle; or, better yet, if in the first place petitioner delivered the right
materials as required by the contracts.
IN VIEW THEREOF, the assailed 27 July 2009 Decision of the Court of Appeals
in CA-G.R. CV No. 88989 is hereby AFFIRMED.
SO ORDERED.

SECOND DIVISION
Consequently, the CA correctly found substantial breach on the part of petitioner.
G.R. No. 189145
In contrast, Northwesterns breach, if any, was characterized by the appellate
court as slight or casual.21 By way of negative definition, a breach is considered
casual if it does not fundamentally defeat the object of the parties in entering into
an agreement. Furthermore, for there to be a breach to begin with, there must be
a "failure, without legal excuse, to perform any promise which forms the whole or
part of the contract."22
Here, as discussed, the stoppage of the installation was justified. The action of
Northwestern constituted a legal excuse to prevent the highly possible rejection
of the IBS. Hence, just as the CA concluded, we find that Northwestern exercised
ordinary prudence to avert a possible wastage of time, effort, resources and also
of theP2.9 million representing the value of the new IBS.
Actual Damages, Moral and Exemplary Damages, and Attorney's Fees

December 4, 2013

OPTIMUM DEVELOPMENT BANK, Petitioner,

vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R.
JOVELLANOS, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 29,
2009 and Resolution 3 dated August 10, 2009 of the Court of Appeals (CA) in CAG.R. SP No. 104487 which reversed the Decision4 dated December 27, 2007 of
the Regional Trial Court of Caloocan City, Branch 128 (RTC) in Civil Case No. C-

68
21867 that, in turn, affirmed the Decision5 dated June 8, 2007 of the Metropolitan
Trial Court, Branch 53 of that same city (MeTC) in Civil Case No. 06-28830
ordering respondents-spouses Benigno and Lourdes Jovellanos (Sps.
Jovellanos) to, inter alia, vacate the premises of the property subject of this case.
The Facts
On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell6 with Palmera
Homes, Inc. (Palmera Homes) for the purchase of a residential house and lot
situated in Block 3, Lot 14, Villa Alegria Subdivision, Caloocan City (subject
property) for a total consideration of P1,015,000.00. Pursuant to the contract,
Sps. Jovellanos took possession of the subject property upon a down payment
of P91,500.00, undertaking to pay the remaining balance of the contract price in
equal monthly installments of P13,107.00 for a period of 10 years starting June
12, 2005.7
On August 22, 2006, Palmera Homes assigned all its rights, title and interest in
the Contract to Sell in favor of petitioner Optimum Development Bank (Optimum)
through a Deed of Assignment of even date.8

In a Decision15 dated June 8, 2007, the MeTC ordered Sps. Jovellanos to vacate
the subject property and pay Optimum reasonable compensation in the amount
of P5,000.00 for its use and occupation until possession has been surrendered. It
held that Sps. Jovellanoss possession of the said property was by virtue of a
Contract to Sell which had already been cancelled for non-payment of the
stipulated monthly installment payments. As such, their "rights of possession over
the subject property necessarily terminated or expired and hence, their continued
possession thereof constitute[d] unlawful detainer."16
Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum
counsel made them believe that a compromise agreement was being prepared,
thus their decision not to engage the services of counsel and their concomitant
failure to file an answer.17
They also assailed the jurisdiction of the MeTC, claiming that the case did not
merely involve the issue of physical possession but rather, questions arising from
their rights under a contract to sell which is a matter that is incapable of
pecuniary estimation and, therefore, within the jurisdiction of the RTC.18
The RTC Ruling

On April 10, 2006, Optimum issued a Notice of Delinquency and Cancellation of

Contract to Sell9 for Sps. Jovellanoss failure to pay their monthly installments
despite several written and verbal notices.10
In a final Demand Letter dated May 25, 2006,11 Optimum required Sps.
Jovellanos to vacate and deliver possession of the subject property within seven
(7) days which, however, remained unheeded. Hence, Optimum filed, on
November 3, 2006, a complaint for unlawful detainer12 before the MeTC,
docketed as Civil Case No. 06-28830. Despite having been served with
summons, together with a copy of the complaint,13 Sps. Jovellanos failed to file
their answer within the prescribed reglementary period, thus prompting Optimum
to move for the rendition of judgment.14
Thereafter, Sps. Jovellanos filed their opposition with motion to admit answer,
questioning the jurisdiction of the court, among others. Further, they filed a
Motion to Reopen and Set the Case for Preliminary Conference, which the MeTC
denied.
The MeTC Ruling

In a Decision19 dated December 27, 2007, the RTC affirmed the MeTCs
judgment, holding that the latter did not err in refusing to admit Sps. Jovellanos s
belatedly filed answer considering the mandatory period for its filing. It also
affirmed the MeTCs finding that the action does not involve the rights of the
respective parties under the contract but merely the recovery of possession by
Optimum of the subject property after the spouses default.20
Aggrieved, Sps. Jovellanos moved for reconsideration which was, however,
denied in a Resolution21 dated June 27, 2008. Hence, the petition before the CA
reiterating that the RTC erred in affirming the decision of the MeTC with respect
to:
(a) the non-admission of their answer to the complaint; and
(b) the jurisdiction of the MeTC over the complaint for unlawful
detainer.22
The CA Ruling

69
In an Amended Decision23 dated May 29, 2009, the CA reversed and set aside
the RTCs decision, ruling to dismiss the complaint for lack of jurisdiction. It found
that the controversy does not only involve the issue of possession but also the
validity of the cancellation of the Contract to Sell and the determination of the
rights of the parties thereunder as well as the governing law, among others,
Republic Act No. (RA) 6552.24
Accordingly, it concluded that the subject matter is one which is incapable of
pecuniary estimation and thus, within the jurisdiction of the RTC.25
Undaunted, Optimum moved for reconsideration which was denied in a
Resolution26 dated August 10, 2009. Hence, the instant petition, submitting that
the case is one for unlawful detainer, which falls within the exclusive original
jurisdiction of the municipal trial courts, and not a case incapable of pecuniary
estimation cognizable solely by the regional trial courts.
The Courts Ruling
The petition is meritorious. What is determinative of the nature of the action and
the court with jurisdiction over it are the allegations in the complaint and the
character of the relief sought, not the defenses set up in an answer.27
A complaint sufficiently alleges a cause of action for unlawful detainer if it recites
that:
(a) initially, possession of the property by the defendant was by contract
with or by tolerance of the plaintiff;
(b) eventually, such possession became illegal upon notice by plaintiff to
defendant of the termination of the latter's right of possession;
(c) thereafter, defendant remained in possession of the property and
deprived plaintiff of the enjoyment thereof; and
(d) within one year from the last demand on defendant to vacate the
property, plaintiff instituted the complaint for ejectment.28
Corollarily, the only issue to be resolved in an unlawful detainer case is physical
or material possession of the property involved, independent of any claim of
ownership by any of the parties involved.29

In its complaint, Optimum alleged that it was by virtue of the April 26, 2005
Contract to Sell that Sps. Jovellanos were allowed to take possession of the
subject property. However, since the latter failed to pay the stipulated monthly
installments, notwithstanding several written and verbal notices made upon them,
it cancelled the said contract as per the Notice of Delinquency and Cancellation
dated April 10, 2006. When Sps. Jovellanos refused to vacate the subject
property despite repeated demands, Optimum instituted the present action for
unlawful detainer on November 3, 2006, or within one year from the final demand
made on May 25, 2006.
While the RTC upheld the MeTCs ruling in favor of Optimum, the CA, on the
other hand, declared that the MeTC had no jurisdiction over the complaint for
unlawful detainer, reasoning that the case involves a matter which is incapable of
pecuniary estimation i.e., the validity of the cancellation of the Contract to Sell
and the determination of the rights of the parties under the contract and law
and hence, within the jurisdiction of the RTC. The Court disagrees. Metropolitan
Trial Courts are conditionally vested with authority to resolve the question of
ownership raised as an incident in an ejectment case where the determination is
essential to a complete adjudication of the issue of possession.30 Concomitant to
the ejectment courts authority to look into the claim of ownership for purposes of
resolving the issue of possession is its authority to interpret the contract or
agreement upon which the claim is premised. Thus, in the case of Oronce v.
CA,31 wherein the litigants opposing claims for possession was hinged on
whether their written agreement reflected the intention to enter into a sale or
merely an equitable mortgage, the Court affirmed the propriety of the ejectment
courts examination of the terms of the agreement in question by holding that,
"because metropolitan trial courts are authorized to look into the ownership of the
property in controversy in ejectment cases, it behooved MTC Branch 41 to
examine the bases for petitioners claim of ownership that entailed interpretation
of the Deed of Sale with Assumption of Mortgage."32Also, in Union Bank of the
Philippines v. Maunlad Homes, Inc.33 (Union Bank), citing Sps. Refugia v.
CA,34 the Court declared that MeTCs have authority to interpret contracts in
unlawful detainer cases, viz.:35
The authority granted to the MeTC to preliminarily resolve the issue of ownership
to determine the issue of possession ultimately allows it to interpret and enforce
the contract or agreement between the plaintiff and the defendant. To deny the
MeTC jurisdiction over a complaint merely because the issue of possession
requires the interpretation of a contract will effectively rule out unlawful detainer
as a remedy. As stated, in an action for unlawful detainer, the defendants right to
possess the property may be by virtue of a contract, express or implied;

70
corollarily, the termination of the defendants right to possess would be governed
by the terms of the same contract.
Interpretation of the contract between the plaintiff and the defendant is inevitable
because it is the contract that initially granted the defendant the right to possess
the property; it is this same contract that the plaintiff subsequently claims was
violated or extinguished, terminating the defendants right to possess. We ruled in
Sps. Refugia v. CA that where the resolution of the issue of possession hinges
on a determination of the validity and interpretation of the document of title or any
other contract on which the claim of possession is premised, the inferior court
may likewise pass upon these issues.
The MeTCs ruling on the rights of the parties based on its interpretation of their
contract is, of course, not conclusive, but is merely provisional and is binding only
with respect to the issue of possession. (Emphases supplied; citations omitted)
In the case at bar, the unlawful detainer suit filed by Optimum against Sps.
Jovellanos for illegally withholding possession of the subject property is similarly
premised upon the cancellation or termination of the Contract to Sell between
them. Indeed, it was well within the jurisdiction of the MeTC to consider the terms
of the parties agreement in order to ultimately determine the factual bases of
Optimums possessory claims over the subject property. Proceeding accordingly,
the MeTC held that Sps. Jovellanoss non-payment of the installments due had
rendered the Contract to Sell without force and effect, thus depriving the latter of
their right to possess the property subject of said contract.36 The foregoing
disposition aptly squares with existing jurisprudence. As the Court similarly held
in the Union Bank case, the sellers cancellation of the contract to sell necessarily
extinguished the buyers right of possession over the property that was the
subject of the terminated agreement.37
Verily, in a contract to sell, the prospective seller binds himself to sell the property
subject of the agreement exclusively to the prospective buyer upon fulfillment of
the condition agreed upon which is the full payment of the purchase price but
reserving to himself the ownership of the subject property despite delivery thereof
to the prospective buyer.38
The full payment of the purchase price in a contract to sell is a suspensive
condition, the non-fulfillment of which prevents the prospective sellers obligation
to convey title from becoming effective,39 as in this case. Further, it is significant
to note that given that the Contract to Sell in this case is one which has for its
object real property to be sold on an installment basis, the said contract is
especially governed by and thus, must be examined under the provisions of

RA 6552, or the "Realty Installment Buyer Protection Act", which provides for the
rights of the buyer in case of his default in the payment of succeeding
installments. Breaking down the provisions of the law, the Court, in the case of
Rillo v. CA,40 explained the mechanics of cancellation under RA 6552 which are
based mainly on the amount of installments already paid by the buyer under the
subject contract, to wit:41
Given the nature of the contract of the parties, the respondent court correctly
applied Republic Act No. 6552. Known as the Maceda Law, R.A. No. 6552
recognizes in conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents the obligation of
the vendor to convey title from acquiring binding force. It also provides the right
of the buyer on installments in case he defaults in the payment of succeeding
installments, viz.:
(1) Where he has paid at least two years of installments,
(a) To pay, without additional interest, the unpaid installments due within the total
grace period earned by him, which is hereby fixed at the rate of one month grace
period for every one year of installment payments made:
Provided, That this right shall be exercised by the buyer only once in every five
years of the life of the contract and its extensions, if any. (b) If the contract is
cancelled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to fifty per cent of the total payments made
and, after five years of installments, an additional five per cent every year but not
to exceed ninety per cent of the total payments made:
Provided, That the actual cancellation of the contract shall take place after
cancellation or the demand for rescission of the contract by a notarial act and
upon full payment of the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the
computation of the total number of installments made.
(2) Where he has paid less than two years in installments, Sec. 4. x x x the seller
shall give the buyer a grace period of not less than sixty days from the date the
installment became due. If the buyer fails to pay the installments due at the
expiration of the grace period, the seller may cancel the contract after thirty days
from receipt by the buyer of the notice of cancellation or the demand for

71
rescission of the contract by a notarial act. (Emphasis and underscoring
supplied)
Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly
installments as found by the MeTC, the Court examines Optimums compliance
with Section 4 of RA 6552, as above-quoted and highlighted, which is the
provision applicable to buyers who have paid less than two (2) years-worth of
installments. Essentially, the said provision provides for three (3) requisites
before the seller may actually cancel the subject contract: first, the seller shall
give the buyer a 60-day grace period to be reckoned from the date the
installment became due; second, the seller must give the buyer a notice of
cancellation/demand for rescission by notarial act if the buyer fails to pay the
installments due at the expiration of the said grace period; and third, the seller
may actually cancel the contract only after thirty (30) days from the buyers
receipt of the said notice of cancellation/demand for rescission by notarial act. In
the present case, the 60-day grace period automatically operated42 in favor of the
buyers, Sps. Jovellanos, and took effect from the time that the maturity dates of
the installment payments lapsed. With the said grace period having expired
bereft of any installment payment on the part of Sps. Jovellanos,43 Optimum then
issued a notarized Notice of Delinquency and Cancellation of Contract on April
10, 2006. Finally, in proceeding with the actual cancellation of the contract to sell,
Optimum gave Sps. Jovellanos an additional thirty (30) days within which to
settle their arrears and reinstate the contract, or sell or assign their rights to
another.44
It was only after the expiration of the thirty day (30) period did Optimum treat the
contract to sell as effectively cancelled making as it did a final demand upon
Sps. Jovellanos to vacate the subject property only on May 25, 2006. Thus,
based on the foregoing, the Court finds that there was a valid and effective
cancellation of the Contract to Sell in accordance with Section 4 of RA 6552 and
since Sps. Jovellanos had already lost their right to retain possession of the
subject property as a consequence of such cancellation, their refusal to vacate
and turn over possession to Optimum makes out a valid case for unlawful
detainer as properly adjudged by the MeTC.
WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009 and
Resolution dated August 10, 2009 of the Court of Appeals in CA-G.R. SP No.
104487 are SET ASIDE. The Decision dated June 8, 2007 of Metropolitan Trial
Court, Branch 53, Caloocan City in Civil Case No. 06-28830 is hereby
REINSTATED.
SO ORDERED.

SECOND DIVISION
G.R. No. 185798

January 13, 2014

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK

INC., Petitioners,
vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.
DECISION
PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997
Rules .of Civil Procedure assailing the Decision1 of the Court of Appeals in CAG.R. SP No. 100450 which affirmed the Decision of the Office of the President in
O.P. Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central
Park Place Tower while co-petitioner Fil-Estate Network, Inc. is its authorized
marketing agent. Respondent Spouses Conrado and Maria Victoria Ronquillo
purchased from petitioners an 82-square meter condominium unit at Central Park
Place Tower in Mandaluyong City for a pre-selling contract price of FIVE
MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY
(P5,174,000.00). On 29 August 1997, respondents executed and signed a
Reservation Application Agreement wherein they deposited P200,000.00 as
reservation fee. As agreed upon, respondents paid the full downpayment
of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations
until September 1998.
Upon learning that construction works had stopped, respondents likewise
stopped paying their monthly amortization. Claiming to have paid a total
of P2,198,949.96 to petitioners, respondents through two (2) successive letters,
demanded a full refund of their payment with interest. When their demands went
unheeded, respondents were constrained to file a Complaint for Refund and
Damages before the Housing and Land Use Regulatory Board (HLURB).
Respondents prayed for reimbursement/refund of P2,198,949.96 representing

72
the total amortization payments, P200,000.00 as and by way of moral damages,
attorneys fees and other litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default against petitioners
for failing to file their Answer within the reglementary period despite service of
summons.2
Petitioners filed a motion to lift order of default and attached their position paper
attributing the delay in construction to the 1997 Asian financial crisis. Petitioners
denied committing fraud or misrepresentation which could entitle respondents to
an award of moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered
judgment ordering petitioners to jointly and severally pay respondents the
following amount:
a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT
THOUSAND NINE HUNDRED FORTY NINE PESOS & 96/100
(P2,198,949.96) with interest thereon at twelve percent (12%) per
annum to be computed from the time of the complainants demand for
refund on October 08, 1998 until fully paid,
b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral
damages,

Arbiters Decision. The HLURB reiterated that the depreciation of the peso as a
result of the Asian financial crisis is not a fortuitous event which will exempt
petitioners from the performance of their contractual obligation.
Petitioners filed a motion for reconsideration but it was denied5 on 8 May 2006.
Thereafter, petitioners filed a Notice of Appeal with the Office of the President.
On 18 April 2007, petitioners appeal was dismissed6 by the Office of the
President for lack of merit. Petitioners moved for a reconsideration but their
motion was denied7 on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a petition for review
under Rule 43 containing the same arguments they raised before the HLURB
and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE
DECISION OF THE HONORABLE HOUSING AND LAND USE REGULATORY
BOARD AND ORDERING PETITIONERS-APPELLANTS TO REFUND
RESPONDENTS-APPELLEES THE SUM OF P2,198,949.96 WITH 12%
INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING
THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST
PETITIONERS-APPELLANTS.
II.

c) FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees,

d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS (P10,000.00)
payable to this Office fifteen (15) days upon receipt of this decision, for
violation of Section 20 in relation to Section 38 of PD 957.3
The Arbiter considered petitioners failure to develop the condominium project as
a substantial breach of their obligation which entitles respondents to seek for
rescission with payment of damages. The Arbiter also stated that mere economic
hardship is not an excuse for contractual and legal delay.
Petitioners appealed the Arbiters Decision through a petition for review pursuant
to Rule XII of the 1996 Rules of Procedure of HLURB. On 17 February 2005, the
Board of Commissioners of the HLURB denied4 the petition and affirmed the

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE

DECISION OF THE OFFICE BELOW ORDERING PETITIONERS-APPELLANTS
TO PAY RESPONDENTS-APPELLEES THE SUM OF P100,000.00 AS MORAL
DAMAGES AND P50,000.00 AS ATTORNEYS FEES CONSIDERING THE
ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE
DECISION OF THE HOUSING AND LAND USE REGULATORY BOARD
ORDERING PETITIONERS-APPELLANTS TO PAYP10,000.00 AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL
BASIS TO SUPPORT SUCH FINDING.8

73
On 30 July 2008, the Court of Appeals denied the petition for review for lack of
merit. The appellate court echoed the HLURB Arbiters ruling that "a buyer for a
condominium/subdivision unit/lot unit which has not been developed in
accordance with the approved condominium/subdivision plan within the time limit
for complying with said developmental requirement may opt for reimbursement
under Section 20 in relation to Section 23 of Presidential Decree (P.D.) 957 x x
x."9 The appellate court supported the HLURB Arbiters conclusion, which was
affirmed by the HLURB Board of Commission and the Office of the President,
that petitioners failure to develop the condominium project is tantamount to a
substantial breach which warrants a refund of the total amount paid, including
interest. The appellate court pointed out that petitioners failed to prove that the
Asian financial crisis constitutes a fortuitous event which could excuse them from
the performance of their contractual and statutory obligations. The appellate
court also affirmed the award of moral damages in light of petitioners unjustified
refusal to satisfy respondents claim and the legality of the administrative fine, as
provided in Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a Resolution10 dated 11
December 2008 by the Court of Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially the same
grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN
TOTO THE DECISION OF THE OFFICE OF THE PRESIDENT WHICH
SUSTAINED RESCISSION AND REFUND IN FAVOR OF THE RESPONDENTS
DESPITE LACK OF CAUSE OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE
LIABLE UNDER THE PREMISES, THE HONORABLE COURT OF APPEALS
ERRED WHEN IT AFFIRMED THE HUGE AMOUNT OF INTEREST OF
TWELVE PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT
AFFIRMED IN TOTO THE DECISION OF THE OFFICE OF THE PRESIDENT

