JUAN F. VILLARROEL, vs.

BERNARDINO ESTRADA
G.R. No. L-47362 December 19, 1940
FACTS: On May 9 1912, Alejandra F. Callao mother of herein petitioner obtained from the Sps
Mariano Estrada and Severina a loan of 1000 pesos payable in 6 years. Alejandra died leaving
petitioner as the sole heir. The Sps Mariano Estrada and Severina died as well leaving the
respondent as the sole heir. On Aug 9 1930, petitioner signed a document assuming the obligation
to pay the respondent 1000 plus 12% per annum interest. Hence the action filed to recover said
amount.
The CFI ruled in favor of the respondent ordering the petitioner to pay 1000 plus interest of 12% per
annum to be counted from Aug 9 1930.

ISSUE: Whether or not the present action may prosper notwithstanding the prescription of the action
to recover the original debt?
HELD: Yes. The present action is not based on the original debt contracted by petitioners mother
which has already prescribed but on petitioners undertaking on Aug 9 1930 to assume the original
obligation. For the petitioner who is the sole heir of the original debtor with rights to the latters
inheritance, the debt legally contracted by his mother even if it has already lost enforceability due to
prescription, has become a moral obligation which is a sufficient consideration to make the obligation
he voluntarily assumedon Aug 9 1930 enforceable and legally demandable.

G.R. No. L-13667 April 29, 1960

PRIMITIVO ANSAY, ETC., ET AL., plaintiffs-appellants,

vs.
THE BOARD OF DIRECTORS OF THE NATIONAL DEVELOPMENT COMPANY, ET
AL., defendants-appellees.

On July 25, 1956, appellants filed against appellees in the Court of First Instance of Manila a
complaint praying for a 20% Christmas bonus for the years 1954 and 1955. The court a quo on
appellees' motion to dismiss.

(a) A bonus is an act of liberality and the court takes it that it is not within its judicial powers
to command respondents to be liberal;

(b) Petitioners admit that respondents are not under legal duty to give such bonus but that
they had only ask that such bonus be given to them because it is a moral obligation of
respondents to give that but as this Court understands, it has no power to compel a party to
comply with a moral obligation (Art. 142, New Civil Code.).
Appellants contend that there exists a cause of action in their complaint because their claim rests on
moral grounds or what in brief is defined by law as a natural obligation.

Since appellants admit that appellees are not under legal obligation to give such claimed bonus; that
the grant arises only from a moral obligation or the natural obligation that they discussed in their brief,
this Court feels it urgent to reproduce at this point, the definition and meaning of natural obligation.

Article 1423 of the New Civil Code classifies obligations into civil or natural. "Civil obligations are a
right of action to compel their performance. Natural obligations, not being based on positive law but
on equity and natural law, do not grant a right of action to enforce their performance, but after
voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or
rendered by reason thereof".

GR: It is thus readily seen that an element of natural obligation before it can be cognizable by the
court is voluntary fulfillment by the obligor. Certainly retention can be ordered but only after there has
been voluntary performance. But here there has been no voluntary performance. In fact, the court
cannot order the performance.

From the legal point of view a bonus is not a demandable and enforceable obligation. It is so when it
is made a part of the wage or salary compensation. Philippine Education Co. vs. CIR and the Union
of Philippine Education Co., Employees

H. E. Heacock vs. National Labor Union, et al.

XPN: Even if a bonus is not demandable for not forming part of the wage, salary or
compensation of an employee, the same may nevertheless, be granted on equitable
consideration as when it was given in the past, though withheld in succeeding two years from
low salaried employees due to salary increases.

G.R. No. L-48889 May 11, 1989

DEVELOPMENT BANK OF THE PHILIPPINES (DBP), petitioner,

vs.
THE HONORABLE MIDPAINTAO L. ADIL, Judge of the Second Branch of the Court of First
Instance of Iloilo and SPOUSES PATRICIO CONFESOR and JOVITA
VILLAFUERTE, respondents.

the validity of a promissory note which was executed in consideration of a previous promissory note
the enforcement of which had been barred by prescription.

On February 10, 1940 spouses Patricio Confesor and Jovita Villafuerte obtained an agricultural loan
from the Agricultural and Industrial Bank (AIB), now the Development of the Philippines (DBP), in the
sum of P2,000.00, Philippine Currency, as evidenced by a promissory note of said date whereby
they bound themselves jointly and severally to pay the account in ten (10) equal yearly amortizations.
As the obligation remained outstanding and unpaid even after the lapse of the aforesaid ten-year
period, Confesor, who was by then a member of the Congress of the Philippines, executed a second
promissory note on April 11, 1961 expressly acknowledging said loan and promising to pay the
same on or before June 15, 1961

Said spouses not having paid the obligation on the specified date, the DBP filed a complaint FOR
PAYMENT.
There is no doubt that prescription has set in as to the first promissory note of February 10, 1940.
However, when respondent Confesor executed the second promissory note on April 11, 1961
whereby he promised to pay the amount covered by the previous promissory note on or before June
15, 1961, and upon failure to do so, agreed to the foreclosure of the mortgage, said respondent
thereby effectively and expressly renounced and waived his right to the prescription of the action
covering the first promissory note.

This Court had ruled in a similar case that

... when a debt is already barred by prescription, it cannot be enforced by the creditor.
But a new contract recognizing and assuming the prescribed debt would be valid and
enforceable ... . 1

Thus, it has been held

Where, therefore, a party acknowledges the correctness of a debt and promises to

pay it after the same has prescribed and with full knowledge of the prescription he
thereby waives the benefit of prescription. 2

This is not a mere case of acknowledgment of a debt that has prescribed but a new promise to pay
the debt. The consideration of the new promissory note is the pre-existing obligation under the first
promissory note. The statutory limitation bars the remedy but does not discharge the debt.

A new express promise to pay a debt barred ... will take the case from the operation
of the statute of limitations as this proceeds upon the ground that as a statutory
limitation merely bars the remedy and does not discharge the debt, there is
something more than a mere moral obligation to support a promise, to wit a pre-
existing debt which is a sufficient consideration for the new the new promise; upon
this sufficient consideration constitutes, in fact, a new cause of action. 3

... It is this new promise, either made in express terms or deduced from an
acknowledgement as a legal implication, which is to be regarded as reanimating the
old promise, or as imparting vitality to the remedy (which by lapse of time had
become extinct) and thus enabling the creditor to recover upon his original contract. 4

However, the court a quo held that in signing the promissory note alone, respondent Confesor ALSO
BIND HER WIFE.

Under Article 165 of the Civil Code, the husband is the administrator of the conjugal partnership. As
such administrator, all debts and obligations contracted by the husband for the benefit of the
conjugal partnership, are chargeable to the conjugal partnership. 5 No doubt, in this case, respondent
Confesor signed the second promissory note for the benefit of the conjugal partnership. Hence the
conjugal partnership is liable for this obligation.

G.R. No. L-3756 June 30, 1952

SAGRADA ORDEN DE PREDICADORES DEL SANTISMO ROSARIO DE FILIPINAS, plaintiff-

appellee,
vs.
NATIONAL COCONUT CORPORATION, defendant-appellant.
This is an action to recover the possession of a piece of real property (land and warehouses)
situated in Pandacan Manila, and the rentals for its occupation and use. The land belongs to the
SAGRADA ORDEN, in whose name the title was registered before the war. On January 4, 1943,
during the Japanese military occupation, the land was acquired by a Japanese corporation. After
liberation, on April 4, 1946, the Alien Property Custodian of the United States of America took
possession, control, and custody thereof under section 12 of the Trading with the Enemy Act, 40
Stat., 411, for the reason that it belonged to an enemy national. During the year 1946 the property
was occupied by the Copra Export Management Company under a custodianship agreement with
United States Alien Property Custodian (Exhibit G), and when it vacated the property it was occupied
by the NATIONAL COCONUT CORP. The Philippine Government made representations with the
Office Alien Property Custodian for the use of property by the Government. On March 31, 1947, the
defendant was authorized to repair the warehouse on the land, and actually spent thereon the
repairs the sum of P26,898.27. In 1948, defendant leased one-third of the warehouse to one
Dioscoro Sarile at a monthly rental of P500, which was later raised to P1,000 a month. Sarile did not
pay the rents, so action was brought against him. It is not shown, however, if the judgment was ever
executed.

Plaintiff made claim to the property before the Alien Property Custodian of the United States, but as
this was denied, it brought an action in court to annul the sale of property of Taiwan Tekkosho, and
recover its possession. The Republic of the Philippines was allowed to intervene in the action. The
case did not come for trial because the parties presented a joint petition in which it is claimed by
plaintiff that the sale in favor of the Taiwan Tekkosho was null and void because it was executed
under threats, duress, and intimidation, and it was agreed that the title issued in the name of the
Taiwan Tekkosho be cancelled and the original title of plaintiff re-issued;

Defendant-appellant is not guilty of any offense at all, because it entered the premises and occupied
it with the permission of the entity which had the legal control and administration thereof, the
Allien Property Administration. Neither was there any negligence on its part. There was also no
privity (of contract or obligation) between the Alien Property Custodian and the Taiwan Tekkosho,
which had secured the possession of the property from the plaintiff-appellee by the use of duress,
such that the Alien Property Custodian or its permittee (defendant-appellant) may be held
responsible for the supposed illegality of the occupation of the property by the said Taiwan Tekkosho.
The Allien Property Administration had the control and administration of the property not as
successor to the interests of the enemy holder of the title, the Taiwan Tekkosho, but by express
provision of law (Trading with the Enemy Act of the United States, 40 Stat., 411; 50 U.S.C.A., 189).
Neither is it a trustee of the former owner, the plaintiff-appellee herein, but a trustee of then
Government of the United States (32 Op. Atty. Gen. 249; 50 U.S.C.A. 283), in its own right, to the
exclusion of, and against the claim or title of, the enemy owner. (Youghioheny & Ohio Coal Co. vs.
Lasevich [1920], 179 N.W., 355; 171 Wis., 347; U.S.C.A., 282-283.) From August, 1946, when
defendant-appellant took possession, to the late of judgment on February 28, 1948, Allien Property
Administration had the absolute control of the property as trustee of the Government of the United
States, with power to dispose of it by sale or otherwise, as though it were the absolute owner. (U.S
vs. Chemical Foundation [C.C.A. Del. 1925], 5 F. [2d], 191; 50 U.S.C.A., 283.) Therefore, even if
defendant-appellant were liable to the Allien Property Administration for rentals, these would not
accrue to the benefit of the plaintiff-appellee, the owner, but to the United States Government.

But there is another ground why the claim or rentals can not be made against defendant-appellant.
There was no agreement between the Alien Property Custodian and the defendant-appellant for the
latter to pay rentals on the property. The existence of an implied agreement to that effect is contrary
to the circumstances. The copra Export Management Company, which preceded the defendant-
appellant, in the possession and use of the property, does not appear to have paid rentals therefor,
as it occupied it by what the parties denominated a "custodianship agreement," and there is no
provision therein for the payment of rentals or of any compensation for its custody and or occupation
and the use. The Trading with the Enemy Act, as originally enacted, was purely a measure of
conversation, hence, it is very unlikely that rentals were demanded for the use of the property. When
the National coconut Corporation succeeded the Copra Export Management Company in the
possession and use of the property, it must have been also free from payment of rentals, especially
as it was Government corporation, and steps where then being taken by the Philippine Government
to secure the property for the National Coconut Corporation. So that the circumstances do not justify
the finding that there was an implied agreement that the defendant-appellant was to pay for the use
and occupation of the premises at all.

The above considerations show that plaintiff-appellee's claim for rentals before it obtained the
judgment annulling the sale of the Taiwan Tekkosho may not be predicated on any negligence or
offense of the defendant-appellant, or any contract, express or implied, because the Allien Property
Administration was neither a trustee of plaintiff-appellee, nor a privy to the obligations of the Taiwan
Tekkosho, its title being based by legal provision of the seizure of enemy property. We have also
tried in vain to find a law or provision thereof, or any principle in quasi contracts or equity, upon
which the claim can be supported. On the contrary, as defendant-appellant entered into possession
without any expectation of liability for such use and occupation, it is only fair and just that it may not
be held liable therefor. And as to the rents it collected from its lessee, the same should accrue to it
as a possessor in good faith, as this Court has already expressly held. (Resolution, National
Coconut Corporation vs. Geronimo, 83 Phil. 467.)

Lastly, the reservation of this action may not be considered as vesting a new right; if no right to claim
for rentals existed at the time of the reservation, no rights can arise or accrue from such reservation
alone.

Wherefore, the part of the judgment appealed from, which sentences defendant-appellant to pay
rentals from August, 1946, to February 28, 1949, is hereby reversed. In all other respects the
judgment is affirmed. Costs of this appeal shall be against the plaintiff-appellee.

G.R. No. 183204 January 13, 2014

THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.

Bank deposits, which are in the nature of a simple loan or mutuum,1 must be paid upon demand by
the depositor.2

Petitioner Metropolitan Bank and Trust Company is a domestic banking corporation duly organized
and existing under the laws of the Philippines.6 Respondent Ana Grace Rosales (Rosales) is the
owner of China Golden Bridge Travel Services,7 a travel agency.8 Respondent Yo Yuk To is the
mother of respondent Rosales.9

In 2000, respondents opened a Joint Peso Account10 with petitioners Pritil-Tondo Branch.11

In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a Taiwanese National
applying for a retirees visa from the Philippine Leisure and Retirement Authority (PLRA), to
petitioners branch in Escolta to open a savings account, as required by the PLRA.13 Since Liu Chiu
Fang could speak only in Mandarin, respondent Rosales acted as an interpreter for her.14

respondents opened with petitioners Pritil-Tondo Branch a Joint Dollar Account15 with an initial
deposit of US$14,000.00.16
petitioner issued a "Hold Out" order against respondents accounts.17

METROBANK filed before the Office of the Prosecutor of Manila a criminal case for Estafa through
False Pretences, Misrepresentation, Deceit, and Use of Falsified Documents against respondent
Rosales.19

Petitioner accused respondent Rosales and an unidentified woman as the ones responsible for the
unauthorized and fraudulent withdrawal of US$75,000.00 from Liu Chiu Fangs dollar account with
petitioners Escolta Branch.20Petitioner alleged that on February 5, 2003, its branch in Escolta
received from the PLRA a Withdrawal Clearance for the dollar account of Liu Chiu Fang;21

that in the afternoon of the same day, respondent Rosales went to petitioners Escolta Branch to
inform its Branch Head, Celia A. Gutierrez (Gutierrez), that Liu Chiu Fang was going to withdraw her
dollar deposits in cash;

that the impostor was able to withdraw Liu Chiu Fangs dollar deposit in the amount of
US$75,000.00;25 that on March 3, 2003, respondents opened a dollar account with petitioner; and
that the bank later discovered that the serial numbers of the dollar notes deposited by respondents
in the amount of US$11,800.00 were the same as those withdrawn by the impostor.26

Respondent Rosales, however, denied taking part in the fraudulent and unauthorized withdrawal
from the dollar account of Liu Chiu Fang.27

On December 15, 2003, the Office of the City Prosecutor of Manila issued a Resolution dismissing
the criminal case for lack of probable cause.43 Unfazed, petitioner moved for reconsideration.

The Petition is bereft of merit.

At the outset, the relevant issues in this case are (1) whether petitioner breached its contract with
respondents, and (2) if so, whether it is liable for damages.

The "Hold Out" clause does not apply to the instant case.

Petitioner claims that it did not breach its contract with respondents because it has a valid reason for
issuing the "Hold Out" order. Petitioner anchors its right to withhold respondents deposits on the
Application and Agreement for Deposit Account, which reads:

Petitioners reliance on the "Hold Out" clause in the Application and Agreement for Deposit Account
is misplaced.

The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the
sources of obligation enumerated in Article 115779 of the Civil Code, to wit: law, contracts, quasi-
contracts, delict, and quasi-delict. In this case, petitioner failed to show that respondents have an
obligation to it under any law, contract, quasi-contract, delict, or quasi-delict. And although a criminal
case was filed by petitioner against respondent Rosales, this is not enough reason for petitioner to
issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been
rendered against respondent Rosales.

In view of the foregoing, we find that petitioner is guilty of breach of contract when it unjustifiably
refused to release respondents deposit despite demand. Having breached its contract with
respondents, petitioner is liable for damages.
Respondents are entitled to moral and
exemplary damages and attorneys fees. 1wphi1

In cases of breach of contract, moral damages may be recovered only if the defendant acted
fraudulently or in bad faith,80 or is "guilty of gross negligence amounting to bad faith, or in wanton
disregard of his contractual obligations."81

In this case, a review of the circumstances surrounding the issuance of the "Hold Out" order reveals
that petitioner issued the "Hold Out" order in bad faith. First of all, the order was issued without any
legal basis. Second, petitioner did not inform respondents of the reason for the "Hold Out."82 Third,
the order was issued prior to the filing of the criminal complaint. Records show that the "Hold Out"
order was issued on July 31, 2003,83 while the criminal complaint was filed only on September 3,
2003.84 All these taken together lead us to conclude that petitioner acted in bad faith when it
breached its contract with respondents. As we see it then, respondents are entitled to moral
damages.

As to the award of exemplary damages, Article 222985 of the Civil Code provides that exemplary
damages may be imposed "by way of example or correction for the public good, in addition to the
moral, temperate, liquidated or compensatory damages." They are awarded only if the guilty party
acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.86

In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner when it refused to release the deposits of respondents without any legal basis.
We need not belabor the fact that the banking industry is impressed with public interest.87 As
such, "the highest degree of diligence is expected, and high standards of integrity and performance
are even required of it."88 It must therefore "treat the accounts of its depositors with meticulous care
and always to have in mind the fiduciary nature of its relationship with them."89 For failing to do this,
an award of exemplary damages is justified to set an example.

The award of attorney's fees is likewise proper pursuant to paragraph 1, Article 220890 of the Civil
Code.

Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
 (8) In actions for indemnity under workmen's compensation and employer's liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney's fees and
expenses of litigation should be recovered.

In all cases, the attorney's fees and expenses of litigation must be reasonable.

G.R. No. 179337 April 30, 2008

JOSEPH SALUDAGA, petitioner,

vs.
FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of
FEU, respondents.

The antecedent facts are as follows:

Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University
(FEU) when he was shot by Alejandro Rosete (Rosete), one of the security guards on duty at the
school premises on August 18, 1996. .SALUDAGA WAS RUSH TO THE HOSPITAL. Rosete
was brought to the police station where he explained that the shooting was accidental. He was
eventually released considering that no formal complaint was filed against him.

Petitioner thereafter filed a complaint for damages against FEU AND ITS PRESIDENT on the
ground that they breached their obligation to provide students with a safe and secure environment
and an atmosphere conducive to learning. Respondents, in turn, filed a Third-Party
Complaint7 against Galaxy Development and Management Corporation (Galaxy), the agency
contracted by respondent FEU to provide security services within its premises and Mariano D.
Imperial (Imperial), to indemnify them for whatever would be adjudged in favor of petitioner, if any;
and to pay attorney's fees and cost of the suit. On the other hand, Galaxy and Imperial filed a
Fourth-Party Complaint against AFP General Insurance.8

trial court rendered a decision in favor of petitioner, the dispositive portion of which reads:

FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally Joseph
Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum from the filing
of the complaint until fully paid; moral damages of P300,000.00, exemplary damages of
P500,000.00, attorney's fees of P100,000.00 and cost of the suit;

Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to indemnify
jointly and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity as President of
FEU) for the above-mentioned amounts;
Petitioner is suing respondents for damages based on the alleged breach of student-school contract
for a safe learning environment. The pertinent portions of petitioner's Complaint read:

6.0. At the time of plaintiff's confinement, the defendants or any of their representative did
not bother to visit and inquire about his condition.

11.0. Defendants are responsible for ensuring the safety of its students while the latter are
within the University premises.

12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them.
Under this contract, defendants are supposed to ensure that adequate steps are taken to
provide an atmosphere conducive to study and ensure the safety of the plaintiff while inside
defendant FEU's premises

In Philippine School of Business Administration v. Court of Appeals,13 we held that:

When an academic institution accepts students for enrollment, there is established a contract
between them, resulting in bilateral obligations which both parties are bound to comply with.
For its part, the school undertakes to provide the student with an education that would
presumably suffice to equip him with the necessary tools and skills to pursue higher
education or a profession. On the other hand, the student covenants to abide by the school's
academic requirements and observe its rules and regulations.

Institutions of learning must also meet the implicit or "built-in" obligation of providing their
students with an atmosphere that promotes or assists in attaining its primary undertaking of
imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher
mathematics or explore the realm of the arts and other sciences when bullets are flying or
grenades exploding in the air or where there looms around the school premises a constant
threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to
maintain peace and order within the campus premises and to prevent the breakdown
thereof.14

It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of
its compliance justify, prima facie, a corresponding right of relief.15 In the instant case, we find that,
when petitioner was shot inside the campus by no less the security guard who was hired to maintain
peace and secure the premises, there is a prima facie showing that respondents failed to comply
with its obligation to provide a safe and secure environment to its students.

In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event
because they could not have reasonably foreseen nor avoided the accident caused by Rosete as he
was not their employee;16and that they complied with their obligation to ensure a safe learning
environment for their students by having exercised due diligence in selecting the security services of
Galaxy.

After a thorough review of the records, we find that respondents failed to discharge the burden of
proving that they exercised due diligence in providing a safe learning environment for their students.
They failed to prove that they ensured that the guards assigned in the campus met the requirements
stipulated in the Security Service Agreement. Indeed, certain documents about Galaxy were
presented during trial; however, no evidence as to the qualifications of Rosete as a security guard
for the university was offered.
Respondents also failed to show that they undertook steps to ascertain and confirm that the security
guards assigned to them actually possess the qualifications required in the Security Service
Agreement. It was not proven that they examined the clearances, psychiatric test results, 201 files,
and other vital documents enumerated in its contract with Galaxy.

Consequently, respondents' defense of force majeure must fail. In order for force majeure to be
considered, respondents must show that no negligence or misconduct was committed that may have
occasioned the loss. 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.17

Article 1170 of the Civil Code provides that those who are negligent in the performance of their
obligations are liable for damages. Accordingly, for breach of contract due to negligence in providing
a safe learning environment, respondent FEU is liable to petitioner for damages. It is essential in the
award of damages that the claimant must have satisfactorily proven during the trial the existence of
the factual basis of the damages and its causal connection to defendant's acts.18

In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and
other medical expenses.19 While the trial court correctly imposed interest on said amount, however,
the case at bar involves an obligation arising from a contract and not a loan or forbearance of money.
As such, the proper rate of legal interest is six percent (6%) per annum of the amount demanded.
Such interest shall continue to run from the filing of the complaint until the finality of this
Decision.20 After this Decision becomes final and executory, the applicable rate shall be twelve
percent (12%) per annum until its satisfaction.

The other expenses being claimed by petitioner, such as transportation expenses and those incurred
in hiring a personal assistant while recuperating were however not duly supported by receipts.21 In
the absence thereof, no actual damages may be awarded. Nonetheless, temperate damages under
Art. 2224 of the Civil Code may be recovered where it has been shown that the claimant suffered
some pecuniary loss but the amount thereof cannot be proved with certainty. Hence, the amount of
P20,000.00 as temperate damages is awarded to petitioner.

As regards the award of moral damages, there is no hard and fast rule in the determination of what
would be a fair amount of moral damages since each case must be governed by its own peculiar
circumstances.22 The testimony of petitioner about his physical suffering, mental anguish, fright,
serious anxiety, and moral shock resulting from the shooting incident23 justify the award of moral
damages. However, moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty on the wrongdoer. We deem it just
and reasonable under the circumstances to award petitioner moral damages in the amount of
P100,000.00.

Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is
reasonable in view of Article 2208 of the Civil Code.25 However, the award of exemplary damages is
deleted considering the absence of proof that respondents acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.

We note that the trial court held respondent De Jesus solidarily liable with respondent FEU.
In Powton Conglomerate, Inc. v. Agcolicol,26 we held that:
 [A] corporation is invested by law with a personality separate and distinct from those of the
persons composing it, such that, save for certain exceptions, corporate officers who entered
into contracts in behalf of the corporation cannot be held personally liable for the liabilities of
the latter. Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when - (1) he assents
to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of interest resulting in damages
to the corporation, its stockholders or other persons; (2) he consents to the issuance of
watered down stocks or who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto; (3) he agrees to hold himself personally and
solidarily liable with the corporation; or (4) he is made by a specific provision of law
personally answerable for his corporate action.27

None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus
should not be held solidarily liable with respondent FEU.

Incidentally, although the main cause of action in the instant case is the breach of the school-student
contract, petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of
the Civil Code, which provides:

Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts
or omissions, but also for those of persons for whom one is responsible.

xxxx

Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in
any business or industry.

xxxx

The responsibility treated of in this article shall cease when the persons herein mentioned
prove that they observed all the diligence of a good father of a family to prevent damage.

We agree with the findings of the Court of Appeals that respondents cannot be held liable for
damages under Art. 2180 of the Civil Code because respondents are not the employers of Rosete.
The latter was employed by Galaxy. The instructions issued by respondents' Security Consultant to
Galaxy and its security guards are ordinarily no more than requests commonly envisaged in the
contract for services entered into by a principal and a security agency. They cannot be construed as
the element of control as to treat respondents as the employers of Rosete.28

As held in Mercury Drug Corporation v. Libunao:29

In Soliman, Jr. v. Tuazon,30 we held that where the security agency recruits, hires and
assigns the works of its watchmen or security guards to a client, the employer of such guards
or watchmen is such agency, and not the client, since the latter has no hand in selecting the
security guards. Thus, the duty to observe the diligence of a good father of a family cannot
be demanded from the said client:

[I]t is settled in our jurisdiction that where the security agency, as here, recruits,
hires and assigns the work of its watchmen or security guards, the agency is the
 employer of such guards or watchmen. Liability for illegal or harmful acts committed
by the security guards attaches to the employer agency, and not to the clients or
customers of such agency. As a general rule, a client or customer of a security
agency has no hand in selecting who among the pool of security guards or
watchmen employed by the agency shall be assigned to it; the duty to observe the
diligence of a good father of a family in the selection of the guards cannot, in the
ordinary course of events, be demanded from the client whose premises or property
are protected by the security guards.

xxxx

The fact that a client company may give instructions or directions to the security guards
assigned to it, does not, by itself, render the client responsible as an employer of the security
guards concerned and liable for their wrongful acts or omissions.31

For these acts of negligence and for having supplied respondent FEU with an unqualified security
guard, which resulted to the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable
to respondent FEU for such damages equivalent to the above-mentioned amounts awarded to
petitioner.

Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly
negligent in directing the affairs of the security agency. It was Imperial who assured petitioner that
his medical expenses will be shouldered by Galaxy but said representations were not fulfilled
because they presumed that petitioner and his family were no longer interested in filing a formal
complaint against them.35

G.R. No. L-36840 May 22, 1973

PEOPLE'S CAR INC., plaintiff-appellant,

vs.
COMMANDO SECURITY SERVICE AGENCY, defendant-appellee.

On April 5, 1970 at around 1:00 A.M., however, defendant's security guard on duty at plaintiff's
premises, "without any authority, consent, approval, knowledge or orders of the plaintiff and/or
defendant brought out of the compound of the plaintiff a car belonging to its customer, and drove
said car for a place or places unknown, abandoning his post as such security guard on duty inside
the plaintiff's compound, and while so driving said car in one of the City streets lost control of said
car, causing the same to fall into a ditch along J.P. Laurel St., Davao City by reason of which the
plaintiff's complaint for qualified theft against said driver, was blottered in the office of the Davao City
Police Department."5

the car of plaintiff's customer, Joseph Luy, which had been left with plaintiff for servicing and
maintenance.

Plaintiff claimed that defendant was liable for the entire amount under paragraph 5 of their contract
whereunder defendant assumed "sole responsibility for the acts done during their watch hours" by its
guards, whereas defendant contended, without questioning the amount of the actual damages
incurred by plaintiff, that its liability "shall not exceed one thousand (P1,000.00) pesos per guard
post" under paragraph 4 of their contract.

meritorious and must be granted.

Paragraph 4 of the contract, which limits defendant's liability for the amount of loss or damage to any
property of plaintiff to "P1,000.00 per guard post," is by its own terms applicable only for loss or
damage 'through the negligenceof its guards ... during the watch hours" provided that the same is
duly reported by plaintiff within 24 hours of the occurrence and the guard's negligence is verified
after proper investigation with the attendance of both contracting parties. Said paragraph is
manifestly inapplicable to the stipulated facts of record, which involve neither property of plaintiff that
has been lost or damaged at its premises nor mere negligence of defendant's security guard on duty.

Here, instead of defendant, through its assigned security guards, complying with its contractual
undertaking 'to safeguard and protect the business premises of (plaintiff) from theft, robbery,
vandalism and all other unlawful acts of any person or persons," defendant's own guard on duty
unlawfully and wrongfully drove out of plaintiffs premises a customer's car, lost control of it on the
highway causing it to fall into a ditch, thereby directly causing plaintiff to incur actual damages in the
total amount of P8,489.10.

Defendant is therefore undoubtedly liable to indemnify plaintiff for the entire damages thus incurred,
since under paragraph 5 of their contract it "assumed the responsibility for the proper performance
by the guards employed of their duties and (contracted to) be solely responsible for the acts done
during their watch hours" and "specifically released (plaintiff) from any and all liabilities ... to the third
parties arising from the acts or omissions done by the guards during their tour of duty."

Plaintiff was in law liable to its customer for the damages caused the customer's car, which had been
entrusted into its custody. Plaintiff therefore was in law justified in making good such damages and
relying in turn on defendant to honor its contract and indemnify it for such undisputed damages,
which had been caused directly by the unlawful and wrongful acts of defendant's security guard in
breach of their contract. As ordained in Article 1159, Civil Code, "obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good faith."

Plaintiff in law could not tell its customer, as per the trial court's view, that "under the Guard Service
Contract it was not liable for the damage but the defendant" since the customer could not hold
defendant to account for the damages as he had no privity of contract with defendant. Such an
approach of telling the adverse party to go to court, notwithstanding his plainly valid claim, aside
from its ethical deficiency among others, could hardly create any goodwill for plaintiff's business, in
the same way that defendant's baseless attempt to evade fully discharging its contractual liability to
plaintiff cannot be expected to have brought it more business. Worse, the administration of justice is
prejudiced, since the court dockets are unduly burdened with unnecessary litigation.