INCLUDING THE PAYMENT OF P100,000.00 AS MORAL

DAMAGES, P50,000.00 AS ATTORNEYS FEES AND P10,000.00 AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL
BASIS TO SUPPORT SUCH CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because they
allegedly have not committed any act of misrepresentation amounting to bad faith
which could entitle respondents to a refund. Petitioners claim that there was a
mere delay in the completion of the project and that they only resorted to
"suspension and reformatting as a testament to their commitment to their
buyers." Petitioners attribute the delay to the 1997 Asian financial crisis that befell
the real estate industry. Invoking Article 1174 of the New Civil Code, petitioners
maintain that they cannot be held liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account of
suspension of development on a project. They liken their situation to a bank
which this Court, in Overseas Bank v. Court of Appeals,12 adjudged as not liable
to pay interest on deposits during the period that its operations are ordered
suspended by the Monetary Board of the Central Bank.
Lastly, petitioners aver that they should not be ordered to pay moral damages
because they never intended to cause delay, and again blamed the Asian
economic crisis as the direct, proximate and only cause of their failure to
complete the project. Petitioners submit that moral damages should not be
awarded unless so stipulated except under the instances enumerated in Article
2208 of the New Civil Code. Lastly, petitioners refuse to pay the administrative
fine because the delay in the project was caused not by their own deceptive
intent to defraud their buyers, but due to unforeseen circumstances beyond their
control.
Three issues are presented for our resolution: 1) whether or not the Asian
financial crisis constitute a fortuitous event which would justify delay by
petitioners in the performance of their contractual obligation; 2) assuming that
petitioners are liable, whether or not 12% interest was correctly imposed on the
judgment award, and 3) whether the award of moral damages, attorneys fees
and administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all the
legal fora. The rulings were consistent that first, the Asian financial crisis is not a
fortuitous event that would excuse petitioners from performing their contractual
obligation; second, as a result of the breach committed by petitioners,
respondents are entitled to rescind the contract and to be refunded the amount of

74
amortizations paid including interest and damages; and third, petitioners are
likewise obligated to pay attorneys fees and the administrative fine.
This petition did not present any justification for us to deviate from the rulings of
the HLURB, the Office of the President and the Court of Appeals.
Indeed, the non-performance of petitioners obligation entitles respondents to
rescission under Article 1191 of the New Civil Code which states:
Article 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.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule governing the
sale of condominiums, which provides:
Section 23. Non-Forfeiture of Payments.1wphi1 No installment payment made
by a buyer in a subdivision or condominium project for the lot or unit he
contracted to buy shall be forfeited in favor of the owner or developer when the
buyer, after due notice to the owner or developer, desists from further payment
due to the failure of the owner or developer to develop the subdivision or
condominium project according to the approved plans and within the time limit for
complying with the same. Such buyer may, at his option, be reimbursed the total
amount paid including amortization interests but excluding delinquency interests,
with interest thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to rescind the
contract and demand reimbursement for the payments they had made to
petitioners.
Notably, the issues had already been settled by the Court in the case of FilEstate Properties, Inc. v. Spouses Go13 promulgated on 17 August 2007, where
the Court stated that the Asian financial crisis is not an instance of caso fortuito.
Bearing the same factual milieu as the instant case, G.R. No. 165164 involves
the same company, Fil-Estate, albeit about a different condominium property. The
company likewise reneged on its obligation to respondents therein by failing to
develop the condominium project despite substantial payment of the contract
price. Fil-Estate advanced the same argument that the 1997 Asian financial crisis

is a fortuitous event which justifies the delay of the construction project. First off,
the Court classified the issue as a question of fact which may not be raised in a
petition for review considering that there was no variance in the factual findings
of the HLURB, the Office of the President and the Court of Appeals. Second, the
Court cited the previous rulings of Asian Construction and Development
Corporation v. Philippine Commercial International Bank14 and Mondragon
Leisure and Resorts Corporation v. Court of Appeals15 holding that the 1997
Asian financial crisis did not constitute a valid justification to renege on
obligations. The Court expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was
unforeseeable and beyond the control of a business corporation. It is unfortunate
that petitioner apparently met with considerable difficulty e.g. increase cost of
materials and labor, even before the scheduled commencement of its real estate
project as early as 1995. However, a real estate enterprise engaged in the preselling of condominium units is concededly a master in projections on
commodities and currency movements and business risks. The fluctuating
movement of the Philippine peso in the foreign exchange market is an everyday
occurrence, and fluctuations in currency exchange rates happen everyday, thus,
not an instance of caso fortuito.16
The aforementioned decision becomes a precedent to future cases in which the
facts are substantially the same, as in this case. The principle of stare decisis,
which means adherence to judicial precedents, applies.
In said case, the Court ordered the refund of the total amortizations paid by
respondents plus 6% legal interest computed from the date of demand. The
Court also awarded attorneys fees. We follow that ruling in the case before us.
The resulting modification of the award of legal interest is, also, in line with our
recent ruling in Nacar v. Gallery Frames,17 embodying the amendment introduced
by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB Circular No. 799
which pegged the interest rate at 6% regardless of the source of obligation.
We likewise affirm the award of attorneys fees because respondents were forced
to litigate for 14 years and incur expenses to protect their rights and interest by
reason of the unjustified act on the part of petitioners.18 The imposition
of P10,000.00 administrative fine is correct pursuant to Section 38 of Presidential
Decree No. 957 which reads:
Section 38. Administrative Fines. The Authority may prescribe and impose fines
not exceeding ten thousand pesos for violations of the provisions of this Decree

75
or of any rule or regulation thereunder. Fines shall be payable to the Authority
and enforceable through writs of execution in accordance with the provisions of
the Rules of Court.

Angara, Concepcion, Regala & Cruz for private respondent.

Finally, we sustain the award of moral damages. In order that moral damages
may be awarded in breach of contract cases, the defendant must have acted in
bad faith, must be found guilty of gross negligence amounting to bad faith, or
must have acted in wanton disregard of contractual obligations.19 The Arbiter
found petitioners to have acted in bad faith when they breached their contract,
when they failed to address respondents grievances and when they adamantly
refused to refund respondents' payment.

MEDIALDEA, J.:p

In fine, we find no reversible error on the merits in the impugned Court of

Appeals' Decision and Resolution.

The facts of the case as adopted by the respondent appellant court from herein
petitioner's brief before said court are as follows:

WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is

AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the time of respondents'
demand for refund on 8 October 1998.
SO ORDERED.

FIRST DIVISION

G.R. No. 72275 November 13, 1991

PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA,
JR., respondents.
Ocampo, Dizon & Domingo for petitioner.

This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the
Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No.
02753, 1 which modified the decision of the trial court against herein private
respondent Roberto Regala, Jr., one of the defendants in the case for sum of
money filed by Pacific Banking Corporation.

On October 24, 1975, defendant Celia Syjuco Regala

(hereinafter referred to as Celia Regala for brevity), applied for
and obtained from the plaintiff the issuance and use of
Pacificard credit card (Exhs. "A", "A-l",), under the Terms and
Conditions Governing the Issuance and Use of Pacificard (Exh.
"B" and hereinafter referred to as Terms and Conditions), a
copy of which was issued to and received by the said
defendant on the date of the application and expressly agreed
that the use of the Pacificard is governed by said Terms and
Conditions. On the same date, the defendant-appelant Robert
Regala, Jr., spouse of defendant Celia Regala, executed a
"Guarantor's Undertaking" (Exh. "A-1-a") in favor of the
appellee Bank, whereby the latter agreed "jointly and severally
of Celia Aurora Syjuco Regala, to pay the Pacific Banking
Corporation upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred by said Celia
Aurora Syjuco Regala with the use of the Pacificard, or
renewals thereof, issued in her favor by the Pacific Banking
Corporation". It was also agreed that "any changes of or
novation in the terms and conditions in connection with the
issuance or use of the Pacificard, or any extension of time to
pay such obligations, charges or liabilities shall not in any
manner release me/us from responsibility hereunder, it being
understood that I fully agree to such charges, novation or
extension, and that this understanding is a continuing one and
shall subsist and bind me until the liabilities of the said Celia
Syjuco Regala have been fully satisfied or paid.

76
Plaintiff-appellee Pacific Banking Corporation has contracted
with accredited business establishments to honor purchases of
goods and/or services by Pacificard holders and the cost
thereof to be advanced by the plaintiff-appellee for the account
of the defendant cardholder, and the latter undertook to pay
any statements of account rendered by the plaintiff-appellee for
the advances thus made within thirty (30) days from the date of
the statement, provided that any overdue account shall earn
interest at the rate of 14% per annum from date of default.
The defendant Celia Regala, as such Pacificard holder, had
purchased goods and/or services on credit (Exh. "C", "C-l" to
"C-112") under her Pacificard, for which the plaintiff advanced
the cost amounting to P92,803.98 at the time of the filing of the
complaint.
In view of defendant Celia Regala's failure to settle her account
for the purchases made thru the use of the Pacificard, a written
demand (Exh. "D") was sent to the latter and also to the
defendant Roberto Regala, Jr. (Exh. " ") under his "Guarantor's
Undertaking."
A complaint was subsequently filed in Court for defendant's
(sic) repeated failure to settle their obligation. Defendant Celia
Regala was declared in default for her failure to file her answer
within the reglementary period. Defendant-appellant Roberto
Regala, Jr., on the other hand, filed his Answer with
Counterclaim admitting his execution of the "Guarantor's
Understanding", "but with the understanding that his liability
would be limited to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the
presentation of evidence ex-parte as against the defendant
Celia Regala was jointly held with the trial of the case as
against defendant Roberto Regala.
After the presentation of plaintiff's testimonial and documentary
evidence, fire struck the City Hall of Manila, including the court
where the instant case was pending, as well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the records
of the instant case were duly reconstituted. Thereafter, the

case was set for pre-trial conference with respect to the

defendant-appellant Roberto Regala on plaintiff-appellee's
motion, after furnishing the latter a copy of the same. No
opposition thereto having been interposed by defendantappellant, the trial court set the case for pre-trial conference.
Neither did said defendant-appellant nor his counsel appear on
the date scheduled by the trial court for said conference
despite due notice. Consequently, plaintiff-appellee moved that
the defendant-appellant Roberto Regala he declared as in
default and that it be allowed to present its evidence ex-parte,
which motion was granted. On July 21, 1983, plaintiff-appellee
presented its evidence ex-parte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the
dispositive portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff and
against the defendants condemning the latter, jointly and
severally, to pay said plaintiff the amount of P92,803.98, with
interest thereon at 14% per annum, compounded annually,
from the time of demand on November 17, 1978 until said
principal amount is fully paid; plus 15% of the principal
obligation as and for attorney's fees and expense of suit; and
the costs.
The counterclaim of defendant Roberto Regala, Jr. is
dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate
Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment modifying
the decision of the trial court. Private respondent Roberto Regala, Jr. was made
liable only to the extent of the monthly credit limit granted to Celia Regala, i.e., at
P2,000.00 a month and only for the advances made during the one year period
of the card's effectivity counted from October 29, 1975 up to October 29, 1976.
The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated December
5, 1983 is modified only as to appellant Roberto Regala, Jr., so

77
as to make him liable only for the purchases made by
defendant Celia Aurora Syjuco Regala with the use of the
Pacificard from October 29, 1975 up to October 29, 1976 up to
the amount of P2,000.00 per month only, with interest from the
filing of the complaint up to the payment at the rate of 14% per
annum without pronouncement as to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking Corporation which the
respondent appellate court denied for lack of merit on September 19, 1985 (p.
33, Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends that
while the appellate court correctly recognized Celia Regala's obligation to Pacific
Banking Corp. for the purchases of goods and services with the use of a
Pacificard credit card in the total amount of P92,803.98 with 14% interest per
annum, it erred in limiting private respondent Roberto Regala, Jr.'s liability only
for purchases made by Celia Regala with the use of the card from October 29,
1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14%
interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking" which private respondent
Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with
Celia Syjuco Regala to pay the Pacific Banking Corporation
upon demand any and all indebtedness, obligations, charges
or liabilities due and incurred by said Celia Syjuco Regala with
the use of the Pacificard or renewals thereof issued in his favor
by the Pacific Banking Corporation. Any changes of or
Novation in the terms and conditions in connection with the
issuance or use of said Pacificard, or any extension of time to
pay such obligations, charges or liabilities shall not in any
manner release me/us from the responsibility hereunder, it
being understood that the undertaking is a continuing one and
shall subsist and bind me/us until all the liabilities of the said
Celia Syjuco Regala have been fully satisfied or paid. (p.
12,Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated
"Guarantor's Undertaking," was in substance a contract of surety. As

distinguished from a contract of guaranty where the guarantor binds himself to

the creditor to fulfill the obligation of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the surety binds himself solidarily
with the principal debtor (Art. 2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and extent of private
respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself
jointly and severally with the debtor Celia Regala "to pay the Pacific Banking
Corporation upon demand, any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard
or renewals thereof issued in (her) favor by Pacific Banking Corporation." This
undertaking was also provided as a condition in the issuance of the Pacificard to
Celia Regala, thus:
5. A Pacificard is issued to a Pacificard-holder against the joint
and several signature of a third party and as such, the
Pacificard holder and the guarantor assume joint and several
liabilities for any and all amount arising out of the use of the
Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights of the guarantor are
not thereby lost by the guarantor becoming liable solidarily and therefore a
surety." It further ruled that although the surety's liability is like that of a joint and
several debtor, it does not make him the debtor but still the guarantor (or the
surety), relying on the case of Government of the Philippines v. Tizon. G.R. No.
L-22108, August 30, 1967, 20 SCRA 1182. Consequently, Article 2054 of the Civil
Code providing for a limited liability on the part of the guarantor or debtor still
applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind
himself for less, but not for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions. 2 It is likewise not disputed by
the parties that the credit limit granted to Celia Regala was P2,000.00 per month
and that Celia Regala succeeded in using the card beyond the original period of
its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s
liability should be limited to that extent. Private respondent Roberto Regala, Jr.,
as surety of his wife, expressly bound himself up to the extent of the debtor's
(Celia) indebtedness likewise expressly waiving any "discharge in case of any
change or novation of the terms and conditions in connection with the issuance
of the Pacificard credit card." Roberto, in fact, made his commitment as a surety
a continuing one, binding upon himself until all the liabilities of Celia Regala have

78
been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto
signed, thus:
. . . Any changes of or novation in the terms and conditions in
connection with the issuance or use of said Pacificard, or any
extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a
continuing one and shall subsist and bind me/us until all the
liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid. (p. 12, supra; emphasis supplied)

extent of the liabilities of a guarantor or a surety is determined by the clauses in

the contract of suretyship(see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA
24).
ACCORDINGLY, the petition is GRANTED. The questioned decision of
respondent appellate court is SET ASIDE and the decision of the trial court is
REINSTATED.
SO ORDERED.

Private respondent Roberto Regala, Jr. had been made aware by the terms of
the undertaking of future changes in the terms and conditions governing the
issuance of the credit card to his wife and that, notwithstanding, he voluntarily
agreed to be bound as a surety. As in guaranty, a surety may secure additional
and future debts of the principal debtor the amount of which is not yet known
(see Article 2053, supra).

SECOND DIVISION
G.R. No. 101723 May 11, 2000

The application by respondent court of the ruling in Government v. Tizon, supra is

misplaced. It was held in that case that:
. . . although the defendants bound themselves in solidum, the
liability of the Surety under its bond would arise only if its codefendants, the principal obligor, should fail to comply with the
contract. To paraphrase the ruling in the case of Municipality of
Orion vs. Concha, the liability of the Surety is "consequent
upon the liability" of Tizon, or "so dependent on that of the
principal debtor" that the Surety "is considered in law as being
the same party as the debtor in relation to whatever is
adjudged, touching the obligation of the latter"; or the liabilities
of the two defendants herein "are so interwoven and
dependent as to be inseparable." Changing the expression, if
the defendants are held liable, their liability to pay the plaintiff
would be solidary, but the nature of the Surety's undertaking is
such that it does not incur liability unless and until the principal
debtor is held liable.
A guarantor or surety does not incur liability unless the principal debtor is held
liable. It is in this sense that a surety, although solidarily liable with the principal
debtor, is different from the debtor. It does not mean, however, that the surety
cannot be held liable to the same extent as the principal debtor. The nature and

INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP.

(INIMACO), petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, (Fourth Division) Cebu City,
and ENRIQUE SULIT, SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA
BACUSMO, GINO NIERE, VIRGINIA BACUS, ROBERTO NEMENZO, DARIO
GO, and ROBERTO ALEGARBES, respondents.

BUENA, J.:
This is a petition for certiorari assailing the Resolution dated September 4, 1991
issued by the National Labor Relations Commission in RAB-VII-0711-84 on the
alleged ground that it committed a grave abuse of discretion amounting to lack of
jurisdiction in upholding the Alias Writ of Execution issued by the Labor Arbiter
which deviated from the dispositive portion of the Decision dated March 10,
1987, thereby holding that the liability of the six respondents in the case below is
solidary despite the absence of the word "solidary" in the dispositive portion of
the Decision, when their liability should merely be joint.
The factual antecedents are undisputed:

79
In September 1984, private respondent Enrique Sulit, Socorro Mahinay,
Esmeraldo Pegarido, Tita Bacusmo, Gino Niere, Virginia Bacus, Roberto
Nemenzo, Dariogo, and Roberto Alegarbes filed a complaint with the Department
of Labor and Employment, Regional Arbitration Branch No. VII in Cebu City
against Filipinas Carbon Mining Corporation, Gerardo Sicat, Antonio Gonzales,
Chiu Chin Gin, Lo Kuan Chin, and petitioner Industrial Management
Development Corporation (INIMACO), for payment of separation pay and unpaid
wages.
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held
that:
RESPONSIVE, to all the foregoing, judgment is hereby
entered, ordering respondents Filipinas Carbon and Mining
Corp. Gerardo Sicat, Antonio Gonzales/Industrial Management
Development Corp. (INIMACO), Chiu Chin Gin and Lo Kuan
Chin, to pay complainants Enrique Sulit, the total award of
P82,800.00; ESMERALDO PEGARIDO the full award of
P19,565.00; Roberto Nemenzo the total sum of P29,623.60
and DARIO GO the total award of P6,599.71, or the total
aggregate award of ONE HUNDRED THIRTY-EIGHT
THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND
31/100 (P138,588.31) to be deposited with this Commission
within ten (10) days from receipt of this Decision for
appropriate disposition. All other claims are hereby Dismiss
(sic) for lack of merit.
SO ORDERED.
Cebu City, Philippines.
10 March 1987. 1
No appeal was filed within the reglementary period thus, the above Decision
became final and executory. On June 16, 1987, the Labor Arbiter issued a writ of
execution but it was returned unsatisfied. On August 26, 1987, the Labor Arbiter
issued an Alias Writ of Execution which ordered thus:
NOW THEREFORE, by virtue of the powers vested in me by
law, you are hereby commanded to proceed to the premises of
respondents Antonio Gonzales/Industrial Management
Development Corporation (INIMACO) situated at Barangay
Lahug, Cebu City, in front of La Curacha Restaurant,and/or to
Filipinas Carbon and Mining corporation and Gerardo Sicat at
4th Floor Universal RE-Bldg. 106 Paseo de Roxas, Legaspi
Village, Makati Metro Manila and at Philippine National Bank,
Escolta, Manila respectively, and collect the aggregate award

of ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE

HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE
CENTAVOS (P138,588.31) and thereafter turn over said
amount to complainants ENRIQUE SULIT, ESMERALDO
PEGARIDO, ROBERTO NEMENZO AND DARIO GO or to this
Office for appropriate disposition. Should you fail to collect the
said sum in cash, you are hereby authorized to cause the
satisfaction of the same on the movable or immovable
property(s) of respondents not exempt from execution. You are
to return this writ sixty (6) (sic) days from your receipt hereof,
together with your corresponding report.
You may collect your legal expenses from the respondents as
provided for by law.
SO ORDERED. 2
On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of Execution
and Set Aside Decision," 3alleging among others that the alias writ of execution
altered and changed the tenor of the decision by changing the liability of therein
respondents from joint to solidary, by the insertion of the words "AND/OR"
between "Antonio Gonzales/Industrial Management Development Corporation
and Filipinas Carbon and Mining Corporation, et al." However, in an order dated
September 14, 1987, the Labor Arbiter denied the motion.
On October 2, 1987, petitioner appealed 4 the Labor Arbiter's Order dated
September 14, 1987 to the respondent NLRC.
The respondent NLRC dismissed the appeal in a Decision 5 dated August 31,
1988, the pertinent portions of which read:
In matters affecting labor rights and labor justice, we have
always adopted the liberal approach which favors the exercise
of labor rights and which is beneficial to labor as a means to
give full meaning and import to the constitutional mandate to
afford protection to labor. Considering the factual
circumstances in this case, there is no doubt in our mind that
the respondents herein are called upon to pay, jointly and
severally, the claims of the complainants as was the latters'
prayers. Inasmuch as respondents herein never controverted
the claims of the complainants below, there is no reason why
complainants' prayer should not be granted. Further, in line
with the powers granted to the Commission under Article 218
(c) of the Labor code, "to waive any error, defect or irregularity
whether in substance or in form" in a proceeding before Us,
We hold that the Writ of Execution be given due course in all
respects.

80
On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment
Of P23,198.05 Representing One Sixth Pro Rata Share of Respondent INIMACO
As Full and Final Satisfaction of Judgment As to Said Respondent." 6 The private
respondents opposed the motion. In an Order 7 dated August 15, 1989, the Labor
Arbiter denied the motion ruling thus:
WHEREFORE, responsive to the foregoing respondent
INIMACO's Motions are hereby DENIED. The Sheriff of this
Office is order (sic) to accept INIMACO's tender payment (sic)
of the sum of P23,198.05, as partial satisfaction of the
judgment and to proceed with the enforcement of the Alias Writ
of Execution of the levied properties, now issued by this Office,
for the full and final satisfaction of the monetary award granted
in the instant case.
SO ORDERED.
Petitioner appealed the above Order of the Labor Arbiter but this was again
dismissed by the respondent NLRC in its Resolution 8 dated September 4, 1991
which held that:
The arguments of respondent on the finality of the dispositive
portion of the decision in this case is beside the point. What is
important is that the Commission has ruled that the Writ of
Execution issued by the Labor Arbiter in this case is proper. It
is not really correct to say that said Writ of Execution varied the
terms of the judgment. At most, considering the nature of labor
proceedings there was, an ambiguity in said dispositive portion
which was subsequently clarified by the Labor Arbiter and the
Commission in the incidents which were initiated by INIMACO
itself. By sheer technicality and unfounded assertions,
INIMACO would now reopen the issue which was already
resolved against it. It is not in keeping with the established
rules of practice and procedure to allow this attempt of
INIMACO to delay the final disposition of this case.
WHEREFORE, in view of all the foregoing, this appeal is
DISMISSED and the Order appealed from is hereby
AFFIRMED.
With double costs against appellant.
Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the
respondent NLRC committed grave abuse of discretion in affirming the Order of
the Labor Arbiter dated August 15, 1989, which declared the liability of petitioner
to be solidary.

The only issue in this petition is whether petitioner's liability pursuant to the
Decision of the Labor Arbiter dated March 10, 1987, is solidary or not.
Upon careful examination of the pleadings filed by the parties, the Court finds
that petitioner INIMACO's liability is not solidary but merely joint and that the
respondent NLRC acted with grave abuse of discretion in upholding the Labor
Arbiter's Alias Writ of Execution and subsequent Orders to the effect that
petitioner's liability is solidary.
A solidary or joint and several obligation is one in which each debtor is liable for
the entire obligation, and each creditor is entitled to demand the whole
obligation. 9 In a joint obligation each obligor answers only for a part of the whole
liability and to each obligee belongs only a part of the correlative
rights. 10
Well-entrenched is the rule that solidary obligation cannot lightly be
inferred. 11 There is a solidary liability only when the obligation expressly so
states, when the law so provides or when the nature of the obligation so
requires.12
In the dispositive portion of the Labor Arbiter, the word "solidary" does not
appear. The said fallo expressly states the following respondents therein as
liable, namely: Filipinas Carbon and Mining Corporation, Gerardo Sicat, Antonio
Gonzales, Industrial Management Development Corporation (petitioner
INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it be inferred therefrom
that the liability of the six (6) respondents in the case below is solidary, thus their
liability should merely be joint.
Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is not
provided in a judgment that the defendants are liable to pay jointly and severally
a certain sum of money, none of them may be compelled to satisfy in full said
judgment. In Oriental Commercial Co. vs. Abeto and Mabanag 1 this Court held:
It is of no consequence that, under the contract of suretyship
executed by the parties, the obligation contracted by the
sureties was joint and several in character. The final judgment,
which superseded the action for the enforcement of said
contract, declared the obligation to be merely joint, and the
same cannot be executed otherwise. 14
Granting that the Labor Arbiter has committed a mistake in failing to indicate in
the dispositive portion that the liability of respondents therein is solidary, the
correction which is substantial can no longer be allowed in this case
because the judgment has already become final and executory.

81
It is an elementary principle of procedure that the resolution of the court in a
given issue as embodied in the dispositive part of a decision or order is the
controlling factor as to settlement of rights of the parties. 15 Once a decision or
order becomes final and executory, it is removed from the power or jurisdiction of
the court which rendered it to further alter or amend it. 16 It thereby becomes
immutable and unalterable and any amendment or alteration which substantially
affects a final and executory judgment is null and void for lack of jurisdiction,
including the entire proceedings held for that purpose. 17 An order of execution
which varies the tenor of the judgment or exceeds the terms thereof is a
nullity. 18
None of the parties in the case before the Labor Arbiter appealed the Decision
dated March 10, 1987, hence the same became final and executory. It was,
therefore, removed from the jurisdiction of the Labor Arbiter or the NLRC to
further alter or amend it. Thus, the proceedings held for the purpose of amending
or altering the dispositive portion of the said decision are null and void for lack of
jurisdiction. Also, the Alias Writ of Execution is null and void because it varied the
tenor of the judgment in that it sought to enforce the final judgment against
"Antonio Gonzales/Industrial Management Development Corp.
(INIMACO) and/or Filipinas Carbon and Mining Corp. and Gerardo Sicat," which
makes the liability solidary.
WHEREFORE, the petition is hereby GRANTED. The Resolution dated
September 4, 1991 of the respondent National Labor Relations is hereby
declared NULL and VOID. The liability of the respondents in RAB-VII-0711-84
pursuant to the Decision of the Labor Arbiter dated March 10, 1987 should be, as
it is hereby, considered joint and petitioner's payment which has been accepted
considered as full satisfaction of its liability, without prejudice to the enforcement
of the award, against the other five (5) respondents in the said case.

MARIVELES SHIPYARD CORP., Petitioner,

vs.
HON. COURT OF APPEALS, LUIS REGONDOLA, MANUELIT GATALAN,
ORESCA AGAPITO, NOEL ALBADBAD, ROGELIO PINTUAN, DANILO
CRISOSTOMO, ROMULO MACALINAO, NESTOR FERER, RICKY CUESTA,
ROLLY ANDRADA, LARRY ROGOLA, FRANCISCO LENOGON, AUGUSTO
QUINTO, ARFE BERAMO, BONIFACIO TRINIDAD, ALFREDO ASCARRAGA,
ERNESTO MAGNO, HONORARIO HORTECIO, NELBERT PINEDA, GLEN
ESTIPULAR, FRANCISCO COMPUESTO, ISABELITO CORTEZ, MATURAN
ROSAURO, SAMSON CANAS, FEBIEN ISIP, JESUS RIPARIP, ALFREDO
SIENES, ADOLAR ALBERT, HONESTO CABANILLAS, AMPING CASTILLO
and ELWIN REVILLA, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Resolution,1 dated December 29, 1999, of the
Court of Appeals in CA-G.R. SP No. 55416, which dismissed outright the petition
for certiorari of Mariveles Shipyard Corp., due to a defective certificate of nonforum shopping and non-submission of the required documents to accompany
said petition. Mariveles Shipyard Corp., had filed a special civil action for
certiorari with the Court of Appeals to nullify the resolution2 of the National Labor
Relations Commission (NLRC), dated April 22, 1999, in NLRC NCR Case No.
00-09-005440-96-A, which affirmed the Labor Arbiters decision,3 dated May 22,
1998, holding petitioner jointly and severally liable with Longest Force
Investigation and Security Agency, Inc., for the underpayment of wages and
overtime pay due to the private respondents. Likewise challenged in the instant
petition is the resolution4 of the Court of Appeals, dated July 12, 2000, denying
petitioners motion for reconsideration.

SO ORDERED.
The facts, as culled from records, are as follows:
SECOND DIVISION
G.R. No. 144134

November 11, 2003

Sometime on October 1993, petitioner Mariveles Shipyard Corporation engaged

the services of Longest Force Investigation and Security Agency, Inc.
(hereinafter, "Longest Force") to render security services at its premises.
Pursuant to their agreement, Longest Force deployed its security guards, the
private respondents herein, at the petitioners shipyard in Mariveles, Bataan.
According to petitioner, it religiously complied with the terms of the security
contract with Longest Force, promptly paying its bills and the contract rates of the
latter. However, it found the services being rendered by the assigned guards
unsatisfactory and inadequate, causing it to terminate its contract with Longest
Force on April 1995.5Longest Force, in turn, terminated the employment of the
security guards it had deployed at petitioners shipyard.

82
On September 2, 1996, private respondents filed a case for illegal dismissal,
underpayment of wages pursuant to the PNPSOSIA-PADPAO rates, nonpayment of overtime pay, premium pay for holiday and rest day, service incentive
leave pay, 13th month pay and attorneys fees, against both Longest Force and
petitioner, before the Labor Arbiter. Docketed as NLRC NCR Case No. 00-09005440-96-A, the case sought the guards reinstatement with full backwages and
without loss of seniority rights.
For its part, Longest Force filed a cross-claim6 against the petitioner. Longest
Force admitted that it employed private respondents and assigned them as
security guards at the premises of petitioner from October 16, 1993 to April 30,
1995, rendering a 12 hours duty per shift for the said period. It likewise admitted
its liability as to the non-payment of the alleged wage differential in the total
amount of P2,618,025 but passed on the liability to petitioner alleging that the
service fee paid by the latter to it was way below the PNPSOSIA and PADPAO
rate, thus, "contrary to the mandatory and prohibitive laws because the right to
proper compensation and benefits provided under the existing labor laws cannot
be waived nor compromised."
The petitioner denied any liability on account of the alleged illegal dismissal,
stressing that no employer-employee relationship existed between it and the
security guards. It further pointed out that it would be the height of injustice to
make it liable again for monetary claims which it had already paid. Anent the
cross-claim filed by Longest Force against it, petitioner prayed that it be
dismissed for lack of merit. Petitioner averred that Longest Force had benefited
from the contract, it was now estopped from questioning said agreement on the
ground that it had made a bad deal.
On May 22, 1998, the Labor Arbiter decided NLRC NCR Case No. 00-09005440-96-A, to wit:
WHEREFORE, conformably with the foregoing, judgment is hereby rendered
ordering the respondents as follows:
1. DECLARING respondents Longest Force Investigation & Security Agency,
Inc.1wphi1 and Mariveles Shipyard Corporation jointly and severally liable to
pay the money claims of complainants representing underpayment of wages and
overtime pay in the total amount of P2,700,623.40 based on the PADPAO rates
of pay covering the period from October 16, 1993 up to April 29, 1995 broken
down as follows:

(8 hrs.
duty)
Oct. 16Dec.
15/93(2
mos.)

P5,485.00

P5,000

P485.00

P970.00

Dec. 16/93Mar.
31/94 (3.5
mos.)

6,630.00

5,000

1,630.00

5,705.00

Apr. 1-Dec.
31/94 (9
mos.)

7,090.00

5,810

1,280.00

11,520.00

Jan. 1-Apr.
29/95 (3.97
mos.)

7,220.00

5,810

1,410.00

5,597

TOTAL UNDERPAYMENTS - - - - - - - - - - - - - -

P23,792.70

OVERTIME:
Oct. 16-Dec. 15/93
(2 mos.)

P5,485

x2

= P 5,

2
Dec. 16/93-Mar.
31/94 (3.5 mos)

6,630

x 3.5

= 11,

2
Apr. 1-Dec.
31/94 (9 mos.)

7,090

x9

31,

x 3.97

14,

2
Jan. 1-Apr.
29/95 (3.97 mos.)

7,220
2

UNDERPAYMENT OF WAGES:
PERIOD
COVERED

MONTHLY
PADPAO
RATES

ACTUAL
SALARY

UNDERPAYMENT
FOR THE
PERIOD

WAGE
DIRRERENTIALS

TOTAL OVERTIME - - - - - - - - -

P63,

83
Sub-Total of Underpayments and Overtime P87,116.90

27. Alfredo Sienes (the same)

87,

28. Adolar Albert (the same)

87,

29. Cabanillas Honesto (the same)

87,

2. Manolito Catalan (the same)

30. Castillo Amping (the same)

87,

3. Oresca Agapito (the same)

31. Revilla Elwin (the same)

87,

1awp++i1
1. Luis Regondula (the same)

4. Noel Alibadbad (the same)

5. Rogelio Pintuan (the same)

GRAND TOTAL

P 2,700,

6. Danilo Crisostomo (the same)

7. Romulo Macalinao (the same)
8. Nestor Ferrer (the same)

2. DECLARING both respondents liable to pay complainants attorneys

fees equivalent to ten (10%) percent of the total award recovered or the
sum of P270,062.34.

9. Ricky Cuesta (the same)

10. Andrada Ricky (the same)
11. Larry Rogola (the same)
12. Francisco Lenogon (the same)
13. Augosto Quinto (the same)
14. Arfe Beramo (the same)
15. Bonifacio Trinidad (the same)
16. Alfredo Azcarraga (the same)
17. Ernesto Magno (the same)
18. Honario Hortecio (the same)
19. Nelbert Pineda (the same)
20. Glen Estipular (the same)
21. Francisco Compuesto (the same)

3. ORDERING respondent Longest Force Investigation & Security

Agency, Inc. to reinstate all the herein complainants to their former or
equivalent positions without loss of seniority rights and privileges with
full backwages which as computed as of the date of this decision are as
follows:
Backwages:
10/16 12/15/93 = 2 mos.
P 5,485.00 x 2 mos.

= P 10,

12/16/93 3/31/94=3.5 mos.

P 6,630.00 x 3.5 mos.

= 23,

4/1 12/31/94 = 9 mos.

P 7,090.00 x 9 mos.

= 63,

1/1 4/29/95 = 3.97 mos.

P 7,220.00 x 3.97 mos.

= 28,

TOTAL

P 126,6

23. Maturan Rosauro (the same)

1. Luis Regondula (same)

P 126,6

24. Samson Canas (the same)

2. Manolito Catalan (same)

126,

25. Febien Isip (the same)

3. Oresca Agapito (same)

126,

26. Jesus Riparip (the same)

4. Noel Alibadbad (same)

126,

22. Isabelito Cortes (the same)

84
5. Rogelio Pintuan (same)
6. Danilo Crisostomo (same)

8. Nestor Ferrer (same)

4. ORDERING said Longest Force Investigation & Security Agency, Inc.

to pay attorneys fees equivalent to ten (10%) percent of the total award
recovered representing backwages in the amount of P392,721.64.10

9. Ricky Cuesta (same)

5. DISMISSING all other claims for lack of legal basis.

7. Romulo Macalinao (same)

10. Andrada Rolly (same)

11. Larry Rogola (same)
12. Francisco Lenogon (same)
13. Augosto Quinto (same)
14. Arfe Beramo (same)
15. Bonifacio Trinidad (same)
16. Alfredo Azcarraga (same)
17. Ernesto Magno (same)

SO ORDERED.11
Petitioner appealed the foregoing to the NLRC in NLRC NCR Case No. 00-09005440-96-A. The labor tribunal, however, affirmed in toto the decision of the
Labor Arbiter. Petitioner moved for reconsideration, but this was denied by the
NLRC.
The petitioner then filed a special civil action for certiorari assailing the NLRC
judgment for having been rendered with grave abuse of discretion with the Court
of Appeals, docketed as CA-G.R. SP No. 55416. The Court of Appeals, however,
denied due course to the petition and dismissed it outright for the following
reasons:

18. Honario Hortecio (same)

1. The verification and certification on non-forum shopping is signed not
by duly authorized officer of petitioner corporation, but by counsel
(Section 1, Rule 65, 1997 Rules of Civil Procedure).

19. Nelbert Pineda (same)

20. Glen Estipular (same)
21. Francisco Compuesto (same)

2. The petition is unaccompanied by copies of relevant and pertinent

documents, particularly the motion for reconsideration filed before the
NLRC (Section 1, Rule 65, 1997 Rules of Civil Procedure).12

22. Isabelito Cortes (same)

23. Maturan Rosauro (same)
24. Samson Canas (same)
25. Febien Isip (same)
26. Jesus Riparip (same)
27. Alfredo Sienes (same)
28. Adolar Albert (same)
29. Cabanillas Honesto (same)

The petitioner then moved for reconsideration of the order of dismissal. The
appellate court denied the motion, pointing out that under prevailing case law
subsequent compliance with formal requirements for filing a petition as
prescribed by the Rules, does not ipso facto warrant a reconsideration. In any
event, it found no grave abuse of discretion on the part of the NLRC to grant the
writ of certiorari.
Hence, this present petition before us. Petitioner submits that THE COURT OF
APPEALS GRAVELY ERRED:

30. Castillo Amping (same)

1. .IN DISMISSING THE PETITION AND DENYING THE MOTION

FOR RECONSIDERATION DESPITE THE FACT THAT PETITIONER
SUBSTANTIALLY COMPLIED WITH THE REQUIREMENTS OF
SECTION 1, RULE 65, 1997 RULES OF CIVIL PROCEDURE.

31. Revilla Elwin (same)

GRAND TOTAL
P3,927,216.40

85
2. .IN RULING THAT PETITIONER WAS NOT DENIED DUE
PROCESS OF LAW.
3. .IN AFFIRMING THE DECISION OF THE NATIONAL LABOR
RELATIONS COMMISSION THAT "LONGEST FORCE" AND
PETITIONER ARE JOINTLY AND SEVERALLY LIABLE FOR PAYMENT
OF WAGES AND OVERTIME PAY DESPITE THE CLEAR SHOWING
THAT PETITIONER HAVE ALREADY PAID THE SECURITY
SERVICES THAT WAS RENDERED BY PRIVATE RESPONDENTS.
4. WHEN IT FAILED TO RULE THAT ONLY "LONGEST FORCE"
SHOULD BE SOLELY AND ULTIMATELY LIABLE IN THE INSTANT
CASE.13
We find the issues for our resolution to be: (1) Was it error for the Court of
Appeals to sustain its order of dismissal of petitioners special civil action for
certiorari, notwithstanding subsequent compliance with the requirements under
the Rules of Court by the petitioner? (2) Did the appellate court err in not holding
that petitioner was denied due process of law by the NLRC? and (3) Did the
appellate court grievously err in finding petitioner jointly and severally liable with
Longest Force for the payment of wage differentials and overtime pay owing to
the private respondents?
On the first issue, the Court of Appeals in dismissing CA-G.R. SP No. 55416
observed that: (1) the verification and certification of non-forum shopping was not
signed by any duly authorized officer of petitioner but merely by petitioners
counsel; and (2) the petition was not accompanied by a copy of motion for
reconsideration filed before the NLRC, thus violating Section 1,14 Rule 65 of the
Rules of Court. Hence, a dismissal was proper under Section 3,15 Rule 46 of the
Rules.
In assailing the appellate courts ruling, the petitioner appeals to our sense of
compassion and kind consideration. It submits that the certification signed by its
counsel and attached to its petition filed with the Court of Appeals is substantial
compliance with the requirement. Moreover, petitioner calls our attention to the
fact that when it filed its motion for reconsideration before the Court of Appeals, a
joint verification and certification of non-forum shopping duly signed by its
Personnel Manager16 and a copy of the Motion for Reconsideration17 filed before
the NLRC were attached therein. Thus, petitioner prays that we take a liberal
stance to promote the ends of justice.
Petitioners plea for liberality, however, cannot be granted by the Court for
reasons herein elucidated.
It is settled that the requirement in the Rules that the certification of non-forum
shopping should be executed and signed by the plaintiff or the principal means
that counsel cannot sign said certification unless clothed with special authority to

do so.18 The reason for this is that the plaintiff or principal knows better than
anyone else whether a petition has previously been filed involving the same case
or substantially the same issues. Hence, a certification signed by counsel alone
is defective and constitutes a valid cause for dismissal of the petition.19 In the
case of natural persons, the Rule requires the parties themselves to sign the
certificate of non-forum shopping. However, in the case of the corporations, the
physical act of signing may be performed, on behalf of the corporate entity, only
by specifically authorized individuals for the simple reason that corporations, as
artificial persons, cannot personally do the task themselves.20 In this case, not
only was the originally appended certification signed by counsel, but in its motion
for reconsideration, still petitioner utterly failed to show that Ms. Rosanna Ignacio,
its Personnel Manager who signed the verification and certification of non-forum
shopping attached thereto, was duly authorized for this purpose. It cannot be
gainsaid that obedience to the requirements of procedural rule is needed if we
are to expect fair results therefrom. Utter disregard of the rules cannot justly be
rationalized by harking on the policy of liberal construction.21
Thus, on this point, no error could be validly attributed to respondent Court of
Appeals. It did not err in dismissing the petition for non-compliance with the
requirements governing the certification of non-forum shopping.
Anent the second issue, petitioner avers that there was denial of due process of
law when the Labor Arbiter failed to have the case tried on the merits. Petitioner
adds that the Arbiter did not observe the mandatory language of the then Sec.
5(b) Rule V (now Section 11, per amendment in Resolution No. 01-02, Series of
2002) of the NLRC New Rules of Procedure which provided that:
If the Labor Arbiter finds no necessity of further hearing after the parties have
submitted their position papers and supporting documents, he shall issue an
Order to that effect and shall inform the parties, stating the reasons therefor. 22
Petitioners contention, in our view, lacks sufficient basis. Well settled is the rule
that the essence of due process is simply an opportunity to be heard, or, as
applied to administrative proceedings, an opportunity to explain ones side or an
opportunity to seek a reconsideration of the action or ruling complained of.23 Not
all cases require a trial-type hearing. The requirement of due process in labor
cases before a Labor Arbiter is satisfied when the parties are given the
opportunity to submit their position papers to which they are supposed to attach
all the supporting documents or documentary evidence that would prove their
respective claims, in the event the Labor Arbiter determines that no formal
hearing would be conducted or that such hearing was not necessary.24 In any
event, as found by the NLRC, petitioner was given ample opportunity to present
its side in several hearings conducted before the Labor Arbiter and in the position
papers and other supporting documents that it had submitted. We find that such
opportunity more than satisfies the requirement of due process in labor cases.