ACCORDINGLY, the judgment appealed from is hereby reversed and judgment is hereby rendered
sentencing defendant-appellee to pay plaintiff-appellant the sum of P8,489.10 as and by way of
reimbursement of the stipulated actual damages and expenses, as well as the costs of suit in both
instances. It is so ordered.
G.R. No. L-23749 April 29, 1977

FAUSTINO CRUZ, plaintiff-appellant,

vs.
J. M. TUASON & COMPANY, INC., and GREGORIO ARANETA, INC., defendants-appellees.

that upon request of the Deudors (the family of Telesforo Deudor who laid claim on the land in
question on the strength of an "informacion posesoria" ) plaintiff made permanent improvements
valued at P30,400.00 on said land having an area of more or less since defendants-appellees are
being benefited by said improvements, he is entitled to reimbursement from them of said amounts

Plaintiff opposed the motion, insisting that Article 2142 of the applicable to his case; that the Statute
of Frauds cannot be invoked by defendants, not only because Article 1403 of the Civil Code refers
only to "sale of real property or of an interest therein" and not to promises to convey real property
like the one supposedly promised by defendants to him, but also because, he, the plaintiff has
already performed his part of the agreement, hence the agreement has already been partly executed
and not merely executory within the contemplation of the Statute; and that his action has not
prescribed for the reason that defendants had ten years to comply and only after the said ten years
did his cause of action accrue, that is, ten years after March 16, 1963, the date of the approval of the
compromise agreement, and his complaint was filed on January 24, 1964.\

Defendant J. M. Tuason & Co., Inc. claimed that, insofar as the plaintiffs claim for the reimbursement
of the amounts of P38,400.00 and P7,781.74 is concerned, it is not a privy to the plaintiff's
agreement to assist the Deudors n improving the 50 quinones. On the other hand, the plaintiff
countered that, by holding and utilizing the improvements introduced by him, the defendants are
unjustly enriching and benefiting at the expense of the plaintiff; and that said improvements
constitute a lien or charge of the property itself

On the issue of statute of fraud, the Court believes that same is applicable to the instant case. The
allegation in par. 12 of the complaint states that the defendants promised and agreed to cede,
transfer and convey unto the plaintiff the 3,000 square meters of land in consideration of certain
services to be rendered then. it is clear that the alleged agreement involves an interest in real
property. Under the provisions of See. 2(e) of Article 1403 of the Civil Code, such agreement is not
enforceable as it is not in writing and subscribed by the party charged.

On the issue of statute of limitations, the Court holds that the plaintiff's action has prescribed.

Said this Honorable Court (at p. 2, Order):

It is found that the defendants are not parties to the supposed express contract entered into by and
between the plaintiff and the Deudors for the clearing and improvement of the 50 quinones.
Furthermore, in order that the alleged improvement may he considered a lien or charge on the
property, the same should have been made in good faith and under the mistake as to title.

The Court can take judicial notice of the fact that the tract of land supposedly improved by the
plaintiff had been registered way back in 1914 in the name of the predecessors-in-interest of
defendant J. M. Tuason & Co., Inc. Such being the case, the plaintiff cannot claim good faith and
mistake as to the title of the land.

Plaintiff's cause of action is premised inter alia, on the theory of unjust enrichment
under Article 2142 of the civil Code:
 ART. 2142. Certain lawful voluntary and unilateral acts give rise to
the juridical relation of quasi-contract to the end that no one shill be
unjustly enriched or benefited at the expense of another.

In like vein, Article 19 of the same Code enjoins that:

ART. 19. Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give every-one his due and observe honesty and good
faith.

We respectfully draw the attention of this Honorable Court to the fact that ARTICLE
2142 (SUPRA) DEALS WITH QUASI-CONTRACTS or situations WHERE THERE IS
NO CONTRACT BETWEEN THE PARTIES TO THE ACTION. Further, as we can
readily see from the title thereof (Title XVII), that the Same bears the designation
'EXTRA CONTRACTUAL OBLIGATIONS' or obligations which do not arise from
contracts. While it is true that there was no agreement between plaintiff and
defendants herein for the improvement of the 50 quinones since the latter are
presently enjoying and utilizing the benefits brought about through plaintiff's labor
and expenses, defendants should pay and reimburse him therefor under the principle
that 'no one may enrich himself at the expense of another.' In this posture, the
complaint states a cause of action against the defendants.

II. THAT REGARDING PLAINTIFF'S CLAIM OVER THE 3,000 SQ. MS. THE SAME
HAS NOT PRESCRIBED AND THE STATUTE OF FRAUDS IS NOT APPLICABLE
THERETO.

The Statute of Frauds is CLEARLY inapplicable to this case:

At page 2 of this Honorable Court's order dated 13 August 1964, the Court ruled as
follows:

On the issue of statute of fraud, the Court believes that same is applicable to the instant Case, The
allegation in par. 12 of the complaint states that the defendants promised and agree to cede, transfer
and convey unto the plaintiff, 3,000 square meters of land in consideration of certain services to be
rendered then. It is clear that the alleged agreement involves an interest in real property. Under the
provisions of Sec. 2(e) of Article 1403 of the Civil Code, such agreement is not enforceable as it is
not in writing and subscribed by the party charged.

To bring this issue in sharper focus, shall reproduce not only paragraph 12 of the
complaint but also the other pertinent paragraphs therein contained. Paragraph 12
states thus:

From the foregoing, it is clear then the agreement between the parties mentioned in
paragraph 12 (supra) of the complaint has already been fully EXECUTED ON ONE
PART, namely by the plaintiff. Regarding the applicability of the statute of frauds (Art.
1403, Civil Code), it has been uniformly held that the statute of frauds IS
APPLICABLE ONLY TO EXECUTORY CONTRACTS BUT NOT WHERE THE
CONTRACT HAS BEEN PARTLY EXECUTED:

SAME ACTION TO ENFORCE. The statute of frauds has

been uniformly interpreted to be applicable to executory and not to
 completed or contracts. Performance of the contracts takes it out of
the operation of the statute. ...

The statute of the frauds is not applicable to contracts which are

either totally or partially performed, on the theory that there is a wide
field for the commission of frauds in executory contracts which can
only be prevented by requiring them to be in writing, a facts which is
reduced to a minimum in executed contracts because the intention of
the parties becomes apparent buy their execution and execution, in
mots cases, concluded the right the parties. ... The partial
performance may be proved by either documentary or oral evidence.
(At pp. 564-565, Tolentino's Civil Code of the Philippines, Vol. IV,
1962 Ed.; Emphasis supplied).

Authorities in support of the foregoing rule are legion. Thus Mr. Justice Moran in his
'Comments on the Rules of Court', Vol. III, 1974 Ed., at p. 167, states:

2 THE STATUTE OF FRAUDS IS APPLICABLE ONLY TO

EXECUTORY CONTRACTS: CONTRACTS WHICH ARE EITHER
TOTALLY OR PARTIALLY PERFORMED ARE WITHOUT THE
STATUE. The statute of frauds is applicable only to executory
contracts. It is neither applicable to executed contracts nor to
contracts partially performed. The reason is simple. In executory
contracts there is a wide field for fraud because unless they be in
writing there is no palpable evidence of the intention of the
contracting parties. The statute has been enacted to prevent fraud.
On the other hand the commission of fraud in executed contracts is
reduced to minimum in executed contracts because (1) the intention
of the parties is made apparent by the execution and (2) execution
concludes, in most cases, the rights of the parties. (Emphasis
supplied)

Under paragraphs 13 and 14 of the complaint (supra) one can readily see that the
plaintiff has fulfilled ALL his obligation under the agreement between him defendants
concerning the 3,000 sq. ms. over which the latter had agreed to execute the proper
documents of transfer. This fact is further projected in paragraph 15 of the complaint
where plaintiff states;

15). That in or about the middle of 1963, after all the conditions stated
in paragraph 12 hereof had been fulfilled and fully complied with,
plaintiff demanded of said defendants that they execute the Deed of
Conveyance in his favor and deliver the title certificate in his name,
over the 3,000 sq. ms. but defendants failed and refused and
continue to fail and refuse to heed his demands. (par. 15, complaint;
Emphasis supplied).

In view of the foregoing, we respectfully submit that this Honorable court erred in
holding that the statute of frauds is applicable to plaintiff's claim over the 3,000 sq.
ms. There having been full performance of the contract on plaintiff's part, the same
takes this case out of the context of said statute.

Plaintiff's Cause of Action had NOT Prescribed:

We agree with appellant that the Statute of Frauds was erroneously applied by the trial court. It is
elementary that the Statute refers to specific kinds of transactions and that it cannot apply to any
that is not enumerated therein. And the only agreements or contracts covered thereby are the
following:

(1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;

(2) Those do not comply with the Statute of Frauds as set forth in this number, In the
following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary evidence of its
contents:

(a) An agreement that by its terms is not to be performed within a

year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage

of another;

(c) An agreement made in consideration of marriage, other than a

mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at

a price not less than five hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the evidences, or some of
them of such things in action, or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the time of the sale, of
the amount and kind of property sold, terms of sale, price, names of
the purchasers and person on whose account the sale is made, it is a
sufficient memorandum:

(e) An agreement for the leasing for a longer period than one year, or
for the sale of real property or of an interest therein:

(f) a representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract. (Art. 1403,
civil Code.)

In the instant case, what appellant is trying to enforce is the delivery to him of 3,000 square meters
of land which he claims defendants promised to do in consideration of his services as mediator or
intermediary in effecting a compromise of the civil action, Civil Case No. 135, between the
defendants and the Deudors. In no sense may such alleged contract be considered as being a "sale
of real property or of any interest therein." Indeed, not all dealings involving interest in real property
come under the Statute.
We cannot, however, escape taking judicial notice, in relation to the compromise agreement relied
upon by appellant, that in several cases We have decided, We have declared the same rescinded
and of no effect. In J. M. Tuason & Co., Inc. vs. Bienvenido Sanvictores, 4 SCRA 123, the Court held:

It is also worthy of note that the compromise between Deudors and Tuason, upon
which Sanvictores predicates his right to buy the lot he occupies, has been validly
rescinded and set aside, as recognized by this Court in its decision in G.R. No. L-
13768, Deudor vs. Tuason, promulgated on May 30, 1961.

As regards appellant's third assignment of error, We hold that the allegations in his complaint do not
sufficiently Appellants' reliance. on Article 2142 of Civil Code is misplaced. Said article provides:

Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense
of another.

it is obvious that a presumed qauasi-contract cannot emerge as against one party when the
subject mater thereof is already covered by an existing contract with another party.
Predicated on the principle that no one should be allowed to unjustly enrich himself at the expense
of another, Article 2124 creates the legal fiction of a quasi-contract precisely because of the absence
of any actual agreement between the parties concerned. Corollarily, if the one who claims having
enriched somebody has done so pursuant to a contract with a third party, his cause of action should
be against the latter, who in turn may, if there is any ground therefor, seek relief against the party
benefited.

It is essential that the act by which the defendant is benefited must have been voluntary and
unilateral on the part of the plaintiff. As one distinguished civilian puts it, "The act is voluntary.
because the actor in quasi-contracts is not bound by any pre-existing obligation to act. It is unilateral,
because it arises from the sole will of the actor who is not previously bound by any reciprocal or
bilateral agreement. The reason why the law creates a juridical relations and imposes certain
obligation is to prevent a situation where a person is able to benefit or take advantage of such lawful,
voluntary and unilateral acts at the expense of said actor." (Ambrosio Padilla, Civil Law, Vol. VI, p.
748, 1969 ed.) appellant entered into an agreement. 2142 is not applicable.

G.R. No. L-9188 December 4, 1914

GUTIERREZ HERMANOS, plaintiff-appellee,

vs.
ENGRACIO ORENSE, defendant-appellant.

counsel for Gutierrez Hermanos filed a complaint,

defendant Orense had been the owner of a parcel of land

property has up to date been recorded in the new property registry in the name of the said Orense,
Jose Duran, a nephew of the defendant, with the latter's knowledge and consent, executed before a
notary a public instrument whereby he sold and conveyed to the plaintiff company, Duran reserving
to himself the right to repurchase it for the same price within a period of four years from the date of
the said instrument;
that the plaintiff company had not entered into possession of the purchased property, owing to its
continued occupancy by the defendant and his nephew, Jose Duran, by virtue of a contract of lease
executed by the plaintiff to Duran, which contract was in force up to February 14, 1911; t

Jose Duran is notoriously insolvent and cannot reimburse the plaintiff company for the price of the
sale which he received, nor pay any sum whatever for the losses and damages occasioned by the
said sale, aside from the fact that the plaintiff had suffered damage by losing the present value of the
property, which was worth P3,000;

This suit involves the validity and efficacy of the sale under right of redemption of a parcel of land
and a masonry house with the nipa roof erected thereon, effected by Jose Duran, a nephew of the
owner of the property, Engracio Orense, for the sum of P1,500 by means of a notarial instrument
executed and ratified on February 14, 1907.

After the lapse of the four years stipulated for the redemption, the defendant refused to deliver the
property to the purchaser, the firm of Gutierrez Hermanos, and to pay the rental thereof at the rate of
P30 per month for its use and occupation since February 14, 1911, when the period for its
repurchase terminated.

His refusal was based on the allegations that he had been and was then the owner of the said
property, which was registered in his name in the property registry; that he had not executed any
written power of attorney to Jose Duran, nor had he given the latter any verbal authorization
to sell the said property to the plaintiff firm in his name;

The plaintiff firm charged Jose Duran with estafa, for having represented himself in the said deed of
sale to be the absolute owner of the aforesaid land and improvements, whereas in reality they did
not belong to him, but to the defendant Orense. acquitted

As a result of the acquittal of Jose Duran, based on the explicit testimony of his uncle, Engacio
Orense, the owner of the property, to the effect that he had consented to his nephew Duran's selling
the property under right of repurchase to Gutierrez Hermanos, counsel for this firm filed a
complainant praying, among other remedies, that the defendant Orense be compelled to execute a
deed for the transfer and conveyance to the plaintiff company of all the right, title and interest with
Orense had in the property sold, and to pay to the same the rental of the property due from February
14, 1911.itc-alf

Notwithstanding the allegations of the defendant, the record in this case shows that he did give his
consent in order that his nephew, Jose Duran, might sell the property in question to Gutierrez
Hermanos, and that he did thereafter confirm and ratify the sale by means of a public instrument
executed before a notary.

It having been proven at the trial that he gave his consent to the said sale, it follows that the
defendant conferred verbal, or at least implied, power of agency upon his nephew Duran, who
accepted it in the same way by selling the said property. The principal must therefore fulfill all the
obligations contracted by the agent, who acted within the scope of his authority. (Civil Code, arts.
1709, 1710 and 1727.)

Even should it be held that the said consent was granted subsequently to the sale, it is
unquestionable that the defendant, the owner of the property, approved the action of his nephew,
who in this case acted as the manager of his uncle's business, and Orense'r ratification produced
the effect of an express authorization to make the said sale. (Civil Code, arts. 1888 and 1892.)
Article 1259 of the Civil Code prescribes: "No one can contract in the name of another without being
authorized by him or without his legal representation according to law.

A contract executed in the name of another by one who has neither his authorization nor
legal representation shall be void, unless it should be ratified by the person in whose name it
was executed before being revoked by the other contracting party.

The sworn statement made by the defendant, Orense, while testifying as a witness at the trial of
Duran for estafa, virtually confirms and ratifies the sale of his property effected by his nephew, Duran,
and, pursuant to article 1313 of the Civil Code, remedies all defects which the contract may have
contained from the moment of its execution.

The sale of the said property made by Duran to Gutierrez Hermanos was indeed null and void in the
beginning, but afterwards became perfectly valid and cured of the defect of nullity it bore at its
execution by the confirmation solemnly made by the said owner upon his stating under oath to the
judge that he himself consented to his nephew Jose Duran's making the said sale. Moreover,
pursuant to article 1309 of the Code, the right of action for nullification that could have been brought
became legally extinguished from the moment the contract was validly confirmed and ratified, and, in
the present case, it is unquestionable that the defendant did confirm the said contract of sale and
consent to its execution.

On the testimony given by Engacio Orense at the trial of Duran for estafa, the latter was acquitted,
and it would not be just that the said testimony, expressive of his consent to the sale of his property,
which determined the acquittal of his nephew, Jose Duran, who then acted as his business manager,
and which testimony wiped out the deception that in the beginning appeared to have been practiced
by the said Duran, should not now serve in passing upon the conduct of Engracio Orense in relation
to the firm of Gutierrez Hermanos in order to prove his consent to the sale of his property, for, had it
not been for the consent admitted by the defendant Orense, the plaintiff would have been the victim
of estafa.

If the defendant Orense acknowledged and admitted under oath that he had consented to Jose
Duran's selling the property in litigation to Gutierrez Hermanos, it is not just nor is it permissible for
him afterward to deny that admission, to the prejudice of the purchaser, who gave P1,500 for the
said property.

The contract of sale of the said property contained in the notarial instrument of February 14, 1907, is
alleged to be invalid, null and void under the provisions of paragraph 5 of section 335 of the Code of
Civil Procedure, because the authority which Orense may have given to Duran to make the said
contract of sale is not shown to have been in writing and signed by Orense, but the record discloses
satisfactory and conclusive proof that the defendant Orense gave his consent to the contract of sale
executed in a public instrument by his nephew Jose Duran. Such consent was proven in a criminal
action by the sworn testimony of the principal and presented in this civil suit by other sworn
testimony of the same principal and by other evidence to which the defendant made no objection.
Therefore the principal is bound to abide by the consequences of his agency as though it had
actually been given in writing (Conlu vs. Araneta and Guanko, 15 Phil. Rep., 387; Gallemit vs.
Tabiliran, 20 Phil. Rep., 241; Kuenzle & Streiff vs. Jiongco, 22 Phil. Rep., 110.)

The repeated and successive statements made by the defendant Orense in two actions, wherein he
affirmed that he had given his consent to the sale of his property, meet the requirements of the law
and legally excuse the lack of written authority, and, as they are a full ratification of the acts
executed by his nephew Jose Duran, they produce the effects of an express power of agency.
The judgment appealed from in harmony with the law and the merits of the case, and the errors
assigned thereto have been duly refuted by the foregoing considerations, so it should be affirmed.

The judgment appealed from is hereby affirmed, with the costs against the appellant.

G.R. No. L-44546 January 29, 1988

RUSTICO ADILLE, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, EMETERIA ASEJO, TEODORICA ASEJO, DOMINGO
ASEJO, JOSEFA ASEJO and SANTIAGO ASEJO, respondents.

... [T]he land in question originally belonged to one Felisa Alzul as her own private
property; she married twice in her lifetime; the first, with one Bernabe Adille, with
whom she had as an only child, herein defendant Rustico Adille; in her second
marriage with one Procopio Asejo, her children were herein plaintiffs, now,
sometime in 1939, said Felisa sold the property in pacto de retro to certain 3rd
persons, period of repurchase being 3 years, but she died in 1942 without being able
to redeem and after her death, but during the period of redemption, herein defendant
repurchased, by himself alone, and after that, he executed a deed of extra-judicial
partition representing himself to be the only heir and child of his mother Felisa with
the consequence that he was able to secure title in his name alone also, so that OCT.
No. 21137 in the name of his mother was transferred to his name, that was in 1955;
that was why after some efforts of compromise had failed, his half-brothers and
sisters, herein plaintiffs, filed present case for partition with accounting on the
position that he was only a trustee on an implied trust when he redeemed,-and this is
the evidence, but as it also turned out that one of plaintiffs, Emeteria Asejo was
occupying a portion, defendant counterclaimed for her to vacate that,

The petition raises a purely legal issue: May a co-owner acquire exclusive ownership over the
property held in common?

Essentially, it is the petitioner's contention that the property subject of dispute devolved upon him
upon the failure of his co-heirs to join him in its redemption within the period required by law. He
relies on the provisions of Article 1515 of the old Civil Article 1613 of the present Code, giving the
vendee a retro the right to demand redemption of the entire property.

There is no merit in this petition.

The right of repurchase may be exercised by a co-owner with aspect to his share alone. 5 While the
records show that the petitioner redeemed the property in its entirety, shouldering the expenses
therefor, that did not make him the owner of all of it. In other words, it did not put to end the existing
state of co-ownership.

Necessary expenses may be incurred by one co-owner, subject to his right to collect reimbursement
from the remaining co-owners. 6 There is no doubt that redemption of property entails a necessary
expense. Under the Civil Code:

ART. 488. Each co-owner shall have a right to compel the other co-owners to
contribute to the expenses of preservation of the thing or right owned in common and
to the taxes. Any one of the latter may exempt himself from this obligation by
renouncing so much of his undivided interest as may be equivalent to his share of
 the expenses and taxes. No such waiver shall be made if it is prejudicial to the co-
ownership.

The result is that the property remains to be in a condition of co-ownership. While a vendee a retro,
under Article 1613 of the Code, "may not be compelled to consent to a partial redemption," the
redemption by one co-heir or co-owner of the property in its totality does not vest in him ownership
over it. Failure on the part of all the co-owners to redeem it entitles the vendee a retro to retain the
property and consolidate title thereto in his name. 7 But the provision does not give to the redeeming
co-owner the right to the entire property. It does not provide for a mode of terminating a co-
ownership.

Neither does the fact that the petitioner had succeeded in securing title over the parcel in his name
terminate the existing co-ownership. While his half-brothers and sisters are, as we said, liable to him
for reimbursement as and for their shares in redemption expenses, he cannot claim exclusive right to
the property owned in common. Registration of property is not a means of acquiring ownership. It
operates as a mere notice of existing title, that is, if there is one.

The petitioner must then be said to be a trustee of the property on behalf of the private respondents.
The Civil Code states:

ART. 1456. If property is acquired through mistake or fraud, the person obtaining it is,
by force of law, considered a trustee of an implied trust for the benefit of the person
from whom the property comes.

We agree with the respondent Court of Appeals that fraud attended the registration of the property.
The petitioner's pretension that he was the sole heir to the land in the affidavit of extrajudicial
settlement he executed preliminary to the registration thereof betrays a clear effort on his part to
defraud his brothers and sisters and to exercise sole dominion over the property. The aforequoted
provision therefore applies.

It is the view of the respondent Court that the petitioner, in taking over the property, did so either on
behalf of his co-heirs, in which event, he had constituted himself a negotiorum gestor under Article
2144 of the Civil Code, or for his exclusive benefit, in which case, he is guilty of fraud, and must act
as trustee, the private respondents being the beneficiaries, under the Article 1456. The evidence, of
course, points to the second alternative the petitioner having asserted claims of exclusive ownership
over the property and having acted in fraud of his co-heirs. He cannot therefore be said to have
assume the mere management of the property abandoned by his co-heirs, the situation Article 2144
of the Code contemplates. In any case, as the respondent Court itself affirms, the result would be
the same whether it is one or the other. The petitioner would remain liable to the Private respondents,
his co-heirs.

This Court is not unaware of the well-established principle that prescription bars any demand on
property (owned in common) held by another (co-owner) following the required number of years. In
that event, the party in possession acquires title to the property and the state of co-ownership is
ended . 8 In the case at bar, the property was registered in 1955 by the petitioner, solely in his name,
while the claim of the private respondents was presented in 1974. Has prescription then, set in?

We hold in the negative. Prescription, as a mode of terminating a relation of co-ownership, must

have been preceded by repudiation (of the co-ownership). The act of repudiation, in turn is subject to
certain conditions: (1) a co-owner repudiates the co-ownership; (2) such an act of repudiation is
clearly made known to the other co-owners; (3) the evidence thereon is clear and conclusive, and (4)
he has been in possession through open, continuous, exclusive, and notorious possession of the
property for the period required by law. 9

The instant case shows that the petitioner had not complied with these requisites. We are not
convinced that he had repudiated the co-ownership; on the contrary, he had deliberately kept the
private respondents in the dark by feigning sole heirship over the estate under dispute. He cannot
therefore be said to have "made known" his efforts to deny the co-ownership. Moreover, one of the
private respondents, Emeteria Asejo, is occupying a portion of the land up to the present, yet, the
petitioner has not taken pains to eject her therefrom. As a matter of fact, he sought to recover
possession of that portion Emeteria is occupying only as a counterclaim, and only after the private
respondents had first sought judicial relief.

It is true that registration under the Torrens system is constructive notice of title, 10 but it has likewise
been our holding that the Torrens title does not furnish a shield for fraud. 11 It is therefore no
argument to say that the act of registration is equivalent to notice of repudiation, assuming there was
one, notwithstanding the long-standing rule that registration operates as a universal notice of title.

G.R. No. 82670 September 15, 1989

DOMETILA M. ANDRES, doing business under the name and style "IRENE'S WEARING
APPAREL," petitioner,
vs.
MANUFACTURERS HANOVER & TRUST CORPORATION and COURT OF
APPEALS, respondents.

Petitioner, using the business name "Irene's Wearing Apparel," was engaged in the manufacture of
ladies garments, children's wear, men's apparel and linens for local and foreign buyers. Among its
foreign buyers was Facets Funwear, Inc.

In the course of the business transaction between the two, FACETS from time to time remitted
certain amounts of money to petitioner in payment for the items it had purchased.

Acting on said instruction, FNSB instructed private respondent Manufacturers Hanover and Trust
Corporation to effect the above- mentioned transfer through its facilities and to charge the amount to
the account of FNSB with private respondent. Although private respondent was able to send a telex
to PNB to pay petitioner $10,000.00 through the Pilipinas Bank, where petitioner had an account, the
payment was not effected immediately because the payee designated in the telex was only "Wearing
Apparel." Upon query by PNB, private respondent sent PNB another telex dated August 27, 1980
stating that the payment was to be made to "Irene's Wearing Apparel." On August 28, 1980,
petitioner received the remittance of $10,000.00 through Demand Draft No. 225654 of the PNB.

Meanwhile, on August 25, 1980, after learning about the delay in the remittance of the money to
petitioner, FACETS informed FNSB about the situation. On September 8, 1980, unaware that
petitioner had already received the remittance, FACETS informed private respondent about the
delay and at the same time amended its instruction by asking it to effect the payment through the
Philippine Commercial and Industrial Bank (hereinafter referred to as PCIB) instead of PNB.

Accordingly, private respondent, which was also unaware that petitioner had already received the
remittance of $10,000.00 from PNB instructed the PCIB to pay $10,000.00 to petitioner. Hence, on
September 11, 1980, petitioner received a second $10,000.00 remittance.
Private respondent debited the account of FNSB for the second $10,000.00 remittance effected
through PCIB. However, when FNSB discovered that private respondent had made a duplication of
the remittance, it asked for a recredit of its account in the amount of $10,000.00. Private respondent
complied with the request.

petition was filed. The sole issue in this case is whether or not the private respondent has the right to
recover the second $10,000.00 remittance it had delivered to petitioner. The resolution of this issue
would hinge on the applicability of Art. 2154 of the New Civil Code which provides that:

Art. 2154. If something received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.

In Velez v. Balzarza, 73 Phil. 630 (1942), the Court, speaking through Mr. Justice Bocobo explained
the nature of this article thus:

Article 1895 [now Article 2154] of the Civil Code abovequoted, is therefore applicable.
This legal provision, which determines the quasi-contract of solution indebiti, is one
of the concrete manifestations of the ancient principle that no one shall enrich himself
unjustly at the expense of another. In the Roman Law Digest the maxim was
formulated thus: "Jure naturae acquum est, neminem cum alterius detrimento et
injuria fieri locupletiorem." And the Partidas declared: "Ninguno non deue
enriquecerse tortizeramente con dano de otro." Such axiom has grown through the
centuries in legislation, in the science of law and in court decisions. The lawmaker
has found it one of the helpful guides in framing statutes and codes. Thus, it is
unfolded in many articles scattered in the Spanish Civil Code. (See for example,
articles, 360, 361, 464, 647, 648, 797, 1158, 1163, 1295, 1303, 1304, 1893 and 1895,
Civil Code.) This time-honored aphorism has also been adopted by jurists in their
study of the conflict of rights. It has been accepted by the courts, which have not
hesitated to apply it when the exigencies of right and equity demanded its assertion.
It is a part of that affluent reservoir of justice upon which judicial discretion draws
whenever the statutory laws are inadequate because they do not speak or do so with
a confused voice. [at p. 632.]

For this article to apply the following requisites must concur: "(1) that he who paid was not under
obligation to do so; and, (2) that payment was made by reason of an essential mistake of fact" [City
of Cebu v. Piccio, 110 Phil. 558, 563 (1960)].

The contract of petitioner, as regards the sale of garments and other textile products, was with
FACETS. It was the latter and not private respondent which was indebted to petitioner. On the other
hand, the contract for the transmittal of dollars from the United States to petitioner was entered into
by private respondent with FNSB. Petitioner, although named as the payee was not privy to the
contract of remittance of dollars. Neither was private respondent a party to the contract of sale
between petitioner and FACETS. There being no contractual relation between them, petitioner has
no right to apply the second $10,000.00 remittance delivered by mistake by private respondent to
the outstanding account of FACETS.

Petitioner next contends that the payment by respondent bank of the second $10,000.00 remittance
was not made by mistake but was the result of negligence of its employees.

Petitioner invokes the equitable principle that when one of two innocent persons must suffer by the
wrongful act of a third person, the loss must be borne by the one whose negligence was the
proximate cause of the loss.
G.R. No. L-17447 April 30, 1963

GONZALO PUYAT & SONS, INC., plaintiff-appelle,

vs.
CITY OF MANILA AND MARCELO SARMIENTO, as City Treasurer of Manila, defendants-
appellants

plaintiff Gonzalo Puyat & Sons, Inc., filed an action for refund of Retail DealerlsTaxes paid by it,
corresponding to the first Quarter of 1950 up to the third Quarter of 1956, amounting to P33,785.00,
against the City of Manila and its City Treasurer.The case was submitted on the following stipulation
of facts, to wit--

plaintiff is engaged in the business of manufacturing and selling all kinds of furniture

acting pursuant to the provisions of Sec. 1. group II, of Ordinance No. 3364, defendant City
Treasurer of Manilaassessed from plaintiff retail dealer's tax corresponding to the quarters
hereunder stated on the sales of furniture manufactured and sold by it at its factory site, all of
which assessments plaintiff paid without protest in the erroneous belief that it was liable

plaintiff, being a manufacturer of various kinds of furniture, is exempt from the payment of
taxes imposed under the provisions of Sec. 1, Group II, of Ordinance No. 3364,

however, plaintiff, is liable for the payment of taxes on the sales of imported billiard balls,
bowling balls and other accessories at its displayroom.

plaintiff filed with defendant City Treasurer of Manila, a formal request for refund of the retail
dealer's taxes unduly paid. Denied refund

(1) Whether or not the amounts paid by plaintiff-appelle, as retail dealer's taxes under Ordinance
1925, as amended by Ordinance No. 3364of the City of Manila, without protest, are refundable;

(2) Assuming arguendo, that plaintiff-appellee is entitled to the refund of the retail taxes in question,
whether or not the claim for refund filed in October 1956, in so far as said claim refers to taxes paid
from 1950 to 1952 has already prescribed. .

1. "If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligationto retun it arises" (Art. 2154, NCC)..

Appelle categorically stated that the payment was not voluntarily made, (a fact found also by the
lower court),but on the erronoues belief, that they were due. Under this circumstance, the amount
paid, even without protest is recoverable. "If the payer was in doubt whether the debt was due, he
may recover if he proves that it was not due" (Art. 2156, NCC). Appellee had duly proved that taxes
were not lawfully due. There is, therefore, no doubt that the provisions of solutio indebtiti, the new
Civil Code, apply to the admitted facts of the case..

"Payment by reason of a mistake in the contruction or application of a doubtful or difficult question of

law may come within the scope of the preceding article" (Art. 21555)..