86
On the third issue, petitioner argues that it should not be held jointly and
severally liable with Longest Force for underpayment of wages and overtime pay
because it had been religiously and promptly paying the bills for the security
services sent by Longest Force and that these are in accordance with the
statutory minimum wage. Also, petitioner contends that it should not be held
liable for overtime pay as private respondents failed to present proof that
overtime work was actually performed. Lastly, petitioner claims that the Court of
Appeals failed to render a decision that finally disposed of the case because it
did not specifically rule on the immediate recourse of private respondents, that is,
the matter of reimbursement between petitioner and Longest Force in
accordance with Eagle Security Agency Inc. v. NLRC,25 and Philippine Fisheries
Development Authority v. NLRC.26
Petitioners liability is joint and several with that of Longest Force, pursuant to
Articles 106, 107 and 109 of the Labor Code which provide as follows:
ART. 106. CONTRACTOR OR SUBCONTRACTOR Whenever an employer
enters into a contract with another person for the performance of the formers
work, the employees of the contractor and of the latters subcontractor, if any,
shall be paid in accordance with the provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his
employees in accordance with this Code, the employer shall be jointly and
severally liable with his contractor or subcontractor to such employees to the
extent of the work performed under the contract, in the same manner and extent
that he is liable to employees directly employed by him.
xxx
ART. 107. INDIRECT EMPLOYER. The provisions of the immediately
preceding Article shall likewise apply to any person, partnership, association or
corporation which, not being an employer, contracts with an independent
contractor for the performance of any work, task, job or project.
ART. 109. SOLIDARY LIABILITY. The provisions of existing laws to the contrary
notwithstanding, every employer or indirect employer shall be held responsible
with his contractor or subcontractor for any violation of any provision of this
Code. For purposes of determining the extent of their civil liability under this
Chapter, they shall be considered as direct employers.
In this case, when petitioner contracted for security services with Longest Force
as the security agency that hired private respondents to work as guards for the
shipyard corporation, petitioner became an indirect employer of private
respondents pursuant to Article 107 abovecited. Following Article 106, when the
agency as contractor failed to pay the guards, the corporation as principal
becomes jointly and severally liable for the guards wages. This is mandated by
the Labor Code to ensure compliance with its provisions, including payment of

statutory minimum wage. The security agency is held liable by virtue of its status
as direct employer, while the corporation is deemed the indirect employer of the
guards for the purpose of paying their wages in the event of failure of the agency
to pay them. This statutory scheme gives the workers the ample protection
consonant with labor and social justice provisions of the 1987 Constitution.27
Petitioner cannot evade its liability by claiming that it had religiously paid the
compensation of guards as stipulated under the contract with the security
agency. Labor standards are enacted by the legislature to alleviate the plight of
workers whose wages barely meet the spiraling costs of their basic needs. Labor
laws are considered written in every contract. Stipulations in violation thereof are
considered null. Similarly, legislated wage increases are deemed amendments to
the contract. Thus, employers cannot hide behind their contracts in order to
evade their (or their contractors or subcontractors) liability for noncompliance
with the statutory minimum wage.28
However, we must emphasize that the solidary liability of petitioner with that of
Longest Force does not preclude the application of the Civil Code provision on
the right of reimbursement from his co-debtor by the one who paid.29As held in
Del Rosario & Sons Logging Enterprises, Inc. v. NLRC,30 the joint and several
liability imposed on petitioner is without prejudice to a claim for reimbursement by
petitioner against the security agency for such amounts as petitioner may have to
pay to complainants, the private respondents herein. The security agency may
not seek exculpation by claiming that the principals payments to it were
inadequate for the guards lawful compensation. As an employer, the security
agency is charged with knowledge of labor laws; and the adequacy of the
compensation that it demands for contractual services is its principal concern and
not any others.31
On the issue of the propriety of the award of overtime pay despite the alleged
lack of proof thereof, suffice it to state that such involves a determination and
evaluation of facts which cannot be done in a petition for review. Well established
is the rule that in an appeal via certiorari, only questions of law may be
reviewed.32
One final point. Upon review of the award of backwages and attorneys fees, we
discovered certain errors that happened in the addition of the amount of
individual backwages that resulted in the erroneous total amount of backwages
and attorneys fees. These errors ought to be properly rectified now. Thus, the
correct sum of individual backwages should be P126,648.40 instead
of P126,684.40, while the correct sum of total backwages awarded and
attorneys fees should be P3,926,100.40 and P392,610.04, instead
of P3,927,216.40 andP392,721.64, respectively.
WHEREFORE, the Resolution of the Court of Appeals in CA-G.R. SP No. 55416
is AFFIRMED with MODIFICATION. Petitioner and Longest Force are held liable
jointly and severally for underpayment of wages and overtime pay of the security

87
guards, without prejudice to petitioners right of reimbursement from Longest
Force Investigation and Security Agency, Inc. The amounts payable to
complaining security guards, herein private respondents, by way of total
backwages and attorneys fees are hereby set at P3,926,100.40
and P392,610.04, respectively. Costs against petitioner.

Fracture, left tibia mid 3rd

Lacerated wound, chin
Contusions with abrasions, left lower leg
Fracture, 6th and 7th ribs, right3
Medical Certificate of Rachel Fletcher

SO ORDERED.
FIRST DIVISION
G.R. No. 147791

September 8, 2006

CONSTRUCTION DEVELOPMENT CORPORATION OF THE

PHILIPPINES, petitioner,
vs.
REBECCA G. ESTRELLA, RACHEL E. FLETCHER, PHILIPPINE PHOENIX
SURETY & INSURANCE INC., BATANGAS LAGUNA TAYABAS BUS CO., and
WILFREDO DATINGUINOO, respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the March 29, 2001 Decision1 of the Court of
Appeals in CA-G.R. CV No. 46896, which affirmed with modification the February
9, 1993 Decision2 of the Regional Trial Court of Manila, Branch 13, in Civil Case
No. R-82-2137, finding Batangas Laguna Tayabas Bus Co. (BLTB) and
Construction Development Corporation of the Philippines (CDCP) liable for
damages.
The antecedent facts are as follows:
On December 29, 1978, respondents Rebecca G. Estrella and her
granddaughter, Rachel E. Fletcher, boarded in San Pablo City, a BLTB bus
bound for Pasay City. However, they never reached their destination because
their bus was rammed from behind by a tractor-truck of CDCP in the South
Expressway. The strong impact pushed forward their seats and pinned their
knees to the seats in front of them. They regained consciousness only when
rescuers created a hole in the bus and extricated their legs from under the seats.
They were brought to the Makati Medical Center where the doctors diagnosed
their injuries to be as follows:
Medical Certificate of Rebecca Estrella

Extensive lacerated wounds, right leg posterior aspect popliteal area

and antero-lateral aspect mid lower leg with severance of muscles.
Partial amputation BK left leg with severance of gastro-soleus and
antero-lateral compartment of lower leg.
Fracture, open comminuted, both tibial4
Thereafter, respondents filed a Complaint5 for damages against CDCP, BLTB,
Espiridion Payunan, Jr. and Wilfredo Datinguinoo before the Regional Trial Court
of Manila, Branch 13. They alleged (1) that Payunan, Jr. and Datinguinoo, who
were the drivers of CDCP and BLTB buses, respectively, were negligent and did
not obey traffic laws; (2) that BLTB and CDCP did not exercise the diligence of a
good father of a family in the selection and supervision of their employees; (3)
that BLTB allowed its bus to operate knowing that it lacked proper maintenance
thus exposing its passengers to grave danger; (4) that they suffered actual
damages amounting to P250,000.00 for Estrella and P300,000.00 for Fletcher;
(5) that they suffered physical discomfort, serious anxiety, fright and mental
anguish, besmirched reputation and wounded feelings, moral shock, and lifelong
social humiliation; (6) that defendants failed to act with justice, give respondents
their due, observe honesty and good faith which entitles them to claim for
exemplary damage; and (7) that they are entitled to a reasonable amount of
attorney's fees and litigation expenses.
CDCP filed its Answer6 which was later amended to include a third-party
complaint against Philippine Phoenix Surety and Insurance, Inc. (Phoenix).7
On February 9, 1993, the trial court rendered a decision finding CDCP and BLTB
and their employees liable for damages, the dispositive portion of which, states:
WHEREFORE, judgment is rendered:
In the Complaint
1. In favor of the plaintiffs and against the defendants BLTB, Wilfredo
Datinguinoo, Construction and Development Corporation of the
Philippines (now PNCC) and Espiridion Payunan, Jr., ordering said
defendants, jointly and severally to pay the plaintiffs the sum of
P79,254.43 as actual damages and to pay the sum of P10,000.00 as
attorney's fees or a total of P89,254.43;

88
2. In addition, defendant Construction and Development Corporation of
the Philippines and defendant Espiridion Payunan, Jr., shall pay the
plaintiffs the amount of Fifty Thousand (P50,000.00) Pesos to plaintiff
Rachel Fletcher and Twenty Five Thousand (P25,000.00) Pesos to
plaintiff Rebecca Estrella;
3. On the counterclaim of BLTB Co. and Wilfredo Datinguinoo
Dismissing the counterclaim;
4. On the crossclaim against Construction and Development
Corporation of the Philippines (now PNCC) and Espiridion Payunan, Jr.

Dismissing the crossclaim;

5. On the counterclaim of Construction and Development Corporation of
the Philippines (now PNCC)
Dismissing the counterclaim;
6. On the crossclaim against BLTB
Dismissing the crossclaim;
7. On the Third Party Complaint by Construction and Development
Corporation of the Philippines against Philippine Phoenix Surety and
Insurance, Incorporated
Dismissing the Third Party Complaint.
SO ORDERED.8
The trial court held that BLTB, as a common carrier, was bound to observe
extraordinary diligence in the vigilance over the safety of its passengers. It must
carry the passengers safely as far as human care and foresight provide, using
the utmost diligence of very cautious persons, with a due regard for all the
circumstances. Thus, where a passenger dies or is injured, the carrier is
presumed to have been at fault or has acted negligently. BLTB's inability to carry
respondents to their destination gave rise to an action for breach of contract of
carriage while its failure to rebut the presumption of negligence made it liable to
respondents for the breach.9
Regarding CDCP, the trial court found that the tractor-truck it owned bumped the
BLTB bus from behind. Evidence showed that CDCP's driver was reckless and

driving very fast at the time of the incident. The gross negligence of its driver
raised the presumption that CDCP was negligent either in the selection or in the
supervision of its employees which it failed to rebut thus making it and its driver
liable to respondents.10
Unsatisfied with the award of damages and attorney's fees by the trial court,
respondents moved that the decision be reconsidered but was denied.
Respondents elevated the case11 to the Court of Appeals which affirmed the
decision of the trial court but modified the amount of damages, the dispositive
portion of which provides:
WHEREFORE, the assailed decision dated October 7, 1993 of the
Regional Trial Court, Branch 13, Manila is hereby AFFIRMED with the
following MODIFICATION:
1. The interest of six (6) percent per annum on the actual damages of
P79,354.43 should commence to run from the time the judicial demand
was made or from the filing of the complaint on February 4, 1980;
2. Thirty (30) percent of the total amount recovered is hereby awarded
as attorney's fees;
3. Defendants-appellants Construction and Development Corporation of
the Philippines (now PNCC) and Espiridion Payunan, Jr. are ordered to
pay plaintiff-appellants Rebecca Estrella and Rachel Fletcher the
amount of Twenty Thousand (P20,000.00) each as exemplary damages
and P80,000.00 by way of moral damages to Rachel Fletcher.
SO ORDERED.12
The Court of Appeals held that the actual or compensatory damage sought by
respondents for the injuries they sustained in the form of hospital bills were
already liquidated and were ascertained. Accordingly, the 6% interest per annum
should commence to run from the time the judicial demand was made or from the
filing of the complaint and not from the date of judgment. The Court of Appeals
also awarded attorney's fees equivalent to 30% of the total amount recovered
based on the retainer agreement of the parties. The appellate court also held that
respondents are entitled to exemplary and moral damages. Finally, it affirmed the
ruling of the trial court that the claim of CDCP against Phoenix had already
prescribed.
Hence, this petition raising the following issues:
I

89
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN
NOT HOLDING RESPONDENTS BLTB AND/OR ITS DRIVER
WILFREDO DATINGUINOO SOLELY LIABLE FOR THE DAMAGES
SUSTAINED BY HEREIN RESPONDENTS FLETCHER AND
ESTRELLA.

employer for an employee's act or omission. The liability for the negligent
conduct of the subordinate is direct and primary, but is subject to the defense of
due diligence in the selection and supervision of the employee.14 In the instant
case, the trial court found that petitioner failed to prove that it exercised the
diligence of a good father of a family in the selection and supervision of Payunan,
Jr.

II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN
AWARDING EXCESSIVE OR UNFOUNDED DAMAGES, ATTORNEY'S
FEES AND LEGAL INTEREST TO RESPONDENTS FLETCHER AND
ESTRELLA.
III
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN
NOT HOLDING RESPONDENT PHOENIX LIABLE UNDER ITS
INSURANCE POLICY ON THE GROUND OF PRESCRIPTION.
The issues for resolution are as follows: (1) whether BLTB and its driver Wilfredo
Datinguinoo are solely liable for the damages sustained by respondents; (2)
whether the damages, attorney's fees and legal interest awarded by the CA are
excessive and unfounded; (3) whether CDCP can recover under its insurance
policy from Phoenix.
Petitioner contends that since it was made solidarily liable with BLTB for actual
damages and attorney's fees in paragraph 1 of the trial court's decision, then it
should no longer be held liable to pay the amounts stated in paragraph 2 of the
same decision. Petitioner claims that the liability for actual damages and
attorney's fees is based on culpa contractual, thus, only BLTB should be held
liable. As regards paragraph 2 of the trial court's decision, petitioner claims that it
is ambiguous and arbitrary because the dispositive portion did not state the basis
and nature of such award.
Respondents, on the other hand, argue that petitioner is also at fault, hence, it
was properly joined as a party. There may be an action arising out of one incident
where questions of fact are common to all. Thus, the cause of action based
on culpa aquiliana in the civil suit they filed against it was valid.
The petition lacks merit.
The case filed by respondents against petitioner is an action for culpa
aquiliana or quasi-delict under Article 2176 of the Civil Code.13 In this regard,
Article 2180 provides that the obligation imposed by Article 2176 is demandable
for the acts or omissions of those persons for whom one is responsible.
Consequently, an action based on quasi-delict may be instituted against the

The trial court and the Court of Appeals found petitioner solidarily liable with
BLTB for the actual damages suffered by respondents because of the injuries
they sustained. It was established that Payunan, Jr. was driving recklessly
because of the skid marks as shown in the sketch of the police investigator.
It is well-settled in Fabre, Jr. v. Court of Appeals,15 that the owner of the other
vehicle which collided with a common carrier is solidarily liable to the injured
passenger of the same. We held, thus:
The same rule of liability was applied in situations where the negligence
of the driver of the bus on which plaintiff was riding concurred with the
negligence of a third party who was the driver of another vehicle, thus
causing an accident. In Anuran v. Buo, Batangas Laguna Tayabas Bus
Co. v. Intermediate Appellate Court, and Metro Manila Transit
Corporation v. Court of Appeals, the bus company, its driver, the
operator of the other vehicle and the driver of the vehicle were
jointly and severally held liable to the injured passenger or the
latter's heirs. The basis of this allocation of liability was explained
inViluan v. Court of Appeals, thus:
Nor should it make any difference that the liability of petitioner
[bus owner] springs from contract while that of respondents
[owner and driver of other vehicle] arises from quasi-delict.As early
as 1913, we already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in
case of injury to a passenger due to the negligence of the driver of the
bus on which he was riding and of the driver of another vehicle, the
drivers as well as the owners of the two vehicles are jointly and
severally liable for damages. x x x
xxxx
As in the case of BLTB, private respondents in this case and her coplaintiffs did not stake out their claim against the carrier and the driver
exclusively on one theory, much less on that of breach of contract
alone.After all, it was permitted for them to allege alternative
causes of action and join as many parties as may be liable on such
causes of action so long as private respondent and her coplaintiffs do not recover twice for the same injury. What is clear from
the cases is the intent of the plaintiff there to recover from both the
carrier and the driver, thus justifying the holding that the carrier and the

90
driver were jointly and severally liable because their separate and
distinct acts concurred to produce the same injury.16(Emphasis supplied)
In a "joint" obligation, each obligor answers only for a part of the whole liability; in
a "solidary" or "joint and several" obligation, the relationship between the active
and the passive subjects is so close that each of them must comply with or
demand the fulfillment of the whole obligation. In Lafarge Cement v. Continental
Cement Corporation,17 we reiterated that joint tort feasors are jointly and
severally liable for the tort which they commit. Citing Worcester v. Ocampo,18 we
held that:
x x x The difficulty in the contention of the appellants is that they fail to
recognize that the basis of the present action is tort. They fail to
recognize the universal doctrine that each joint tort feasor is not only
individually liable for the tort in which he participates, but is also jointly
liable with his tort feasors. x x x
It may be stated as a general rule that joint tort feasors are all the
persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or who
approve of it after it is done, if done for their benefit. They are each
liable as principals, to the same extent and in the same manner as if
they had performed the wrongful act themselves. x x x
Joint tort feasors are jointly and severally liable for the tort which they
commit. The persons injured may sue all of them or any number less
than all. Each is liable for the whole damages caused by all, and all
together are jointly liable for the whole damage. It is no defense for one
sued alone, that the others who participated in the wrongful act are not
joined with him as defendants; nor is it any excuse for him that his
participation in the tort was insignificant as compared to that of the
others. x x x
Joint tort feasors are not liable pro rata. The damages can not be
apportioned among them, except among themselves. They cannot insist
upon an apportionment, for the purpose of each paying an aliquot part.
They are jointly and severally liable for the whole amount. x x x
A payment in full for the damage done, by one of the joint tort feasors, of
course satisfies any claim which might exist against the others. There
can be but satisfaction. The release of one of the joint tort feasors by
agreement generally operates to discharge all. x x x

Of course the court during trial may find that some of the alleged tort
feasors are liable and that others are not liable. The courts may release
some for lack of evidence while condemning others of the alleged tort
feasors. And this is true even though they are charged jointly and
severally.19
Petitioner's claim that paragraph 2 of the dispositive portion of the trial court's
decision is ambiguous and arbitrary and also entitles respondents to recover
twice is without basis. In the body of the trial court's decision, it was clearly stated
that petitioner and its driver Payunan, Jr., are jointly and solidarily liable for moral
damages in the amount of P50,000.00 to respondent Fletcher and P25,000.00 to
respondent Estrella.20 Moreover, there could be no double recovery because the
award in paragraph 2 is for moral damages while the award in paragraph 1 is for
actual damages and attorney's fees.
Petitioner next claims that the damages, attorney's fees, and legal interest
awarded by the Court of Appeals are excessive.
Moral damages may be recovered in quasi-delicts causing physical
injuries.21 The award of moral damages in favor of Fletcher and Estrella in the
amount of P80,000.00 must be reduced since prevailing jurisprudence fixed the
same at P50,000.00.22 While moral damages are not intended to enrich the
plaintiff at the expense of the defendant, the award should nonetheless be
commensurate to the suffering inflicted.23
The Court of Appeals correctly awarded respondents exemplary damages in the
amount of P20,000.00 each. Exemplary damages may be awarded in addition to
moral and compensatory damages.24 Article 2231 of the Civil Code also states
that in quasi-delicts, exemplary damages may be granted if the defendant acted
with gross negligence.25 In this case, petitioner's driver was driving recklessly at
the time its truck rammed the BLTB bus. Petitioner, who has direct and primary
liability for the negligent conduct of its subordinates, was also found negligent in
the selection and supervision of its employees. In Del Rosario v. Court of
Appeals,26 we held, thus:
ART. 2229 of the Civil Code also provides that such damages may be
imposed, by way of example or correction for the public good. While
exemplary damages cannot be recovered as a matter of right, they need
not be proved, although plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider the
question of whether or not exemplary damages should be awarded.
Exemplary Damages are imposed not to enrich one party or impoverish
another but to serve as a deterrent against or as a negative incentive to
curb socially deleterious actions.
Regarding attorney's fees, we held in Traders Royal Bank Employees UnionIndependent v. National Labor Relations Commission,27 that:

91
There are two commonly accepted concepts of attorney's fees, the socalled ordinary and extraordinary. In its ordinary concept, an attorney's
fee is the reasonable compensation paid to a lawyer by his client for the
legal services he has rendered to the latter. The basis of this
compensation is the fact of his employment by and his agreement with
the client.
In its extraordinary concept, an attorney's fee is an indemnity for
damages ordered by the court to be paid by the losing party in a
litigation. The basis of this is any of the cases provided by law where
such award can be made, such as those authorized in Article 2208, Civil
Code, and is payable not to the lawyer but to the client, unless they
have agreed that the award shall pertain to the lawyer as additional
compensation or as part thereof.28 (Emphasis supplied)
In the instant case, the Court of Appeals correctly awarded attorney's fees and
other expenses of litigation as they may be recovered as actual or compensatory
damages when exemplary damages are awarded; when the defendant acted in
gross and evident bad faith in refusing to satisfy the plaintiff's valid, just and
demandable claim; and in any other case where the court deems it just and
equitable that attorney's fees and expenses of litigation should be recovered.29
Regarding the imposition of legal interest at the rate of 6% from the time of the
filing of the complaint, we held inEastern Shipping Lines, Inc. v. Court of
Appeals,30 that when an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for payment of interest in the concept of actual and compensatory
damages,31 subject to the following rules, to wit
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is

made,the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit.32 (Emphasis supplied)
Accordingly, the legal interest of 6% shall begin to run on February 9, 1993 when
the trial court rendered judgment and not on February 4, 1980 when the
complaint was filed. This is because at the time of the filing of the complaint, the
amount of the damages to which plaintiffs may be entitled remains unliquidated
and unknown, until it is definitely ascertained, assessed and determined by the
court and only upon presentation of proof thereon.33From the time the judgment
becomes final and executory, the interest rate shall be 12% until its satisfaction.
Anent the last issue of whether petitioner can recover under its insurance policy
from Phoenix, we affirm the findings of both the trial court and the Court of
Appeals, thus:
As regards the liability of Phoenix, the court a quo correctly ruled that
defendant-appellant CDCP's claim against Phoenix already prescribed
pursuant to Section 384 of P.D. 612, as amended, which provides:
Any person having any claim upon the policy issued pursuant
to this chapter shall, without any unnecessary delay, present to
the insurance company concerned a written notice of
claim setting forth the nature, extent and duration of the injuries
sustained as certified by a duly licensed physician. Notice of
claim must be filed within six months from date of the accident,
otherwise, the claim shall be deemed waived. Action or suit for
recovery of damage due to loss or injury must be brought in
proper cases, with the Commissioner or Courts within one year
from denial of the claim, otherwise, the claimant's right of
action shall prescribe. (As amended by PD 1814, BP 874.)34
The law is clear and leaves no room for interpretation. A written notice of claim
must be filed within six months from the date of the accident. Since petitioner
never made any claim within six months from the date of the accident, its claim
has already prescribed.

92
WHEREFORE, the instant petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 46896 dated March 29, 2001, which modified the
Decision of the Regional Trial Court of Manila, Branch 13, in Civil Case No. R-822137, is AFFIRMED with the MODIFICATIONS that petitioner is held jointly and
severally liable to pay (1) actual damages in the amount of P79,354.43; (2) moral
damages in the amount of P50,000.00 each for Rachel Fletcher and Rebecca
Estrella; (3) exemplary damages in the amount of P20,000.00 each for Rebecca
Estrella and Rachel Fletcher; and (4) thirty percent (30%) of the total amount
recovered as attorney's fees. The total amount adjudged shall earn interest at the
rate of 6% per annum from the date of judgment of the trial court until finality of
this judgment. From the time this Decision becomes final and executory and the
judgment amount remains unsatisfied, the same shall earn interest at the rate of
12% per annum until its satisfaction.
SO ORDERED.
FIRST DIVISION
G.R. No. 157917

August 29, 2012

SPOUSES TEODORO1 and NANETTE PERENA, Petitioners,

vs.
SPOUSES TERESITA PHILIPPINE NICOLAS and L. ZARATE, NATIONAL
RAILWAYS, and the COURT OF APPEALS Respondents.
DECISION
BERSAMIN, J.:
The operator of a. school bus service is a common carrier in the eyes of the law.
He is bound to observe extraordinary diligence in the conduct of his business. He
is presumed to be negligent when death occurs to a passenger. His liability may
include indemnity for loss of earning capacity even if the deceased passenger
may only be an unemployed high school student at the time of the accident.
The Case
By petition for review on certiorari, Spouses Teodoro and Nanette Perefia
(Perefias) appeal the adverse decision promulgated on November 13, 2002, by
which the Court of Appeals (CA) affirmed with modification the decision rendered
on December 3, 1999 by the Regional Trial Court (RTC), Branch 260, in
Paraaque City that had decreed them jointly and severally liable with Philippine
National Railways (PNR), their co-defendant, to Spouses Nicolas and Teresita

Zarate (Zarates) for the death of their 15-year old son, Aaron John L. Zarate
(Aaron), then a high school student of Don Bosco Technical Institute (Don
Bosco).
Antecedents
The Pereas were engaged in the business of transporting students from their
respective residences in Paraaque City to Don Bosco in Pasong Tamo, Makati
City, and back. In their business, the Pereas used a KIA Ceres Van (van) with
Plate No. PYA 896, which had the capacity to transport 14 students at a time, two
of whom would be seated in the front beside the driver, and the others in the rear,
with six students on either side. They employed Clemente Alfaro (Alfaro) as
driver of the van.
In June 1996, the Zarates contracted the Pereas to transport Aaron to and from
Don Bosco. On August 22, 1996, as on previous school days, the van picked
Aaron up around 6:00 a.m. from the Zarates residence. Aaron took his place on
the left side of the van near the rear door. The van, with its air-conditioning unit
turned on and the stereo playing loudly, ultimately carried all the 14 student riders
on their way to Don Bosco. Considering that the students were due at Don Bosco
by 7:15 a.m., and that they were already running late because of the heavy
vehicular traffic on the South Superhighway, Alfaro took the van to an alternate
route at about 6:45 a.m. by traversing the narrow path underneath the
Magallanes Interchange that was then commonly used by Makati-bound vehicles
as a short cut into Makati. At the time, the narrow path was marked by piles of
construction materials and parked passenger jeepneys, and the railroad crossing
in the narrow path had no railroad warning signs, or watchmen, or other
responsible persons manning the crossing. In fact, the bamboo barandilla was
up, leaving the railroad crossing open to traversing motorists.
At about the time the van was to traverse the railroad crossing, PNR Commuter
No. 302 (train), operated by Jhonny Alano (Alano), was in the vicinity of the
Magallanes Interchange travelling northbound. As the train neared the railroad
crossing, Alfaro drove the van eastward across the railroad tracks, closely tailing
a large passenger bus. His view of the oncoming train was blocked because he
overtook the passenger bus on its left side. The train blew its horn to warn
motorists of its approach. When the train was about 50 meters away from the
passenger bus and the van, Alano applied the ordinary brakes of the train. He
applied the emergency brakes only when he saw that a collision was imminent.
The passenger bus successfully crossed the railroad tracks, but the van driven
by Alfaro did not. The train hit the rear end of the van, and the impact threw nine
of the 12 students in the rear, including Aaron, out of the van. Aaron landed in the

93
path of the train, which dragged his body and severed his head, instantaneously
killing him. Alano fled the scene on board the train, and did not wait for the police
investigator to arrive.

At the material time, countless number of Makati bound public utility

and private vehicles used on a daily basis the site of the collision as an
alternative route and short-cut to Makati;(6)

Devastated by the early and unexpected death of Aaron, the Zarates

commenced this action for damages against Alfaro, the Pereas, PNR and
Alano. The Pereas and PNR filed their respective answers, with cross-claims
against each other, but Alfaro could not be served with summons.

The train driver or operator left the scene of the incident on board the
commuter train involved without waiting for the police investigator;(7)

At the pre-trial, the parties stipulated on the facts and issues, viz:
A. FACTS:
That spouses Zarate were the legitimate parents of Aaron John L.
Zarate;(1)
Spouses Zarate engaged the services of spouses Perea for the
adequate and safe transportation carriage of the former spouses' son
from their residence in Paraaque to his school at the Don Bosco
Technical Institute in Makati City;(2)
During the effectivity of the contract of carriage and in the
implementation thereof, Aaron, the minor son of spouses Zarate died in
connection with a vehicular/train collision which occurred while Aaron
was riding the contracted carrier Kia Ceres van of spouses Perea, then
driven and operated by the latter's employee/authorized driver
Clemente Alfaro, which van collided with the train of PNR, at around
6:45 A.M. of August 22, 1996, within the vicinity of the Magallanes
Interchange in Makati City, Metro Manila, Philippines;(3)
At the time of the vehicular/train collision, the subject site of the
vehicular/train collision was a railroad crossing used by motorists for
crossing the railroad tracks;(4)
During the said time of the vehicular/train collision, there were no
appropriate and safety warning signs and railings at the site commonly
used for railroad crossing;(5)

The site commonly used for railroad crossing by motorists was not in
fact intended by the railroad operator for railroad crossing at the time of
the vehicular collision;(8)
PNR received the demand letter of the spouses Zarate;(9)
PNR refused to acknowledge any liability for the vehicular/train
collision;(10)
The eventual closure of the railroad crossing alleged by PNR was an
internal arrangement between the former and its project contractor;
and(11)
The site of the vehicular/train collision was within the vicinity or less
than 100 meters from the Magallanes station of PNR.(12)
B. ISSUES
(1) Whether or not defendant-driver of the van is, in the performance of
his functions, liable for negligence constituting the proximate cause of
the vehicular collision, which resulted in the death of plaintiff spouses'
son;
(2) Whether or not the defendant spouses Perea being the employer of
defendant Alfaro are liable for any negligence which may be attributed
to defendant Alfaro;
(3) Whether or not defendant Philippine National Railways being the
operator of the railroad system is liable for negligence in failing to
provide adequate safety warning signs and railings in the area
commonly used by motorists for railroad crossings, constituting the
proximate cause of the vehicular collision which resulted in the death of
the plaintiff spouses' son;

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(4) Whether or not defendant spouses Perea are liable for breach of
the contract of carriage with plaintiff-spouses in failing to provide
adequate and safe transportation for the latter's son;

For its part, PNR tended to show that the proximate cause of the collision had
been the reckless crossing of the van whose driver had not first stopped, looked
and listened; and that the narrow path traversed by the van had not been
intended to be a railroad crossing for motorists.

(5) Whether or not defendants spouses are liable for actual, moral
damages, exemplary damages, and attorney's fees;
(6) Whether or not defendants spouses Teodorico and Nanette Perea
observed the diligence of employers and school bus operators;
(7) Whether or not defendant-spouses are civilly liable for the accidental
death of Aaron John Zarate;
(8) Whether or not defendant PNR was grossly negligent in operating
the commuter train involved in the accident, in allowing or tolerating the
motoring public to cross, and its failure to install safety devices or
equipment at the site of the accident for the protection of the public;
(9) Whether or not defendant PNR should be made to reimburse
defendant spouses for any and whatever amount the latter may be held
answerable or which they may be ordered to pay in favor of plaintiffs by
reason of the action;
(10) Whether or not defendant PNR should pay plaintiffs directly and
fully on the amounts claimed by the latter in their Complaint by reason
of its gross negligence;
(11) Whether or not defendant PNR is liable to defendants spouses for
actual, moral and exemplary damages and attorney's fees.2
The Zarates claim against the Pereas was upon breach of the contract of
carriage for the safe transport of Aaron; but that against PNR was based on
quasi-delict under Article 2176, Civil Code.
In their defense, the Pereas adduced evidence to show that they had exercised
the diligence of a good father of the family in the selection and supervision of
Alfaro, by making sure that Alfaro had been issued a drivers license and had not
been involved in any vehicular accident prior to the collision; that their own son
had taken the van daily; and that Teodoro Perea had sometimes accompanied
Alfaro in the vans trips transporting the students to school.

Ruling of the RTC

On December 3, 1999, the RTC rendered its decision,3 disposing:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendants ordering them to jointly and severally pay the
plaintiffs as follows:
(1) (for) the death of Aaron- Php50,000.00;
(2) Actual damages in the amount of Php100,000.00;
(3) For the loss of earning capacity- Php2,109,071.00;
(4) Moral damages in the amount of Php4,000,000.00;
(5) Exemplary damages in the amount of Php1,000,000.00;
(6) Attorneys fees in the amount of Php200,000.00; and
(7) Cost of suit.
SO ORDERED.
On June 29, 2000, the RTC denied the Pereas motion for
reconsideration,4 reiterating that the cooperative gross negligence of the Pereas
and PNR had caused the collision that led to the death of Aaron; and that the
damages awarded to the Zarates were not excessive, but based on the
established circumstances.
The CAs Ruling
Both the Pereas and PNR appealed (C.A.-G.R. CV No. 68916).
PNR assigned the following errors, to wit:5

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The Court a quo erred in:
1. In finding the defendant-appellant Philippine National Railways jointly
and severally liable together with defendant-appellants spouses
Teodorico and Nanette Perea and defendant-appellant Clemente
Alfaro to pay plaintiffs-appellees for the death of Aaron Zarate and
damages.
2. In giving full faith and merit to the oral testimonies of plaintiffsappellees witnesses despite overwhelming documentary evidence on
record, supporting the case of defendants-appellants Philippine National
Railways.
The Pereas ascribed the following errors to the RTC, namely:
The trial court erred in finding defendants-appellants jointly and severally liable
for actual, moral and exemplary damages and attorneys fees with the other
defendants.
The trial court erred in dismissing the cross-claim of the appellants Pereas
against the Philippine National Railways and in not holding the latter and its train
driver primarily responsible for the incident.
The trial court erred in awarding excessive damages and attorneys fees.
The trial court erred in awarding damages in the form of deceaseds loss of
earning capacity in the absence of sufficient basis for such an award.
On November 13, 2002, the CA promulgated its decision, affirming the findings of
the RTC, but limited the moral damages to P 2,500,000.00; and deleted the
attorneys fees because the RTC did not state the factual and legal bases, to wit:6
WHEREFORE, premises considered, the assailed Decision of the Regional Trial
Court, Branch 260 of Paraaque City is AFFIRMED with the modification that the
award of Actual Damages is reduced to P59,502.76; Moral Damages is reduced
to P 2,500,000.00; and the award for Attorneys Fees is Deleted.

Railroad Company,7 wherein the Court gave the heirs of Cariaga a sum
representing the loss of the deceaseds earning capacity despite Cariaga being
only a medical student at the time of the fatal incident. Applying the formula
adopted in the American Expectancy Table of Mortality:
2/3 x (80 - age at the time of death) = life expectancy
the CA determined the life expectancy of Aaron to be 39.3 years upon reckoning
his life expectancy from age of 21 (the age when he would have graduated from
college and started working for his own livelihood) instead of 15 years (his age
when he died). Considering that the nature of his work and his salary at the time
of Aarons death were unknown, it used the prevailing minimum wage
of P 280.00/day to compute Aarons gross annual salary to beP 110,716.65,
inclusive of the thirteenth month pay. Multiplying this annual salary by Aarons life
expectancy of 39.3 years, his gross income would aggregate to P 4,351,164.30,
from which his estimated expenses in the sum ofP 2,189,664.30 was deducted to
finally arrive at P 2,161,500.00 as net income. Due to Aarons computed net
income turning out to be higher than the amount claimed by the Zarates,
only P 2,109,071.00, the amount expressly prayed for by them, was granted.
On April 4, 2003, the CA denied the Pereas motion for reconsideration.8
Issues
In this appeal, the Pereas list the following as the errors committed by the CA,
to wit:
I. The lower court erred when it upheld the trial courts decision holding the
petitioners jointly and severally liable to pay damages with Philippine National
Railways and dismissing their cross-claim against the latter.
II. The lower court erred in affirming the trial courts decision awarding damages
for loss of earning capacity of a minor who was only a high school student at the
time of his death in the absence of sufficient basis for such an award.
III. The lower court erred in not reducing further the amount of damages
awarded, assuming petitioners are liable at all.

SO ORDERED.
The CA upheld the award for the loss of Aarons earning capacity, taking
cognizance of the ruling in Cariaga v. Laguna Tayabas Bus Company and Manila

Ruling
The petition has no merit.

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1.
Were the Pereas and PNR jointly
and severally liable for damages?
The Zarates brought this action for recovery of damages against both the
Pereas and the PNR, basing their claim against the Pereas on breach of
contract of carriage and against the PNR on quasi-delict.
The RTC found the Pereas and the PNR negligent. The CA affirmed the
findings.
We concur with the CA.
To start with, the Pereas defense was that they exercised the diligence of a
good father of the family in the selection and supervision of Alfaro, the van driver,
by seeing to it that Alfaro had a drivers license and that he had not been
involved in any vehicular accident prior to the fatal collision with the train; that
they even had their own son travel to and from school on a daily basis; and that
Teodoro Perea himself sometimes accompanied Alfaro in transporting the
passengers to and from school. The RTC gave scant consideration to such
defense by regarding such defense as inappropriate in an action for breach of
contract of carriage.
We find no adequate cause to differ from the conclusions of the lower courts that
the Pereas operated as a common carrier; and that their standard of care was
extraordinary diligence, not the ordinary diligence of a good father of a family.
Although in this jurisdiction the operator of a school bus service has been usually
regarded as a private carrier,9primarily because he only caters to some specific
or privileged individuals, and his operation is neither open to the indefinite public
nor for public use, the exact nature of the operation of a school bus service has
not been finally settled. This is the occasion to lay the matter to rest.
A carrier is a person or corporation who undertakes to transport or convey goods
or persons from one place to another, gratuitously or for hire. The carrier is
classified either as a private/special carrier or as a common/public carrier.10 A
private carrier is one who, without making the activity a vocation, or without
holding himself or itself out to the public as ready to act for all who may desire his
or its services, undertakes, by special agreement in a particular instance only, to
transport goods or persons from one place to another either gratuitously or for
hire.11The provisions on ordinary contracts of the Civil Code govern the contract
of private carriage.The diligence required of a private carrier is only ordinary, that

is, the diligence of a good father of the family. In contrast, a common carrier is a
person, corporation, firm or association engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for
compensation, offering such services to the public.12Contracts of common
carriage are governed by the provisions on common carriers of the Civil Code,
the Public Service Act,13 and other special laws relating to transportation. A
common carrier is required to observe extraordinary diligence, and is presumed
to be at fault or to have acted negligently in case of the loss of the effects of
passengers, or the death or injuries to passengers.14
In relation to common carriers, the Court defined public use in the following terms
in United States v. Tan Piaco,15viz:
"Public use" is the same as "use by the public". The essential feature of the
public use is not confined to privileged individuals, but is open to the indefinite
public. It is this indefinite or unrestricted quality that gives it its public character. In
determining whether a use is public, we must look not only to the character of the
business to be done, but also to the proposed mode of doing it. If the use is
merely optional with the owners, or the public benefit is merely incidental, it is not
a public use, authorizing the exercise of the jurisdiction of the public utility
commission. There must be, in general, a right which the law compels the owner
to give to the general public. It is not enough that the general prosperity of the
public is promoted. Public use is not synonymous with public interest. The true
criterion by which to judge the character of the use is whether the public may
enjoy it by right or only by permission.
In De Guzman v. Court of Appeals,16 the Court noted that Article 1732 of the Civil
Code avoided any distinction between a person or an enterprise offering
transportation on a regular or an isolated basis; and has not distinguished a
carrier offering his services to the general public, that is, the general community
or population, from one offering his services only to a narrow segment of the
general population.
Nonetheless, the concept of a common carrier embodied in Article 1732 of the
Civil Code coincides neatly with the notion of public service under the Public
Service Act, which supplements the law on common carriers found in the Civil
Code. Public service, according to Section 13, paragraph (b) of the Public
Service Act, includes:
x x x every person that now or hereafter may own, operate, manage, or control in
the Philippines, for hire or compensation, with general or limited clientle,
whether permanent or occasional, and done for the general business purposes,

97
any common carrier, railroad, street railway, traction railway, subway motor
vehicle, either for freight or passenger, or both, with or without fixed route and
whatever may be its classification, freight or carrier service of any class, express
service, steamboat, or steamship line, pontines, ferries and water craft, engaged
in the transportation of passengers or freight or both, shipyard, marine repair
shop, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and
power, water supply and power petroleum, sewerage system, wire or wireless
communications systems, wire or wireless broadcasting stations and other
similar public services. x x x.17

as far as human care and foresight can provide, using the utmost diligence of
very cautious persons, with a due regard for all the circumstances." To
successfully fend off liability in an action upon the death or injury to a passenger,
the common carrier must prove his or its observance of that extraordinary
diligence; otherwise, the legal presumption that he or it was at fault or acted
negligently would stand.23 No device, whether by stipulation, posting of notices,
statements on tickets, or otherwise, may dispense with or lessen the
responsibility of the common carrier as defined under Article 1755 of the Civil
Code. 24

Given the breadth of the aforequoted characterization of a common carrier, the

Court has considered as common carriers pipeline operators,18 custom brokers
and warehousemen,19 and barge operators20 even if they had limited clientle.