There is no gainsaying the fact that the payments made by appellee was due to a mistake in the
construction of a doubtful question of law. The reason underlying similar provisions, as applied to
illegal taxation, in the United States, is expressed in the case of Newport v. Ringo, 37 Ky. 635, 636;
10 S.W. 2, in the following manner:.

"It is too well settled in this state to need the citation of authority that if money be paid
through a clear mistake of law or fact, essentially affecting the rights of the parties, and
which in law or conscience was not payable, and should not be retained by the party
receiving it, it may be recovered.

"Every person who through an act or performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal grounds, shall
return the same to him"(Art. 22, Civil Code). It would seems unedifying for the government, (here the
City of Manila), that knowing it has no right at all to collect or to receive money for alleged taxes paid
by mistake, it would be reluctant to return the same. No one should enrich itself unjustly at the
expense of another (Art. 2125, Civil Code)..

The next issue in discussion is that of prescription.

Appellants maintain that article 1146 (NCC), which provides for a period of four (4) years (upon
injury to the rights of the plaintiff), apply to the case. On the other hand, appellee contends that
provisions of Act 190 (Code of Civ. Procedure) should apply, insofar as payments made before the
effectivity of the New Civil Code on August 30, 1950, the period of which is ten (10) years, (Sec.
40,Act No. 190; Osorio v. Tan Jongko, 51 O.G. 6211) and article 1145 (NCC), for payments made
after said effectivity, providing for a period of six (6) years (upon quasi-contracts like solutio indebiti).
Even if the provisionsof Act No. 190 should apply to those payments made before the effectivity of
the new Civil Code, because "prescription already runnig before the effectivity of this Code shall be
governed by laws previously in force x x x" (art. 1116, NCC), for payments made after said
effectivity,providing for a period of six (6) years (upon quasi-contracts like solutio indebiti). Even if
the provisions of Act No. 190should apply to those payments made before the effectivity of the new
Civil Code, because "prescription already running before the effectivity of of this Code shall be
govern by laws previously in force xxx " (Art. 1116, NCC), Still payments made before August 30,
1950 are no longer recoverable in view of the second paragraph of said article (1116), which
provides:"but if since the time this Code took effect the entire period herein required for prescription
should elapse the present Code shall be applicable even though by the former laws a longer period
might be required". Anent the payments made after August 30, 1950, it is abvious that the action has
prescribed with respect to those made before October 30, 1950 only, considering the fact that the
prescription of action is interrupted xxx when is a writteen extra-judicial demand x x x" (Art. 1155,
NCC), and the written demand in the case at bar was made on October 30, 1956 (Stipulation of
Facts).MODIFIED in the sense that only payments made on or after October 30, 1950 should be
refunded, the decision appealed from is affirmed, in all other respects. No costs. .

G.R. Nos. 198729-30 January 15, 2014

CBK POWER COMPANY LIMITED, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure filed
by CBK Power Company Limited (petitioner). The Petition assails the Decision2 dated 27 June 2011
and Resolution3 dated 16 September 2011 of the Court of Tax Appeals En Banc (CTA En Banc in
C.T.A. EB Nos. 658 and 659. The assailed Decision and Resolution reversed and set aside the
Decision4 dated 3 March 2010 and Resolution5 dated 6 July 2010 rendered by the CTA Special
Second Division in C.T.A. Case No. 7621, which partly granted the claim of petitioner for the
issuance of a tax credit certificate representing the latter's alleged unutilized input taxes on local
purchases of goods and services attributable to effectively zero-rated sales to National Power
Corporation (NPC) for the second and third quarters of 2005.

The Facts

Petitioner is engaged, among others, in the operation, maintenance, and management of the
Kalayaan II pumped-storage hydroelectric power plant, the new Caliraya Spillway, Caliraya, Botocan;
and the Kalayaan I hydroelectric power plants and their related facilities located in the Province of
Laguna.6

On 29 December 2004, petitioner filed an Application for VAT Zero-Rate with the Bureau of Internal
Revenue (BIR) in accordance with Section 108(B)(3) of the National Internal Revenue Code (NIRC)
of 1997, as amended. The application was duly approved by the BIR. Thus, petitioner s sale of
electr icity to the NPC from 1 January 2005 to 31 October 2005 was declared to be entitled to the
benefit of effectively zero-rated value added tax (VAT).7

Petitioner filed its administrative claims for the issuance of tax credit certificates for its alleged
unutilized input taxes on its purchase of capital goods and alleged unutilized input taxes on its local
purchases and/or importation of goods and services, other than capital goods, pursuant to Sections
112(A) and (B) of the NIRC of 1997, as amended, with BIR Revenue District Office (RDO) No. 55 of
Laguna, as follows:8

Period Covered Date Of Filing

1st quarter of 2005 30-Jun-05
2nd quarter of 2005 15-Sep-05

3rd quarter of 2005 28-Oct-05

Alleging inaction of the Commissioner of Internal Revenue (CIR), petitioner filed a Petition for
Review with the CTA on 18 April 2007.

THE CTA SPECIAL SECOND DIVISION RULING

After trial on the merits, the CTA Special Second Division rendered a Decision on 3 March 2010.
Applying Commissioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant),9 the court

a quo ruled that petitioner had until the following dates within which to file both administrative and
judicial claims:

Taxable Quarter Last Day to

File Claim for
2005 Close of the quarter Refund

1st quarter 31-Mar-05 31-Mar-07

2nd quarter 30-Jun-05 30-Jun-07
3rd quarter 30-Sep-05 30-Sep-07
Accordingly, petitioner timely filed its administrative claims for the three quarters of 2005. However,
considering that the judicial claim was filed on 18 April 2007, the CTA Division denied the claim for
the first quarter of 2005 for having been filed out of time.

After an evaluation of petitioners claim for the second and third quarters of 2005, the court a quo
partly granted the claim and ordered the issuance of a tax credit certificate in favor of petitioner in
the reduced amount of 27,170,123.36.

The parties filed their respective Motions for Partial Reconsideration, which were both denied by the
CTA Division.

THE CTA EN BANC RULING

On appeal, relying on Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.
(Aichi),10 the CTA En Banc ruled that petitioners judicial claim for the first, second, and third quarters
of 2005 were belatedly filed.

The CTA Special Second Division Decision and Resolution were reversed and set aside, and the
Petition for Review filed in CTA Case No. 7621 was dismissed. Petitioners Motion for
Reconsideration was likewise denied for lack of merit.

Hence, this Petition.ISSUE

Petitioners assigned errors boil down to the principal issue of the applicable prescriptive period on
its claim for refund of unutilized input VAT for the first to third quarters of 2005.11

THE COURTS RULING

The pertinent provision of the NIRC at the time when petitioner filed its claim for refund provides:

SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or refund
of creditable input tax due or paid attributable to such sales, except transitional input tax, to
the extent that such input tax has not been applied against output tax: Provided, however,
That in the case of zero-rated sales under Section 106(A)(2)(a)(1),(2) and (B) and Section
108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or
services, and the amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be allocated proportionately on the basis of
the volume of sales.

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases,
the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of complete
 documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration
of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals.

Petitioners sales to NPC are effectively zero-rated

As aptly ruled by the CTA Special Second Division, petitioners sales to NPC are effectively subject
to zero percent (0%) VAT. The NPC is an entity with a special charter, which categorically exempts it
from the payment of any tax, whether direct or indirect, including VAT. Thus, services rendered to
NPC by a VAT-registered entity are effectively zero-rated. In fact, the BIR itself approved the
application for zero-rating on 29 December 2004, filed by petitioner for its sales to NPC covering
January to October 2005.12 As a consequence, petitioner claims for the refund of the alleged excess
input tax attributable to its effectively zero-rated sales to NPC.

In Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal

Revenue,13 this Court ruled:

Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes equal to the
input taxes that his suppliers passed on to him, no payment is required of him. It is when his output
taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the
output taxes, however, the excess payment shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from
the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the
taxpayer.

The crux of the controversy arose from the proper application of the prescriptive periods set forth in
Section 112 of the NIRC of 1997, as amended, and the interpretation of the applicable jurisprudence.

Although the ponente in this case expressed a different view on the mandatory application of the
120+30 day period as prescribed in Section 112, with the finality of the Courts pronouncement on
the consolidated tax cases Commissioner of Internal Revenue v. San Roque Power Corporation,
Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue14 (hereby collectively referred as San Roque), we are constrained
to apply the dispositions therein to the facts herein which are similar.

Administrative Claim

Section 112(A) provides that after the close of the taxable quarter when the sales were made, there
is a two-year prescriptive period within which a VAT-registered person whose sales are zero-rated or
effectively zero-rated may apply for the issuance of a tax credit certificate or refund of creditable
input tax.

Our VAT Law provides for a mechanism that would allow VAT-registered persons to recover the
excess input taxes over the output taxes they had paid in relation to their sales. For the refund or
credit of excess or unutilized input tax, Section 112 is the governing law. Given the distinctive nature
of creditable input tax, the law under Section 112 (A) provides for a different reckoning point for the
two-year prescriptive period, specifically for the refund or credit of that tax only.
We agree with petitioner that Mirant was not yet in existence when their administrative claim was
filed in 2005; thus, it should not retroactively be applied to the instant case.

However, the fact remains that Section 112 is the controlling provision for the refund or credit of
input tax during the time that petitioner filed its claim with which they ought to comply. It must be
emphasized that the Court merely clarified in Mirant that Sections 204 and 229, which prescribed a
different starting point for the two-year prescriptive limit for filing a claim for a refund or credit of
excess input tax, were not applicable. Input tax is neither an erroneously paid nor an illegally
collected internal revenue tax.15

Section 112(A) is clear that for VAT-registered persons whose sales are zero-rated or effectively
zero-rated, a claim for the refund or credit of creditable input tax that is due or paid, and that is
attributable to zero-rated or effectively zero-rated sales, must be filed within two years after the close
of the taxable quarter when such sales were made. The reckoning frame would always be the end of
the quarter when the pertinent sale or transactions were made, regardless of when the input VAT
was paid.16

Pursuant to Section 112(A), petitioners administrative claims were filed well within the two-year
period from the close of the taxable quarter when the effectively zero-rated sales were made, to wit:

Period Covered Close of the Last day to File Administrative Date of Filing
Taxable Claim
Quarter
1st quarter 2005 31-Mar-05 31-Mar-07 30-Jun-05

2nd quarter 2005 30-Jun-05 30-Jun-07 15-Sep-05

3rd quarter 2005 30-Sep-05 30-Sep-07 28-Oct-05

Judicial Claim

Section 112(D) further provides that the CIR has to decide on an administrative claim within one
hundred twenty (120) days from the date of submission of complete documents in support thereof.

Bearing in mind that the burden to prove entitlement to a tax refund is on the taxpayer, it is
presumed that in order to discharge its burden, petitioner had attached complete supporting
documents necessary to prove its entitlement to a refund in its application, absent any evidence to
the contrary.

Thereafter, the taxpayer affected by the CIRs decision or inaction may appeal to the CTA within 30
days from the receipt of the decision or from the expiration of the 120-day period within which the
claim has not been acted upon.

Considering further that the 30-day period to appeal to the CTA is dependent on the 120-day period,
compliance with both periods is jurisdictional. The period of 120 days is a prerequisite for the
commencement of the 30-day period to appeal to the CTA.

Prescinding from San Roque in the consolidated case Mindanao II Geothermal Partnership v.
Commissioner of Internal Revenue and Mindanao I Geothermal Partnership v. Commissioner of
Internal Revenue,17 this Court has ruled thus:
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San
Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel in favor of
taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for
the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for
Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly

on a difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that
the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly
situated, being made to return the tax refund or credit they received or could have received under
Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud,
bad faith or misrepresentation, the reversal by this Court of a general interpretative rule issued by
the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable
to all taxpayers or a specific ruling applicable only to a particular taxpayer. BIR Ruling No. DA-489-
03 is a general interpretative rule because it was a response to a query made, not by a particular
taxpayer, but by a government agency asked with processing tax refunds and credits, that is, the
One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03.
Thus, while this government agency mentions in its query to the Commissioner the administrative
claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner
what to do in cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer
did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on
1wphi1

BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by
this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional. (Emphasis supplied)

In applying the foregoing to the instant case, we consider the following pertinent dates:
1w phi1

Period Covered Administrative Expiration of Last day to file Judicial Claim

Claim Filed 120-days Judicial Claim Filed

1st quarter 2005 30-Jun-05 28-Oct-05 27-Nov-05 18-Apr-07

2nd quarter 2005 15-Sep-05 13-Jan-06 13-Feb-06

3rd quarter 2005 28-Oct-05 26-Feb-06 28-Mar-06

It must be emphasized that this is not a case of premature filing of a judicial claim. Although
petitioner did not file its judicial claim with the CTA prior to the expiration of the 120-day waiting
period, it failed to observe the 30-day prescriptive period to appeal to the CTA counted from the
lapse of the 120-day period.

Petitioner is similarly situated as Philex in the same case, San Roque,18 in which this Court ruled:
Unlike San Roque and Taganito, Philexs case is not one of premature filing but of late filing. Philex
did not file any petition with the CTA within the 120-day period. Philex did not also file any petition
with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim
long after the expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period.
In any event, whether governed by jurisprudence before, during, or after the Atlas case, Philexs
judicial claim will have to be rejected because of late filing. Whether the two-year prescriptive period
is counted from the date of payment of the output VAT following the Atlas doctrine, or from the close
of the taxable quarter when the sales attributable to the input VAT were made following the Mirant
and Aichi doctrines, Philexs judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the
Commissioner on Philexs claim during the 120-day period is, by express provision of law, "deemed
a denial" of Philexs claim. Philex had 30 days from the expiration of the 120-day period to file its
judicial claim with the CTA. Philexs failure to do so rendered the "deemed a denial" decision of the
Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a
denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The
exercise of such statutory privilege requires strict compliance with the conditions attached by the
statute for its exercise. Philex failed to comply with the statutory conditions and must thus bear the
consequences. (Emphases in the original)

Likewise, while petitioner filed its administrative and judicial claims during the period of applicability
of BIR Ruling No. DA-489-03, it cannot claim the benefit of the exception period as it did not file its
judicial claim prematurely, but did so long after the lapse of the 30-day period following the expiration
of the 120-day period. Again, BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim,
which means non-exhaustion of the 120-day period for the Commissioner to act on an administrative
claim,19 but not its late filing.

As this Court enunciated in San Roque , petitioner cannot rely on Atlas either, since the latter case
was promulgated only on 8 June 2007. Moreover, the doctrine in Atlas which reckons the two-year
period from the date of filing of the return and payment of the tax, does not interpret expressly or
impliedly the 120+30 day periods.20 Simply stated, Atlas referred only to the reckoning of the
prescriptive period for filing an administrative claim.

For failure of petitioner to comply with the 120+30 day mandatory and jurisdictional period, petitioner
lost its right to claim a refund or credit of its alleged excess input VAT.

With regard to petitioners argument that Aichi should not be applied retroactively, we reiterate that
even without that ruling, the law is explicit on the mandatory and jurisdictional nature of the 120+30
day period.

Also devoid of merit is the applicability of the principle of solutio indebiti to the present case.
According to this principle, if something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises. In that situation, a creditor-debtor
relationship is created under a quasi-contract, whereby the payor becomes the creditor who then
has the right to demand the return of payment made by mistake, and the person who has no right to
receive the payment becomes obligated to return it.21 The quasi-contract of solutio indebiti is based
on the ancient principle that no one shall enrich oneself unjustly at the expense of another.22

There is solutio indebiti when:

(1) Payment is made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment; and
 (2) Payment is made through mistake, and not through liberality or some other cause.23

Though the principle of solutio indebiti may be applicable to some instances of claims for a refund,
the elements thereof are wanting in this case.

First, there exists a binding relation between petitioner and the CIR, the former being a taxpayer
obligated to pay VAT.

Second, the payment of input tax was not made through mistake, since petitioner was legally
obligated to pay for that liability. The entitlement to a refund or credit of excess input tax is solely
based on the distinctive nature of the VAT system. At the time of payment of the input VAT, the
amount paid was correct and proper.24

Finally, equity, which has been aptly described as "a justice outside legality," is applied only in the
absence of, and never against, statutory law or judicial rules of procedure.25 Section 112 is a positive
rule that should preempt and prevail over all abstract arguments based only on equity. Well-settled is
the rule that tax refunds or credits, just like tax exemptions, are strictly construed against the
taxpayer.26 The burden is on the taxpayer to show strict compliance with the conditions for the grant
of the tax refund or credit.27

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.

G.R. No. L-12191 October 14, 1918

JOSE CANGCO, plaintiff-appellant,

vs.
MANILA RAILROAD CO., defendant-appellee.

Ramon Sotelo for appellant.

Kincaid & Hartigan for appellee.

FISHER, J.:

At the time of the occurrence which gave rise to this litigation the plaintiff, Jose Cangco, was in the
employment of Manila Railroad Company in the capacity of clerk, with a monthly wage of P25. He
lived in the pueblo of San Mateo, in the province of Rizal, which is located upon the line of the
defendant railroad company; and in coming daily by train to the company's office in the city of Manila
where he worked, he used a pass, supplied by the company, which entitled him to ride upon the
company's trains free of charge. Upon the occasion in question, January 20, 1915, the plaintiff arose
from his seat in the second class-car where he was riding and, making, his exit through the door,
took his position upon the steps of the coach, seizing the upright guardrail with his right hand for
support.

On the side of the train where passengers alight at the San Mateo station there is a cement platform
which begins to rise with a moderate gradient some distance away from the company's office and
extends along in front of said office for a distance sufficient to cover the length of several coaches.
As the train slowed down another passenger, named Emilio Zuiga, also an employee of the railroad
company, got off the same car, alighting safely at the point where the platform begins to rise from
the level of the ground. When the train had proceeded a little farther the plaintiff Jose Cangco
stepped off also, but one or both of his feet came in contact with a sack of watermelons with the
result that his feet slipped from under him and he fell violently on the platform. His body at once
rolled from the platform and was drawn under the moving car, where his right arm was badly
crushed and lacerated. It appears that after the plaintiff alighted from the train the car moved forward
possibly six meters before it came to a full stop.

The accident occurred between 7 and 8 o'clock on a dark night, and as the railroad station was
lighted dimly by a single light located some distance away, objects on the platform where the
accident occurred were difficult to discern especially to a person emerging from a lighted car.

The explanation of the presence of a sack of melons on the platform where the plaintiff alighted is
found in the fact that it was the customary season for harvesting these melons and a large lot had
been brought to the station for the shipment to the market. They were contained in numerous sacks
which has been piled on the platform in a row one upon another. The testimony shows that this row
of sacks was so placed of melons and the edge of platform; and it is clear that the fall of the plaintiff
was due to the fact that his foot alighted upon one of these melons at the moment he stepped upon
the platform. His statement that he failed to see these objects in the darkness is readily to be
credited.

The plaintiff was drawn from under the car in an unconscious condition, and it appeared that the
injuries which he had received were very serious. He was therefore brought at once to a certain
hospital in the city of Manila where an examination was made and his arm was amputated. The
result of this operation was unsatisfactory, and the plaintiff was then carried to another hospital
where a second operation was performed and the member was again amputated higher up near the
shoulder. It appears in evidence that the plaintiff expended the sum of P790.25 in the form of
medical and surgical fees and for other expenses in connection with the process of his curation.

Upon August 31, 1915, he instituted this proceeding in the Court of First Instance of the city of
Manila to recover damages of the defendant company, founding his action upon the negligence of
the servants and employees of the defendant in placing the sacks of melons upon the platform and
leaving them so placed as to be a menace to the security of passenger alighting from the company's
trains. At the hearing in the Court of First Instance, his Honor, the trial judge, found the facts
substantially as above stated, and drew therefrom his conclusion to the effect that, although
negligence was attributable to the defendant by reason of the fact that the sacks of melons were so
placed as to obstruct passengers passing to and from the cars, nevertheless, the plaintiff himself
had failed to use due caution in alighting from the coach and was therefore precluded form
recovering. Judgment was accordingly entered in favor of the defendant company, and the plaintiff
appealed.

It can not be doubted that the employees of the railroad company were guilty of negligence in piling
these sacks on the platform in the manner above stated; that their presence caused the plaintiff to
fall as he alighted from the train; and that they therefore constituted an effective legal cause of the
injuries sustained by the plaintiff. It necessarily follows that the defendant company is liable for the
damage thereby occasioned unless recovery is barred by the plaintiff's own contributory negligence.
In resolving this problem it is necessary that each of these conceptions of liability, to-wit, the primary
responsibility of the defendant company and the contributory negligence of the plaintiff should be
separately examined.
It is important to note that the foundation of the legal liability of the defendant is the contract of
carriage, and that the obligation to respond for the damage which plaintiff has suffered arises, if at all,
from the breach of that contract by reason of the failure of defendant to exercise due care in its
performance. That is to say, its liability is direct and immediate, differing essentially, in legal
viewpoint from that presumptive responsibility for the negligence of its servants, imposed by article
1903 of the Civil Code, which can be rebutted by proof of the exercise of due care in their selection
and supervision. Article 1903 of the Civil Code is not applicable to obligations arising ex contractu,
but only to extra-contractual obligations or to use the technical form of expression, that article
relates only to culpa aquiliana and not to culpa contractual.

Manresa (vol. 8, p. 67) in his commentaries upon articles 1103 and 1104 of the Civil Code, clearly
points out this distinction, which was also recognized by this Court in its decision in the case of
Rakes vs. Atlantic, Gulf and Pacific Co. (7 Phil. rep., 359). In commenting upon article 1093 Manresa
clearly points out the difference between "culpa, substantive and independent, which of itself
constitutes the source of an obligation between persons not formerly connected by any legal tie"
and culpa considered as an accident in the performance of an obligation already existing . . . ."

In the Rakes case (supra) the decision of this court was made to rest squarely upon the proposition
that article 1903 of the Civil Code is not applicable to acts of negligence which constitute the breach
of a contract.

Upon this point the Court said:

The acts to which these articles [1902 and 1903 of the Civil Code] are applicable are
understood to be those not growing out of pre-existing duties of the parties to one another.
But where relations already formed give rise to duties, whether springing from contract or
quasi-contract, then breaches of those duties are subject to article 1101, 1103, and 1104 of
the same code. (Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. Rep., 359 at 365.)

This distinction is of the utmost importance. The liability, which, under the Spanish law, is, in certain
cases imposed upon employers with respect to damages occasioned by the negligence of their
employees to persons to whom they are not bound by contract, is not based, as in the English
Common Law, upon the principle of respondeat superior if it were, the master would be liable in
every case and unconditionally but upon the principle announced in article 1902 of the Civil Code,
which imposes upon all persons who by their fault or negligence, do injury to another, the obligation
of making good the damage caused. One who places a powerful automobile in the hands of a
servant whom he knows to be ignorant of the method of managing such a vehicle, is himself guilty of
an act of negligence which makes him liable for all the consequences of his imprudence. The
obligation to make good the damage arises at the very instant that the unskillful servant, while acting
within the scope of his employment causes the injury. The liability of the master is personal and
direct. But, if the master has not been guilty of any negligence whatever in the selection and
direction of the servant, he is not liable for the acts of the latter, whatever done within the scope of
his employment or not, if the damage done by the servant does not amount to a breach of the
contract between the master and the person injured.

It is not accurate to say that proof of diligence and care in the selection and control of the servant
relieves the master from liability for the latter's acts on the contrary, that proof shows that the
responsibility has never existed. As Manresa says (vol. 8, p. 68) the liability arising from extra-
contractual culpa is always based upon a voluntary act or omission which, without willful intent, but
by mere negligence or inattention, has caused damage to another. A master who exercises all
possible care in the selection of his servant, taking into consideration the qualifications they should
possess for the discharge of the duties which it is his purpose to confide to them, and directs them
with equal diligence, thereby performs his duty to third persons to whom he is bound by no
contractual ties, and he incurs no liability whatever if, by reason of the negligence of his servants,
even within the scope of their employment, such third person suffer damage. True it is that under
article 1903 of the Civil Code the law creates a presumption that he has been negligent in the
selection or direction of his servant, but the presumption is rebuttable and yield to proof of due care
and diligence in this respect.

The supreme court of Porto Rico, in interpreting identical provisions, as found in the Porto Rico Code,
has held that these articles are applicable to cases of extra-contractual culpa exclusively.
(Carmona vs. Cuesta, 20 Porto Rico Reports, 215.)

This distinction was again made patent by this Court in its decision in the case of Bahia vs. Litonjua
and Leynes, (30 Phil. rep., 624), which was an action brought upon the theory of the extra-
contractual liability of the defendant to respond for the damage caused by the carelessness of his
employee while acting within the scope of his employment. The Court, after citing the last paragraph
of article 1903 of the Civil Code, said:

From this article two things are apparent: (1) That when an injury is caused by the
negligence of a servant or employee there instantly arises a presumption of law that there
was negligence on the part of the master or employer either in selection of the servant or
employee, or in supervision over him after the selection, or both; and (2) that that
presumption is juris tantum and not juris et de jure, and consequently, may be rebutted. It
follows necessarily that if the employer shows to the satisfaction of the court that in selection
and supervision he has exercised the care and diligence of a good father of a family, the
presumption is overcome and he is relieved from liability.

This theory bases the responsibility of the master ultimately on his own negligence and not
on that of his servant. This is the notable peculiarity of the Spanish law of negligence. It is, of
course, in striking contrast to the American doctrine that, in relations with strangers, the
negligence of the servant in conclusively the negligence of the master.

The opinion there expressed by this Court, to the effect that in case of extra-contractual culpa based
upon negligence, it is necessary that there shall have been some fault attributable to the defendant
personally, and that the last paragraph of article 1903 merely establishes a rebuttable presumption,
is in complete accord with the authoritative opinion of Manresa, who says (vol. 12, p. 611) that the
liability created by article 1903 is imposed by reason of the breach of the duties inherent in the
special relations of authority or superiority existing between the person called upon to repair the
damage and the one who, by his act or omission, was the cause of it.

On the other hand, the liability of masters and employers for the negligent acts or omissions of their
servants or agents, when such acts or omissions cause damages which amount to the breach of a
contact, is not based upon a mere presumption of the master's negligence in their selection or
control, and proof of exercise of the utmost diligence and care in this regard does not relieve the
master of his liability for the breach of his contract.

Every legal obligation must of necessity be extra-contractual or contractual. Extra-contractual

obligation has its source in the breach or omission of those mutual duties which civilized society
imposes upon it members, or which arise from these relations, other than contractual, of certain
members of society to others, generally embraced in the concept of status. The legal rights of each
member of society constitute the measure of the corresponding legal duties, mainly negative in
character, which the existence of those rights imposes upon all other members of society. The
breach of these general duties whether due to willful intent or to mere inattention, if productive of
injury, give rise to an obligation to indemnify the injured party. The fundamental distinction between
obligations of this character and those which arise from contract, rests upon the fact that in cases of
non-contractual obligation it is the wrongful or negligent act or omission itself which creates
the vinculum juris, whereas in contractual relations the vinculum exists independently of the breach
of the voluntary duty assumed by the parties when entering into the contractual relation.

With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is
competent for the legislature to elect and our Legislature has so elected whom such an
obligation is imposed is morally culpable, or, on the contrary, for reasons of public policy, to extend
that liability, without regard to the lack of moral culpability, so as to include responsibility for the
negligence of those person who acts or mission are imputable, by a legal fiction, to others who are in
a position to exercise an absolute or limited control over them. The legislature which adopted our
Civil Code has elected to limit extra-contractual liability with certain well-defined exceptions to
cases in which moral culpability can be directly imputed to the persons to be charged. This moral
responsibility may consist in having failed to exercise due care in the selection and control of one's
agents or servants, or in the control of persons who, by reason of their status, occupy a position of
dependency with respect to the person made liable for their conduct.

The position of a natural or juridical person who has undertaken by contract to render service to
another, is wholly different from that to which article 1903 relates. When the sources of the obligation
upon which plaintiff's cause of action depends is a negligent act or omission, the burden of proof
rests upon plaintiff to prove the negligence if he does not his action fails. But when the facts
averred show a contractual undertaking by defendant for the benefit of plaintiff, and it is alleged that
plaintiff has failed or refused to perform the contract, it is not necessary for plaintiff to specify in his
pleadings whether the breach of the contract is due to willful fault or to negligence on the part of the
defendant, or of his servants or agents. Proof of the contract and of its nonperformance is
sufficient prima facie to warrant a recovery.

As a general rule . . . it is logical that in case of extra-contractual culpa, a suing creditor

should assume the burden of proof of its existence, as the only fact upon which his action is
based; while on the contrary, in a case of negligence which presupposes the existence of a
contractual obligation, if the creditor shows that it exists and that it has been broken, it is not
necessary for him to prove negligence. (Manresa, vol. 8, p. 71 [1907 ed., p. 76]).

As it is not necessary for the plaintiff in an action for the breach of a contract to show that the breach
was due to the negligent conduct of defendant or of his servants, even though such be in fact the
actual cause of the breach, it is obvious that proof on the part of defendant that the negligence or
omission of his servants or agents caused the breach of the contract would not constitute a defense
to the action. If the negligence of servants or agents could be invoked as a means of discharging the
liability arising from contract, the anomalous result would be that person acting through the medium
of agents or servants in the performance of their contracts, would be in a better position than those
acting in person. If one delivers a valuable watch to watchmaker who contract to repair it, and the
bailee, by a personal negligent act causes its destruction, he is unquestionably liable. Would it be
logical to free him from his liability for the breach of his contract, which involves the duty to exercise
due care in the preservation of the watch, if he shows that it was his servant whose negligence
caused the injury? If such a theory could be accepted, juridical persons would enjoy practically
complete immunity from damages arising from the breach of their contracts if caused by negligent
acts as such juridical persons can of necessity only act through agents or servants, and it would no
doubt be true in most instances that reasonable care had been taken in selection and direction of
such servants. If one delivers securities to a banking corporation as collateral, and they are lost by
reason of the negligence of some clerk employed by the bank, would it be just and reasonable to
permit the bank to relieve itself of liability for the breach of its contract to return the collateral upon
the payment of the debt by proving that due care had been exercised in the selection and direction
of the clerk?

This distinction between culpa aquiliana, as the source of an obligation, and culpa contractual as a
mere incident to the performance of a contract has frequently been recognized by the supreme court
of Spain. (Sentencias of June 27, 1894; November 20, 1896; and December 13, 1896.) In the
decisions of November 20, 1896, it appeared that plaintiff's action arose ex contractu, but that
defendant sought to avail himself of the provisions of article 1902 of the Civil Code as a defense.
The Spanish Supreme Court rejected defendant's contention, saying:

These are not cases of injury caused, without any pre-existing obligation, by fault or
negligence, such as those to which article 1902 of the Civil Code relates, but of damages
caused by the defendant's failure to carry out the undertakings imposed by the contracts . . . .

A brief review of the earlier decision of this court involving the liability of employers for damage done
by the negligent acts of their servants will show that in no case has the court ever decided that the
negligence of the defendant's servants has been held to constitute a defense to an action for
damages for breach of contract.