And, secondly, the Pereas have not presented any compelling defense or
reason by which the Court might now reverse the CAs findings on their liability.
On the contrary, an examination of the records shows that the evidence fully
supported the findings of the CA.

As all the foregoing indicate, the true test for a common carrier is not the quantity
or extent of the business actually transacted, or the number and character of the
conveyances used in the activity, but whether the undertaking is a part of the
activity engaged in by the carrier that he has held out to the general public as his
business or occupation. If the undertaking is a single transaction, not a part of the
general business or occupation engaged in, as advertised and held out to the
general public, the individual or the entity rendering such service is a private, not
a common, carrier. The question must be determined by the character of the
business actually carried on by the carrier, not by any secret intention or mental
reservation it may entertain or assert when charged with the duties and
obligations that the law imposes.21
Applying these considerations to the case before us, there is no question that the
Pereas as the operators of a school bus service were: (a) engaged in
transporting passengers generally as a business, not just as a casual occupation;
(b) undertaking to carry passengers over established roads by the method by
which the business was conducted; and (c) transporting students for a fee.
Despite catering to a limited clientle, the Pereas operated as a common carrier
because they held themselves out as a ready transportation indiscriminately to
the students of a particular school living within or near where they operated the
service and for a fee.
The common carriers standard of care and vigilance as to the safety of the
passengers is defined by law. Given the nature of the business and for reasons
of public policy, the common carrier is bound "to observe extraordinary diligence
in the vigilance over the goods and for the safety of the passengers transported
by them, according to all the circumstances of each case."22 Article 1755 of the
Civil Code specifies that the common carrier should "carry the passengers safely

As earlier stated, the Pereas, acting as a common carrier, were already

presumed to be negligent at the time of the accident because death had occurred
to their passenger.25 The presumption of negligence, being a presumption of law,
laid the burden of evidence on their shoulders to establish that they had not been
negligent.26It was the law no less that required them to prove their observance of
extraordinary diligence in seeing to the safe and secure carriage of the
passengers to their destination. Until they did so in a credible manner, they stood
to be held legally responsible for the death of Aaron and thus to be held liable for
all the natural consequences of such death.
There is no question that the Pereas did not overturn the presumption of their
negligence by credible evidence. Their defense of having observed the diligence
of a good father of a family in the selection and supervision of their driver was not
legally sufficient. According to Article 1759 of the Civil Code, their liability as a
common carrier did not cease upon proof that they exercised all the diligence of
a good father of a family in the selection and supervision of their employee. This
was the reason why the RTC treated this defense of the Pereas as
inappropriate in this action for breach of contract of carriage.
The Pereas were liable for the death of Aaron despite the fact that their driver
might have acted beyond the scope of his authority or even in violation of the
orders of the common carrier.27 In this connection, the records showed their
drivers actual negligence. There was a showing, to begin with, that their driver
traversed the railroad tracks at a point at which the PNR did not permit motorists
going into the Makati area to cross the railroad tracks. Although that point had
been used by motorists as a shortcut into the Makati area, that fact alone did not
excuse their driver into taking that route. On the other hand, with his familiarity

98
with that shortcut, their driver was fully aware of the risks to his passengers but
he still disregarded the risks. Compounding his lack of care was that loud music
was playing inside the air-conditioned van at the time of the accident. The
loudness most probably reduced his ability to hear the warning horns of the
oncoming train to allow him to correctly appreciate the lurking dangers on the
railroad tracks. Also, he sought to overtake a passenger bus on the left side as
both vehicles traversed the railroad tracks. In so doing, he lost his view of the
train that was then coming from the opposite side of the passenger bus, leading
him to miscalculate his chances of beating the bus in their race, and of getting
clear of the train. As a result, the bus avoided a collision with the train but the van
got slammed at its rear, causing the fatality. Lastly, he did not slow down or go to
a full stop before traversing the railroad tracks despite knowing that his
slackening of speed and going to a full stop were in observance of the right of
way at railroad tracks as defined by the traffic laws and regulations.28 He thereby
violated a specific traffic regulation on right of way, by virtue of which he was
immediately presumed to be negligent.29
The omissions of care on the part of the van driver constituted
negligence,30 which, according to Layugan v. Intermediate Appellate Court,31 is
"the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do,
or the doing of something which a prudent and reasonable man would not
do,32 or as Judge Cooley defines it, (t)he failure to observe for the protection of
the interests of another person, that degree of care, precaution, and vigilance
which the circumstances justly demand, whereby such other person suffers
injury."33
The test by which to determine the existence of negligence in a particular case
has been aptly stated in the leading case of Picart v. Smith,34 thuswise:
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 reasonable care and caution which an ordinarily prudent 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 speculation
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 the 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 the conduct or guarding against
its consequences. (Emphasis supplied)
Pursuant to the Picart v. Smith test of negligence, the Pereas driver was
entirely negligent when he traversed the railroad tracks at a point not allowed for
a motorists crossing despite being fully aware of the grave harm to be thereby
caused to his passengers; and when he disregarded the foresight of harm to his
passengers by overtaking the bus on the left side as to leave himself blind to the
approach of the oncoming train that he knew was on the opposite side of the bus.
Unrelenting, the Pereas cite Phil. National Railways v. Intermediate Appellate
Court,35 where the Court held the PNR solely liable for the damages caused to a
passenger bus and its passengers when its train hit the rear end of the bus that
was then traversing the railroad crossing. But the circumstances of that case and
this one share no similarities. In Philippine National Railways v. Intermediate
Appellate Court, no evidence of contributory negligence was adduced against the
owner of the bus. Instead, it was the owner of the bus who proved the exercise of
extraordinary diligence by preponderant evidence. Also, the records are replete
with the showing of negligence on the part of both the Pereas and the PNR.
Another distinction is that the passenger bus in Philippine National Railways v.
Intermediate Appellate Court was traversing the dedicated railroad crossing when
it was hit by the train, but the Pereas school van traversed the railroad tracks at
a point not intended for that purpose.
At any rate, the lower courts correctly held both the Pereas and the PNR "jointly
and severally" liable for damages arising from the death of Aaron. They had been
impleaded in the same complaint as defendants against whom the Zarates had

99
the right to relief, whether jointly, severally, or in the alternative, in respect to or
arising out of the accident, and questions of fact and of law were common as to
the Zarates.36 Although the basis of the right to relief of the Zarates (i.e., breach
of contract of carriage) against the Pereas was distinct from the basis of the
Zarates right to relief against the PNR (i.e., quasi-delict under Article 2176, Civil
Code), they nonetheless could be held jointly and severally liable by virtue of
their respective negligence combining to cause the death of Aaron. As to the
PNR, the RTC rightly found the PNR also guilty of negligence despite the school
van of the Pereas traversing the railroad tracks at a point not dedicated by the
PNR as a railroad crossing for pedestrians and motorists, because the PNR did
not ensure the safety of others through the placing of crossbars, signal lights,
warning signs, and other permanent safety barriers to prevent vehicles or
pedestrians from crossing there. The RTC observed that the fact that a crossing
guard had been assigned to man that point from 7 a.m. to 5 p.m. was a good
indicium that the PNR was aware of the risks to others as well as the need to
control the vehicular and other traffic there. Verily, the Pereas and the PNR
were joint tortfeasors.
2.
Was the indemnity for loss of
Aarons earning capacity proper?
The RTC awarded indemnity for loss of Aarons earning capacity. Although
agreeing with the RTC on the liability, the CA modified the amount. Both lower
courts took into consideration that Aaron, while only a high school student, had
been enrolled in one of the reputable schools in the Philippines and that he had
been a normal and able-bodied child prior to his death. The basis for the
computation of Aarons earning capacity was not what he would have become or
what he would have wanted to be if not for his untimely death, but the minimum
wage in effect at the time of his death. Moreover, the RTCs computation of
Aarons life expectancy rate was not reckoned from his age of 15 years at the
time of his death, but on 21 years, his age when he would have graduated from
college.
We find the considerations taken into account by the lower courts to be
reasonable and fully warranted.
Yet, the Pereas submit that the indemnity for loss of earning capacity was
speculative and unfounded.1wphi1 They cited People v. Teehankee, Jr.,37 where
the Court deleted the indemnity for victim Jussi Leinos loss of earning capacity
as a pilot for being speculative due to his having graduated from high school at
the International School in Manila only two years before the shooting, and was at

the time of the shooting only enrolled in the first semester at the Manila Aero
Club to pursue his ambition to become a professional pilot. That meant,
according to the Court, that he was for all intents and purposes only a high
school graduate.
We reject the Pereas submission.
First of all, a careful perusal of the Teehankee, Jr. case shows that the situation
there of Jussi Leino was not akin to that of Aaron here. The CA and the RTC
were not speculating that Aaron would be some highly-paid professional, like a
pilot (or, for that matter, an engineer, a physician, or a lawyer). Instead, the
computation of Aarons earning capacity was premised on him being a lowly
minimum wage earner despite his being then enrolled at a prestigious high
school like Don Bosco in Makati, a fact that would have likely ensured his
success in his later years in life and at work.
And, secondly, the fact that Aaron was then without a history of earnings should
not be taken against his parents and in favor of the defendants whose negligence
not only cost Aaron his life and his right to work and earn money, but also
deprived his parents of their right to his presence and his services as well. Our
law itself states that the loss of the earning capacity of the deceased shall be the
liability of the guilty party in favor of the heirs of the deceased, and shall in every
case be assessed and awarded by the court "unless the deceased on account of
permanent physical disability not caused by the defendant, had no earning
capacity at the time of his death."38Accordingly, we emphatically hold in favor of
the indemnification for Aarons loss of earning capacity despite him having been
unemployed, because compensation of this nature is awarded not for loss of time
or earnings but for loss of the deceaseds power or ability to earn money.39
This favorable treatment of the Zarates claim is not unprecedented. In Cariaga v.
Laguna Tayabas Bus Company and Manila Railroad Company,40 fourth-year
medical student Edgardo Carriagas earning capacity, although he survived the
accident but his injuries rendered him permanently incapacitated, was computed
to be that of the physician that he dreamed to become. The Court considered his
scholastic record sufficient to justify the assumption that he could have finished
the medical course and would have passed the medical board examinations in
due time, and that he could have possibly earned a modest income as a medical
practitioner. Also, in People v. Sanchez,41 the Court opined that murder and rape
victim Eileen Sarmienta and murder victim Allan Gomez could have easily landed
good-paying jobs had they graduated in due time, and that their jobs would
probably pay them high monthly salaries from P 10,000.00 to P 15,000.00 upon
their graduation. Their earning capacities were computed at rates higher than the

100
minimum wage at the time of their deaths due to their being already senior
agriculture students of the University of the Philippines in Los Baos, the
countrys leading educational institution in agriculture.
3.
Were the amounts of damages excessive?
The Pereas plead for the reduction of the moral and exemplary damages
awarded to the Zarates in the respective amounts of P 2,500,000.00
and P 1,000,000.00 on the ground that such amounts were excessive.
The plea is unwarranted.
The moral damages of P 2,500,000.00 were really just and reasonable under the
established circumstances of this case because they were intended by the law to
assuage the Zarates deep mental anguish over their sons unexpected and
violent death, and their moral shock over the senseless accident. That amount
would not be too much, considering that it would help the Zarates obtain the
means, diversions or amusements that would alleviate their suffering for the loss
of their child. At any rate, reducing the amount as excessive might prove to be an
injustice, given the passage of a long time from when their mental anguish was
inflicted on them on August 22, 1996.
Anent the P 1,000,000.00 allowed as exemplary damages, we should not reduce
the amount if only to render effective the desired example for the public good. As
a common carrier, the Pereas needed to be vigorously reminded to observe
their duty to exercise extraordinary diligence to prevent a similarly senseless
accident from happening again. Only by an award of exemplary damages in that
amount would suffice to instill in them and others similarly situated like them the
ever-present need for greater and constant vigilance in the conduct of a business
imbued with public interest.
WHEREFORE, we DENY the petition for review on certiorari; AFFIRM the
decision promulgated on November 13, 2002; and ORDER the petitioners to pay
the costs of suit.
SO ORDERED.

G.R. No. 138677

February 12, 2002

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,

vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST
COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules
of Court, assailing the decision and resolutions of the Court of Appeals in CAG.R. CV No. 34594, entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan,
et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a
loan in the amount of P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding themselves, jointly and
severally, to pay the sum borrowed with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on the outstanding principal and
interest in case of default. In addition, petitioners agreed to pay 10% of the total
amount due by way of attorneys fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. The obligation matured
on 8 September 1981; the bank, however, granted an extension but only up until
29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt
which, as of 20 May 1982, amounted to P114,416.10. On 30 September 1982,
the bank sent a final demand letter to petitioners informing them that they had
five days within which to make full payment. Since petitioners still defaulted on
their obligation, the bank filed on 3 November 1982, with the Regional Trial Court
of Makati, Branch 143, a complaint for recovery of the due amount.

101
After petitioners had filed a joint answer to the complaint, the bank presented its
evidence and, on 27 March 1985, rested its case. Petitioners, instead of
introducing their own evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of petitioners and their counsel on
28 August 1985, the third hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for
reconsideration of the order of the trial court declaring them as having waived
their right to present evidence and prayed that they be allowed to prove their
case. The court a quo denied the motion in an order, dated 5 September 1988,
and on 20 October 1989, it rendered its decision,1 the dispositive portion of which
read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against
the defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as
follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189%
per annum, 2% service charge and 5% per month penalty charge,
commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of
indebtedness for and as attorneys fees; and

"We find merit in plaintiff-appellees claim that the principal sum of P114,416.00
with interest thereon must commence not on the date of filing of the complaint as
we have previously held in our decision but on the date when the obligation
became due.
"Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render the
obligor in default when the obligation or the law so provides.
"In the case at bar, defendants-appellants executed a promissory note where
they undertook to pay the obligation on its maturity date 'without necessity of
demand.' They also agreed to pay the interest in case of non-payment from the
date of default.
"x x x

xxx

xxx

"While we maintain that defendants-appellants must be bound by the contract

which they acknowledged and signed, we take cognizance of their plea for the
application of the provisions of Article 1229 x x x.
"Considering that defendants-appellants partially complied with their obligation
under the promissory note by the reduction of the original amount of P120,000.00
to P114,416.00 and in order that they will finally settle their obligation, it is our
view and we so hold that in the interest of justice and public policy, a penalty of
3% per month or 36% per annum would suffice.

"3. To pay the costs of the suit."2

"x x x
Petitioners interposed an appeal with the Court of Appeals, questioning the
rejection by the trial court of their motion to present evidence and assailing the
imposition of the 2% service charge, the 5% per month penalty charge and 10%
attorney's fees. In its decision3 of 7 March 1996, the appellate court affirmed the
judgment of the trial court except on the matter of the 2% service charge which
was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with
the decision of the appellate court, both parties filed their respective motions for
reconsideration.4 Petitioners prayed for the reduction of the 5% stipulated penalty
for being unconscionable. The bank, on the other hand, asked that the payment
of interest and penalty be commenced not from the date of filing of complaint but
from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:

xxx

xxx

"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED.

The defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby
ordered to pay the plaintiff-appellee Security Bank and Trust Company the
following:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189%
per annum and 3% per month penalty charge commencing May 20,
1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the indebtedness
as and for attorneys fees."5

102
On 16 November 1998, petitioners filed an omnibus motion for reconsideration
and to admit newly discovered evidence,6 alleging that while the case was
pending before the trial court, petitioner Tolomeo Ligutan and his wife Bienvenida
Ligutan executed a real estate mortgage on 18 January 1984 to secure the
existing indebtedness of petitioners Ligutan and dela Llana with the bank.
Petitioners contended that the execution of the real estate mortgage had the
effect of novating the contract between them and the bank. Petitioners further
averred that the mortgage was extrajudicially foreclosed on 26 August 1986, that
they were not informed about it, and the bank did not credit them with the
proceeds of the sale. The appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence, ratiocinating that such a
second motion for reconsideration cannot be entertained under Section 2, Rule
52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said,
the newly-discovered evidence being invoked by petitioners had actually been
known to them when the case was brought on appeal and when the first motion
for reconsideration was filed.7
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners
elevated their case to this Court on 9 July 1999 via a petition for review
on certiorari under Rule 45 of the Rules of Court, submitting thusly "I. The respondent Court of Appeals seriously erred in not holding that
the 15.189% interest and the penalty of three (3%) percent per month or
thirty-six (36%) percent per annum imposed by private respondent bank
on petitioners loan obligation are still manifestly exorbitant, iniquitous
and unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a
reasonable level the ten (10%) percent award of attorneys fees which is
highly and grossly excessive, unreasonable and unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting
petitioners newly discovered evidence which could not have been
timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that
there was a novation of the cause of action of private respondents
complaint in the instant case due to the subsequent execution of the
real estate mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage."8

Respondent bank, which did not take an appeal, would, however, have it that the
penalty sought to be deleted by petitioners was even insufficient to fully cover
and compensate for the cost of money brought about by the radical devaluation
and decrease in the purchasing power of the peso, particularly vis-a-vis the U.S.
dollar, taking into account the time frame of its occurrence. The Bank would
stress that only the amount of P5,584.00 had been remitted out of the entire loan
of P120,000.00.9
A penalty clause, expressly recognized by law,10 is an accessory undertaking to
assume greater liability on the part of an obligor in case of breach of an
obligation. It functions to strengthen the coercive force of the obligation11 and to
provide, in effect, for what could be the liquidated damages resulting from such a
breach. The obligor would then be bound to pay the stipulated indemnity without
the necessity of proof on the existence and on the measure of damages caused
by the breach.12 Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene
neither law nor morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly or irregularly
complied with.13
The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such factors as,
but not necessarily confined to, the type, extent and purpose of the penalty, the
nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. vs. Court of Appeals,14 just an
example, the Court has tempered the penalty charges after taking into account
the debtors pitiful situation and its offer to settle the entire obligation with the
creditor bank. The stipulated penalty might likewise be reduced when a partial or
irregular performance is made by the debtor.15 The stipulated penalty might even
be deleted such as when there has been substantial performance in good faith
by the obligor,16 when the penalty clause itself suffers from fatal infirmity, or when
exceptional circumstances so exist as to warrant it.17
The Court of Appeals, exercising its good judgment in the instant case, has
reduced the penalty interest from 5% a month to 3% a month which petitioner still
disputes. Given the circumstances, not to mention the repeated acts of breach by
petitioners of their contractual obligation, the Court sees no cogent ground to
modify the ruling of the appellate court..

103
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time,
question its reasonableness and prays that the Court reduce the amount. This
contention is a fresh issue that has not been raised and ventilated before the
courts below. In any event, the interest stipulation, on its face, does not appear
as being that excessive. The essence or rationale for the payment of interest,
quite often referred to as cost of money, is not exactly the same as that of a
surcharge or a penalty. A penalty stipulation is not necessarily preclusive of
interest, if there is an agreement to that effect, the two being distinct concepts
which may separately be demanded.18 What may justify a court in not allowing
the creditor to impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally justify the non-payment
or reduction of interest. Indeed, the interest prescribed in loan financing
arrangements is a fundamental part of the banking business and the core of a
bank's existence.19
Petitioners next assail the award of 10% of the total amount of indebtedness by
way of attorney's fees for being grossly excessive, exorbitant and
unconscionable vis-a-vis the time spent and the extent of services rendered by
counsel for the bank and the nature of the case. Bearing in mind that the rate of
attorneys fees has been agreed to by the parties and intended to answer not
only for litigation expenses but also for collection efforts as well, the Court, like
the appellate court, deems the award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call
for a new trial or to admit newly discovered evidence. As the appellate court so
held in its resolution of 14 May 1999 "Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
motion for reconsideration of a judgment or final resolution by the same party
shall be entertained. Considering that the instant motion is already a second
motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the
newly-discovered evidence being invoked by defendants-appellants have
actually been existent when the case was brought on appeal to this court as well
as when the first motion for reconsideration was filed.1wphi1 Hence, it is quite
surprising why defendants-appellants raised the alleged newly-discovered
evidence only at this stage when they could have done so in the earlier pleadings
filed before this court.
"The propriety or acceptability of such a second motion for reconsideration is not
contingent upon the averment of 'new' grounds to assail the judgment, i.e.,

grounds other than those theretofore presented and rejected. Otherwise,

attainment of finality of a judgment might be stayed off indefinitely, depending on
the partys ingenuousness or cleverness in conceiving and formulating 'additional
flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice
to the rights of the movant for reconsideration."20
At any rate, the subsequent execution of the real estate mortgage as security for
the existing loan would not have resulted in the extinguishment of the original
contract of loan because of novation. Petitioners acknowledge that the real
estate mortgage contract does not contain any express stipulation by the parties
intending it to supersede the existing loan agreement between the petitioners
and the bank.21 Respondent bank has correctly postulated that the mortgage is
but an accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the
agreement of all the parties to the new contract; third, the extinguishment of the
obligation; and fourth, the validity of the new one.22 In order that an obligation
may be extinguished by another which substitutes the same, it is imperative that
it be so declared in unequivocal terms, or that the old and the new obligation be
on every point incompatible with each other.23 An obligation to pay a sum of
money is not extinctively novated by a new instrument which merely changes the
terms of payment or adding compatible covenants or where the old contract is
merely supplemented by the new one.24When not expressed, incompatibility is
required so as to ensure that the parties have indeed intended such novation
despite their failure to express it in categorical terms. The incompatibility, to be
sure, should take place in any of the essential elements of the obligation, i.e., (1)
the juridical relation or tie, such as from a merecommodatum to lease of things,
or from negotiorum gestio to agency, or from a mortgage to antichresis,25 or from
a sale to one of loan;26 (2) the object or principal conditions, such as a change of
the nature of the prestation; or (3) the subjects, such as the substitution of a
debtor27 or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by itself; certain
terms and conditions may be carried, expressly or by implication, over to the new
obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

THIRD DIVISION

104
G.R. No. 157480

May 6, 2005

PRYCE CORPORATION (formerly PRYCE PROPERTIES

CORPORATION), petitioners,
vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to
its rescission. When an agreement is terminated, it is deemed valid at inception.
Prior to termination, the contract binds the parties, who are thus obliged to
observe its provisions. However, when it is rescinded, it is deemed inexistent,
and the parties are returned to their status quo ante. Hence, there is mutual
restitution of benefits received. The consequences of termination may be
anticipated and provided for by the contract. As long as the terms of the contract
are not contrary to law, morals, good customs, public order or public policy, they
shall be respected by courts. The judiciary is not authorized to make or modify
contracts; neither may it rescue parties from disadvantageous stipulations.
Courts, however, are empowered to reduce iniquitous or unconscionable
liquidated damages, indemnities and penalties agreed upon by the parties.

The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing
the May 22, 2002 Decision2 of the Court of Appeals (CA) in CA-GR CV No.
51629 and its March 4, 2003 Resolution3 denying petitioners Motion for
Reconsideration. The assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered
as follows: (1) In Civil Case No. 93-68266, the appealed decision[,] is
AFFIRMED with MODIFICATION[,] ordering [Respondent] Philippine
Amusement and Gaming Corporation to pay [Petitioner] Pryce
Properties Corporation the total amount ofP687,289.50 as actual
damages representing the accrued rentals for the quarter September to

November 1993 with interest and penalty at the rate of two percent (2%)
per month from date of filing of the complaint until the amount shall have
been fully paid, and the sum of P50,000.00 as attorneys fees; (2) In
Civil Case No. 93-68337, the appealed decision is REVERSED and
SET ASIDE and a new judgment is rendered ordering [Petitioner] Pryce
Properties Corporation to reimburse [Respondent] Philippine
Amusement and Gaming Corporation the amount of P687,289.50
representing the advanced rental deposits, which amount may be
compensated by [Petitioner] Pryce Properties Corporation with its award
in Civil Case No. 93-68266 in the equal amount of P687,289.50."4
The Facts
According to the CA, the facts are as follows:
"Sometime in the first half of 1992, representatives from Pryce
Properties Corporation (PPC for brevity) made representations with the
Philippine Amusement and Gaming Corporation (PAGCOR) on the
possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de
Oro City. [A] series of negotiations followed. PAGCOR representatives
went to Cagayan de Oro City to determine the pulse of the people
whether the presence of a casino would be welcomed by the residents.
Some local government officials showed keen interest in the casino
operation and expressed the view that possible problems were
surmountable. Their negotiations culminated with PPCs counter-letter
proposal dated October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x
involving the ballroom of the Hotel for a period of three (3) years starting
December 1, 1992 and until November 30, 1995. On November 13,
1992, they executed an addendum to the contract x x x which included
a lease of an additional 1000 square meters of the hotel grounds as
living quarters and playground of the casino personnel. PAGCOR
advertised the start of their casino operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro
City passed Resolution No. 2295 x x x dated November 19, 1990
declaring as a matter of policy to prohibit and/or not to allow the
establishment of a gambling casino in Cagayan de Oro City. Resolution
No. 2673 x x x dated October 19, 1992 (or a month before the contract
of lease was executed) was subsequently passed reiterating with vigor
and vehemence the policy of the City under Resolution No. 2295, series

105
of 1990, banning casinos in Cagayan de Oro City. On December 7,
1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted
Ordinance No. 3353 x x x prohibiting the issuance of business permits
and canceling existing business permits to any establishment for using,
or allowing to be used, its premises or any portion thereof for the
operation of a casino.
"In the afternoon of December 18, 1992 and just hours before the actual
formal opening of casino operations, a public rally in front of the hotel
was staged by some local officials, residents and religious leaders.
Barricades were placed [which] prevented some casino personnel and
hotel guests from entering and exiting from the Hotel. PAGCOR was
constrained to suspend casino operations because of the rally. An
agreement between PPC and PAGCOR, on one hand, and
representatives of the rallyists, on the other, eventually ended the rally
on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the
Sangguniang Panlungsod of Cagayan de Oro City, prohibiting the
operation of casinos and providing for penalty for violation thereof. On
January 7, 1993, PPC filed a Petition for Prohibition with Preliminary
Injunction x x x against then public respondent Cagayan de Oro City
and/or Mayor Pablo P. Magtajas x x x before the Court of Appeals,
docketed as CA G.R. SP No. 29851 praying inter alia, for the
declaration of unconstitutionality of Ordinance No. 3353. PAGCOR
intervened in said petition and further assailed Ordinance No. 4475-93
as being violative of the non-impairment of contracts and equal
protection clauses. On March 31, 1993, the Court of Appeals
promulgated its decision x x x, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and
Ordinance No. 3375-93 are hereby DECLARED
UNCONSTITUTIONAL and VOID and the respondents and all
other persons acting under their authority and in their behalf
are PERMANENTLY ENJOINED from enforcing those
ordinances.
SO ORDERED.
"Aggrieved by the decision, then public respondents Cagayan de Oro
City, et al. elevated the case to the Supreme Court in G.R. No. 111097,
where, in an En Banc Decision dated July 20, 1994 x x x, the Supreme

Court denied the petition and affirmed the decision of the Court of
Appeals.
"In the meantime, PAGCOR resumed casino operations on July 15,
1993, against which, however, another public rally was held. Casino
operations continued for some time, but were later on indefinitely
suspended due to the incessant demonstrations. Per verbal advice x x x
from the Office of the President of the Philippines, PAGCOR decided to
stop its casino operations in Cagayan de Oro City. PAGCOR stopped its
casino operations in the hotel prior to September, 1993. In two
Statements of Account dated September 1, 1993 x x x, PPC apprised
PAGCOR of its outstanding account for the quarter September 1 to
November 30, 1993. PPC sent PAGCOR another Letter dated
September 3, 1993 x x x as a follow-up to the parties earlier
conference. PPC sent PAGCOR another Letter dated September 15,
1993 x x x stating its Board of Directors decision to collect the full
rentals in case of pre-termination of the lease.
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating]
that it was not amenable to the payment of the full rentals citing as
reasons unforeseen legal and other circumstances which prevented it
from complying with its obligations. PAGCOR further stated that it had
no other alternative but to pre-terminate the lease agreement due to the
relentless and vehement opposition to their casino operations. In a letter
dated October 12, 1993 x x x, PAGCOR asked PPC to refund the total
of P1,437,582.25 representing the reimbursable rental deposits and
expenses for the permanent improvement of the Hotels parking lot. In a
letter dated November 5, 1993 x x x, PAGCOR formally demanded from
PPC the payment of its claim for reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68266. On
November 19, 1993, PAGCOR also filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
"In a letter dated November 25, 1993, PPC informed PAGCOR that it
was terminating the contract of lease due to PAGCORs continuing
breach of the contract and further stated that it was exercising its rights
under the contract of lease pursuant to Article 20 (a) and (c) thereof.
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil
Case No. 93-68266, which the trial court admitted in an Order dated

106
February 11, 1994. In an Order dated April 27, 1994, Civil Case No. 9368377 was ordered consolidated with Civil Case No. 93-68266. These
cases were jointly tried by the court a quo. On August 17, 1995, the
court a quo promulgated its decision. Both parties appealed."5
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the
court to award actual and moral damages; 2) the 50 percent reduction of the
amount PPC was claiming; and 3) the courts ruling that the 2 percent penalty
was to be imposed from the date of the promulgation of the Decision, not from
the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule
that the Contract of Lease had already been terminated as early as September
21, 1993, or at the latest, on October 14, 1993, when PPC received PAGCORs
letter dated October 12, 1993. The gaming corporation added that the trial court
erred in 1) failing to consider that PPC was entitled to avail itself of the provisions
of Article XX only when PPC was the party terminating the Contract; 2) not
finding that there were valid, justifiable and good reasons for terminating the
Contract; and 3) dismissing the Complaint of PAGCOR in Civil Case No. 9368337 for lack of merit, and not finding PPC liable for the reimbursement of
PAGCORS cash deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination
of the Contract of Lease was unjustified. The appellate court explained that
public demonstrations and rallies could not be considered as fortuitous events
that would exempt the gaming corporation from complying with the latters
contractual obligations. Therefore, the Contract continued to be effective until
PPC elected to terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the
Civil Code, PPC had the right to ask for (1) rescission of the Contract and
indemnification for damages; or (2) only indemnification plus the continuation of
the Contract. These two remedies were alternative, not cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to
November 1993, PPC correctly exercised the option to terminate the lease
agreement. Previously, the Contract remained effective, and PPC could collect
the accrued rentals. However, from the time it terminated the Contract on
November 25, 1993, PPC could no longer demand payment of the remaining
rentals as part of actual damages, the CA added.

Denying the claim for moral damages, the CA pointed out the failure of PPC to
show that PAGCOR had acted in gross or evident bad faith in failing to pay the
rentals from September to November 1993. Such failure was shown especially
by the fact that PPC still had in hand three (3) months advance rental deposits of
PAGCOR. The former could have simply applied this deposit to the unpaid
rentals, as provided in the Contract. Neither did PPC adequately show that its
reputation had been besmirched or the hotels goodwill eroded by the
establishment of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA
held that PAGCOR had not presented official receipts to prove the latters alleged
expenses. The appellate court, however, upheld the trial courts award to PPC
of P50,000 attorneys fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible
error by holding that Pryce was not entitled to future rentals or lease
payments for the unexpired period of the Contract of Lease between
Pryce and PAGCOR?
"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of
Lease relative to the right of PRYCE to terminate the Contract for cause
and to moreover collect rentals from PAGCOR corresponding to the
remaining term of the lease valid and binding?
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and
20(c) of the Contract, PRYCE having rescinded the Contract of Lease?
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and
the other cases cited by PAGCOR support its position that PRYCE was
not entitled to future rentals?

107
"4. Would the collection by PRYCE of future rentals not give rise to
unjust enrichment?
"5. Could we not have harmonized Article 1659 of the Civil Code and
Article 20 of the Contract of Lease?
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written
in contracts, particularly in the PRYCE-PAGCOR Contract of Lease?"7
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract.
Likewise, it argues thattermination, as defined under the Contract, is different
from the remedy of rescission prescribed under Article 1659 of the Civil Code. On
the other hand, PAGCOR contends, as the CA ruled, that Article 1659 of the Civil
Code governs; hence, PPC is allegedly no longer entitled to future rentals,
because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from contracts
have the force of law between the contracting parties and should be complied
with in good faith."8 In deference to the rights of the parties, the law9allows them
to enter into stipulations, clauses, terms and conditions they may deem
convenient; that is, as long as these are not contrary to law, morals, good
customs, public order or public policy. Likewise, it is settled that if the terms of the
contract clearly express the intention of the contracting parties, the literal
meaning of the stipulations would be controlling.10
In this case, Article XX of the parties Contract of Lease provides in part as
follows:
"XX. BREACH OR DEFAULT

"a) The LESSEE agrees that all the terms, conditions and/or covenants
herein contained shall be deemed essential conditions of this contract,
and in the event of default or breach of any of such terms, conditions
and/or covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors,the LESSOR shall have the
right to terminate and cancel this contract by giving them fifteen (15
days) prior notice delivered at the leased premises or posted on the
main door thereof. Upon such termination or cancellation, the LESSOR
may forthwith lock the premises and exclude the LESSEE therefrom,
forcefully or otherwise, without incurring any civil or criminal liability.
During the fifteen (15) days notice, the LESSEE may prevent the
termination of lease by curing the events or causes of termination or
cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the
rentals corresponding to the remaining term of the lease as well as for
any and all damages, actual or consequential resulting from such
default and termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give
PPC the right to terminate and cancel the Contract in the event of a default or
breach by the lessee; and 2) to make PAGCOR fully liable for rentals for the
remaining term of the lease, despite the exercise of such right to terminate.
Plainly, the parties have voluntarily bound themselves to require strict compliance
with the provisions of the Contract by stipulating that a default or breach, among
others, shall give the lessee the termination option, coupled with the lessors
liability for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good
customs, public order or public policy. Neither is there anything objectionable
about the inclusion in the Contract of mandatory provisions concerning the rights
and obligations of the parties.11 Being the primary law between the parties, it
governs the adjudication of their rights and obligations. A court has no alternative
but to enforce the contractual stipulations in the manner they have been agreed
upon and written.12 It is well to recall that courts, be they trial or appellate, have
no power to make or modify contracts.13 Neither can they save parties from
disadvantageous provisions.

108
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for
"termination plus the full payment of future rentals" under the provisions of the
Contract, rather than just rescission under Article 1659 of the Civil Code. This
Court is not unmindful of the fact that termination and rescission are terms that
have been used loosely and interchangeably in the past. But distinctions ought to
be made, especially in this controversy, in which the terms mean differently and
lead to equally different consequences.
The term "rescission" is found in 1) Article 119114 of the Civil Code, the general
provision on rescission of reciprocal obligations; 2) Article 1659,15 which
authorizes rescission as an alternative remedy, insofar as the rights and
obligations of the lessor and the lessee in contracts of lease are concerned; and
3) Article 138016 with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,17 Justice J. B. L.
Reyes differentiated rescission under Article 1191 from that under Article 1381 et
seq. as follows:
"x x x. The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff but on the
breach of faith by the defendant, that violates the reciprocity between
the parties. It is not a subsidiary action, and Article 1191 may be
scanned without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the culpable breach of
his obligations to the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to fulfill
his promises when the other violates his. As expressed in the old Latin
aphorism: Non servanti fidem, non est fides servanda. Hence, the
reparation of damages for the breach is purely secondary.
"On the contrary, in rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison detre as well as the measure of the
right to rescind. x x x."18
Relevantly, it has been pointed out that resolution was originally used in Article
1124 of the old Civil Code, and that the term became the basis
for rescission under Article 1191 (and, conformably, also Article 1659).19

Now, as to the distinction between termination (or cancellation)

and rescission (more properly, resolution),Huibonhoa v. CA20 held that, where the
action prayed for the payment of rental arrearages, the aggrieved party actually
sought the partial enforcement of a lease contract. Thus, the remedy was not
rescission, but termination or cancellation, of the contract. The Court explained:
"x x x. By the allegations of the complaint, the Gojoccos aim was to
cancel or terminate the contract because they sought its partial
enforcement in praying for rental arrearages. There is a distinction in
law between cancellation of a contract and its rescission. To rescind is
to declare a contract void in its inception and to put an end to it as
though it never were. It is not merely to terminate it and release parties
from further obligations to each other but to abrogate it from the
beginning and restore the parties to relative positions which they would
have occupied had no contract ever been made.
"x x x. The termination or cancellation of a contract would necessarily
entail enforcement of its terms prior to the declaration of its cancellation
in the same way that before a lessee is ejected under a lease contract,
he has to fulfill his obligations thereunder that had accrued prior to his
ejectment. However, termination of a contract need not undergo judicial
intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a contract, or
its undoing from the beginning, and not merely its termination." Rescission may
be effected by both parties by mutual agreement; or unilaterally by one of them
declaring a rescission of contract without the consent of the other, if a legally
sufficient ground exists or if a decree of rescission is applied for before the
courts.22 On the other hand, termination refers to an "end in time or existence; a
close, cessation or conclusion." With respect to a lease or contract, it means an
ending, usually before the end of the anticipated term of such lease or contract,
that may be effected by mutual agreement or by one party exercising one of its
remedies as a consequence of the default of the other.23
Thus, mutual restitution is required in a rescission (or resolution), in order to bring
back the parties to their original situation prior to the inception of the
contract.24 Applying this principle to this case, it means that PPC would reacquire possession of the leased premises, and PAGCOR would get back the
rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original
situation; neither is the contract treated as if it never existed. Prior to its

109
termination, the parties are obliged to comply with their contractual obligations.
Only after the contract has been cancelled will they be released from their
obligations.
In this case, the actions and pleadings of petitioner show that it never intended
to rescind the Lease Contract from the beginning. This fact was evident when it
first sought to collect the accrued rentals from September to November 1993
because, as previously stated, it actually demanded the enforcement of the
Lease Contract prior to termination. Any intent to rescind was not shown, even
when it abrogated the Contract on November 25, 1993, because such abrogation
was not the rescission provided for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is inapplicable,
because the remedy resorted to by the lessors in that case was rescission, not
termination. The rights and obligations of the parties in Rios were governed by
Article 1659 of the Civil Code; hence, the Court held that the damages to which
the lessor was entitled could not have extended to the lessees liability for future
rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the
use or enjoyment of anothers property after the termination of a contract. We
stress that by abrogating the Contract in the present case, PPC released
PAGCOR from the latters future obligations, which included the payment of
rentals. To grant that right to the former is to unjustly enrich it at the latters
expense.
However, it appears that Section XX (c) was intended to be a penalty clause.
That fact is manifest from a reading of the mandatory provision under
subparagraph (a) in conjunction with subparagraph (c) of the Contract. A penal
clause is "an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on the
debtor a special prestation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled."26
Quite common in lease contracts, this clause functions to strengthen the coercive
force of the obligation and to provide, in effect, for what could be the liquidated
damages resulting from a breach.27 There is nothing immoral or illegal in such
indemnity/penalty clause, absent any showing that it was forced upon or
fraudulently foisted on the obligor.28