In the case of Johnson vs. David (5 Phil. Rep., 663), the court held that the owner of a carriage was
not liable for the damages caused by the negligence of his driver. In that case the court commented
on the fact that no evidence had been adduced in the trial court that the defendant had been
negligent in the employment of the driver, or that he had any knowledge of his lack of skill or
carefulness.

In the case of Baer Senior & Co's Successors vs. Compania Maritima (6 Phil. Rep., 215), the plaintiff
sued the defendant for damages caused by the loss of a barge belonging to plaintiff which was
allowed to get adrift by the negligence of defendant's servants in the course of the performance of a
contract of towage. The court held, citing Manresa (vol. 8, pp. 29, 69) that if the "obligation of the
defendant grew out of a contract made between it and the plaintiff . . . we do not think that the
provisions of articles 1902 and 1903 are applicable to the case."

In the case of Chapman vs. Underwood (27 Phil. Rep., 374), plaintiff sued the defendant to recover
damages for the personal injuries caused by the negligence of defendant's chauffeur while driving
defendant's automobile in which defendant was riding at the time. The court found that the damages
were caused by the negligence of the driver of the automobile, but held that the master was not
liable, although he was present at the time, saying:

. . . unless the negligent acts of the driver are continued for a length of time as to give the
owner a reasonable opportunity to observe them and to direct the driver to desist
therefrom. . . . The act complained of must be continued in the presence of the owner for
such length of time that the owner by his acquiescence, makes the driver's acts his own.

In the case of Yamada vs. Manila Railroad Co. and Bachrach Garage & Taxicab Co. (33 Phil. Rep.,
8), it is true that the court rested its conclusion as to the liability of the defendant upon article 1903,
although the facts disclosed that the injury complaint of by plaintiff constituted a breach of the duty to
him arising out of the contract of transportation. The express ground of the decision in this case was
that article 1903, in dealing with the liability of a master for the negligent acts of his servants "makes
the distinction between private individuals and public enterprise;" that as to the latter the law creates
a rebuttable presumption of negligence in the selection or direction of servants; and that in the
particular case the presumption of negligence had not been overcome.
It is evident, therefore that in its decision Yamada case, the court treated plaintiff's action as though
founded in tort rather than as based upon the breach of the contract of carriage, and an examination
of the pleadings and of the briefs shows that the questions of law were in fact discussed upon this
theory. Viewed from the standpoint of the defendant the practical result must have been the same in
any event. The proof disclosed beyond doubt that the defendant's servant was grossly negligent and
that his negligence was the proximate cause of plaintiff's injury. It also affirmatively appeared that
defendant had been guilty of negligence in its failure to exercise proper discretion in the direction of
the servant. Defendant was, therefore, liable for the injury suffered by plaintiff, whether the breach of
the duty were to be regarded as constituting culpa aquiliana or culpa contractual. As Manresa points
out (vol. 8, pp. 29 and 69) whether negligence occurs an incident in the course of the performance of
a contractual undertaking or its itself the source of an extra-contractual undertaking obligation, its
essential characteristics are identical. There is always an act or omission productive of damage due
to carelessness or inattention on the part of the defendant. Consequently, when the court holds that
a defendant is liable in damages for having failed to exercise due care, either directly, or in failing to
exercise proper care in the selection and direction of his servants, the practical result is identical in
either case. Therefore, it follows that it is not to be inferred, because the court held in the Yamada
case that defendant was liable for the damages negligently caused by its servants to a person to
whom it was bound by contract, and made reference to the fact that the defendant was negligent in
the selection and control of its servants, that in such a case the court would have held that it would
have been a good defense to the action, if presented squarely upon the theory of the breach of the
contract, for defendant to have proved that it did in fact exercise care in the selection and control of
the servant.

The true explanation of such cases is to be found by directing the attention to the relative spheres of
contractual and extra-contractual obligations. The field of non- contractual obligation is much more
broader than that of contractual obligations, comprising, as it does, the whole extent of juridical
human relations. These two fields, figuratively speaking, concentric; that is to say, the mere fact that
a person is bound to another by contract does not relieve him from extra-contractual liability to such
person. When such a contractual relation exists the obligor may break the contract under such
conditions that the same act which constitutes the source of an extra-contractual obligation had no
contract existed between the parties.

The contract of defendant to transport plaintiff carried with it, by implication, the duty to carry him in
safety and to provide safe means of entering and leaving its trains (civil code, article 1258). That
duty, being contractual, was direct and immediate, and its non-performance could not be excused by
proof that the fault was morally imputable to defendant's servants.

The railroad company's defense involves the assumption that even granting that the negligent
conduct of its servants in placing an obstruction upon the platform was a breach of its contractual
obligation to maintain safe means of approaching and leaving its trains, the direct and proximate
cause of the injury suffered by plaintiff was his own contributory negligence in failing to wait until the
train had come to a complete stop before alighting. Under the doctrine of comparative negligence
announced in the Rakes case (supra), if the accident was caused by plaintiff's own negligence, no
liability is imposed upon defendant's negligence and plaintiff's negligence merely contributed to his
injury, the damages should be apportioned. It is, therefore, important to ascertain if defendant was in
fact guilty of negligence.

It may be admitted that had plaintiff waited until the train had come to a full stop before alighting, the
particular injury suffered by him could not have occurred. Defendant contends, and cites many
authorities in support of the contention, that it is negligence per se for a passenger to alight from a
moving train. We are not disposed to subscribe to this doctrine in its absolute form. We are of the
opinion that this proposition is too badly stated and is at variance with the experience of every-day
life. In this particular instance, that the train was barely moving when plaintiff alighted is shown
conclusively by the fact that it came to stop within six meters from the place where he stepped from
it. Thousands of person alight from trains under these conditions every day of the year, and sustain
no injury where the company has kept its platform free from dangerous obstructions. There is no
reason to believe that plaintiff would have suffered any injury whatever in alighting as he did had it
not been for defendant's negligent failure to perform its duty to provide a safe alighting place.

We are of the opinion that the correct doctrine relating to this subject is that expressed in
Thompson's work on Negligence (vol. 3, sec. 3010) as follows:

The test by which to determine whether the passenger has been guilty of negligence in
attempting to alight from a moving railway train, is that of ordinary or reasonable care. It is to
be considered whether an ordinarily prudent person, of the age, sex and condition of the
passenger, would have acted as the passenger acted under the circumstances disclosed by
the evidence. This care has been defined to be, not the care which may or should be used
by the prudent man generally, but the care which a man of ordinary prudence would use
under similar circumstances, to avoid injury." (Thompson, Commentaries on Negligence, vol.
3, sec. 3010.)

Or, it we prefer to adopt the mode of exposition used by this court in Picart vs. Smith (37 Phil. rep.,
809), we may say that the test is this; Was there anything in the circumstances surrounding the
plaintiff at the time he alighted from the train which would have admonished a person of average
prudence that to get off the train under the conditions then existing was dangerous? If so, the plaintiff
should have desisted from alighting; and his failure so to desist was contributory negligence. 1aw ph!l.net

As the case now before us presents itself, the only fact from which a conclusion can be drawn to the
effect that plaintiff was guilty of contributory negligence is that he stepped off the car without being
able to discern clearly the condition of the platform and while the train was yet slowly moving. In
considering the situation thus presented, it should not be overlooked that the plaintiff was, as we find,
ignorant of the fact that the obstruction which was caused by the sacks of melons piled on the
platform existed; and as the defendant was bound by reason of its duty as a public carrier to afford
to its passengers facilities for safe egress from its trains, the plaintiff had a right to assume, in the
absence of some circumstance to warn him to the contrary, that the platform was clear. The place,
as we have already stated, was dark, or dimly lighted, and this also is proof of a failure upon the part
of the defendant in the performance of a duty owing by it to the plaintiff; for if it were by any
possibility concede that it had right to pile these sacks in the path of alighting passengers, the
placing of them adequately so that their presence would be revealed.

As pertinent to the question of contributory negligence on the part of the plaintiff in this case the
following circumstances are to be noted: The company's platform was constructed upon a level
higher than that of the roadbed and the surrounding ground. The distance from the steps of the car
to the spot where the alighting passenger would place his feet on the platform was thus reduced,
thereby decreasing the risk incident to stepping off. The nature of the platform, constructed as it was
of cement material, also assured to the passenger a stable and even surface on which to alight.
Furthermore, the plaintiff was possessed of the vigor and agility of young manhood, and it was by no
means so risky for him to get off while the train was yet moving as the same act would have been in
an aged or feeble person. In determining the question of contributory negligence in performing such
act that is to say, whether the passenger acted prudently or recklessly the age, sex, and
physical condition of the passenger are circumstances necessarily affecting the safety of the
passenger, and should be considered. Women, it has been observed, as a general rule are less
capable than men of alighting with safety under such conditions, as the nature of their wearing
apparel obstructs the free movement of the limbs. Again, it may be noted that the place was
perfectly familiar to the plaintiff as it was his daily custom to get on and of the train at this station.
There could, therefore, be no uncertainty in his mind with regard either to the length of the step
which he was required to take or the character of the platform where he was alighting. Our
conclusion is that the conduct of the plaintiff in undertaking to alight while the train was yet slightly
under way was not characterized by imprudence and that therefore he was not guilty of contributory
negligence.

The evidence shows that the plaintiff, at the time of the accident, was earning P25 a month as a
copyist clerk, and that the injuries he has suffered have permanently disabled him from continuing
that employment. Defendant has not shown that any other gainful occupation is open to plaintiff. His
expectancy of life, according to the standard mortality tables, is approximately thirty-three years. We
are of the opinion that a fair compensation for the damage suffered by him for his permanent
disability is the sum of P2,500, and that he is also entitled to recover of defendant the additional sum
of P790.25 for medical attention, hospital services, and other incidental expenditures connected with
the treatment of his injuries.

The decision of lower court is reversed, and judgment is hereby rendered plaintiff for the sum of
P3,290.25, and for the costs of both instances. So ordered.

Arellano, C.J., Torres, Street and Avancea, JJ., concur.

G.R. No. 34840 September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,

vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO
VELASCO, and SATURNINO CORTEZ, defendants-appellants.

L.D. Lockwood for appellants Velasco and Cortez.

San Agustin and Roxas for other appellants.
Ramon Diokno for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five
defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a result
of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both sets of
defendants appealed.

On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of
Las Pias, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was
owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18
years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At
the time of the collision, the father was not in the car, but the mother, together will several other
members of the Gutierrez family, seven in all, were accommodated therein. A passenger in the
autobus, by the name of Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The
collision between the bus and the automobile resulted in Narciso Gutierrez suffering a fracture right
leg which required medical attendance for a considerable period of time, and which even at the date
of the trial appears not to have healed properly.

It is conceded that the collision was caused by negligence pure and simple. The difference between
the parties is that, while the plaintiff blames both sets of defendants, the owner of the passenger
truck blames the automobile, and the owner of the automobile, in turn, blames the truck. We have
given close attention to these highly debatable points, and having done so, a majority of the court
are of the opinion that the findings of the trial judge on all controversial questions of fact find
sufficient support in the record, and so should be maintained. With this general statement set down,
we turn to consider the respective legal obligations of the defendants.

In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may be
explained that the youth Bonifacio was in incompetent chauffeur, that he was driving at an excessive
rate of speed, and that, on approaching the bridge and the truck, he lost his head and so contributed
by his negligence to the accident. The guaranty given by the father at the time the son was granted a
license to operate motor vehicles made the father responsible for the acts of his son. Based on
these facts, pursuant to the provisions of article 1903 of the Civil Code, the father alone and not the
minor or the mother, would be liable for the damages caused by the minor.

We are dealing with the civil law liability of parties for obligations which arise from fault or negligence.
At the same time, we believe that, as has been done in other cases, we can take cognizance of the
common law rule on the same subject. In the United States, it is uniformly held that the head of a
house, the owner of an automobile, who maintains it for the general use of his family is liable for its
negligent operation by one of his children, whom he designates or permits to run it, where the car is
occupied and being used at the time of the injury for the pleasure of other members of the owner's
family than the child driving it. The theory of the law is that the running of the machine by a child to
carry other members of the family is within the scope of the owner's business, so that he is liable for
the negligence of the child because of the relationship of master and servant. (Huddy On
Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Atl., 322.) The liability of Saturnino
Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco rests on a different basis,
namely, that of contract which, we think, has been sufficiently demonstrated by the allegations of the
complaint, not controverted, and the evidence. The reason for this conclusion reaches to the findings
of the trial court concerning the position of the truck on the bridge, the speed in operating the
machine, and the lack of care employed by the chauffeur. While these facts are not as clearly
evidenced as are those which convict the other defendant, we nevertheless hesitate to disregard the
points emphasized by the trial judge. In its broader aspects, the case is one of two drivers
approaching a narrow bridge from opposite directions, with neither being willing to slow up and give
the right of way to the other, with the inevitable result of a collision and an accident.

The defendants Velasco and Cortez further contend that there existed contributory negligence on
the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the case
is contradictory in the extreme and leads us far afield into speculative matters.

The last subject for consideration relates to the amount of the award. The appellee suggests that the
amount could justly be raised to P16,517, but naturally is not serious in asking for this sum, since no
appeal was taken by him from the judgment. The other parties unite in challenging the award of
P10,000, as excessive. All facts considered, including actual expenditures and damages for the
injury to the leg of the plaintiff, which may cause him permanent lameness, in connection with other
adjudications of this court, lead us to conclude that a total sum for the plaintiff of P5,000 would be
fair and reasonable. The difficulty in approximating the damages by monetary compensation is well
elucidated by the divergence of opinion among the members of the court, three of whom have
inclined to the view that P3,000 would be amply sufficient, while a fourth member has argued that
P7,500 would be none too much.
In consonance with the foregoing rulings, the judgment appealed from will be modified, and the
plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo Velasco,
and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both instances.

Avancea, C.J., Johnson, Street, Villamor, Ostrand, Romualdez, and Imperial, JJ., concur.

HONGKONG AND SHANGHAI G.R. No. 178610

BANKING CORP., LTD. STAFF
RETIREMENT PLAN, (now HSBC Present:
Retirement Trust Fund, Inc.)
Petitioner,
CARPIO, J., Chairperson,
NACHURA,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.

SPOUSES BIENVENIDO AND EDITHA Promulgated:

BROQUEZA,
Respondents. November 17, 2010
x--------------------------------------------------x

DECISION

CARPIO, J.:

G.R. No. 178610 is a petition for review[1] assailing the Decision[2] promulgated on
30 March 2006 by the Court of Appeals (CA) in CA-G.R. SP No. 62685. The
appellate court granted the petition filed by Fe Gerong (Gerong) and Spouses
Bienvenido and Editha Broqueza (spouses Broqueza) and dismissed the
consolidated complaints filed by Hongkong and Shanghai Banking Corporation,
Ltd. - Staff Retirement Plan (HSBCL-SRP) for recovery of sum of money. The
appellate court reversed and set aside the Decision[3] of Branch 139 of the Regional
Trial Court of Makati City (RTC) in Civil Case No. 00-787 dated 11 December
2000, as well as its Order[4] dated 5 September 2000. The RTCs decision affirmed
the Decision[5] dated 28 December 1999 of Branch 61 of the Metropolitan Trial
Court (MeTC) of Makati City in Civil Case No. 52400 for Recovery of a Sum of
Money.

The Facts

The appellate court narrated the facts as follows:

Petitioners Gerong and [Editha] Broqueza (defendants below) are

employees of Hongkong and Shanghai Banking Corporation (HSBC).
They are also members of respondent Hongkong Shanghai Banking
Corporation, Ltd. Staff Retirement Plan (HSBCL-SRP, plaintiff below).
The HSBCL-SRP is a retirement plan established by HSBC through its
Board of Trustees for the benefit of the employees.

On October 1, 1990, petitioner [Editha] Broqueza obtained a car loan in

the amount of Php175,000.00. On December 12, 1991, she again applied
and was granted an appliance loan in the amount of Php24,000.00. On
the other hand, petitioner Gerong applied and was granted an emergency
loan in the amount of Php35,780.00 on June 2, 1993. These loans are
paid through automatic salary deduction.

Meanwhile [in 1993], a labor dispute arose between HSBC and its
employees. Majority of HSBCs employees were terminated, among
whom are petitioners Editha Broqueza and Fe Gerong. The employees
then filed an illegal dismissal case before the National Labor Relations
Commission (NLRC) against HSBC. The legality or illegality of such
termination is now pending before this appellate Court in CA G.R. CV
No. 56797, entitled Hongkong Shanghai Banking Corp. Employees
Union, et al. vs. National Labor Relations Commission, et al.

Because of their dismissal, petitioners were not able to pay the monthly
amortizations of their respective loans. Thus, respondent HSBCL-SRP
considered the accounts of petitioners delinquent. Demands to pay the
respective obligations were made upon petitioners, but they failed to
pay.[6]

HSBCL-SRP, acting through its Board of Trustees and represented by Alejandro L.

Custodio, filed Civil Case No. 52400 against the spouses Broqueza on 31 July
1996. On 19 September 1996, HSBCL-SRP filed Civil Case No. 52911 against
Gerong. Both suits were civil actions for recovery and collection of sums of money.

The Metropolitan Trial Courts Ruling

On 28 December 1999, the MeTC promulgated its Decision[7] in favor of HSBCL-

SRP. The MeTC ruled that the nature of HSBCL-SRPs demands for payment is
civil and has no connection to the ongoing labor dispute. Gerong and Editha
Broquezas termination from employment resulted in the loss of continued benefits
under their retirement plans. Thus, the loans secured by their future retirement
benefits to which they are no longer entitled are reduced to unsecured and pure
civil obligations. As unsecured and pure obligations, the loans are immediately
demandable.

The dispositive portion of the MeTCs decision reads:

WHEREFORE, premises considered and in view of the foregoing, the

Court finds that the plaintiff was able to prove by a preponderance of
evidence the existence and immediate demandability of the defendants
loan obligations as judgment is hereby rendered in favor of the plaintiff
and against the defendants in both cases, ordering the latter:

1. In Civil Case No. 52400, to pay the amount of Php116,740.00 at six

percent interest per annum from the time of demand and in Civil Case
No. 52911, to pay the amount of Php25,344.12 at six percent per annum
from the time of the filing of these cases, until the amount is fully paid;

2. To pay the amount of Php20,000.00 each as reasonable attorneys fees;

3. Cost of suit.

SO ORDERED.[8]

Gerong and the spouses Broqueza filed a joint appeal of the MeTCs decision
before the RTC.Gerongs case was docketed Civil Case No. 00-786, while the
spouses Broquezas case was docketed as Civil Case No. 00-787.
 The Regional Trial Courts Ruling

The RTC initially denied the joint appeal because of the belated filing of Gerong
and the spouses Broquezas memorandum. The RTC later reconsidered the order of
denial and resolved the issues in the interest of justice.

On 11 December 2000, the RTC affirmed the MeTCs decision in toto.[9]

The RTC ruled that Gerong and Editha Broquezas termination from employment
disqualified them from availing of benefits under their retirement plans. As a
consequence, there is no longer any security for the loans. HSBCL-SRP has a legal
right to demand immediate settlement of the unpaid balance because of Gerong
and Editha Broquezas continued default in payment and their failure to provide
new security for their loans. Moreover, the absence of a period within which to pay
the loan allows HSBCL-SRP to demand immediate payment. The loan obligations
are considered pure obligations, the fulfillment of which are demandable at once.
Gerong and the spouses Broqueza then filed a Petition for Review under
Rule 42 before the CA.

The Ruling of the Court of Appeals

On 30 March 2006, the CA rendered its Decision[10] which reversed the 11

December 2000 Decision of the RTC. The CA ruled that the HSBCL-SRPs
complaints for recovery of sum of money against Gerong and the spouses
Broqueza are premature as the loan obligations have not yet matured. Thus, no
cause of action accrued in favor of HSBCL-SRP. The dispositive portion of the
appellate courts Decision reads as follows:

WHEREFORE, the assailed Decision of the RTC is REVERSED and

SET ASIDE. A new one is hereby rendered DISMISSING the
consolidated complaints for recovery of sum of money.

SO ORDERED.[11]

HSBCL-SRP filed a motion for reconsideration which the CA denied for

lack of merit in its Resolution[12] promulgated on 19 June 2007.
 On 6 August 2007, HSBCL-SRP filed a manifestation withdrawing the
petition against Gerong because she already settled her obligations. In a
Resolution[13] of this Court dated 10 September 2007, this Court treated the
manifestation as a motion to withdraw the petition against Gerong, granted the
motion, and considered the case against Gerong closed and terminated.

Issues

HSBCL-SRP enumerated the following grounds to support its Petition:

I. The Court of Appeals has decided a question of substance in a way not

in accord with law and applicable decisions of this Honorable Court; and
II. The Court of Appeals has departed from the accepted and usual
course of judicial proceedings in reversing the decision of the Regional
Trial Court and the Metropolitan Trial Court.[14]

The Courts Ruling

The petition is meritorious. We agree with the rulings of the MeTC and the RTC.
The Promissory Notes uniformly provide:

PROMISSORY NOTE

P_____ Makati, M.M. ____ 19__

FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to

pay to THE HSBC RETIREMENT PLAN (hereinafter called the PLAN)
at its office in the Municipality of Makati, Metro Manila, on or
before until fully paid the sum of PESOS ___ (P___) Philippine
Currency without discount, with interest from date hereof at the rate
of Six per cent (6%) per annum, payable monthly.

I/WE agree that the PLAN may, upon written notice, increase the
interest rate stipulated in this note at any time depending on prevailing
conditions.
 I/WE hereby expressly consent to any extensions or renewals hereof for
a portion or whole of the principal without notice to the other(s), and in
such a case our liability shall remain joint and several.

In case collection is made by or through an attorney, I/WE jointly and

severally agree to pay ten percent (10%) of the amount due on this note
(but in no case less than P200.00) as and for attorneys fees in addition to
expenses and costs of suit.

In case of judicial execution, I/WE hereby jointly and severally waive

our rights under the provisions of Rule 39, Section 12 of the Rules of
Court.[15]

In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil
Code:
Art. 1179. Every obligation whose performance does not depend upon a
future or uncertain event, or upon a past event unknown to the parties,
is demandable at once.

x x x. (Emphasis supplied.)

We affirm the findings of the MeTC and the RTC that there is no date of payment
indicated in the Promissory Notes. The RTC is correct in ruling that since the
Promissory Notes do not contain a period, HSBCL-SRP has the right to demand
immediate payment. Article 1179 of the Civil Code applies. The spouses
Broquezas obligation to pay HSBCL-SRP is a pure obligation. The fact that
HSBCL-SRP was content with the prior monthly check-off from Editha Broquezas
salary is of no moment. Once Editha Broqueza defaulted in her monthly payment,
HSBCL-SRP made a demand to enforce a pure obligation.

In their Answer, the spouses Broqueza admitted that prior to Editha Broquezas
dismissal from HSBC in December 1993, she religiously paid the loan
amortizations, which HSBC collected through payroll check-off.[16] A definite
amount is paid to HSBCL-SRP on a specific date. Editha Broqueza authorized
HSBCL-SRP to make deductions from her payroll until her loans are fully
paid. Editha Broqueza, however, defaulted in her monthly loan payment due to her
dismissal. Despite the spouses Broquezas protestations, the payroll deduction is
merely a convenient mode of payment and not the sole source of payment for the
loans. HSBCL-SRP never agreed that the loans will be paid only through salary
deductions. Neither did HSBCL-SRP agree that if Editha Broqueza ceases to be an
employee of HSBC, her obligation to pay the loans will be suspended. HSBCL-
SRP can immediately demand payment of the loans at anytime because the
obligation to pay has no period. Moreover, the spouses Broqueza have already
incurred in default in paying the monthly installments.
Finally, the enforcement of a loan agreement involves debtor-creditor relations
founded on contract and does not in any way concern employee relations. As such
it should be enforcedthrough a separate civil action in the regular courts and not
before the Labor Arbiter.[17]

WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals

in CA-G.R. SP No. 62685 promulgated on 30 March
2006 is REVERSED and SET ASIDE. The decision of Branch 139 of the
Regional Trial Court of Makati City in Civil Case No. 00-787, as well as the
decision of Branch 61 of the Metropolitan Trial Court of Makati City in Civil Case
No. 52400 against the spouses Bienvenido and Editha Broqueza,
are AFFIRMED. Costs against respondents.

SO ORDERED.

G.R. No. L-29900 June 28, 1974

IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE

PAY, petitioner-appellant,
vs.
SEGUNDINA CHUA VDA. DE PALANCA, oppositor-appellee.

Florentino B. del Rosario for petitioner-appellant.

Manuel V. San Jose for oppositor-appellee.

FERNANDO, J.:p

There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While several points were raised, the decisive
issue is whether a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen years earlier
with the debtor sued promising to pay either upon receipt by him of his share from a certain estate or upon demand, the basis for the action
being the latter alternative. The lower court held that the ten-year period of limitation of actions did apply, the note being immediately due and
demandable, the creditor admitting expressly that he was relying on the wording "upon demand." On the above facts as found, and with the
law being as it is, it cannot be said that its decision is infected with error. We affirm.

From the appealed decision, the following appears: "The parties in this case agreed to submit the
matter for resolution on the basis of their pleadings and annexes and their respective memoranda
submitted. Petitioner George Pay is a creditor of the Late Justo Palanca who died in Manila on July
3, 1963. The claim of the petitioner is based on a promissory note dated January 30, 1952, whereby
the late Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca promised to pay George Pay the
amount of P26,900.00, with interest thereon at the rate of 12% per annum. George Pay is now
before this Court, asking that Segundina Chua vda. de Palanca, surviving spouse of the late Justo
Palanca, he appointed as administratrix of a certain piece of property which is a residential dwelling
located at 2656 Taft Avenue, Manila, covered by Tax Declaration No. 3114 in the name of Justo
Palanca, assessed at P41,800.00. The idea is that once said property is brought under
administration, George Pay, as creditor, can file his claim against the administratrix."1 It then stated
that the petition could not prosper as there was a refusal on the part of Segundina Chua Vda. de
Palanca to be appointed as administratrix; that the property sought to be administered no longer
belonged to the debtor, the late Justo Palanca; and that the rights of petitioner-creditor had already
prescribed. The promissory note, dated January 30, 1962, is worded thus: " `For value received from
time to time since 1947, we [jointly and severally promise to] pay to Mr. [George Pay] at his office at
the China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos]
(P26,900.00), with interest thereon at the rate of 12% per annum upon receipt by either of the
undersigned of cash payment from the Estate of the late Don Carlos Palanca or upon demand'. . . .
As stated, this promissory note is signed by Rosa Gonzales Vda. de Carlos Palanca and Justo
Palanca."2 Then came this paragraph: "The Court has inquired whether any cash payment has been
received by either of the signers of this promissory note from the Estate of the late Carlos Palanca.
Petitioner informed that he does not insist on this provision but that petitioner is only claiming on his
right under the promissory note ."3 After which, came the ruling that the wording of the promissory
note being "upon demand," the obligation was immediately due. Since it was dated January 30,
1952, it was clear that more "than ten (10) years has already transpired from that time until to date.
The action, therefore, of the creditor has definitely prescribed."4 The result, as above noted, was the
dismissal of the petition.

In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the
correctness of the rulings of the lower court as to the effect of the refusal of the surviving spouse of
the late Justo Palanca to be appointed as administratrix, as to the property sought to be
administered no longer belonging to the debtor, the late Justo Palanca, and as to the rights of
petitioner-creditor having already prescribed. As noted at the outset, only the question of prescription
need detain us in the disposition of this appeal. Likewise, as intimated, the decision must be affirmed,
considering the clear tenor of the promissory note.

From the manner in which the promissory note was executed, it would appear that petitioner was
hopeful that the satisfaction of his credit could he realized either through the debtor sued receiving
cash payment from the estate of the late Carlos Palanca presumptively as one of the heirs, or, as
expressed therein, "upon demand." There is nothing in the record that would indicate whether or not
the first alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen
years after the execution of the promissory note on January 30, 1952, this petition was filed. The
defense interposed was prescription. Its merit is rather obvious. Article 1179 of the Civil Code
provides: "Every obligation whose performance does not depend upon a future or uncertain event, or
upon a past event unknown to the parties, is demandable at once." This used to be Article 1113 of
the Spanish Civil Code of 1889. As far back as Floriano v. Delgado,5 a 1908 decision, it has been
applied according to its express language. The well-known Spanish commentator, Manresa, on this
point, states: "Dejando con acierto, el caracter mas teorico y grafico del acto, o sea la perfeccion de
este, se fija, para determinar el concepto de la obligacion pura, en el distinctive de esta, y que es
consecuencia de aquel: la exigibilidad immediata."6

The obligation being due and demandable, it would appear that the filing of the suit after fifteen
years was much too late. For again, according to the Civil Code, which is based on Section 43 of Act
No. 190, the prescriptive period for a written contract is that of ten years.7 This is another instance
where this Court has consistently adhered to the express language of the applicable norm.8 There is
no necessity therefore of passing upon the other legal questions as to whether or not it did suffice for
the petition to fail just because the surviving spouse refuses to be made administratrix, or just
because the estate was left with no other property. The decision of the lower court cannot be
overturned.

WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.

Zaldivar (Chairman), Barredo, Antonio, Fernandez and Aquino, JJ., concur.

G.R. No. L-16570 March 9, 1922

SMITH, BELL & CO., LTD., plaintiff-appellant,

vs.
VICENTE SOTELO MATTI, defendant-appellant.

Ross and Lawrence and Ewald E. Selph for plaintiff-appellant.

Ramon Sotelo for defendant-appellant.

ROMUALDEZ, J.:

In August, 1918, the plaintiff corporation and the defendant, Mr. Vicente Sotelo, entered into
contracts whereby the former obligated itself to sell, and the latter to purchase from it, two steel
tanks, for the total price of twenty-one thousand pesos (P21,000), the same to be shipped from New
York and delivered at Manila "within three or four months;" two expellers at the price of twenty five
thousand pesos (P25,000) each, which were to be shipped from San Francisco in the month of
September, 1918, or as soon as possible; and two electric motors at the price of two thousand pesos
(P2,000) each, as to the delivery of which stipulation was made, couched in these words:
"Approximate delivery within ninety days. This is not guaranteed."

The tanks arrived at Manila on the 27th of April, 1919: the expellers on the 26th of October, 1918;
and the motors on the 27th of February, 1919.

The plaintiff corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr.
Sotelo refused to receive them and to pay the prices stipulated.

The plaintiff brought suit against the defendant, based on four separate causes of action, alleging,
among other facts, that it immediately notified the defendant of the arrival of the goods, and asked
instructions from him as to the delivery thereof, and that the defendant refused to receive any of
them and to pay their price. The plaintiff, further, alleged that the expellers and the motors were in
good condition. (Amended complaint, pages 16-30, Bill of Exceptions.)