In obligations with a penal clause, the general rule is that the penalty serves as a
substitute for the indemnity for damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the contrary,29in which case
proof of actual damages is not necessary for the penalty to be
demanded.30 There are exceptions to the aforementioned rule, however, as
enumerated in paragraph 1 of Article 1226 of the Civil Code: 1) when there is a
stipulation to the contrary, 2) when the obligor is sued for refusal to pay the
agreed penalty, and 3) when the obligor is guilty of fraud. In these cases, the
purpose of the penalty is obviously to punish the obligor for the breach. Hence,
the obligee can recover from the former not only the penalty, but also other
damages resulting from the nonfulfillment of the principal obligation. 31
In the present case, the first exception applies because Article XX (c) provides
that, aside from the payment of the rentals corresponding to the remaining term
of the lease, the lessee shall also be liable "for any and all damages, actual or
consequential, resulting from such default and termination of this contract."
Having entered into the Contract voluntarily and with full knowledge of its
provisions, PAGCOR must be held bound to its obligations. It cannot evade
further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by
the courts.32 This power is explicitly sanctioned by Articles 1229 and 2227 of the
Civil Code, which we quote:
"Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable."
The question of whether a penalty is reasonable or iniquitous is addressed to the
sound discretion of the courts. To be considered in fixing the amount of penalty
are factors such as -- but not limited to -- the type, extent and purpose of the
penalty; the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; the standing and relationship of the
parties; and the like.33

110
In this case, PAGCORs breach was occasioned by events that, although not
fortuitous in law, were in fact real and pressing. From the CAs factual findings,
which are not contested by either party, we find that PAGCOR conducted a series
of negotiations and consultations before entering into the Contract. It did so not
only with the PPC, but also with local government officials, who assured it that
the problems were surmountable. Likewise, PAGCOR took pains to contest the
ordinances34 before the courts, which consequently declared them
unconstitutional. On top of these developments, the gaming corporation was
advised by the Office of the President to stop the games in Cagayan de Oro City,
prompting the former to cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had
to be suspended for days on end since their start in December 1992; and
indefinitely from July 15, 1993, upon the advice of the Office of President, until
the formal cessation of operations in September 1993. Needless to say, these
interruptions and stoppages meant that PAGCOR suffered a tremendous loss of
expected revenues, not to mention the fact that it had fully operated under the
Contract only for a limited time.
While petitioners right to a stipulated penalty is affirmed, we consider the claim
for future rentals to the tune ofP7,037,835.40 to be highly iniquitous. The amount
should be equitably reduced. Under the circumstances, the advanced rental
deposits in the sum of P687,289.50 should be sufficient penalty for respondents
breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and
Resolution are hereby MODIFIED to include the payment of penalty. Accordingly,
respondent is ordered to pay petitioner the additional amount ofP687,289.50 as
penalty, which may be set off or applied against the formers advanced rental
deposits. Meanwhile, the CAs award to petitioner of actual damages
representing the accrued rentals for September to November 1993 -- with
interest and penalty at the rate of two percent (2%) per month, from the date of
filing of the Complaint until the amount shall have been fully paid -- as well as
the P50,000 award for attorneys fees, isAFFIRMED. No costs.
SO ORDERED.

G.R. No. 172384

September 12, 2007

ERMINDA F. FLORENTINO, Petitioner,

vs.
SUPERVALUE, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the
Revised Rules of Court, filed by petitioner Erminda F. Florentino, seeking to
reverse and set aside the Decision,1 dated 10 October 2003 and the
Resolution,2 dated 19 April 2006 of the Court of Appeals in CA-G.R. CV No.
73853. The appellate court, in its assailed Decision and Resolution, modified the
Decision dated 30 April 2001 of the Regional Trial Court (RTC) of Makati, Branch
57, in Civil Case No. 00-1015, finding the respondent Supervalue, Inc., liable for
the sum ofP192,000.00, representing the security deposits made by the
petitioner upon the commencement of their Contract of Lease. The dispositive
portion of the assailed appellate courts Decision thus reads:
WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The
April 30, 2001 Decision of the Regional Trial Court of Makati, Branch 57 is
therefore MODIFIED to wit: (a) the portion ordering the [herein respondent] to
pay the amount of P192,000.00 representing the security deposits
and P50,000.00 as attorneys fees in favor of the [herein petitioner] as well as
giving [respondent] the option to reimburse [petitioner] of the value of the
improvements introduced by the [petitioner] on the leased [premises] should
[respondent] choose to appropriate itself or require the [petitioner] to remove the
improvements, is hereby REVERSED and SET ASIDE; and (b) the portion
ordering the return to [petitioner] the properties seized by [respondent] after the
former settled her obligation with the latter is however MAINTAINED.3
The factual and procedural antecedents of the instant petition are as follows:
Petitioner is doing business under the business name "Empanada Royale," a
sole proprietorship engaged in the retail of empanada with outlets in different
malls and business establishments within Metro Manila.4

THIRD DIVISION

111
Respondent, on the other hand, is a domestic corporation engaged in the
business of leasing stalls and commercial store spaces located inside SM Malls
found all throughout the country.5

store space in SM Megamall and confiscated the equipment and personal

belongings of the petitioner found therein after the expiration of the lease
contract.14

On 8 March 1999, petitioner and respondent executed three Contracts of Lease

containing similar terms and conditions over the cart-type stalls at SM North
Edsa and SM Southmall and a store space at SM Megamall. The term of each
contract is for a period of four months and may be renewed upon agreement of
the parties.6

In a letter dated 8 May 2000, petitioner demanded that the respondent release
the equipment and personal belongings it seized from the SM Megamall store
space and return the security deposits, in the sum ofP192,000.00, turned over by
the petitioner upon signing of the Contracts of Lease. On 15 June 2000,
petitioner sent respondent another letter reiterating her previous demands, but
the latter failed or refused to comply therewith. 15

Upon the expiration of the original Contracts of Lease, the parties agreed to
renew the same by extending their terms until 31 March 2000.7
Before the expiration of said Contracts of Lease, or on 4 February 2000,
petitioner received two letters from the respondent, both dated 14 January 2000,
transmitted through facsimile transmissions.8
In the first letter, petitioner was charged with violating Section 8 of the Contracts
of Lease by not opening on 16 December 1999 and 26 December 1999.9
Respondent also charged petitioner with selling a new variety of empanada
called "mini-embutido" and of increasing the price of her merchandise
from P20.00 to P22.00, without the prior approval of the respondent.10
Respondent observed that petitioner was frequently closing earlier than the usual
mall hours, either because of non-delivery or delay in the delivery of stocks to her
outlets, again in violation of the terms of the contract. A stern warning was thus
given to petitioner to refrain from committing similar infractions in the future in
order to avoid the termination of the lease contract.11
In the second letter, respondent informed the petitioner that it will no longer
renew the Contracts of Lease for the three outlets, upon their expiration on 31
March 2000.12
In a letter-reply dated 11 February 2000, petitioner explained that the "miniembutido" is not a new variety of empanada but had similar fillings, taste and
ingredients as those of pork empanada; only, its size was reduced in order to
make it more affordable to the buyers.13
Such explanation notwithstanding, respondent still refused to renew its Contracts
of Lease with the petitioner. To the contrary, respondent took possession of the

On 17 August 2000, an action for Specific Performance, Sum of Money and

Damages was filed by the petitioner against the respondent before the RTC of
Makati, Branch 57.16
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the
respondent made verbal representations that the Contracts of Lease will be
renewed from time to time and, through the said representations, the petitioner
was induced to introduce improvements upon the store space at SM Megamall in
the sum of P200,000.00, only to find out a year later that the respondent will no
longer renew her lease contracts for all three outlets.17
In addition, petitioner alleged that the respondent, without justifiable cause and
without previous demand, refused to return the security deposits in the amount
of P192,000.00.18
Further, petitioner claimed that the respondent seized her equipment and
personal belongings found inside the store space in SM Megamall after the lease
contract for the said outlet expired and despite repeated written demands from
the petitioner, respondent continuously refused to return the seized items.19
Petitioner thus prayed for the award of actual damages in the sum
of P472,000.00, representing the sum of security deposits, cost of improvements
and the value of the personal properties seized. Petitioner also asked for the
award of P300,000.00 as moral damages; P50,000.00 as exemplary damages;
and P80,000.00 as attorneys fees and expenses of litigation.20
For its part, respondent countered that petitioner committed several violations of
the terms of their Contracts of Lease by not opening from 16 December 1999 to
26 December 1999, and by introducing a new variety of empanada without the
prior consent of the respondent, as mandated by the provision of Section 2 of the
Contract of Lease. Respondent also alleged that petitioner infringed the lease

112
contract by frequently closing earlier than the agreed closing hours. Respondent
finally averred that petitioner is liable for the amount P106,474.09, representing
the penalty for selling a new variety of empanada, electricity and water bills, and
rental adjustment, among other charges incidental to the lease agreements.
Respondent claimed that the seizure of petitioners personal belongings and
equipment was in the exercise of its retaining lien, considering that the petitioner
failed to settle the said obligations up to the time the complaint was filed.21
Considering that petitioner already committed several breaches of contract, the
respondent thus opted not to renew its Contracts of Lease with her anymore. The
security deposits were made in order to ensure faithful compliance with the terms
of their lease agreements; and since petitioner committed several infractions
thereof, respondent was justified in forfeiting the security deposits in the latters
favor.
On 30 April 2001, the RTC rendered a Judgment22 in favor of the petitioner and
found that the physical takeover by the respondent of the leased premises and
the seizure of petitioners equipment and personal belongings without prior notice
were illegal. The decretal part of the RTC Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby rendered ordering
the [herein respondent] to pay [herein petitioner] the amount of P192,000.00
representing the security deposits made by the [petitioner] andP50,000.00 as
and for attorneys fees.
The [respondent] is likewise ordered to return to the [petitioner] the various
properties seized by the former after settling her account with the [respondent].
Lastly, the [respondent] may choose either to reimburse the [petitioner] one half
(1/2) of the value of the improvements introduced by the plaintiff at SM Megamall
should [respondent] choose to appropriate the improvements to itself or require
the [petitioner] to remove the improvements, even though the principal thing may
suffer damage thereby. [Petitioner] shall not, however, cause anymore
impairment upon the said leased premises than is necessary.
The other damages claimed by the plaintiff are denied for lack of merit.
Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of
Appeals.

In a Decision23 dated 10 October 2003, the Court of Appeals modified the RTC
Judgment and found that the respondent was justified in forfeiting the security
deposits and was not liable to reimburse the petitioner for the value of the
improvements introduced in the leased premises and to pay for attorneys fees.
In modifying the findings of the lower court, the appellate court declared that in
view of the breaches of contract committed by the petitioner, the respondent is
justified in forfeiting the security deposits. Moreover, since the petitioner did not
obtain the consent of the respondent before she introduced improvements on the
SM Megamall store space, the respondent has therefore no obligation to
reimburse the petitioner for the amount expended in connection with the said
improvements.24 The Court of Appeals, however, maintained the order of the trial
court for respondent to return to petitioner her properties after she has settled her
obligations to the respondent. The appellate court denied petitioners Motion for
Reconsideration in a Resolution25 dated 19 April 2006.
Hence, this instant Petition for Review on Certiorari26 filed by the petitioner
assailing the Court of Appeals Decision. For the resolution of this Court are the
following issues:
I. Whether or not the respondent is liable to return the security deposits
to the petitions.
II. Whether or not the respondent is liable to reimburse the petitioner for
the sum of the improvements she introduced in the leased premises.
III. Whether or not the respondent is liable for attorneys fees.27
The appellate court, in finding that the respondent is authorized to forfeit the
security deposits, relied on the provisions of Sections 5 and 18 of the Contract of
Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of
SIXTY THOUSAND PESOS (P60,000.00) equivalent to three (3) months rent as
security for the full and faithful performance to each and every term, provision,
covenant and condition of this lease and not as a pre-payment of rent. If at any
time during the term of this lease the rent is increased[,] the LESSEE on demand
shall make an additional deposit equal to the increase in rent. The LESSOR shall
not be required to keep the deposit separate from its general funds and the
deposit shall not be entitled to interest. The deposit shall remain intact during the
entire term and shall not be applied as payment for any monetary obligations of
the LESSEE under this contract. If the LESSEE shall faithfully perform every
provision of this lease[,] the deposit shall be refunded to the LESSEE upon the

113
expiration of this Lease and upon satisfaction of all monetary obligation to the
LESSOR.
xxxx
Section 18. TERMINATION. Any breach, non-performance or non-observance of
the terms and conditions herein provided shall constitute default which shall be
sufficient ground to terminate this lease, its extension or renewal. In which event,
the LESSOR shall demand that LESSEE immediately vacate the premises,
and LESSOR shall forfeit in its favor the deposit tendered without prejudice to
any such other appropriate action as may be legally authorized.28
Since it was already established by the trial court that the petitioner was guilty of
committing several breaches of contract, the Court of Appeals decreed that she
cannot therefore rightfully demand the return of the security deposits for the
same are deemed forfeited by reason of evident contractual violations.
It is undisputed that the above-quoted provision found in all Contracts of Lease is
in the nature of a penal clause to ensure petitioners faithful compliance with the
terms and conditions of the said contracts.
A penal clause is an accessory undertaking to assume greater liability in case of
breach. It is attached to an obligation in order to insure performance and has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of greater responsibility in the event
of breach.29The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof of the existence and the measure of damages
caused by the breach.30 Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedoms of the parties to
agree on such terms and conditions as they see fit as long as they are not
contrary to law, morals, good customs, public order or public policy.

Nevertheless, courts may equitably reduce a stipulated penalty in the contracts in

two instances: (1) if the principal obligation has been partly or irregularly
complied with; and (2) even if there has been no compliance if the penalty is
iniquitous or unconscionable in accordance with Article 1229 of the Civil Code
which clearly provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.31
In ascertaining whether the penalty is unconscionable or not, this court set out
the following standard in Ligutan v. Court of Appeals,32 to wit:
The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such factor as, but
not necessarily confined to, the type, extent and purpose of the penalty, the
nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the
court. xxx.
In the instant case, the forfeiture of the entire amount of the security deposits in
the sum of P192,000.00 was excessive and unconscionable considering that the
gravity of the breaches committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable therefore to reduce
the penalty of the petitioner to 50% of the total amount of security deposits.
It is in the exercise of its sound discretion that this court tempered the penalty for
the breaches committed by the petitioner to 50% of the amount of the security
deposits. The forfeiture of the entire sum of P192,000.00 is clearly a usurious
and iniquitous penalty for the transgressions committed by the petitioner. The
respondent is therefore under the obligation to return the 50% of P192,000.00 to
the petitioner.
Turning now to the liability of the respondent to reimburse the petitioner for onehalf of the expenses incurred for the improvements on the leased store space at
SM Megamall, the following provision in the Contracts of Lease will enlighten us
in resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The LESSEE
shall not make any alterations, additions, or improvements without the prior

114
written consent of LESSOR; and all alterations, additions or improvements made
on the leased premises, except movable or fixtures put in at LESSEEs expense
and which are removable, without defacing the buildings or damaging its
floorings, shall become LESSORs property without
compensation/reimbursement but the LESSOR reserves the right to require the
removal of the said alterations, additions or improvements upon expiration of the
lease.
The foregoing provision in the Contract of Lease mandates that before the
petitioner can introduce any improvement on the leased premises, she should
first obtain respondents consent. In the case at bar, it was not shown that
petitioner previously secured the consent of the respondent before she made the
improvements on the leased space in SM Megamall. It was not even alleged by
the petitioner that she obtained such consent or she at least attempted to secure
the same. On the other hand, the petitioner asserted that respondent allegedly
misrepresented to her that it would renew the terms of the contracts from time to
time after their expirations, and that the petitioner was so induced thereby that
she expended the sum of P200,000.00 for the improvement of the store space
leased.
This argument was squarely addressed by this court in Fernandez v. Court of
Appeals,33 thus:
The Court ruled that the stipulation of the parties in their lease contract "to be
renewable" at the option of both parties stresses that the faculty to renew was
given not to the lessee alone nor to the lessor by himself but to the two
simultaneously; hence, both must agree to renew if a new contract is to come
about.
Petitioners contention that respondents had verbally agreed to extend the lease
indefinitely is inadmissible to qualify the terms of the written contract under the
parole evidence rule, and unenforceable under the statute of frauds.34
Moreover, it is consonant with human experience that lessees, before occupying
the leased premises, especially store spaces located inside malls and big
commercial establishments, would renovate the place and introduce
improvements thereon according to the needs and nature of their business and in
harmony with their trademark designs as part of their marketing ploy to attract
customers. Certainly, no inducement or misrepresentation from the lessor is
necessary for this purpose, for it is not only a matter of necessity that a lessee
should re-design its place of business but a business strategy as well.

In ruling that the respondent is liable to reimburse petitioner one half of the
amount of improvements made on the leased store space should it choose to
appropriate the same, the RTC relied on the provision of Article 1678 of the Civil
Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which are
suitable to the use for which the lease is intended, without altering the form or
substance of the property leased, the lessor upon the termination of the lease
shall pay the lessee one-half of the value of the improvements at that time.
Should the lessor refuse to reimburse said amount, the lessee may remove the
improvements, even though the principal thing may suffer damage thereby. He
shall not, however, cause any more impairment upon the property leased than is
necessary.
While it is true that under the above-quoted provision of the Civil Code, the lessor
is under the obligation to pay the lessee one-half of the value of the
improvements made should the lessor choose to appropriate the improvements,
Article 1678 however should be read together with Article 448 and Article 546 of
the same statute, which provide:
Art. 448. The owner of the land on which anything has been built, sown or
planted in good faith, shall have the right to appropriate as his own the works,
sowing or planting, after payment of the indemnity provided for in articles 546
and 548, or to oblige the one who built or planted to pay the price of the land, and
the one who sowed, the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more than that of the building
or trees. In such case, he shall pay reasonable rent, if the owner of the land does
not choose to appropriate the building or trees after proper indemnity. The parties
shall agree upon the terms of the lease and in case of disagreement, the court
shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every possessor; but only
possessor in good faith may retain the thing until he has been reimbursed
therefor.
Useful expenses shall be refunded only to the possessor in good faith with the
same right of retention, the person who has defeated him in the possession
having the option of refunding the amount of the expenses or of paying the
increase in value which the thing may have acquired by reason thereof.

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Thus, to be entitled to reimbursement for improvements introduced on the
property, the petitioner must be considered a builder in good faith. Further,
Articles 448 and 546 of the Civil Code, which allow full reimbursement of useful
improvements and retention of the premises until reimbursement is made, apply
only to a possessor in good faith, i.e., one who builds on land with the belief that
he is the owner thereof. A builder in good faith is one who is unaware of any flaw
in his title to the land at the time he builds on it.35 In this case, the petitioner
cannot claim that she was not aware of any flaw in her title or was under the
belief that she is the owner of the subject premises for it is a settled fact that she
is merely a lessee thereof.1wphi1
In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring that
lessees are not possessors or builders in good faith, thus:
Being mere lessees, the private respondents knew that their occupation of the
premises would continue only for the life of the lease. Plainly, they cannot be
considered as possessors nor builders in good faith.
In a plethora of cases, this Court has held that Article 448 of the Civil Code, in
relation to Article 546 of the same Code, which allows full reimbursement of
useful improvements and retention of the premises until reimbursement is made,
applies only to a possessor in good faith, i.e., one who builds on land with the
belief that he is the owner thereof. It does not apply where one's only interest is
that of a lessee under a rental contract; otherwise, it would always be in the
power of the tenant to "improve" his landlord out of his property.
Since petitioners interest in the store space is merely that of the lessee under
the lease contract, she cannot therefore be considered a builder in good faith.

Consequently, respondent may appropriate the improvements introduced on the

leased premises without any obligation to reimburse the petitioner for the sum
expended.
Anent the claim for attorneys fees, we resolve to likewise deny the award of the
same. Attorneys fees may be awarded when a party is compelled to litigate or to
incur expenses to protect its interest by reason of unjustified act of the other.37
In the instant petition, it was not shown that the respondent unjustifiably refused
to grant the demands of the petitioner so as to compel the latter to initiate legal
action to enforce her right. As we have found herein, there is basis for
respondents refusal to return to petitioner the security deposits and to reimburse
the costs of the improvements in the leased premises. The award of attorneys
fees is therefore not proper in the instant case.
WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED.
The Court of Appeals Decision dated 10 October 2003 in CA-G.R. CV No. 73853
is hereby AFFIRMED with the MODIFICATION that the respondent may forfeit
only 50% of the total amount of the security deposits in the sum of P192,000.00,
and must return the remaining 50% to the petitioner. No costs.
SO ORDERED.