In their answer, the defendant, Mr. Sotelo, and the intervenor, the Manila Oil Refining and By-
Products Co., Inc., denied the plaintiff's allegations as to the shipment of these goods and their
arrival at Manila, the notification to the defendant, Mr. Sotelo, the latter's refusal to receive them and
pay their price, and the good condition of the expellers and the motors, alleging as special defense
that Mr. Sotelo had made the contracts in question as manager of the intervenor, the Manila Oil
Refining and By-Products Co., Inc which fact was known to the plaintiff, and that "it was only in May,
1919, that it notified the intervenor that said tanks had arrived, the motors and the expellers having
arrived incomplete and long after the date stipulated." As a counterclaim or set-off, they also allege
that, as a consequence of the plaintiff's delay in making delivery of the goods, which the intervenor
intended to use in the manufacture of cocoanut oil, the intervenor suffered damages in the sums of
one hundred sixteen thousand seven hundred eighty-three pesos and ninety-one centavos
(P116,783.91) for the nondelivery of the tanks, and twenty-one thousand two hundred and fifty
pesos (P21,250) on account of the expellers and the motors not having arrived in due time.

The case having been tried, the court below absolved the defendants from the complaint insofar as
the tanks and the electric motors were concerned, but rendered judgment against them, ordering
them to "receive the aforesaid expellers and pay the plaintiff the sum of fifty thousand pesos
(P50,00), the price of the said goods, with legal interest thereon from July 26, 1919, and costs."

Both parties appeal from this judgment, each assigning several errors in the findings of the lower
court.

The principal point at issue in this case is whether or not, under the contracts entered into and the
circumstances established in the record, the plaintiff has fulfilled, in due time, its obligation to bring
the goods in question to Manila. If it has, then it is entitled to the relief prayed for; otherwise, it must
be held guilty of delay and liable for the consequences thereof.

To solve this question, it is necessary to determine what period was fixed for the delivery of the
goods.

As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both
of them we find this clause:

To be delivered within 3 or 4 months The promise or indication of shipment carries with it

absolutely no obligation on our part Government regulations, railroad embargoes, lack of
vessel space, the exigencies of the requirement of the United States Government, or a
number of causes may act to entirely vitiate the indication of shipment as stated. In other
words, the order is accepted on the basis of shipment at Mill's convenience, time of shipment
being merely an indication of what we hope to accomplish.

In the contract Exhibit C (page 63 of the record), with reference to the expellers, the following
stipulation appears:

The following articles, hereinbelow more particularly described, to be shipped at San

Francisco within the month of September /18, or as soon as possible. Two Anderson oil
expellers . . . .

And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears:

Approximate delivery within ninety days. This is not guaranteed. This sale is subject to
our being able to obtain Priority Certificate, subject to the United States Government
requirements and also subject to confirmation of manufactures.

In all these contracts, there is a final clause as follows:

 The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes
or other causes known as "Force Majeure" entirely beyond the control of the sellers or their
representatives.

Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the
goods. As to the tanks, the agreement was that the delivery was to be made "within 3 or 4 months,"
but that period was subject to the contingencies referred to in a subsequent clause. With regard to
the expellers, the contract says "within the month of September, 1918," but to this is added "or as
soon as possible." And with reference to the motors, the contract contains this expression,
"Approximate delivery within ninety days," but right after this, it is noted that "this is not guaranteed."

The oral evidence falls short of fixing such period.

From the record it appears that these contracts were executed at the time of the world war when
there existed rigid restrictions on the export from the United States of articles like the machinery in
question, and maritime, as well as railroad, transportation was difficult, which fact was known to the
parties; hence clauses were inserted in the contracts, regarding "Government regulations, railroad
embargoes, lack of vessel space, the exigencies of the requirements of the United States
Government," in connection with the tanks and "Priority Certificate, subject to the United State
Government requirements," with respect to the motors. At the time of the execution of the contracts,
the parties were not unmindful of the contingency of the United States Government not allowing the
export of the goods, nor of the fact that the other foreseen circumstances therein stated might
prevent it.

Considering these contracts in the light of the civil law, we cannot but conclude that the term which
the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those
articles could be brought to Manila or not. If that is the case, as we think it is, the obligations must be
regarded as conditional.

Obligations for the performance of which a day certain has been fixed shall be demandable
only when the day arrives.

A day certain is understood to be one which must necessarily arrive, even though its date be
unknown.

If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is
conditional and shall be governed by the rules of the next preceding section. (referring to
pure and conditional obligations). (Art. 1125, Civ. Code.)

And as the export of the machinery in question was, as stated in the contract, contingent upon the
sellers obtaining certificate of priority and permission of the United States Government, subject to
the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a
condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon
the will of third persons who could in no way be compelled to fulfill the condition. In cases like this,
which are not expressly provided for, but impliedly covered, by the Civil Code, the obligor will be
deemed to have sufficiently performed his part of the obligation, if he has done all that was in his
power, even if the condition has not been fulfilled in reality.

In such cases, the decisions prior to the Civil Code have held that the obligee having done all
that was in his power, was entitled to enforce performance of the obligation. This
performance, which is fictitious not real is not expressly authorized by the Code, which
limits itself only to declare valid those conditions and the obligation thereby affected; but it is
 neither disallowed, and the Code being thus silent, the old view can be maintained as a
doctrine. (Manresa's commentaries on the Civil Code [1907], vol. 8, page 132.)

The decisions referred to by Mr. Manresa are those rendered by the supreme court of Spain on
November 19, 1896, and February 23, 1871.

In the former it is held:

First. That when the fulfillment of the conditions does not depend on the will of the obligor,
but on that of a third person who can in no way be compelled to carry it out, and it is found by
the lower court that the obligor has done all in his power to comply with the obligation, the
judgment of the said court, ordering the other party to comply with his part of the contract, is
not contrary to the law of contracts, or to Law 1, Tit. I, Book 10, of the "Novsima
Recopilacin," or Law 12, Tit. 11, of Partida 5, when in the said finding of the lower court, no
law or precedent is alleged to have been violated. (Jurisprudencia Civil published by the
directors of the Revista General de Legislacion y Jurisprudencia [1866], vol. 14, page 656.)

In the second decision, the following doctrine is laid down:

Second. That when the fulfillment of the condition does not depend on the will of the obligor,
but on that of a third person, who can in no way be compelled to carry it out, the obligor's
part of the contract is complied withalf Belisario not having exercised his right of repurchase
reserved in the sale of Basilio Borja mentioned in paragraph (13) hereof, the affidavit of
Basilio Borja for the consolidacion de dominio was presented for record in the registry of
deeds and recorded in the registry on the same date.

(32) The Maximo Belisario left a widow, the opponent Adelina Ferrer and three minor
children, Vitaliana, Eugenio, and Aureno Belisario as his only heirs.

(33) That in the execution and sales thereunder, in which C. H. McClure appears as the
judgment creditor, he was represented by the opponent Peter W. Addison, who prepared
and had charge of publication of the notices of the various sales and that in none of the sales
was the notice published more than twice in a newspaper.

The claims of the opponent-appellant Addison have been very fully and ably argued by his
counsel but may, we think, be disposed of in comparatively few words. As will be seen from
the foregoing statement of facts, he rest his title (1) on the sales under the executions issued
in cases Nos. 435, 450, 454, and 499 of the court of the justice of the peace of Dagupan with
the priority of inscription of the last two sales in the registry of deeds, and (2) on a purchase
from the Director of Lands after the land in question had been forfeited to the Government for
non-payment of taxes under Act No. 1791.

The sheriff's sales under the execution mentioned are fatally defective for what of sufficient
publication of the notice of sale. Section 454 of the Code of civil Procedure reads in part as
follows:

SEC. 454. Before the sale of property on execution, notice thereof must be given, as follows:

1. In case of perishable property, by posing written notice of the time and place of the sale in
three public places of the municipality or city where the sale is to take place, for such time as
may be reasonable, considering the character and condition of the property;
 2. * * * * * * *

3. In cases of real property, by posting a similar notice particularly describing the property,
for twenty days in three public places of the municipality or city where the property is situated,
and also where the property is to be sold, and publishing a copy thereof once a week, for the
same period, in some newspaper published or having general circulation in the province, if
there be one. If there are newspaper published in the province in both the Spanish and
English languages, then a like publication for a like period shall be made in one newspaper
published in the Spanish language, and in one published in the English language: Provided,
however, That such publication in a newspaper will not be required when the assessed
valuation of the property does not exceed four hundred pesos;

4. * * * * * * *

Examining the record, we find that in cases Nos. 435 and 450 the sales took place on October 14,
1916; the notice first published gave the date of the sale as October 15th, but upon discovering that
October 15th was a Sunday, the date was changed to October 14th. The correct notice was
published twice in a local newspaper, the first publication was made on October 7th and the second
and last on October 14th, the date of the sale itself. The newspaper is a weekly periodical published
every Saturday afternoon.

In case No. 454 there were only two publications of the notice in a newspaper, the first publication
being made only fourteen days before the date of the sale. In case No. 499, there were also only two
publications, the first of which was made thirteen days before the sale. In the last case the sale was
advertised for the hours of from 8:30 in the morning until 4:30 in the afternoon, in violation of section
457 of the Code of Civil Procedure. In cases Nos. 435 and 450 the hours advertised were from 9:00
in the morning until 4.30 in the afternoon. In all of the cases the notices of the sale were prepared by
the judgment creditor or his agent, who also took charged of the publication of such notices.

In the case of Campomanes vs. Bartolome and Germann & Co. (38 Phil., 808), this court held that if
a sheriff sells without the notice prescribe by the Code of Civil Procedure induced thereto by the
judgment creditor and the purchaser at the sale is the judgment creditor, the sale is absolutely void
and not title passes. This must now be regarded as the settled doctrine in this jurisdiction whatever
the rule may be elsewhere.

It appears affirmatively from the evidence in the present case that there is a newspaper published in
the province where the sale in question took place and that the assessed valuation of the property
disposed of at each sale exceeded P400. Comparing the requirements of section 454, supra, with
what was actually done, it is self-evident that notices of the sales mentioned were not given as
prescribed by the statute and taking into consideration that in connection with these sales the
appellant Addison was either the judgment creditor or else occupied a position analogous to that of a
judgment creditor, the sales must be held invalid.

The conveyance or reconveyance of the land from the Director of Lands is equally invalid. The
provisions of Act No. 1791 pertinent to the purchase or repurchase of land confiscated for non-
payment of taxes are found in section 19 of the Act and read:

. . . In case such redemption be not made within the time above specified the Government of
the Philippine Islands shall have an absolute, indefeasible title to said real property. Upon the
expiration of the said ninety days, if redemption be not made, the provincial treasurer shall
immediately notify the Director of Lands of the forfeiture and furnish him with a description of
the property, and said Director of Lands shall have full control and custody thereof to lease
 or sell the same or any portion thereof in the same manner as other public lands are leased
or sold: Provided, That the original owner, or his legal representative, shall have the right to
repurchase the entire amount of his said real property, at any time before a sale or contract
of sale has been made by the director of Lands to a third party, by paying therefore the
whole sum due thereon at the time of ejectment together with a penalty of ten per
centum . . . .

The appellant Addison repurchased under the final proviso of the section quoted and was allowed to
do so as the successor in interest of the original owner under the execution sale above discussed.
As we have seen, he acquired no rights under these sales, was therefore not the successor of the
original owner and could only have obtained a valid conveyance of such titles as the Government
might have by following the procedure prescribed by the Public Land Act for the sale of public lands.
he is entitled to reimbursement for the money paid for the redemption of the land, with interest, but
has acquired no title through the redemption.

The question of the priority of the record of the sheriff's sales over that of the sale from Belisario to
Borja is extensively argued in the briefs, but from our point of view is of no importance; void sheriff's
or execution sales cannot be validated through inscription in the Mortgage Law registry.

The opposition of Adelina Ferrer must also be overruled. She maintained that the land in question
was community property of the marriage of Eulalio Belisario and Paula Ira: that upon the death of
Paula Ira inealed from is modified, and the defendant Mr. Vicente Sotelo Matti, sentenced to accept
and receive from the plaintiff the tanks, the expellers and the motors in question, and to pay the
plaintiff the sum of ninety-six thousand pesos (P96,000), with legal interest thereon from July 17,
1919, the date of the filing of the complaint, until fully paid, and the costs of both instances. So
ordered.

N BANC
FRANCISCO CHAVEZ, G.R. No. 168338

Petitioner,
Present:

PUNO, C.J.,

QUISUMBING,

YNARES-SANTIAGO,

- versus - SANDOVAL-GUTIERREZ,

CARPIO,

AUSTRIA-MARTINEZ,

CORONA,

CARPIO MORALES,

AZCUNA,

TINGA,

RAUL M. GONZALES, CHICO-NAZARIO,

in his capacity as the VELASCO, JR.,

Secretary of the NACHURA,

Department of Justice; REYES, and

and NATIONAL LEONARDO-DE CASTRO, JJ.

TELECOMMUNICATIONS
COMMISSION (NTC),
Promulgated:
Respondents.
 February 15, 2008

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

DECISION

PUNO,C.J.:
 A. Precis

In this jurisdiction, it is established that freedom of the press is crucial and so

inextricably woven into the right to free speech and free expression, that any
attempt to restrict it must be met with an examination so critical that only a
danger that is clear and present would be allowed to curtail it.
Indeed, we have not wavered in the duty to uphold this cherished freedom.
We have struck down laws and issuances meant to curtail this right, as in Adiong v.
COMELEC,[1]Burgos v. Chief of Staff,[2] Social Weather Stations v.
COMELEC,[3] and Bayan v. Executive Secretary Ermita.[4] When on its face, it is
clear that a governmental act is nothing more than a naked means to prevent the
free exercise of speech, it must be nullified.

B. The Facts

1. The case originates from events that occurred a year after the 2004
national and local elections. On June 5, 2005, Press Secretary Ignacio Bunye
told reporters that the opposition was planning to destabilize the
administration by releasing an audiotape of a mobile phone conversation
allegedly between the President of the Philippines, Gloria Macapagal
Arroyo, and a high-ranking official of the Commission on Elections
(COMELEC). The conversation was audiotaped allegedly through wire-
tapping.[5]Later, in a Malacaang press briefing, Secretary Bunye produced
two versions of the tape, one supposedly the complete version, and the
other, a spliced, doctored or altered version, which would suggest that the
President had instructed the COMELEC official to manipulate the election
results in the Presidents favor. [6] It seems that Secretary Bunye admitted
that the voice was that of President Arroyo, but subsequently made a
retraction. [7]
2. On June 7, 2005, former counsel of deposed President Joseph Estrada, Atty.
Alan Paguia, subsequently released an alleged authentic tape recording of
the wiretap.Included in the tapes were purported conversations of the
President, the First Gentleman Jose Miguel Arroyo, COMELEC
Commissioner Garcillano, and the late Senator Barbers.[8]

3. On June 8, 2005, respondent Department of Justice (DOJ) Secretary Raul

Gonzales warned reporters that those who had copies of the compact disc
(CD) and those broadcasting or publishing its contents could be held liable
under the Anti-Wiretapping Act. These persons included Secretary Bunye
and Atty. Paguia. He also stated that persons possessing or airing said tapes
were committing a continuing offense, subject to arrest by anybody who
had personal knowledge if the crime was committed or was being
committed in their presence.[9]

4. On June 9, 2005, in another press briefing, Secretary Gonzales ordered the

National Bureau of Investigation (NBI) to go after media
organizations found to have caused the spread, the playing and the printing
of the contents of a tape of an alleged wiretapped conversation involving
the President about fixing votes in the 2004 national elections.Gonzales
said that he was going to start with Inq7.net, a joint venture between
the Philippine Daily Inquirer and GMA7 television network, because by the
very nature of the Internet medium, it was able to disseminate the
contents of the tape more widely.He then expressed his intention of
inviting the editors and managers of Inq7.net and GMA7 to a probe, and
supposedly declared, I [have] asked the NBI to conduct a tactical
interrogation of all concerned. [10]
5. On June 11, 2005, the NTC issued this press release: [11]
NTC GIVES FAIR WARNING TO RADIO AND TELEVISION
OWNERS/OPERATORS TO OBSERVE ANTI-WIRETAPPING LAW AND
PERTINENT CIRCULARS ON PROGRAM STANDARDS
 xxx xxx xxx

Taking into consideration the countrys unusual situation, and in

order not to unnecessarily aggravate the same, the NTC warns all
radio stations and television network owners/operators that the
conditions of the authorization and permits issued to them by
Government like the Provisional Authority and/or Certificate of
Authority explicitly provides that said companies shall not use [their]
stations for the broadcasting or telecasting of false information or
willful misrepresentation.Relative thereto, it has come to the
attention of the [NTC] that certain personalities are in possession of
alleged taped conversations which they claim involve the President
of the Philippines and a Commissioner of the COMELEC regarding
supposed violation of election laws.

These personalities have admitted that the taped conversations are

products of illegal wiretapping operations.

Considering that these taped conversations have not been duly

authenticated nor could it be said at this time that the tapes contain
an accurate or truthful representation of what was recorded therein,
it is the position of the [NTC] that the continuous airing or broadcast
of the said taped conversations by radio and television stations is a
continuing violation of the Anti-Wiretapping Law and the conditions
of the Provisional Authority and/or Certificate of Authority issued to
these radio and television stations. It has been subsequently
established that the said tapes are false and/or fraudulent after a
prosecution or appropriate investigation, the concerned radio and
television companies are hereby warned that their broadcast/airing
of such false information and/or willful misrepresentation shall be
just cause for the suspension, revocation and/or cancellation of
the licenses or authorizations issued to the said companies.
 In addition to the above, the [NTC] reiterates the pertinent NTC
circulars on program standards to be observed by radio and
television stations. NTC Memorandum Circular 111-12-85 explicitly
states, among others, that all radio broadcasting and television
stations shall, during any broadcast or telecast, cut off from the air
the speech, play, act or scene or other matters being broadcast or
telecast the tendency thereof is to disseminate false information or
such other willful misrepresentation, or to propose and/or incite
treason, rebellion or sedition. The foregoing directive had been
reiterated by NTC Memorandum Circular No. 22-89, which, in
addition thereto, prohibited radio, broadcasting and television
stations from using their stations to broadcast or telecast any
speech, language or scene disseminating false information or willful
misrepresentation, or inciting, encouraging or assisting in subversive
or treasonable acts.

The [NTC] will not hesitate, after observing the requirements of

due process, to apply with full force the provisions of said Circulars
and their accompanying sanctions on erring radio and television
stations and their owners/operators.

6. On June 14, 2005, NTC held a dialogue with the Board of Directors of
the Kapisanan ng mga Brodkaster sa Pilipinas (KBP). NTC allegedly assured
the KBP that the press release did not violate the constitutional freedom of
speech, of expression, and of the press, and the right to
information. Accordingly, NTC and KBP issued a Joint Press
Statement which states, among others, that: [12]

NTC respects and will not hinder freedom of the press and the
right to information on matters of public concern. KBP & its
 members have always been committed to the exercise of
press freedom with high sense of responsibility and discerning
judgment of fairness and honesty.

NTC did not issue any MC [Memorandum Circular] or Order

constituting a restraint of press freedom or censorship. The
NTC further denies and does not intend to limit or restrict the
interview of members of the opposition or free expression of
views.

What is being asked by NTC is that the exercise of press freedom

[be] done responsibly.

KBP has program standards that KBP members will observe in the
treatment of news and public affairs programs. These include
verification of sources, non-airing of materials that would
constitute inciting to sedition and/or rebellion.

The KBP Codes also require that no false statement or willful

misrepresentation is made in the treatment of news or
commentaries.

The supposed wiretapped tapes should be treated with

sensitivity and handled responsibly giving due consideration
to the process being undertaken to verify and validate the
authenticity and actual content of the same.
 C. The Petition

Petitioner Chavez filed a petition under Rule 65 of the Rules of Court

against respondents Secretary Gonzales and the NTC, praying for the issuance of
the writs of certiorari and prohibition, as extraordinary legal remedies, to annul
void proceedings, and to prevent the unlawful, unconstitutional and oppressive
exercise of authority by the respondents.[13]

Alleging that the acts of respondents are violations of the freedom on

expression and of the press, and the right of the people to information on matters
of public concern,[14]petitioner specifically asked this Court:

[F]or [the] nullification of acts, issuances, and orders of respondents

committed or made since June 6, 2005 until the present that curtail
the publics rights to freedom of expression and of the press, and to
information on matters of public concern specifically in relation to
information regarding the controversial taped conversion of
President Arroyo and for prohibition of the further commission of
such acts, and making of such issuances, and orders by
respondents. [15]

Respondents[16] denied that the acts transgress the Constitution, and

questioned petitioners legal standing to file the petition. Among the arguments
they raised as to the validity of the fair warning issued by respondent NTC, is that
broadcast media enjoy lesser constitutional guarantees compared to print media,
and the warning was issued pursuant to the NTCs mandate to regulate the
telecommunications industry. [17] It was also stressed that most of the [television]
and radio stations continue, even to this date, to air the tapes, but of late within
the parameters agreed upon between the NTC and KBP. [18]
 D. THE PROCEDURAL THRESHOLD: LEGAL STANDING

To be sure, the circumstances of this case make the constitutional

challenge peculiar. Petitioner, who is not a member of the broadcast media, prays
that we strike down the acts and statements made by respondents as violations
of the right to free speech, free expression and a free press. For another, the
recipients of the press statements have not come forwardneither intervening nor
joining petitioner in this action. Indeed, as a group, they issued a joint statement
with respondent NTC that does not complain about restraints on freedom of the
press.

It would seem, then, that petitioner has not met the requisite legal standing,
having failed to allege such a personal stake in the outcome of the controversy as
to assure that concrete adverseness which sharpens the presentation of issues
upon which the Court so largely depends for illumination of difficult constitutional
questions. [19]

But as early as half a century ago, we have already held that where serious
constitutional questions are involved, the transcendental importance to the
public of these cases demands that they be settled promptly and definitely,
brushing aside if we must, technicalities of procedure. [20] Subsequently, this Court
has repeatedly and consistently refused to wield procedural barriers as
impediments to its addressing and resolving serious legal questions that greatly
impact on public interest,[21] in keeping with the Court's duty under the 1987
Constitution to determine whether or not other branches of government have
kept themselves within the limits of the Constitution and the laws and that they
have not abused the discretion given to them.

Thus, in line with the liberal policy of this Court on locus standi when a case
involves an issue of overarching significance to our society,[22] we therefore brush
aside technicalities of procedure and take cognizance of this petition,[23] seeing as
it involves a challenge to the most exalted of all the civil rights, the freedom of
expression. The petition raises other issues like the extent of the right to
information of the public. It is fundamental, however, that we need not address
all issues but only the most decisive one which in the case at bar is whether the
acts of the respondents abridge freedom of speech and of the press.

But aside from the primordial issue of determining whether free speech and
freedom of the press have been infringed, the case at bar also gives this Court
the opportunity: (1) to distill the essence of freedom of speech and of the press
now beclouded by the vagaries of motherhood statements; (2) to clarify the
types of speeches and their differing restraints allowed by law; (3) to discuss the
core concepts of prior restraint, content-neutral and content-based regulations
and their constitutional standard of review; (4) to examine the historical
difference in the treatment of restraints between print and broadcast media
and stress the standard of review governing both; and (5) to call attention to the
ongoing blurring of the lines of distinction between print and broadcast media.

E. RE-EXAMINING THE LAW ON FREEDOM OF SPEECH,

OF EXPRESSION AND OF THE PRESS

No law shall be passed abridging the freedom of speech, of

expression, or of the press, or the right of the people peaceably to
assemble and petition the government for redress of grievances.[24]

Freedom of expression has gained recognition as a fundamental principle of

every democratic government, and given a preferred right that stands on a higher
level than substantive economic freedom or other liberties. The cognate rights
codified by Article III, Section 4 of the Constitution, copied almost verbatim from
the First Amendment of the U.S. Bill of Rights,[25] were considered the necessary
consequence of republican institutions and the complement of free
speech.[26] This preferred status of free speech has also been codified at the
international level, its recognition now enshrined in international law as a
customary norm that binds all nations.[27]

In the Philippines, the primacy and high esteem accorded freedom of

expression is a fundamental postulate of our constitutional system. [28] This right
was elevated to constitutional status in the 1935, the 1973 and the 1987
Constitutions, reflecting our own lesson of history, both political and legal, that
freedom of speech is an indispensable condition for nearly every other form of
freedom.[29] Moreover, our history shows that the struggle to protect the freedom
of speech, expression and the press was, at bottom, the struggle for the
indispensable preconditions for the exercise of other freedoms.[30] For it is only
when the people have unbridled access to information and the press that they
will be capable of rendering enlightened judgments. In the oft-quoted words of
Thomas Jefferson, we cannot both be free and ignorant.

E.1. ABSTRACTION OF FREE SPEECH

Surrounding the freedom of speech clause are various concepts that we

have adopted as part and parcel of our own Bill of Rights provision on this basic
freedom.[31] What is embraced under this provision was discussed exhaustively by
the Court in Gonzales v. Commission on Elections, [32] in which it was held:

At the very least, free speech and free press may be identified with
the liberty to discuss publicly and truthfully any matter of public
interest without censorship and punishment. There is to be no
previous restraint on the communication of views or subsequent
liability whether in libel suits, prosecution for sedition, or action for
damages, or contempt proceedings unless there be a clear and
 present danger of substantive evil that Congress has a right to
prevent. [33]

Gonzales further explained that the vital need of a constitutional

democracy for freedom of expression is undeniable, whether as a means of
assuring individual self-fulfillment; of attaining the truth; of assuring participation
by the people in social, including political, decision-making; and of maintaining
the balance between stability and change.[34] As early as the 1920s, the trend as
reflected in Philippine and American decisions was to recognize the broadest
scope and assure the widest latitude for this constitutional guarantee. The trend
represents a profound commitment to the principle that debate on public issue
should be uninhibited, robust, and wide-open. [35]

Freedom of speech and of the press means something more than the right
to approve existing political beliefs or economic arrangements, to lend support to
official measures, and to take refuge in the existing climate of opinion on any
matter of public consequence.[36] When atrophied, the right becomes
meaningless.[37] The right belongs as well -- if not more to those who question,
who do not conform, who differ.[38] The ideas that may be expressed under this
freedom are confined not only to those that are conventional or acceptable to the
majority. To be truly meaningful, freedom of speech and of the press should allow
and even encourage the articulation of the unorthodox view, though it be hostile
to or derided by others; or though such view induces a condition of unrest,
creates dissatisfaction with conditions as they are, or even stirs people to
anger.[39] To paraphrase Justice Holmes, it is freedom for the thought that we hate,
no less than for the thought that agrees with us. [40]

The scope of freedom of expression is so broad that it extends protection to

nearly all forms of communication. It protects speech, print and assembly
regarding secular as well as political causes, and is not confined to any particular
field of human interest. The protection covers myriad matters of public interest or
concern embracing all issues, about which information is needed or appropriate,
so as to enable members of society to cope with the exigencies of their period.
The constitutional protection assures the broadest possible exercise of free
speech and free press for religious, political, economic, scientific, news, or
informational ends, inasmuch as the Constitution's basic guarantee of freedom to
advocate ideas is not confined to the expression of ideas that are conventional or
shared by a majority.

The constitutional protection is not limited to the exposition of ideas. The

protection afforded free speech extends to speech or publications that are
entertaining as well as instructive or informative. Specifically, in Eastern
Broadcasting Corporation (DYRE) v. Dans,[41] this Court stated that all forms of
media, whether print or broadcast, are entitled to the broad protection of the
clause on freedom of speech and of expression.

While all forms of communication are entitled to the broad protection of

freedom of expression clause, the freedom of film, television and radio
broadcasting is somewhat lesser in scope than the freedom accorded to
newspapers and other print media, as will be subsequently discussed.

E.2. DIFFERENTIATION: THE LIMITS & RESTRAINTS OF FREE SPEECH

From the language of the specific constitutional provision, it would appear that
the right to free speech and a free press is not susceptible of any limitation. But
the realities of life in a complex society preclude a literal interpretation of the
provision prohibiting the passage of a law that would abridge such freedom. For
freedom of expression is not an absolute, [42] nor is it an unbridled license that
gives immunity for every possible use of language and prevents the punishment
of those who abuse this freedom.

Thus, all speech are not treated the same. Some types of speech may be
subjected to some regulation by the State under its pervasive police power, in
order that it may not be injurious to the equal right of others or those of the
community or society.[43] The difference in treatment is expected because the
relevant interests of one type of speech, e.g., political speech, may vary from
those of another, e.g., obscene speech. Distinctions have therefore been made in
the treatment, analysis, and evaluation of the permissible scope of restrictions on
various categories of speech. [44] We have ruled, for example, that in our
jurisdiction slander or libel, lewd and obscene speech, as well as fighting words
are not entitled to constitutional protection and may be penalized.[45]
Moreover, the techniques of reviewing alleged restrictions on speech
(overbreadth, vagueness, and so on) have been applied differently to each
category, either consciously or unconsciously. [46] A study of free speech
jurisprudencewhether here or abroadwill reveal that courts have developed
different tests as to specific types or categories of speech in
concretesituations; i.e., subversive speech; obscene speech; the speech of the
broadcast media and of the traditional print media; libelous speech; speech
affecting associational rights; speech before hostile audiences; symbolic speech;
speech that affects the right to a fair trial; and speech associated with rights of
assembly and petition. [47]

Generally, restraints on freedom of speech and expression are evaluated by

either or a combination of three tests, i.e., (a) the dangerous tendency
doctrine which permits limitations on speech once a rational connection has been
established between the speech restrained and the danger contemplated; [48] (b)
the balancing of interests tests, used as a standard when courts need to balance
conflicting social values and individual interests, and requires a conscious and
detailed consideration of the interplay of interests observable in a given situation
of type of situation; [49] and (c) the clear and present danger rule which rests on
the premise that speech may be restrained because there is substantial danger
that the speech will likely lead to an evil the government has a right to prevent.
This rule requires that the evil consequences sought to be prevented must be
substantive, extremely serious and the degree of imminence extremely high. [50]

As articulated in our jurisprudence, we have applied either the dangerous

tendency doctrine or clear and present danger test to resolve free speech
challenges. More recently, we have concluded that we have generally adhered to
the clear and present danger test. [51]

E.3. IN FOCUS: FREEDOM OF THE PRESS

Much has been written on the philosophical basis of press freedom as part
of the larger right of free discussion and expression. Its practical importance,
though, is more easily grasped. It is the chief source of information on current
affairs. It is the most pervasive and perhaps most powerful vehicle of opinion on
public questions. It is the instrument by which citizens keep their government
informed of their needs, their aspirations and their grievances. It is the sharpest
weapon in the fight to keep government responsible and efficient. Without a
vigilant press, the mistakes of every administration would go uncorrected and its
abuses unexposed. As Justice Malcolm wrote in United States v. Bustos:[52]

The interest of society and the maintenance of good government

demand a full discussion of public affairs. Complete liberty to
comment on the conduct of public men is a scalpel in the case of
free speech. The sharp incision of its probe relieves the abscesses
of officialdom. Men in public life may suffer under a hostile and
unjust accusation; the wound can be assuaged with the balm of
clear conscience.

Its contribution to the public weal makes freedom of the press deserving of extra
protection. Indeed, the press benefits from certain ancillary rights. The
productions of writers are classified as intellectual and proprietary. Persons who
interfere or defeat the freedom to write for the press or to maintain a periodical
publication are liable for damages, be they private individuals or public officials.
 E.4. ANATOMY OF RESTRICTIONS: PRIOR RESTRAINT, CONTENT-NEUTRAL AND
CONTENT-BASED REGULATIONS

Philippine jurisprudence, even as early as the period under the 1935 Constitution,
has recognized four aspects of freedom of the press. These are (1) freedom from
prior restraint; (2) freedom from punishment subsequent to publication; [53] (3)
freedom of access to information; [54] and (4) freedom of circulation.[55]

Considering that petitioner has argued that respondents press statement

constitutes a form of impermissible prior restraint, a closer scrutiny of this
principle is in order, as well as its sub-specie of content-based (as distinguished
from content-neutral) regulations.

At this point, it should be noted that respondents in this case deny that
their acts constitute prior restraints. This presents a unique tinge to the present
challenge, considering that the cases in our jurisdiction involving prior restrictions
on speech never had any issue of whether the governmental act or
issuance actually constituted prior restraint. Rather, the determinations were
always about whether the restraint was justified by the Constitution.

Be that as it may, the determination in every case of whether there is an

impermissible restraint on the freedom of speech has always been based on the
circumstances of each case, including the nature of the restraint. And in its
application in our jurisdiction, the parameters of this principle have been etched
on a case-to-case basis, always tested by scrutinizing the governmental issuance
or act against the circumstances in which they operate, and then determining
the appropriate test with which to evaluate.

Prior restraint refers to official governmental restrictions on the press or other

forms of expression in advance of actual publication or dissemination.[56] Freedom
from prior restraint is largely freedom from government censorship of
publications, whatever the form of censorship, and regardless of whether it is
wielded by the executive, legislative or judicial branch of the government. Thus, it
precludes governmental acts that required approval of a proposal to publish;
licensing or permits as prerequisites to publication including the payment of
license taxes for the privilege to publish; and even injunctions against
publication. Even the closure of the business and printing offices of certain
newspapers, resulting in the discontinuation of their printing and publication, are
deemed as previous restraint or censorship. [57] Any law or official that requires
some form of permission to be had before publication can be made, commits an
infringement of the constitutional right, and remedy can be had at the courts.

Given that deeply ensconced in our fundamental law is the hostility against all
prior restraints on speech, and any act that restrains speech is presumed
invalid,[58] and any act that restrains speech is hobbled by the presumption of
invalidity and should be greeted with furrowed brows, [59] it is important to stress
not all prior restraints on speech are invalid. Certain previous restraints may be
permitted by the Constitution, but determined only upon a careful evaluation of
the challenged act as against the appropriate test by which it should be measured
against.

Hence, it is not enough to determine whether the challenged act constitutes

some form of restraint on freedom of speech. A distinction has to be made
whether the restraint is (1) a content-neutral regulation, i.e., merely concerned
with the incidents of the speech, or one that merely controls the time, place or
manner, and under well defined standards;[60] or (2) a content-based restraint or
censorship, i.e., the restriction is based on the subject matter of the utterance or
speech. [61] The cast of the restriction determines the test by which the challenged
act is assayed with.

When the speech restraints take the form of a content-neutral regulation, only a
substantial governmental interest is required for its validity.[62] Because
regulations of this type are not designed to suppress any particular message, they
are not subject to the strictest form of judicial scrutiny but an intermediate
approachsomewhere between the mere rationality that is required of any other
law and the compelling interest standard applied to content-based
restrictions.[63] The test is called intermediate because the Court will not merely
rubberstamp the validity of a law but also require that the restrictions be
narrowly-tailored to promote an important or significant governmental interest
that is unrelated to the suppression of expression. The intermediate approach has
been formulated in this manner:

A governmental regulation is sufficiently justified if it is within the

constitutional power of the Government, if it furthers an important
or substantial governmental interest; if the governmental interest
is unrelated to the suppression of free expression; and if the
incident restriction on alleged [freedom of speech & expression] is
no greater than is essential to the furtherance of that interest. [64]

On the other hand, a governmental action that restricts freedom of speech or of

the press based on content is given the strictest scrutiny in light of its inherent
and invasive impact. Only when the challenged act has overcome the clear and
present danger rule will it pass constitutional muster,[65] with the government
having the burden of overcoming the presumed unconstitutionality.

Unless the government can overthrow this presumption, the content-

based restraint will be struck down.[66]
With respect to content-based restrictions, the government must also show the
type of harm the speech sought to be restrained would bring about especially the
gravity and the imminence of the threatened harm otherwise the prior restraint
will be invalid. Prior restraint on speech based on its content cannot be justified
by hypothetical fears, but only by showing a substantive and imminent evil that
has taken the life of a reality already on ground.[67] As formulated, the question in
every case is whether the words used are used in such circumstances and are of
such a nature as
to create a clear and present danger that they willbring about the substantive
evils that Congress has a right to prevent. It is a question of proximity and
degree.[68]

The regulation which restricts the speech content must also serve an important or
substantial government interest, which is unrelated to the suppression of free
expression. [69]

Also, the incidental restriction on speech must be no greater than what is

essential to the furtherance of that interest. [70] A restriction that is so broad that
it encompasses more than what is required to satisfy the governmental interest
will be invalidated. [71] The regulation, therefore, must be reasonable and narrowly
drawn to fit the regulatory purpose, with the least restrictive means
undertaken. [72]

Thus, when the prior restraint partakes of a content-neutral regulation, it is

subjected to an intermediate review. A content-based
[73]
regulation, however, bears a heavy presumption of invalidity and is measured
against the clear and present danger rule. The latter will pass constitutional
muster only if justified by a compelling reason, and the restrictions imposed are
neither overbroad nor vague. [74]

Applying the foregoing, it is clear that the challenged acts in the case at bar need
to be subjected to the clear and present danger rule, as they are content-
based restrictions. The acts of respondents focused solely on but one objecta
specific content fixed as these were on the alleged taped conversations between
the President and a COMELEC official. Undoubtedly these did not merely provide
regulations as to the time, place or manner of the dissemination of speech or
expression.
E.5. Dichotomy of Free Press: Print v. Broadcast Media
 Finally, comes respondents argument that the challenged act is valid on the
ground that broadcast media enjoys free speech rights that are lesser in scope to
that of print media. We next explore and test the validity of this argument, insofar
as it has been invoked to validate a content-based restriction on broadcast media.

The regimes presently in place for each type of media differ from one
other. Contrasted with the regime in respect of books, newspapers, magazines
and traditional printed matter, broadcasting, film and video have been subjected
to regulatory schemes.

The dichotomy between print and broadcast media traces its origins in the
United States. There, broadcast radio and television have been held to
have limited First Amendment protection,[75] and U.S. Courts
have excluded broadcast media from the application of the strict scrutiny
standard that they would otherwise apply to content-based
[76]
restrictions. According to U.S. Courts, the three major reasons why broadcast
media stands apart from print media are: (a) the scarcity of the frequencies by
which the medium operates [i.e., airwaves are physically limited while print
medium may be limitless]; [77] (b) its pervasiveness as a medium; and (c) its unique
accessibility to children.[78] Because cases involving broadcast media need not
follow precisely the same approach that [U.S. courts] have applied to other media,
nor go so far as to demand that such regulations serve compelling government
interests,[79] they are decided on whether the governmental restriction is
narrowly tailored to further a substantial governmental interest,[80] or the
intermediate test.

As pointed out by respondents, Philippine jurisprudence has also echoed a

differentiation in treatment between broadcast and print media. Nevertheless, a
review of Philippine case law on broadcast media will show thatas we have
deviated with the American conception of the Bill of Rights[81] we likewise did
not adopt en masse the U.S. conception of free speech as it relates to broadcast
media, particularly as to which test would govern content-based prior restraints.

Our cases show two distinct features of this dichotomy. First, the difference
in treatment, in the main, is in the regulatory scheme applied to broadcast media
that is not imposed on traditional print media, and narrowly confined to
unprotected speech (e.g., obscenity, pornography, seditious and inciting speech),
or is based on a compelling government interest that also has constitutional
protection, such as national security or the electoral process.

Second, regardless of the regulatory schemes that broadcast media is

subjected to, the Court has consistently held that the clear and present danger
test applies to content-based restrictions on media, without making a distinction
as to traditional print or broadcast media.

The distinction between broadcast and traditional print media was

first enunciated in Eastern Broadcasting Corporation (DYRE) v. Dans,[82] wherein it
was held that [a]ll forms of media, whether print or broadcast, are entitled to the
broad protection of the freedom of speech and expression clause. The test for
limitations on freedom of expression continues to be the clear and present danger
rule[83]

Dans was a case filed to compel the reopening of a radio station which had
been summarily closed on grounds of national security. Although the issue had
become moot and academic because the owners were no longer interested to
reopen, the Court still proceeded to do an analysis of the case and made
formulations to serve as guidelines for all inferior courts and bodies exercising
quasi-judicial functions. Particularly, the Court made a detailed exposition as to
what needs be considered in cases involving broadcast media. Thus:[84]
xxx xxx xxx

(3) All forms of media, whether print or broadcast, are entitled to the
broad protection of the freedom of speech and expression
clause. The test for limitations on freedom of expression
continues to be the clear and present danger rule, that words are
used in such circumstances and are of such a nature as to create a
clear and present danger that they will bring about the substantive
evils that the lawmaker has a right to prevent, In his Constitution of
the Philippines (2nd Edition, pp. 569-570) Chief Justice Enrique M.
Fernando cites at least nine of our decisions which apply the test.
More recently, the clear and present danger test was applied in
J.B.L. Reyes in behalf of the Anti-Bases Coalition v. Bagatsing.
(4) The clear and present danger test, however, does not lend itself
to a simplistic and all embracing interpretation applicable to all
utterances in all forums.

Broadcasting has to be licensed. Airwave frequencies have to be

allocated among qualified users. A broadcast corporation cannot
simply appropriate a certain frequency without regard for
government regulation or for the rights of others.

All forms of communication are entitled to the broad protection of

the freedom of expression clause. Necessarily, however, the
freedom of television and radio broadcasting is somewhat lesser in
scope than the freedom accorded to newspaper and print media.

The American Court in Federal Communications Commission v.

Pacifica Foundation (438 U.S. 726), confronted with a patently
offensive and indecent regular radio program, explained why radio
broadcasting, more than other forms of communications, receives
the most limited protection from the free expression clause. First,
broadcast media have established a uniquely pervasive presence in
the lives of all citizens, Material presented over the airwaves
confronts the citizen, not only in public, but in the privacy of his
home. Second, broadcasting is uniquely accessible to children.
 Bookstores and motion picture theaters may be prohibited from
making certain material available to children, but the same
selectivity cannot be done in radio or television, where the listener
or viewer is constantly tuning in and out.

Similar considerations apply in the area of national security.

The broadcast media have also established a uniquely pervasive

presence in the lives of all Filipinos. Newspapers and current books
are found only in metropolitan areas and in the poblaciones of
municipalities accessible to fast and regular transportation. Even
here, there are low income masses who find the cost of books,
newspapers, and magazines beyond their humble means. Basic
needs like food and shelter perforce enjoy high priorities.

On the other hand, the transistor radio is found everywhere. The

television set is also becoming universal. Their message may be
simultaneously received by a national or regional audience of
listeners including the indifferent or unwilling who happen to be
within reach of a blaring radio or television set. The materials
broadcast over the airwaves reach every person of every age,
persons of varying susceptibilities to persuasion, persons of
different I.Q.s and mental capabilities, persons whose reactions to
inflammatory or offensive speech would be difficult to monitor or
predict. The impact of the vibrant speech is forceful and immediate.
Unlike readers of the printed work, the radio audience has lesser
opportunity to cogitate analyze, and reject the utterance.

(5) The clear and present danger test, therefore, must take the particular
circumstances of broadcast media into account. The supervision of
radio stations-whether by government or through self-regulation by
the industry itself calls for thoughtful, intelligent and sophisticated
handling.

The government has a right to be protected against broadcasts

which incite the listeners to violently overthrow it. Radio and
television may not be used to organize a rebellion or to signal the
start of widespread uprising. At the same time, the people have a
 right to be informed. Radio and television would have little reason
for existence if broadcasts are limited to bland, obsequious, or
pleasantly entertaining utterances. Since they are the most
convenient and popular means of disseminating varying views on
public issues, they also deserve special protection.

(6) The freedom to comment on public affairs is essential to the vitality of

a representative democracy. In the 1918 case of United States v.
Bustos (37 Phil. 731) this Court was already stressing that.

The interest of society and the maintenance of good government

demand a full discussion of public affairs. Complete liberty to
comment on the conduct of public men is a scalpel in the case of
free speech. The sharp incision of its probe relieves the abscesses
of officialdom. Men in public life may suffer under a hostile and an
unjust accusation; the wound can be assuaged with the balm of a
clear conscience. A public officer must not be too thin-skinned with
reference to comment upon his official acts. Only thus can the
intelligence and dignity of the individual be exalted.

(7) Broadcast stations deserve the special protection given to all forms of
media by the due process and freedom of expression clauses of the
Constitution. [Citations omitted]

It is interesting to note that the Court in Dans adopted the arguments found in
U.S. jurisprudence to justify differentiation of treatment (i.e., the scarcity,
pervasiveness and accessibility to children), but only after categorically declaring
that the test for limitations on freedom of expression continues to be the clear
and present danger rule, for all forms of media, whether print or
broadcast. Indeed, a close reading of the above-quoted provisions would show
that the differentiation that the Court in Dans referred to was narrowly restricted
to what is otherwise deemed as unprotected speech (e.g., obscenity, national
security, seditious and inciting speech), or to validate a licensing or regulatory
scheme necessary to allocate the limited broadcast frequencies, which is absent
in print media. Thus, when this Court declared in Dans that the freedom given to
broadcast media was somewhat lesser in scope than the freedom accorded to
newspaper and print media, it was not as to what test should be applied, but the
context by which requirements of licensing, allocation of airwaves, and
application of norms to unprotected speech. [85]
In the same year that the Dans case was decided, it was reiterated in Gonzales v.
Katigbak,[86]that the test to determine free expression challenges was the clear
and present danger, again without distinguishing the media.[87] Katigbak, strictly
speaking, does not treat of broadcast media but motion pictures. Although the
issue involved obscenity standards as applied to movies,[88] the Court concluded
its decision with the following obiter dictum that a less liberal approach would be
used to resolve obscenity issues in television as opposed to motion pictures:
All that remains to be said is that the ruling is to be limited to the
concept of obscenity applicable to motion pictures. It is the
consensus of this Court that where television is concerned, a less
liberal approach calls for observance. This is so because unlike
motion pictures where the patrons have to pay their way, television
reaches every home where there is a set. Children then will likely
be among the avid viewers of the programs therein shown..It
cannot be denied though that the State as parens patriae is called
upon to manifest an attitude of caring for the welfare of the young.

More recently, in resolving a case involving the conduct of exit polls and
dissemination of the results by a broadcast company, we reiterated that the clear
and present danger rule is the test we unquestionably adhere to issues that
involve freedoms of speech and of the press.[89]

This is not to suggest, however, that the clear and present danger rule has been
applied to all cases that involve the broadcast media. The rule applies to all
media, including broadcast, but only when the challenged act is a content-based
regulation that infringes on free speech, expression and the press. Indeed,
in Osmena v. COMELEC,[90] which also involved broadcast media, the Court
refused to apply the clear and present danger rule to a COMELEC regulation of
time and manner of advertising of political advertisements because the
challenged restriction was content-neutral.[91] And in a case involving due process
and equal protection issues, the Court in Telecommunications and Broadcast
Attorneys of the Philippines v. COMELEC[92] treated a restriction imposed on a
broadcast media as a reasonable condition for the grant of the medias franchise,
without going into which test would apply.
That broadcast media is subject to a regulatory regime absent in print media is
observed also in other jurisdictions, where the statutory regimes in place over
broadcast media include elements of licensing, regulation by administrative
bodies, and censorship. As explained by a British author:

The reasons behind treating broadcast and films differently from

the print media differ in a number of respects, but have a common
historical basis. The stricter system of controls seems to have been
adopted in answer to the view that owing to their particular impact
on audiences, films, videos and broadcasting require a system of
prior restraints, whereas it is now accepted that books and other
printed media do not. These media are viewed as beneficial to the
public in a number of respects, but are also seen as possible
sources of harm.[93]

Parenthetically, these justifications are now the subject of debate. Historically,

the scarcity of frequencies was thought to provide a rationale. However, cable
and satellite television have enormously increased the number of actual and
potential channels. Digital technology will further increase the number of
channels available. But still, the argument persists that broadcasting is the most
influential means of communication, since it comes into the home, and so much
time is spent watching television. Since it has a unique impact on people and
affects children in a way that the print media normally does not, that regulation is
said to be necessary in order to preserve pluralism. It has been argued further
that a significant main threat to free expressionin terms of diversitycomes not
from government, but from private corporate bodies. These developments show
a need for a reexamination of the traditional notions of the scope and extent of
broadcast media regulation. [94]

The emergence of digital technology -- which has led to the convergence of

broadcasting, telecommunications and the computer industry -- has likewise led
to the question of whether the regulatory model for broadcasting will continue to
be appropriate in the converged environment.[95] Internet, for example, remains
largely unregulated, yet the Internet and the broadcast media share
similarities, [96] and the rationales used to support broadcast regulation apply
equally to the Internet.[97] Thus, it has been argued that courts, legislative bodies
and the government agencies regulating media must agree to regulate both,
regulate neither or develop a new regulatory framework and rationale to justify
the differential treatment. [98]

F. The Case At Bar

Having settled the applicable standard to content-based restrictions on broadcast

media, let us go to its application to the case at bar. To
recapitulate, a governmental action that restricts freedom of speech
or of the press based on content is given the strictest
scrutiny, with the government having the burden of overcoming the
presumed unconstitutionality by the clear and present danger rule. This rule
applies equally to all kinds of media, including broadcast media.

This outlines the procedural map to follow in cases like the one at bar as it spells
out the following: (a) the test; (b) the presumption; (c) the burden of proof; (d)
the party to discharge the burden; and (e) the quantum of evidence necessary. On
the basis of the records of the case at bar, respondents who have the burden to
show that these acts do not abridge freedom of speech and of the press failed to
hurdle the clear and present danger test. It appears that the great evil which
government wants to prevent is the airing of a tape recording in alleged violation
of the anti-wiretapping law. The records of the case at bar, however, are confused
and confusing, and respondents evidence falls short of satisfying the clear and
present danger test.Firstly, the various statements of the Press Secretary
obfuscate the identity of the voices in the tape recording. Secondly, the integrity
of the taped conversation is also suspect. The Press Secretary showed to the
public two versions, one supposed to be a complete version and the other, an
altered version. Thirdly, the evidence of the respondents on the whos and the
hows of the wiretapping act is ambivalent, especially considering the tapes
different versions. The identity of the wire-tappers, the manner of its commission
and other related and relevant proofs are some of the invisibles of this
case. Fourthly, given all these unsettled facets of the tape, it is even arguable
whether its airing would violate the anti-wiretapping law.

We rule that not every violation of a law will justify straitjacketing the exercise
of freedom of speech and of the press. Our laws are of different kinds and
doubtless, some of them provide norms of conduct which even if violated have
only an adverse effect on a persons private comfort but does not endanger
national security. There are laws of great significance but their violation, by itself
and without more, cannot support suppression of free speech and free press. In
fine, violation of law is just a factor, a vital one to be sure, which should be
weighed in adjudging whether to restrain freedom of speech and of the press.
The totality of the injurious effects of the violation to private and public interest
must be calibrated in light of the preferred status accorded by the Constitution
and by related international covenants protecting freedom of speech and of the
press. In calling for a careful and calibrated measurement of the circumference of
all these factors to determine compliance with the clear and present danger
test, the Court should not be misinterpreted as devaluing violations of law. By
all means, violations of law should be vigorously prosecuted by the
State for they breed their own evil consequence. But to repeat, the need to
prevent their violation cannot per se trump the exercise of
free speech and free press, a preferred right whose breach can lead to greater
evils. For this failure of the respondents alone to offer proof to satisfy the clear
and present danger test, the Court has no option but to uphold the exercise of
free speech and free press. There is no showing that the feared violation of the
anti-wiretapping law clearly endangers the national security of the State.

This is not all the faultline in the stance of the respondents. We slide to the issue
of whether the mere press statements of the Secretary of Justice and of the NTC
in question constitute a form of content-based prior restraint that has
transgressed the Constitution. In resolving this issue, we hold
that it is not decisive that the press statements made by respondents were not
reduced in or followed up with formal orders or circulars. It is sufficient that the
press statements were made by respondents while in the exercise of their
official functions. Undoubtedly, respondent Gonzales made his statements as
Secretary of Justice, while the NTC issued its statement as the regulatory body of
media. Any act done, such as a speech uttered, for and on behalf of the
government in an official capacity is covered by the rule on prior restraint. The
concept of an act does not limit itself to acts already converted to a formal
order or official circular. Otherwise, the non formalization of an act into an
official order or circular will result in the easy circumvention of the prohibition
on prior restraint. The press statements at bar are acts that should be struck
down as they constitute impermissible forms of prior restraints on the right to
free speech and press.

There is enough evidence of chilling effect of the complained acts on

record. The warnings given to media came from no less the NTC, a regulatory
agency that can cancel the Certificate of Authority of the radio and broadcast
media. They also came from the Secretary of Justice, the alter ego of the
Executive, who wields the awesome power to prosecute those perceived to be
violating the laws of the land. After the warnings, the KBP inexplicably joined the
NTC in issuing an ambivalent Joint Press Statement. After the warnings, petitioner
Chavez was left alone to fight this battle for freedom of speech and of the
press. This silence on the sidelines on the part of some media practitioners is too
deafening to be the subject of misinterpretation.
The constitutional imperative for us to strike down unconstitutional acts should
always be exercised with care and in light of the distinct facts of each case. For
there are no hard and fast rules when it comes to slippery constitutional
questions, and the limits and construct of relative freedoms are never set in
stone. Issues revolving on their construct must be decided on a case to case basis,
always based on the peculiar shapes and shadows of each case. But in cases
where the challenged acts are patent invasions of a constitutionally protected
right, we should be swift in striking them down as nullities per se. A blow too
soon struck for freedom is preferred than a blow too late.

In VIEW WHEREOF, the petition is GRANTED. The writs of certiorari and

prohibition are hereby issued, nullifying the official statements made by
respondents on June 8, and 11, 2005 warning the media on airing the alleged
wiretapped conversation between the President and other personalities, for
constituting unconstitutional prior restraint on the exercise of freedom of speech
and of the press

SO ORDERED.
G.R. No. L-264 October 4, 1946

VICENTE SINGSON ENCARNACION, plaintiff-appellee,

vs.
JACINTA BALDOMAR, ET AL., defendants-appellants.

Bausa and Ampil for appellants.

Tolentino and Aguas for appellee.

HILADO, J.:

Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila, some six
years ago leased said house to Jacinto Baldomar and her son, Lefrado Fernando, upon a month-to-
month basis for the monthly rental of P35. After Manila was liberated in the last war, specifically on
March 16, 1945, and on April 7, of the same year, plaintiff Singson Encarnacion notified defendants,
the said mother and son, to vacate the house above-mentioned on or before April 15, 1945, because
plaintiff needed it for his offices as a result of the destruction of the building where said plaintiff had
said offices before. Despite this demand, defendants insisted on continuing their occupancy. When
the original action was lodged with the Municipal Court of Manila on April 20, 1945, defendants were
in arrears in the payment of the rental corresponding to said month, the agrees rental being payable
within the first five days of each month. That rental was paid prior to the hearing of the case in the
municipal court, as a consequence of which said court entered judgment for restitution and payment
of rentals at the rate of P35 a month from May 1, 1945, until defendants completely vacate the
premises. Although plaintiff included in said original complaint a claim for P500 damages per month,
that claim was waived by him before the hearing in the municipal court, on account of which nothing
was said regarding said damages in the municipal court's decision.

When the case reached the Court of First Instance of Manila upon appeal, defendants filed therein a
motion to dismiss (which was similar to a motion to dismiss filed by them in the municipal court)
based upon the ground that the municipal court had no jurisdiction over the subject matter due to the
aforesaid claim for damages and that, therefore, the Court of First Instance had no appellate
jurisdiction over the subject matter of the action. That motion to dismiss was denied by His Honor,
Judge Mamerto Roxas, by order dated July 21, 1945, on the ground that in the municipal court
plaintiff had waived said claim for damages and that, therefore, the same waiver was understood
also to have been made in the Court of First Instance. lawphil.net

In the Court of First Instance the graveman of the defense interposed by defendants, as it was
expressed defendant Lefrado Fernando during the trial, was that the contract which they had
celebrated with plaintiff since the beginning authorized them to continue occupying the house
indefinetly and while they should faithfully fulfill their obligations as respects the payment of the
rentals, and that this agreement had been ratified when another ejectment case between the parties
filed during the Japanese regime concerning the same house was allegedly compounded in the
municipal court. The Court of First Instance gave more credit to plaintiff's witness, Vicente Singson
Encarnacion, jr., who testified that the lease had always and since the beginning been upon a
month-to-month basis. The court added in its decision that this defense which was put up by
defendant's answer, for which reason the Court considered it as indicative of an eleventh-hour
theory. We think that the Court of First Instance was right in so declaring. Furthermore, carried to its
logical conclusion, the defense thus set up by defendant Lefrado Fernando would leave to the sole
and exclusive will of one of the contracting parties (defendants in this case) the validity and
fulfillment of the contract of lease, within the meaning of article 1256 of the Civil Code, since the
continuance and fulfillment of the contract would then depend solely and exclusively upon their free
and uncontrolled choice between continuing paying the rentals or not, completely depriving the
owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to
continue the lease by continuing the payment of the rentals, the owner would never be able to
discontinue it; conversely, although the owner should desire the lease to continue, the lessees could
effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient
of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil
Code. (8 Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil., 100.)

During the pendency of the appeal in the Court of First Instance and before the judgment appealed
from was rendered on October 31, 1945, the rentals in areas were those pertaining to the month of
August, 1945, to the date of said judgment at the rate of P35 a month. During the pendency of the
appeal in that court, certain deposits were made by defendants on account of rentals with the clerk
of said court, and in said judgment it is disposed that the amounts thus deposited should be
delivered to plaintiff.

Upon the whole, we are clearly of opinion that the judgment appealed from should be, as it is hereby,
affirmed, with the costs of the three instances to appellants. So ordered.
Eleizegui v. The Manila Lawn
Tennis Club Digest G.R. No. 967
Eleizegui v. The Manila Lawn Tennis Club

G.R. No. 967 May 19, 1903

Facts:

A contract of lease was executed on January 25, 1980 over a piece of land owned by the
plaintiffs Eleizegui (Lessor) to the Manila Lawn Tennis Club, an English association
(represented by Mr. Williamson) for a fixed consideration of P25 per month and
accordingly, to last at the will of the lessee. Under the contract, the lessee can make
improvements deemed desirable for the comfort and amusement of its members. It
appeared that the plaintiffs terminated the lease right on the first month. The defendant is
in the belief that there can be no other mode of terminating the lease than by its own will,
as what they believe has been stipulated.

As a result the plaintiff filed a case for unlawful detainer for the restitution of the land
claiming that article 1569 of the Civil Code provided that a lessor may judicially
dispossess the lessee upon the expiration of the conventional term or of the legal term;
the conventional term that is, the one agreed upon by the parties; the legal term, in
defect of the conventional, fixed for leases by articles 1577 and 1581. The Plaintiffs
argued that the duration of the lease depends upon the will of the lessor on the basis of
Art. 1581 which provides that, "When the term has not been fixed for the lease, it is
understood to be for years when an annual rental has been fixed, for months when the
rent is monthly. . . ." The second clause of the contract provides as follows: "The rent of
the said land is fixed at 25 pesos per month."

The lower court ruled in favor of the Plaintiffs on the basis of Article 1581 of the Civil
Code, the law which was in force at the time the contract was entered into. It is of the
opinion that the contract of lease was terminated by the notice given by the plaintiff. The
judgment was entered upon the theory of the expiration of a legal term which does not
exist, as the case requires that a term be fixed by the courts under the provisions of article
1128 with respect to obligations which, as is the present, are terminable at the will of the
obligee.

ISSUE: a) Whether or not the parties have agreed upon the duration of the lease

b) Whether or not the lease depends upon the will of the lessee

RULING:

a) YES, the parties have agreed upon a term hence Art. 1581 is inapplicable.

The legal term cannot be applied under Art 1581 as it appears that there was actually an
agreement between the parties as to the duration of the lease, albeit implied that the lease
is to be dependent upon the will of the lessee. It would be absurd to accept the argument
of the plaintiff that the contract was terminated at its notice, given this implication.

Interestingly, the contract should not be understood as one stipulated as a life tenancy,
and still less as a perpetual lease since the terms of the contract express nothing to this
effect, even if they implied this idea. If the lease could last during such time as the lessee
might see fit, because it has been so stipulated by the lessor, it would last, first, as long as
the will of the lessee that is, all his life; second, during all the time that he may have
succession, inasmuch as he who contracts does so for himself and his heirs. (Art. 1257 of
the Civil Code.) The lease in question does not fall within any of the cases in which the
rights and obligations arising from a contract can not be transmitted to heirs, either by its
nature, by agreement, or by provision of law. Moreover, being a lease, then it must be for
a determinate period. (Art. 1543.) By its very nature it must be temporary, just as by
reason of its nature, an emphyteusis must be perpetual, or for an unlimited period. (Art.
1608.)
B) The duration of the lease does not depend solely upon the will of the Lessee
(defendant).

It cannot be concluded that the termination of the contract is to be left completely at the
will of the lessee simply because it has been stipulated that its duration is to be left to his
will.

The Civil Code has made provision for such a case in all kinds of obligations. In speaking
in general of obligations with a term it has supplied the deficiency of the former law with
respect to the "duration of the term when it has been left to the will of the debtor," and
provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In
every contract, as laid down by the authorities, there is always a creditor who is entitled
to demand the performance, and a debtor upon whom rests the obligation to perform the
undertaking. In bilateral contracts the contracting parties are mutually creditors and
debtors. Thus, in this contract of lease, the lessee is the creditor with respect to the rights
enumerated in article 1554, and is the debtor with respect to the obligations imposed by
articles 1555 and 1561. The term within which performance of the latter obligation is due
is what has been left to the will of the debtor. This term it is which must be fixed by the
courts.

The only action which can be maintained under the terms of the contract is that by which
it is sought to obtain from the judge the determination of this period, and not the unlawful
detainer action which has been brought an action which presupposes the expiration of
the term and makes it the duty of the judge to simply decree an eviction. To maintain the
latter action it is sufficient to show the expiration of the term of the contract, whether
conventional or legal; in order to decree the relief to be granted in the former action it is
necessary for the judge to look into the character and conditions of the mutual
undertakings with a view to supplying the lacking element of a time at which the lease is
to expire.
The lower courts judgement is erroneous and therefore reversed and the case was
remanded with directions to enter a judgment of dismissal of the action in favor of the
defendant, the Manila Lawn Tennis Club.

G.R. No. L-17587 September 12, 1967

PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINA SANTOS Y

CANON FAUSTINO, deceased, plaintiff-appellant,
vs.
LUI SHE in her own behalf and as administratrix of the intestate estate of Wong Heng,
deceased, defendant-appellant.

Nicanor S. Sison for plaintiff-appellant.

Ozaeta, Gibbs & Ozaeta for defendant-appellant.

CASTRO, J.:

Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of
land in Manila. This parcel, with an area of 2,582.30 square meters, is located on Rizal Avenue and
opens into Florentino Torres street at the back and Katubusan street on one side. In it are two
residential houses with entrance on Florentino Torres street and the Hen Wah Restaurant with
entrance on Rizal Avenue. The sisters lived in one of the houses, while Wong Heng, a Chinese,
lived with his family in the restaurant. Wong had been a long-time lessee of a portion of the property,
paying a monthly rental of P2,620.

On September 22, 1957 Justina Santos became the owner of the entire property as her sister died
with no other heir. Then already well advanced in years, being at the time 90 years old, blind,
crippled and an invalid, she was left with no other relative to live with. Her only companions in the
house were her 17 dogs and 8 maids. Her otherwise dreary existence was brightened now and then
by the visits of Wong's four children who had become the joy of her life. Wong himself was the
trusted man to whom she delivered various amounts for safekeeping, including rentals from her
property at the corner of Ongpin and Salazar streets and the rentals which Wong himself paid as
lessee of a part of the Rizal Avenue property. Wong also took care of the payment; in her behalf, of
taxes, lawyers' fees, funeral expenses, masses, salaries of maids and security guard, and her
household expenses.

"In grateful acknowledgment of the personal services of the lessee to her," Justina Santos executed
on November 15, 1957 a contract of lease (Plff Exh. 3) in favor of Wong, covering the portion then
already leased to him and another portion fronting Florentino Torres street. The lease was for 50
years, although the lessee was given the right to withdraw at any time from the agreement; the
monthly rental was P3,120. The contract covered an area of 1,124 square meters. Ten days later
(November 25), the contract was amended (Plff Exh. 4) so as to make it cover the entire property,
including the portion on which the house of Justina Santos stood, at an additional monthly rental of
P360. For his part Wong undertook to pay, out of the rental due from him, an amount not exceeding
P1,000 a month for the food of her dogs and the salaries of her maids.
On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the
leased premises for P120,000, payable within ten years at a monthly installment of P1,000. The
option, written in Tagalog, imposed on him the obligation to pay for the food of the dogs and the
salaries of the maids in her household, the charge not to exceed P1,800 a month. The option was
conditioned on his obtaining Philippine citizenship, a petition for which was then pending in the Court
of First Instance of Rizal. It appears, however, that this application for naturalization was withdrawn
when it was discovered that he was not a resident of Rizal. On October 28, 1958 she filed a petition
to adopt him and his children on the erroneous belief that adoption would confer on them Philippine
citizenship. The error was discovered and the proceedings were abandoned.

On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the
lease to 99 years, and another (Plff Exh. 6) fixing the term of the option of 50 years. Both contracts
are written in Tagalog.

In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279), she bade her legatees to
respect the contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later date
(November 4, 1959) she appears to have a change of heart. Claiming that the various contracts
were made by her because of machinations and inducements practiced by him, she now directed
her executor to secure the annulment of the contracts.

On November 18 the present action was filed in the Court of First Instance of Manila. The complaint
alleged that the contracts were obtained by Wong "through fraud, misrepresentation, inequitable
conduct, undue influence and abuse of confidence and trust of and (by) taking advantage of the
helplessness of the plaintiff and were made to circumvent the constitutional provision prohibiting
aliens from acquiring lands in the Philippines and also of the Philippine Naturalization Laws." The
court was asked to direct the Register of Deeds of Manila to cancel the registration of the contracts
and to order Wong to pay Justina Santos the additional rent of P3,120 a month from November 15,
1957 on the allegation that the reasonable rental of the leased premises was P6,240 a month.

In his answer, Wong admitted that he enjoyed her trust and confidence as proof of which he
volunteered the information that, in addition to the sum of P3,000 which he said she had delivered to
him for safekeeping, another sum of P22,000 had been deposited in a joint account which he had
with one of her maids. But he denied having taken advantage of her trust in order to secure the
execution of the contracts in question. As counterclaim he sought the recovery of P9,210.49 which
he said she owed him for advances.

Wong's admission of the receipt of P22,000 and P3,000 was the cue for the filing of an amended
complaint. Thus on June 9, 1960, aside from the nullity of the contracts, the collection of various
amounts allegedly delivered on different occasions was sought. These amounts and the dates of
their delivery are P33,724.27 (Nov. 4, 1957); P7,344.42 (Dec. 1, 1957); P10,000 (Dec. 6, 1957);
P22,000 and P3,000 (as admitted in his answer). An accounting of the rentals from the Ongpin and
Rizal Avenue properties was also demanded.

In the meantime as a result of a petition for guardianship filed in the Juvenile and Domestic
Relations Court, the Security Bank & Trust Co. was appointed guardian of the properties of Justina
Santos, while Ephraim G. Gochangco was appointed guardian of her person.

In his answer, Wong insisted that the various contracts were freely and voluntarily entered into by
the parties. He likewise disclaimed knowledge of the sum of P33,724.27, admitted receipt of
P7,344.42 and P10,000, but contended that these amounts had been spent in accordance with the
instructions of Justina Santos; he expressed readiness to comply with any order that the court might
make with respect to the sums of P22,000 in the bank and P3,000 in his possession.
The case was heard, after which the lower court rendered judgment as follows:

[A]ll the documents mentioned in the first cause of action, with the exception of the first which
is the lease contract of 15 November 1957, are declared null and void; Wong Heng is
condemned to pay unto plaintiff thru guardian of her property the sum of P55,554.25 with
legal interest from the date of the filing of the amended complaint; he is also ordered to pay
the sum of P3,120.00 for every month of his occupation as lessee under the document of
lease herein sustained, from 15 November 1959, and the moneys he has consigned since
then shall be imputed to that; costs against Wong Heng.

From this judgment both parties appealed directly to this Court. After the case was submitted for
decision, both parties died, Wong Heng on October 21, 1962 and Justina Santos on December 28,
1964. Wong was substituted by his wife, Lui She, the other defendant in this case, while Justina
Santos was substituted by the Philippine Banking Corporation.

Justina Santos maintained now reiterated by the Philippine Banking Corporation that the lease
contract (Plff Exh. 3) should have been annulled along with the four other contracts (Plff Exhs. 4-7)
because it lacks mutuality; because it included a portion which, at the time, was in custodia legis;
because the contract was obtained in violation of the fiduciary relations of the parties; because her
consent was obtained through undue influence, fraud and misrepresentation; and because the lease
contract, like the rest of the contracts, is absolutely simulated.

Paragraph 5 of the lease contract states that "The lessee may at any time withdraw from this
agreement." It is claimed that this stipulation offends article 1308 of the Civil Code which provides
that "the contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them."

We have had occasion to delineate the scope and application of article 1308 in the early case
of Taylor v. Uy Tieng Piao.1 We said in that case:

Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the
insertion in a contract for personal service of a resolutory condition permitting the
cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen,
does not make either the validity or the fulfillment of the contract dependent upon the will of
the party to whom is conceded the privilege of cancellation; for where the contracting parties
have agreed that such option shall exist, the exercise of the option is as much in the
fulfillment of the contract as any other act which may have been the subject of agreement.
Indeed, the cancellation of a contract in accordance with conditions agreed upon beforehand
is fulfillment.2

And so it was held in Melencio v. Dy Tiao Lay 3 that a "provision in a lease contract that the lessee,
at any time before he erected any building on the land, might rescind the lease, can hardly be
regarded as a violation of article 1256 [now art. 1308] of the Civil Code."

The case of Singson Encarnacion v. Baldomar 4 cannot be cited in support of the claim of want of
mutuality, because of a difference in factual setting. In that case, the lessees argued that they could
occupy the premises as long as they paid the rent. This is of course untenable, for as this Court said,
"If this defense were to be allowed, so long as defendants elected to continue the lease by
continuing the payment of the rentals, the owner would never be able to discontinue it; conversely,
although the owner should desire the lease to continue the lessees could effectively thwart his
purpose if they should prefer to terminate the contract by the simple expedient of stopping payment
of the rentals." Here, in contrast, the right of the lessee to continue the lease or to terminate it is so
circumscribed by the term of the contract that it cannot be said that the continuance of the lease
depends upon his will. At any rate, even if no term had been fixed in the agreement, this case would
at most justify the fixing of a period5 but not the annulment of the contract.

Nor is there merit in the claim that as the portion of the property formerly owned by the sister of
Justina Santos was still in the process of settlement in the probate court at the time it was leased,
the lease is invalid as to such portion. Justina Santos became the owner of the entire property upon
the death of her sister Lorenzo on September 22, 1957 by force of article 777 of the Civil Code.
Hence, when she leased the property on November 15, she did so already as owner thereof. As this
Court explained in upholding the sale made by an heir of a property under judicial administration:

That the land could not ordinarily be levied upon while in custodia legis does not mean that
one of the heirs may not sell the right, interest or participation which he has or might have in
the lands under administration. The ordinary execution of property in custodia legis is
prohibited in order to avoid interference with the possession by the court. But the sale made
by an heir of his share in an inheritance, subject to the result of the pending administration, in
no wise stands in the way of such administration.6

It is next contended that the lease contract was obtained by Wong in violation of his fiduciary
relationship with Justina Santos, contrary to article 1646, in relation to article 1941 of the Civil Code,
which disqualifies "agents (from leasing) the property whose administration or sale may have been
entrusted to them." But Wong was never an agent of Justina Santos. The relationship of the parties,
although admittedly close and confidential, did not amount to an agency so as to bring the case
within the prohibition of the law.

Just the same, it is argued that Wong so completely dominated her life and affairs that the contracts
express not her will but only his. Counsel for Justina Santos cites the testimony of Atty. Tomas S.
Yumol who said that he prepared the lease contract on the basis of data given to him by Wong and
that she told him that "whatever Mr. Wong wants must be followed."7

The testimony of Atty. Yumol cannot be read out of context in order to warrant a finding that Wong
practically dictated the terms of the contract. What this witness said was:

Q Did you explain carefully to your client, Doa Justina, the contents of this document before
she signed it?

A I explained to her each and every one of these conditions and I also told her these
conditions were quite onerous for her, I don't really know if I have expressed my opinion, but
I told her that we would rather not execute any contract anymore, but to hold it as it was
before, on a verbal month to month contract of lease.

Q But, she did not follow your advice, and she went with the contract just the same?

A She agreed first . . .

Q Agreed what?

A Agreed with my objectives that it is really onerous and that I was really right, but after that,
I was called again by her and she told me to follow the wishes of Mr. Wong Heng.

xxx xxx xxx

 Q So, as far as consent is concerned, you were satisfied that this document was perfectly
proper?

xxx xxx xxx

A Your Honor, if I have to express my personal opinion, I would say she is not, because, as I
said before, she told me "Whatever Mr. Wong wants must be followed."8

Wong might indeed have supplied the data which Atty. Yumol embodied in the lease contract, but to
say this is not to detract from the binding force of the contract. For the contract was fully explained to
Justina Santos by her own lawyer. One incident, related by the same witness, makes clear that she
voluntarily consented to the lease contract. This witness said that the original term fixed for the lease
was 99 years but that as he doubted the validity of a lease to an alien for that length of time, he tried
to persuade her to enter instead into a lease on a month-to-month basis. She was, however, firm
and unyielding. Instead of heeding the advice of the lawyer, she ordered him, "Just follow Mr. Wong
Heng."9 Recounting the incident, Atty. Yumol declared on cross examination:

Considering her age, ninety (90) years old at the time and her condition, she is a wealthy
woman, it is just natural when she said "This is what I want and this will be done." In
particular reference to this contract of lease, when I said "This is not proper," she said
"You just go ahead, you prepare that, I am the owner, and if there is any illegality, I am the
only one that can question the illegality."10

Atty. Yumol further testified that she signed the lease contract in the presence of her close friend,
Hermenegilda Lao, and her maid, Natividad Luna, who was constantly by her side.11 Any of them
could have testified on the undue influence that Wong supposedly wielded over Justina Santos, but
neither of them was presented as a witness. The truth is that even after giving his client time to think
the matter over, the lawyer could not make her change her mind. This persuaded the lower court to
uphold the validity of the lease contract against the claim that it was procured through undue
influence.

Indeed, the charge of undue influence in this case rests on a mere inference12 drawn from the fact
that Justina Santos could not read (as she was blind) and did not understand the English language
in which the contract is written, but that inference has been overcome by her own evidence.

Nor is there merit in the claim that her consent to the lease contract, as well as to the rest of the
contracts in question, was given out of a mistaken sense of gratitude to Wong who, she was made to
believe, had saved her and her sister from a fire that destroyed their house during the liberation of
Manila. For while a witness claimed that the sisters were saved by other persons (the brothers
Edilberto and Mariano Sta. Ana)13 it was Justina Santos herself who, according to her own witness,
Benjamin C. Alonzo, said "very emphatically" that she and her sister would have perished in the fire
had it not been for Wong.14 Hence the recital in the deed of conditional option (Plff Exh. 7) that
"[I]tong si Wong Heng ang siyang nagligtas sa aming dalawang magkapatid sa halos ay tiyak na
kamatayan", and the equally emphatic avowal of gratitude in the lease contract (Plff Exh. 3).

As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs. 4-7)
the consent of Justina Santos was given freely and voluntarily. As Atty. Alonzo, testifying for her,
said:

[I]n nearly all documents, it was either Mr. Wong Heng or Judge Torres and/or both. When
we had conferences, they used to tell me what the documents should contain. But, as I said,
 I would always ask the old woman about them and invariably the old woman used to tell me:
"That's okay. It's all right."15

But the lower court set aside all the contracts, with the exception of the lease contract of November
15, 1957, on the ground that they are contrary to the expressed wish of Justina Santos and that their
considerations are fictitious. Wong stated in his deposition that he did not pay P360 a month for the
additional premises leased to him, because she did not want him to, but the trial court did not believe
him. Neither did it believe his statement that he paid P1,000 as consideration for each of the
contracts (namely, the option to buy the leased premises, the extension of the lease to 99 years, and
the fixing of the term of the option at 50 years), but that the amount was returned to him by her for
safekeeping. Instead, the court relied on the testimony of Atty. Alonzo in reaching the conclusion that
the contracts are void for want of consideration.

Atty. Alonzo declared that he saw no money paid at the time of the execution of the documents, but
his negative testimony does not rule out the possibility that the considerations were paid at some
other time as the contracts in fact recite. What is more, the consideration need not pass from one
party to the other at the time a contract is executed because the promise of one is the consideration
for the other.16

With respect to the lower court's finding that in all probability Justina Santos could not have intended
to part with her property while she was alive nor even to lease it in its entirety as her house was built
on it, suffice it to quote the testimony of her own witness and lawyer who prepared the contracts (Plff
Exhs. 4-7) in question, Atty. Alonzo:

The ambition of the old woman, before her death, according to her revelation to me, was to
see to it that these properties be enjoyed, even to own them, by Wong Heng because Doa
Justina told me that she did not have any relatives, near or far, and she considered Wong
Heng as a son and his children her grandchildren; especially her consolation in life was when
she would hear the children reciting prayers in Tagalog.17

She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped
her much, and she told me to see to it that no one could disturb Wong Heng from those
properties. That is why we thought of the ninety-nine (99) years lease; we thought of
adoption, believing that thru adoption Wong Heng might acquire Filipino citizenship; being
the adopted child of a Filipino citizen.18

This is not to say, however, that the contracts (Plff Exhs. 3-7) are valid. For the testimony just quoted,
while dispelling doubt as to the intention of Justina Santos, at the same time gives the clue to what
we view as a scheme to circumvent the Constitutional prohibition against the transfer of lands to
aliens. "The illicit purpose then becomes the illegal causa"19 rendering the contracts void.

Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they
reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be
sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to
buy real property on condition that he is granted Philippine citizenship. As this Court said in Krivenko
v. Register of Deeds:20

[A]liens are not completely excluded by the Constitution from the use of lands for residential
purposes. Since their residence in the Philippines is temporary, they may be
granted temporary rights such as a lease contract which is not forbidden by the Constitution.
Should they desire to remain here forever and share our fortunes and misfortunes, Filipino
citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of
which the Filipino owner cannot sell or otherwise dispose of his property,21 this to last for 50 years,
then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner
divests himself in stages not only of the right to enjoy the land ( jus possidendi, jus utendi, jus
fruendi and jus abutendi) but also of the right to dispose of it ( jus disponendi) rights the sum total
of which make up ownership. It is just as if today the possession is transferred, tomorrow, the use,
the next day, the disposition, and so on, until ultimately all the rights of which ownership is made up
are consolidated in an alien. And yet this is just exactly what the parties in this case did within the
space of one year, with the result that Justina Santos' ownership of her property was reduced to a
hollow concept. If this can be done, then the Constitutional ban against alien landholding in the
Philippines, as announced in Krivenko v. Register of Deeds,22 is indeed in grave peril.

It does not follow from what has been said, however, that because the parties are in pari delicto they
will be left where they are, without relief. For one thing, the original parties who were guilty of a
violation of the fundamental charter have died and have since been substituted by their
administrators to whom it would be unjust to impute their guilt.23 For another thing, and this is not
only cogent but also important, article 1416 of the Civil Code provides, as an exception to the rule
on pari delicto, that "When the agreement is not illegal per se but is merely prohibited, and the
prohibition by law is designed for the protection of the plaintiff, he may, if public policy is thereby
enhanced, recover what he has paid or delivered." The Constitutional provision that "Save in cases
of hereditary succession, no private agricultural land shall be transferred or assigned except to
individuals, corporations, or associations qualified to acquire or hold lands of the public domain in
the Philippines"24 is an expression of public policy to conserve lands for the Filipinos. As this Court
said in Krivenko:

It is well to note at this juncture that in the present case we have no choice. We are
construing the Constitution as it is and not as we may desire it to be. Perhaps the effect of
our construction is to preclude aliens admitted freely into the Philippines from owning sites
where they may build their homes. But if this is the solemn mandate of the Constitution, we
will not attempt to compromise it even in the name of amity or equity . . . .

For all the foregoing, we hold that under the Constitution aliens may not acquire private or
public agricultural lands, including residential lands, and, accordingly, judgment is affirmed,
without costs.25

That policy would be defeated and its continued violation sanctioned if, instead of setting the
contracts aside and ordering the restoration of the land to the estate of the deceased Justina Santos,
this Court should apply the general rule of pari delicto. To the extent that our ruling in this case
conflicts with that laid down in Rellosa v. Gaw Chee Hun 26 and subsequent similar cases, the latter
must be considered as pro tanto qualified.

The claim for increased rentals and attorney's fees, made in behalf of Justina Santos, must be
denied for lack of merit.

And what of the various amounts which Wong received in trust from her? It appears that he kept two
classes of accounts, one pertaining to amount which she entrusted to him from time to time, and
another pertaining to rentals from the Ongpin property and from the Rizal Avenue property, which he
himself was leasing.

With respect to the first account, the evidence shows that he received P33,724.27 on November 8,
1957 (Plff Exh. 16); P7,354.42 on December 1, 1957 (Plff Exh. 13); P10,000 on December 6, 1957
(Plff Exh. 14) ; and P18,928.50 on August 26, 1959 (Def. Exh. 246), or a total of P70,007.19. He
claims, however, that he settled his accounts and that the last amount of P18,928.50 was in fact
payment to him of what in the liquidation was found to be due to him.

He made disbursements from this account to discharge Justina Santos' obligations for taxes,
attorneys' fees, funeral services and security guard services, but the checks (Def Exhs. 247-278)
drawn by him for this purpose amount to only P38,442.84.27 Besides, if he had really settled his
accounts with her on August 26, 1959, we cannot understand why he still had P22,000 in the bank
and P3,000 in his possession, or a total of P25,000. In his answer, he offered to pay this amount if
the court so directed him. On these two grounds, therefore, his claim of liquidation and settlement of
accounts must be rejected.

After subtracting P38,442.84 (expenditures) from P70,007.19 (receipts), there is a difference of

P31,564 which, added to the amount of P25,000, leaves a balance of P56,564.3528 in favor of
Justina Santos.

As to the second account, the evidence shows that the monthly income from the Ongpin property
until its sale in Rizal Avenue July, 1959 was P1,000, and that from the Rizal Avenue property, of
which Wong was the lessee, was P3,120. Against this account the household expenses and
disbursements for the care of the 17 dogs and the salaries of the 8 maids of Justina Santos were
charged. This account is contained in a notebook (Def. Exh. 6) which shows a balance of P9,210.49
in favor of Wong. But it is claimed that the rental from both the Ongpin and Rizal Avenue properties
was more than enough to pay for her monthly expenses and that, as a matter of fact, there should
be a balance in her favor. The lower court did not allow either party to recover against the other.
Said the court:

[T]he documents bear the earmarks of genuineness; the trouble is that they were made only
by Francisco Wong and Antonia Matias, nick-named Toning, which was the way she
signed the loose sheets, and there is no clear proof that Doa Justina had authorized these
two to act for her in such liquidation; on the contrary if the result of that was a deficit as
alleged and sought to be there shown, of P9,210.49, that was not what Doa Justina
apparently understood for as the Court understands her statement to the Honorable Judge of
the Juvenile Court . . . the reason why she preferred to stay in her home was because there
she did not incur in any debts . . . this being the case, . . . the Court will not adjudicate in
favor of Wong Heng on his counterclaim; on the other hand, while it is claimed that the
expenses were much less than the rentals and there in fact should be a superavit, . . . this
Court must concede that daily expenses are not easy to compute, for this reason, the Court
faced with the choice of the two alternatives will choose the middle course which after all is
permitted by the rules of proof, Sec. 69, Rule 123 for in the ordinary course of things, a
person will live within his income so that the conclusion of the Court will be that there is
neither deficit nor superavit and will let the matter rest here.

Both parties on appeal reiterate their respective claims but we agree with the lower court that both
claims should be denied. Aside from the reasons given by the court, we think that the claim of
Justina Santos totalling P37,235, as rentals due to her after deducting various expenses, should be
rejected as the evidence is none too clear about the amounts spent by Wong for
food29 masses30 and salaries of her maids.31 His claim for P9,210.49 must likewise be rejected as his
averment of liquidation is belied by his own admission that even as late as 1960 he still had P22,000
in the bank and P3,000 in his possession.

ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled and set aside; the land
subject-matter of the contracts is ordered returned to the estate of Justina Santos as represented by
the Philippine Banking Corporation; Wong Heng (as substituted by the defendant-appellant Lui She)
is ordered to pay the Philippine Banking Corporation the sum of P56,564.35, with legal interest from
the date of the filing of the amended complaint; and the amounts consigned in court by Wong Heng
shall be applied to the payment of rental from November 15, 1959 until the premises shall have been
vacated by his heirs. Costs against the defendant-appellant.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Angeles,
JJ., concur.

G.R. No. L-34338 November 21, 1984

LOURDES VALERIO LIM, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, respondent.

RELOVA, J.:

Petitioner Lourdes Valerio Lim was found guilty of the crime of estafa and was sentenced "to suffer
an imprisonment of four (4) months and one (1) day as minimum to two (2) years and four (4)
months as maximum, to indemnify the offended party in the amount of P559.50, with subsidize
imprisonment in case of insolvency, and to pay the costs." (p. 14, Rollo)

From this judgment, appeal was taken to the then Court of Appeals which affirmed the decision of
the lower court but modified the penalty imposed by sentencing her "to suffer an indeterminate
penalty of one (1) month and one (1) day of arresto mayor as minimum to one (1) year and one (1)
day of prision correccional as maximum, to indemnify the complainant in the amount of P550.50
without subsidiary imprisonment, and to pay the costs of suit." (p. 24, Rollo)

The question involved in this case is whether the receipt, Exhibit "A", is a contract of agency to sell
or a contract of sale of the subject tobacco between petitioner and the complainant, Maria de
Guzman Vda. de Ayroso, thereby precluding criminal liability of petitioner for the crime charged.

The findings of facts of the appellate court are as follows:

... The appellant is a businesswoman. On January 10, 1966, the appellant went to
the house of Maria Ayroso and proposed to sell Ayroso's tobacco. Ayroso agreed to
the proposition of the appellant to sell her tobacco consisting of 615 kilos at P1.30 a
kilo. The appellant was to receive the overprice for which she could sell the tobacco.
This agreement was made in the presence of plaintiff's sister, Salud G. Bantug.
Salvador Bantug drew the document, Exh. A, dated January 10, 1966, which reads:

To Whom It May Concern:

This is to certify that I have received from Mrs. Maria de Guzman Vda.
de Ayroso. of Gapan, Nueva Ecija, six hundred fifteen kilos of leaf
tobacco to be sold at Pl.30 per kilo. The proceed in the amount of
Seven Hundred Ninety Nine Pesos and 50/100 (P 799.50) will be
given to her as soon as it was sold.

This was signed by the appellant and witnessed by the complainant's sister, Salud
Bantug, and the latter's maid, Genoveva Ruiz. The appellant at that time was
bringing a jeep, and the tobacco was loaded in the jeep and brought by the appellant.
 Of the total value of P799.50, the appellant had paid to Ayroso only P240.00, and
this was paid on three different times. Demands for the payment of the balance of the
value of the tobacco were made upon the appellant by Ayroso, and particularly by
her sister, Salud Bantug. Salud Bantug further testified that she had gone to the
house of the appellant several times, but the appellant often eluded her; and that the
"camarin" the appellant was empty. Although the appellant denied that demands for
payment were made upon her, it is a fact that on October 19, 1966, she wrote a letter
to Salud Bantug which reads as follows:

Dear Salud,

Hindi ako nakapunta dian noon a 17 nitong nakaraan, dahil kokonte

pa ang nasisingil kong pera, magintay ka hanggang dito sa linggo ito
at tiak na ako ay magdadala sa iyo. Gosto ko Salud ay
makapagbigay man lang ako ng marami para hindi masiadong
kahiyahiya sa iyo. Ngayon kung gosto mo ay kahit konte muna ay
bibigyan kita. Pupunta lang kami ni Mina sa Maynila ngayon. Salud
kung talagang kailangan mo ay bukas ay dadalhan kita ng pera.

Medio mahirap ang maningil sa palengke ng Cabanatuan dahil

nagsisilipat ang mga suki ko ng puesto. Huwag kang mabahala at
tiyak na babayaran kita.

Patnubayan tayo ng mahal na panginoon Dios. (Exh. B).

Pursuant to this letter, the appellant sent a money order for P100.00 on October 24,
1967, Exh. 4, and another for P50.00 on March 8, 1967; and she paid P90.00 on
April 18, 1967 as evidenced by the receipt Exh. 2, dated April 18, 1967, or a total of
P240.00. As no further amount was paid, the complainant filed a complaint against
the appellant for estafa. (pp. 14, 15, 16, Rollo)

In this petition for review by certiorari, Lourdes Valerio Lim poses the following questions of law, to
wit:

1. Whether or not the Honorable Court of Appeals was legally right in holding that the
foregoing document (Exhibit "A") "fixed a period" and "the obligation was therefore,
immediately demandable as soon as the tobacco was sold" (Decision, p. 6) as
against the theory of the petitioner that the obligation does not fix a period, but from
its nature and the circumstances it can be inferred that a period was intended in
which case the only action that can be maintained is a petition to ask the court to fix
the duration thereof;

2. Whether or not the Honorable Court of Appeals was legally right in holding that
"Art. 1197 of the New Civil Code does not apply" as against the alternative theory of
the petitioner that the fore. going receipt (Exhibit "A") gives rise to an obligation
wherein the duration of the period depends upon the will of the debtor in which case
 the only action that can be maintained is a petition to ask the court to fix the duration
of the period; and

3. Whether or not the honorable Court of Appeals was legally right in holding that the
foregoing receipt is a contract of agency to sell as against the theory of the petitioner
that it is a contract of sale. (pp. 3-4, Rollo)

It is clear in the agreement, Exhibit "A", that the proceeds of the sale of the tobacco should be turned
over to the complainant as soon as the same was sold, or, that the obligation was immediately
demandable as soon as the tobacco was disposed of. Hence, Article 1197 of the New Civil Code,
which provides that the courts may fix the duration of the obligation if it does not fix a period, does
not apply.

Anent the argument that petitioner was not an agent because Exhibit "A" does not say that she
would be paid the commission if the goods were sold, the Court of Appeals correctly resolved the
matter as follows:

... Aside from the fact that Maria Ayroso testified that the appellant asked her to be
her agent in selling Ayroso's tobacco, the appellant herself admitted that there was
an agreement that upon the sale of the tobacco she would be given something. The
appellant is a businesswoman, and it is unbelievable that she would go to the extent
of going to Ayroso's house and take the tobacco with a jeep which she had brought if
she did not intend to make a profit out of the transaction. Certainly, if she was doing
a favor to Maria Ayroso and it was Ayroso who had requested her to sell her tobacco,
it would not have been the appellant who would have gone to the house of Ayroso,
but it would have been Ayroso who would have gone to the house of the appellant
and deliver the tobacco to the appellant. (p. 19, Rollo)

The fact that appellant received the tobacco to be sold at P1.30 per kilo and the proceeds to be
given to complainant as soon as it was sold, strongly negates transfer of ownership of the goods to
the petitioner. The agreement (Exhibit "A') constituted her as an agent with the obligation to return
the tobacco if the same was not sold.

ACCORDINGLY, the petition for review on certiorari is dismissed for lack of merit. With costs.

SO ORDERED.

G.R. No. L-22558 May 31, 1967

GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.

Araneta and Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Pao for respondent.

REYES, J.B.L., J.:

Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R,
affirming with modification, an amendatory decision of the Court of First Instance of Manila, in its
Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J. M.
Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants."

As found by the Court of Appeals, the facts of this case are:

J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as
the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950,
through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of 43,034.4
square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates Development
Co., Ltd. The parties stipulated, among in the contract of purchase and sale with mortgage, that the
buyer will

Build on the said parcel land the Sto. Domingo Church and Convent

while the seller for its part will

Construct streets on the NE and NW and SW sides of the land herein sold so that the latter
will be a block surrounded by streets on all four sides; and the street on the NE side shall be
named "Sto. Domingo Avenue;"

The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto.
Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing the
streets, is unable to finish the construction of the street in the Northeast side named (Sto. Domingo
Avenue) because a certain third-party, by the name of Manuel Abundo, who has been physically
occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine
Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and
instance, seeking to compel the latter to comply with their obligation, as stipulated in the above-
mentioned deed of sale, and/or to pay damages in the event they failed or refused to perform said
obligation.

Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter
particularly setting up the principal defense that the action was premature since its obligation to
construct the streets in question was without a definite period which needs to he fixed first by the
court in a proper suit for that purpose before a complaint for specific performance will prosper.

The issues having been joined, the lower court proceeded with the trial, and upon its termination, it
dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses
interposed by defendant Gregorio Araneta, Inc. 1w ph1.t

Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within
which defendants will comply with their obligation to construct the streets in question.

Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not
expressly or impliedly allege and pray for the fixing of a period to comply with its obligation and that
the evidence presented at the trial was insufficient to warrant the fixing of such a period.

On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of
such a period," issued an order granting plaintiff's motion for reconsideration and amending the
dispositive portion of the decision of May 31, 1960, to read as follows:
 WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a
period of two (2) years from notice hereof, within which to comply with its obligation under
the contract, Annex "A".

Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which
motion, plaintiff opposed.

On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter
perfected its appeal Court of Appeals.

In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief
granted, i.e., fixing of a period, under the amendatory decision of July 16, 1960, was not justified by
the pleadings and not supported by the facts submitted at the trial of the case in the court below and
that the relief granted in effect allowed a change of theory after the submission of the case for
decision.

Ruling on the above contention, the appellate court declared that the fixing of a period was within the
pleadings and that there was no true change of theory after the submission of the case for decision
since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by alleging in
paragraph 7 of the affirmative defenses contained in its answer which reads

7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a
reasonable time within which to comply with its obligations to construct and complete the
streets on the NE, NW and SW sides of the lot in question; that under the circumstances,
said reasonable time has not elapsed;

Disposing of the other issues raised by appellant which were ruled as not meritorious and which are
not decisive in the resolution of the legal issues posed in the instant appeal before us, said appellate
court rendered its decision dated December 27, 1963, the dispositive part of which reads

IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given

two (2) years from the date of finality of this decision to comply with the obligation to
construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the same
would be a block surrounded by streets on all four sides.

Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc.
resorted to a petition for review by certiorari to this Court. We gave it due course.

We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of
First Instance is legally untenable. The fixing of a period by the courts under Article 1197 of the Civil
Code of the Philippines is sought to be justified on the basis that petitioner (defendant below) placed
the absence of a period in issue by pleading in its answer that the contract with respondent
Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable
time within which to comply with its obligation to construct and complete the streets." Neither of the
courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was
not whether the court should fix the time of performance, but whether or not the parties agreed that
the petitioner should have reasonable time to perform its part of the bargain. If the contract so
provided, then there was a period fixed, a "reasonable time;" and all that the court should have done
was to determine if that reasonable time had already elapsed when suit was filed if it had passed,
then the court should declare that petitioner had breached the contract, as averred in the complaint,
and fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the
court perforce was bound to dismiss the action for being premature. But in no case can it be logically
held that under the plea above quoted, the intervention of the court to fix the period for performance
was warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the
parties.

Even on the assumption that the court should have found that no reasonable time or no period at all
had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the
complaint not having sought that the Court should set a period, the court could not proceed to do so
unless the complaint in as first amended; for the original decision is clear that the complaint
proceeded on the theory that the period for performance had already elapsed, that the contract had
been breached and defendant was already answerable in damages.

Granting, however, that it lay within the Court's power to fix the period of performance, still the
amended decision is defective in that no basis is stated to support the conclusion that the period
should be set at two years after finality of the judgment. The list paragraph of Article 1197 is clear
that the period can not be set arbitrarily. The law expressly prescribes that

the Court shall determine such period as may under the circumstances been probably
contemplated by the parties.

All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the
proven facts precisely warrant the fixing of such a period," a statement manifestly insufficient to
explain how the two period given to petitioner herein was arrived at.

It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must
first determine that "the obligation does not fix a period" (or that the period is made to depend upon
the will of the debtor)," but from the nature and the circumstances it can be inferred that a period was
intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to
the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3).
So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be
reasonable, but must set the time that the parties are shown to have intended. As the record stands,
the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no
circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code.

In this connection, it is to be borne in mind that the contract shows that the parties were fully aware
that the land described therein was occupied by squatters, because the fact is expressly mentioned
therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have known that
they could not take the law into their own hands, but must resort to legal processes in evicting the
squatters, they must have realized that the duration of the suits to be brought would not be under
their control nor could the same be determined in advance. The conclusion is thus forced that the
parties must have intended to defer the performance of the obligations under the contract until the
squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.

The Court of Appeals objected to this conclusion that it would render the date of performance
indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is
what explains why the agreement did not specify any exact periods or dates of performance.

It follows that there is no justification in law for the setting the date of performance at any other time
than that of the eviction of the squatters occupying the land in question; and in not so holding, both
the trial Court and the Court of Appeals committed reversible error. It is not denied that the case
against one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in
this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of
the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on
affected areas are finally evicted therefrom.

Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.

G.R. No. L-55480

PACIFICA MILLARE, petitioner,

vs.
HON. HAROLD M. HERNANDO, In his capacity as Presiding Judge, Court of Instance of Abra,
Second Judicial District, Branch I, ANTONIO CO and ELSA CO, respondents.

FELICIANO, J.:

On 17 June 1975, a five-year Contract of Lease 1 was executed between petitioner Pacifica Millare
as lessor and private respondent Elsa Co, married to Antonio Co, as lessee. Under the written
agreement, which was scheduled to expire on 31 May 1980, the lessor-petitioner agreed to rent out
to thelessee at a monthly rate of P350.00 the "People's Restaurant", a commercial establishment
located at the corner of McKinley and Pratt Streets in Bangued, Abra.

The present dispute arose from events which transpired during the months of May and July in 1980.
According to the Co spouses, sometime during the last week of May 1980, the lessor informed them
that they could continue leasing the People's Restaurant so long as they were amenable to paying
creased rentals of P1,200.00 a month. In response, a counteroffer of P700.00 a month was made by
the Co spouses. At this point, the lessor allegedly stated that the amount of monthly rentals could be
resolved at a later time since "the matter is simple among us", which alleged remark was supposedly
taken by the spouses Co to mean that the Contract of Lease had been renewed, prompting them to
continue occupying the subject premises and to forego their search for a substitute place to rent. 2 In
contrast, the lessor flatly denied ever having considered, much less offered, a renewal of the
Contract of Lease.

The variance in versions notwithstanding, the record shows that on 22 July 1980, Mrs. Millare wrote
the Co spouses requesting them to vacate the leased premises as she had no intention of renewing
the Contract of Lease which had, in the meantime, already expirecl. 3 In reply, the Co spouses
reiterated their unwillingness to pay the Pl,200.00 monthly rentals supposedly sought bv Mrs. Millare
which they considered "highly excessive, oppressive and contrary to existing laws". They also
signified their intention to deposit the amount of rentals in court, in view of Mrs. Millare's refusal to
accept their counter-offer.4 Another letter of demand from Mrs. Millare was received on 28 July 1980
by the Co spouses, who responded by depositing the rentals for June and July (at 700.00 a month)
in court.

On 30 August 1980, a Saturday, the Co spouses jumped the gun, as it were, and filed a
Complaint 5 (docketed as Civil Case No. 1434) with the then Court of First Instance of Abra against
Mrs. Millare and seeking judgment (a) ordering the renewal of the Contract of Lease at a rental rate
of P700.00 a nionth and for a period of ten years, (b) ordering the defendant to collect the sum of
P1,400.00 deposited by plaintiffs with the court, and (c) ordering the defendant to pay damages in
the amount of P50,000.00. The following Monday, on 1 September 1980, Mrs. Millare filed an
ejectment case against the Co spouses in the Municipal Court of Bangued, Abra, docketed as Civil
Case No. 661. The spouses Co, defendants therein, sut)sequently set up lis pendens as a Civil
Case No. 661. The spouses Co, defendants therein, subsequently set up lis pendens as a defense
against the complaint for ejectment.

Mrs. Millare, defendant in Civil Case No. 1434, countered with an Omnibus Motion to
Dismiss6 rounded on (a) lack of cause of action due to plaintiffs' failure to establish a valid renewal of
the Contract of Lease, and (b) lack of jurisdiction by the trial court over the complaint for failure of
plaintiffs to secure a certification from the Lupong Tagapayapa of the barangay wherein both
disputants reside attesting that no amicable settlement between them had been reached despite
efforts to arrive at one, as required by Section 6 of Presidential Decree No. 1508. The Co spouses
opposed the motion to dismiss. 7

In an Order dated 15 October 1980, respondent judge denied the motion to dismiss and ordered the
renewal of the Contract of Lease. Furthermore plaintiffs were allowed to deposit all accruing monthly
rentals in court, while defendant Millare was directed to submit her answer to the complaint. 8 A
motion for reconsideration 9 was subsequently filed which, however, was likewise denied. 10 Hence,
on 13 November 1980, Mrs. Millare filed the instant Petition for Certiorari, Prohibition and Mandamus,
seeking injunctive relief from the abovementioned orders. This Court issued a temporary restraining
order on 21 November 1980 enjoining respondent, judge from conducting further proceedings in
Civil Case No. 1434. 11 Apparently, before the temporary restraining order could be served on the
respondent judge, he rendered a "Judgment by Default" dated 26 November 1980 ordering the
renewal of the lease contract for a term of 5 years counted from the expiration date of the original
lease contract, and fixing monthly rentals thereunder at P700.00 a month, payable in arrears. On18
March 1981, this Court gave due course to the Petition for Certiorari, Prohibition and Mandamus. 12

Two issues are presented for resolution: (1) whether or not the trial court acquired jurisdiction over
Civil Case No. 1434; and (2) whether or not private respondents have a valid cause of action against
petitioner.

Turning to the first issue, petitioner's attack on the jurisdiction of the trial court must fail, though for
reasons different from those cited by the respondent judge. 13 We would note firstly that the
conciliation procedure required under P.D. 1508 is not a jurisdictional requirement in the sense that
failure to have prior recourse to such procedure would not deprive a court of its jurisdiction either
over the subject matter or over the person of the defendant.14 Secondly, the acord shows that two
complaints were submitted to the barangay authorities for conciliation one by petitioner for
ejectment and the other by private respondents for renewal of the Contract of Lease. It appears
further that both complaints were, in fact, heard by the Lupong Tagapayapa in the afternoon of 30
August 1980. After attempts at conciliation had proven fruitless, Certifications to File Action
authorizing the parties to pursue their respective claims in court were then issued at 5:20 p.m. of that
same aftemoon, as attested to by the Barangay Captain in a Certification presented in evidence by
petitioner herself. 15

Petitioner would, nonetheless, assail the proceedings in the trial court on a technicaety, i.e., private
respondents allegedly filed their complaint at 4:00 p.m. of 30 August 1980, or one hour and twenty
minutes before the issuance of the requisite certification by the Lupng Tagapayapa. The defect in
procedure admittedly initially present at that particular moment when private respondents first filed
the complaint in the trial court, was cured by the subsequent issuance of the Certifications to File
Action by the barangay Lupong Tagapayapa Such certifications in any event constituted substantial
comphance with the requirement of P.D. 1508.
We turn to the second issue, that is, whether or not the complaint in Civil Case No. 1434 filed by the
respondent Co spouses claiming renewal of the contract of lease stated a valid cause of action.
Paragraph 13 of the Contract of Lease reads as follows:

13. This contract of lease is subject to the laws and regulations ofthe goverrunent; and that
this contract of lease may be renewed after a period of five (5) years under the terms and
conditions as will be mutually agreed upon by the parties at the time of renewal; ...
(Emphasis supplied.)

The respondent judge, in his Answer and Comment to the Petition, urges that under paragraph 13
quoted above.

there was already a consummated and finished mutual agreement of the parties to renew the
contract of lease after five years; what is only left unsettled between the parties to the
contract of lease is the amount of the monthly rental; the lessor insists Pl,200 a month, while
the lessee is begging P700 a month which doubled the P350 monthly rental under the
original contract .... In short, the lease contract has never expired because paragraph 13
thereof had expressly mandated that it is renewable. ...16

In the "Judgment by Default" he rendered, the respondent Judge elaborated his views obviously
highly emotional in character in the following extraordinary tatements:

However, it is now the negative posture of the defendant-lessor to block, reject and refuse to
renew said lease contract. It is the defendant-lessor's assertion and position that she can at
the mere click of her fingers, just throw-out the plaintiffs-lessees from the leased premises
and any time after the original term of the lease contract had already expired; This negative
position of the defendantlessor, to the mind of this Court does not conform to the principles
and correct application of the philosophy underlying the law of lease; for indeed, the law of
lease is impressed with public interest, social justice and equity; reason for which, this Court
cannot sanction lot owner's business and commercial speculations by allowing them
with "unbridled discretion" to raise rentals even to the extent of "extraordinary gargantuan
proportions, and calculated to unreasonably and unjustly eject the helpless lessee because
he cannot afford said inflated monthly rental and thereby said lessee is placed without any
alternative, except to surrender and vacate the premises mediately,-" Many business
establishments would be closed and the public would directly suffer the direct consequences;
Nonetheless, this is not the correct concept or perspective the law of lease, that is, to place
the lessee always at the mercy of the lessor's "Merchant of Venice" and to agit the latter's
personal whims and caprices; the defendant-lessor's hostile attitude by imposing upon the
lessee herein an "unreasonable and extraordinary gargantuan monthly rental of P1,200.00",
to the mind of this Court, is "fly-by night unjust enrichment" at the expense of said lessees;
but, no Man should unjustly enrich himself at the expense of another; under these facts and
circumstances surrounding this case, the action therefore to renew the lease contract! is
"tenable" because it falls squarely within the coverage and command of Articles 1197 and
1670 of the New Civil Code, to wit:

xxx xxx xxx

The term "to be renewed" as expressly stipulated by the herein parties in the original contract
of lease means that the lease may be renewed for another term of five (5) years; its
equivalent to a promise made by the lessor to the lessee, and as a unilateral stipulation,
obliges the lessor to fulfill her promise; of course the lessor is free to comply and honor her
commitment or back-out from her promise to renew the lease contract; but, once expressly
 stipulated, the lessor shall not be allowed to evade or violate the obligation to renew the
lease because, certainly, the lessor may be held hable for damages caused to the lessee as
a consequence of the unjustifiable termination of the lease or renewal of the same; In other
words, the lessor is guilty of breach of contract: Since the original lease was fixed for five (5)
years, it follows, therefore, that the lease contract is renewable for another five (5) years and
the lessee is not required before hand to give express notice of this fact to the lessor
because it was expressly stipulated in the original lease contract to be renewed; Wherefore,
the bare refusal of the lessor to renew the lease contract unless the monthly rental is
P1,200.00 is contrary to law, morals, good customs, public policy, justice and equity because
no one should unjustly enrich herself at the expense of another. Article 1197 and 1670 of the
New Civil Code must therefore govern the case at bar and whereby this Court is authorized
to fix the period thereof by ordering the renewal of the lease contract to another fixed term of
five (5) years.17

Clearly, the respondent judge's grasp of both the law and the Enghsh language is tenuous at best.
We are otherwise unable to comprehend how he arrived at the reading set forth above. Paragraph
13 of the Contract of Lease can only mean that the lessor and lessee may agree to renew the
contract upon their reaching agreement on the terms and conditions to be embodied in such renewal
contract. Failure to reach agreement on the terms and conditions of the renewal contract will of
course prevent the contract from being renewed at all. In the instant case, the lessor and the lessee
conspicuously failed to reach agreement both on the amount of the rental to be payable during the
renewal term, and on the term of the renewed contract.

The respondent judge cited Articles 1197 and 1670 of the Civil Code to sustain the "Judgment by
Default" by which he ordered the renewal of the lease for another term of five years and fixed
monthly rentals thereunder at P700.00 a month. Article 1197 of the Civil Code provides as follows:

If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may, under the circumstances, have
been probably contemplated by the parties. Once fixed by the courts, the period cannot be
changed by them. (Emphasis supplied.)

The first paragraph of Article 1197 is clearly inapplicable, since the Contract of Lease did in fact fix
an original period of five years, which had expired. It is also clear from paragraph 13 of the Contract
of Lease that the parties reserved to themselves the faculty of agreeing upon the period of the
renewal contract. The second paragraph of Article 1197 is equally clearly inapplicable since the
duration of the renewal period was not left to the wiu of the lessee alone, but rather to the will of both
the lessor and the lessee. Most importantly, Article 1197 applies only where a contract of lease
clearly exists. Here, the contract was not renewed at all, there was in fact no contract at all the
period of which could have been fixed.

Article 1670 of the Civil Code reads thus:

If at the end of the contract the lessee should continue enjoying the thing left for 15 days with
the acquiescence of the lessor and unless a notice to the contrary by either party has
previously been given. It is understood that there is an implied new lease, not for the period
of the original contract but for the time established in Articles 1682 and 1687. The ther terms
of the original contract shall be revived. (Emphasis suplied.)
The respondents themselves, public and private, do not pretend that the continued occupancy of the
leased premises after 31 May 1980, the date of expiration of the contract, was with the
acquiescence of the lessor. Even if it be assumed that tacite reconduccion had occurred, the implied
new lease could not possibly have a period of five years, but rather would have been a month-to-
month lease since the rentals (under the original contract) were payable on a monthly basis. At the
latest, an implied new lease (had one arisen) would have expired as of the end of July 1980 in view
of the written demands served by the petitioner upon the private respondents to vacate the
previously leased premises.

It follows that the respondent judge's decision requiring renewal of the lease has no basis in law or in
fact. Save in the limited and exceptional situations envisaged inArticles ll97 and 1670 of the Civil
Code, which do not obtain here, courts have no authority to prescribe the terms and conditions of a
contract for the parties. As pointed out by Mr. Justice J.B.L. Reyes in Republic vs. Philippine Long
Distance Telephone,Co.,[[18

[P]arties cannot be coerced to enter into a contract where no agreement is had between
them as to the principal terms and conditions of the contract. Freedom to stipulate such
terms and conditions is of the essence of our contractual system, and by express provision
of the statute, a contract may be annulled if tainted by violence, intimidation or undue
influence (Article 1306, 1336, 1337, Civil Code of the Philippines).

Contractual terms and conditions created by a court for two parties are a contradiction in terms. If
they are imposed by a judge who draws upon his own private notions of what morals, good customs,
justice, equity and public policy" demand, the resulting "agreement" cannot, by definition, be
consensual or contractual in nature. It would also follow that such coerced terms and conditions
cannot be the law as between the parties themselves. Contracts spring from the volition of the
parties. That volition cannot be supplied by a judge and a judge who pretends to do so, acts
tyrannically, arbitrarily and in excess of his jurisdiction. 19

WHEREFORE, the Petition for Certiorari, Prohibition and mandamus is granted. The Orders of the
respondent judge in Civil Case No. 1434 dated 26 September 1980 (denying petitioner's motion to
dismiss) and 4 November 1980 (denying petitioner's motion for reconsideration), and the "Judgment
by Default" rendered by the respondent judge dated 26 November 1980, are hereby annulled and
set aside and Civil Case No. 1434 is hereby dismissed. The temporary restraining order dated 21
November 1980 issued by this ourt, is hereby made permanent. No pronouncement as to costs.

G.R. No. 206806, June 25, 2014

ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS, Petitioners, v. DAN T. LIM, DOING
BUSINESS UNDER THE NAME AND STYLE OF QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES, Respondent.

DECISION

LEONEN, J.:

Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed
and may be implied only if the old and new contracts are incompatible on every point.

Before us is a petition for review on certiorari1 assailing the Court of Appeals decision2 in CA-G.R. CV No.
95709, which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch 171,
for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the
name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business.4From
February 2007 to March 2007, he delivered scrap papers worth P7,220,968.31 to Arco Pulp and Paper
Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A.
Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the
raw materials or deliver to him their finished products of equivalent value.6 cralaw red

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check
dated April 18, 20077 in the amount of P1,487,766.68 as partial payment, with the assurance that the check
would not bounce.8 When he deposited the check on April 18, 2007, it was dishonored for being drawn
against a closed account.9 cralawred

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement10where
Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation,
owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by
Dan T. Lim, through his company, Quality Paper and Plastic Products. The memorandum of agreement reads
as follows:
chanRoble svirtual Lawli bra ry

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of
P18.50 per kg. to Megapack Container for Mr. Eric Sys account. Schedule of deliveries are as follows:

....

It has been agreed further that the Local OCC materials to be used for the production of the above Test
Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50 per kg.
(price subject to change per advance notice). Quantity of Local OCC delivery will be based on the quantity of
Test Liner delivered to Megapack Container Corp. based on the above production schedule.11

On May 5, 2007, Dan T. Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount
of ?7,220,968.31, but no payment was made to him.13 cralawred

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the Regional
Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed
to have its representatives attend the pre-trial hearing. Hence, the trial court allowed Dan T. Lim to present
his evidence ex parte.16 c ralawre d

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed
the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of
agreement, novation took place, which extinguished Arco Pulp and Papers obligation to Dan T. Lim.17 cralawred

Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take
place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and
private agreement between them. He argued that if his name was mentioned in the contract, it was only for
supplying the parties their required scrap papers, where his conformity through a separate contract was
indispensable.19 cralaw red

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment
dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the
amount of P7,220,968.31 with interest at 12% per annum from the time of demand; P50,000.00 moral
damages; P50,000.00 exemplary damages; and P50,000.00 attorneys fees.22 cralawred

The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an
alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorneys fees due to the
bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking.24 cralaw red

Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief
Executive Officer, Candida A. Santos, bring this petition for review on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation
of the original obligation since Eric Sy became the new debtor of respondent. They also argue that there is
no legal basis to hold petitioner Candida A. Santos personally liable for the transaction that petitioner
corporation entered into with respondent. The Court of Appeals, they allege, also erred in awarding moral
and exemplary damages and attorneys fees to respondent who did not show proof that he was entitled to
damages. 27 cralawred

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no
proper novation in this case. He argues that the Court of Appeals was correct in ordering the payment
of ?7,220,968.31 with damages since the debt of petitioners remains unpaid.28 He also argues that the Court
of Appeals was correct in holding petitioners solidarily liable since petitioner Candida A. Santos was the
prime mover for such outstanding corporate liability.29 c ralawred

In their reply, petitioners reiterate that novation took place since there was nothing in the memorandum of
agreement showing that the obligation was alternative. They also argue that when respondent allowed them
to deliver the finished products to Eric Sy, the original obligation was novated.30 cralawred

A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC
dated November 21, 2000.31 cralaw red

The issues to be resolved by this court are as follows: chanRoblesvi rt ual Lawlib rary

1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.

3. Whether moral damages, exemplary damages, and attorneys fees can be awarded

The petition is denied.

The obligation between the

parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states: chanRoblesvi rtual Lawli bra ry

Article 1199. A person alternatively bound by different prestations shall completely perform one of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election.32 The right of election is
extinguished when the party who may exercise that option categorically and unequivocally makes his or her
choice known.33 The choice of the debtor must also be communicated to the creditor who must receive
notice of it since: cha nRoblesvi rt ualLaw lib rary

The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice shall the election take legal effect when consented
by the creditor, or if impugned by the latter, when declared proper by a competent court.34

According to the factual findings of the trial court and the appellate court, the original contract between the
parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner Arco Pulp and Paper.
The payment for this delivery became petitioner Arco Pulp and Papers obligation. By agreement, petitioner
Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price or (2) deliver the finished
products of equivalent value to respondent.35 cralaw red

The appellate court, therefore, correctly identified the obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent,
would either pay him the price of the raw materials or, in the alternative, deliver to him the finished
products of equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap papers,
they exercised their option to pay the price. Respondents receipt of the check and his subsequent act of
depositing it constituted his notice of petitioner Arco Pulp and Papers option to pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on the
same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Papers
finished products would be to a third person, thereby extinguishing the option to deliver the finished
products of equivalent value to respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract

The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver
the finished products to a third person, it did not novate the original obligation between the parties.

The rules on novation are outlined in the Civil Code, thus:chanRoble svirtual Lawlib ra ry

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other. (1204)

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)

Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors
or when there is subrogation of the creditor. It occurs only when the new contract declares so in
unequivocal terms or that the old and the new obligations be on every point incompatible with each
other.36
cralawred

Novation was extensively discussed by this court in Garcia v. Llamas:37 cralawred

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations,

by substituting a new debtor in place of the old one, or by subrogating a third person to the
rights of the creditor. Article 1293 of the Civil Code defines novation as follows:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.

In general, there are two modes of substituting the person of the debtor: (1) expromisionand (2) delegacion.
In expromision, the initiative for the change does not come from and may even be made without the
knowledge of the debtor, since it consists of a third persons assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the
creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary. Both modes of substitution by the debtor require the
consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or
modificatory, novation is made either by changing the object or the principal conditions, referred to as
objective or real novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. For novation to take place, the
following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the
old one on every point. The test of incompatibility is whether the two obligations can stand
together, each one with its own independent existence.38 (Emphasis supplied)

Because novation requires that it be clear and unequivocal, it is never presumed, thus: chanRoblesv irt ual Lawlib rary

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman
Law jurisprudence, the principle novatio non praesumitur that novation is never presumed.
At bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito
basically extinguishing the old obligation for the new one.39 (Emphasis supplied)

There is nothing in the memorandum of agreement that states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy
somehow substituted petitioner Arco Pulp and Paper as respondents debtor. It merely shows that petitioner
Arco Pulp and Paper opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid: chanRoble svirtual Lawlib rary

Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce a clear and
unequivocal intent by the parties to novate the old agreement.40 (Emphasis supplied)

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states: chanRoblesvi rtua lLawl ibra ry

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy. . . .41

If the memorandum of agreement was intended to novate the original agreement between the parties,
respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal terms that it has replaced the original obligation of
petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case.

Petitioner Arco Pulp and Papers act of tendering partial payment to respondent also conflicts with their
alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner
Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor consented to
the latter as his new debtor. These acts, when taken together, clearly show that novation did not take place.

Since there was no novation, petitioner Arco Pulp and Papers obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of
P7,220,968.31.

Petitioners are liable for damages

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where
the breach is due to fraud or bad faith:
chanRoblesvi rtua lLawl ibra ry

Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court should
find that, under the circumstances, such damages are justly due. The same rule applies to breaches of
contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)

Moral damages are not awarded as a matter of right but only after the party claiming it proved that the
breach was due to fraud or bad faith. As this court stated: chanRob lesvi rtual Lawl ibra ry
Moral damages are not recoverable simply because a contract has been breached. They are recoverable only
if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or
abusive.42

Further, the following requisites must be proven for the recovery of moral damages: chanRoblesvi rtua lLawl ibra ry

An award of moral damages would require certain conditions to be met, to wit: (1) first, there must be an
injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second, there must
be culpable act or omission factually established; (3)third, the wrongful act or omission of the defendant is
the proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is
predicated on any of the cases stated in Article 2219 of the Civil Code.43

Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has remained
unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Papers act of refusing to
pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a third person in an effort to evade its liability. This
proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in
the following instances:chanRob lesvi rtua lLawl ibra ry

Article 2219. Moral damages may be recovered in the following and analogous cases: ChanRobles Vi rtua lawlib rary

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of the Civil Code, which states: chanRoble svirtual Lawli bra ry

Article 19. 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.

Persons who have the right to enter into contractual relations must exercise that right with honesty and
good faith. Failure to do so results in an abuse of that right, which may become the basis of an action for
damages. Article 19, however, cannot be its sole basis: chanRob lesvirtual Lawlib ra ry

Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of an
actionable tort. Article 19 describes the degree of care required so that an actionable tort may arise when it
is alleged together with Article 20 or Article 21.44

Article 20 and 21 of the Civil Code are as follows: chanRoblesvi rt ualLaw lib rary

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.

Article 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts that
are contrary to morals, good customs, and public policy: chanRoble svirtual Lawli bra ry
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have
been willful or negligent. Willful may refer to the intention to do the act and the desire to achieve the
outcome which is considered by the plaintiff in tort action as injurious. Negligence may refer to a situation
where the act was consciously done but without intending the result which the plaintiff considers as injurious.

Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily
proscribed by law. This article requires that the act be willful, that is, that there was an intention to do the
act and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve around whether
such outcome should be considered a legal injury on the part of the plaintiff or whether the commission of
the act was done in violation of the standards of care required in Article 19.45

When parties act in bad faith and do not faithfully comply with their obligations under contract, they run the
risk of violating Article 1159 of the Civil Code: chanRoble svirtual Lawli bra ry

Article 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered
since it only specifies, among others, Article 21. When a party reneges on his or her obligations arising from
contracts in bad faith, the act is not only contrary to morals, good customs, and public policy; it is also a
violation of Article 1159. Breaches of contract become the basis of moral damages, not only under Article
2220, but also under Articles 19 and 20 in relation to Article 1159.

Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that
the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46 cralawred

To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless
and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must prove its
existence by clear and convincing evidence for the law always presumes good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of known duty through some
motive or interest or ill will that partakes of the nature of fraud. It is, therefore, a question of
intention, which can be inferred from ones conduct and/or contemporaneous
statements.47 (Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the
circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was
presumably with the knowledge that it was being drawn against a closed account. Worse, it attempted to
shift their obligations to a third person without the consent of respondent.

Petitioner Arco Pulp and Papers actions clearly show a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes
of the nature of fraud.48 Moral damages may, therefore, be awarded.

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the
following circumstances: chanRoblesvi rt ualLaw lib rary

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or
not they should be adjudicated.

Article 2234. While the amount of the exemplary damages need not be proven, the 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.

In Tankeh v. Development Bank of the Philippines,49 we stated that: chanRoblesvirt ual Lawlib rary
The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties
from the commission of a similar offense. The case of People v. Rante citing People v. Dalisay held
that:ChanRoblesVi rtua lawlib rary

Also known as punitive or vindictive damages, exemplary or corrective damages are intended
to serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and
wanton invasion of the rights of an injured or a punishment for those guilty of outrageous
conduct. These terms are generally, but not always, used interchangeably. In common law, there is
preference in the use of exemplary damages when the award is to account for injury to feelings and for the
sense of indignity and humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt caused by the highly
reprehensible conduct of the defendantassociated with such circumstances as willfulness, wantonness,
malice, gross negligence or recklessness, oppression, insult or fraud or gross fraudthat intensifies the
injury. The terms punitive or vindictive damages are often used to refer to those species of damages that
may be awarded against a person to punish him for his outrageous conduct. In either case, these damages
are intended in good measure to deter the wrongdoer and others like him from similar conduct in the
future.50 (Emphasis supplied; citations omitted)

The requisites for the award of exemplary damages are as follows: ChanRobles Vi rtua lawlib rary

(1) they may be imposed by way of example in addition to compensatory

damages, and only after the claimant's right to them has been
established;
(2) that they cannot be recovered as a matter of right, their determination
depending upon the amount of compensatory damages that may be
awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton,
fraudulent, oppressive or malevolent manner.51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to those who use fraudulent means to evade their
liabilities.

Since the award of exemplary damages is proper, attorneys fees and cost of the suit may also be recovered.
Article 2208 of the Civil Code states: chanRoblesvi rt ualLaw lib rary

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:

(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos

is solidarily liable with petitioner
corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to prove
that the transaction was also a personal undertaking of petitioner Santos. We disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that: chanRoblesvirtual Lawlib rary

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the corporation. Nevertheless, this
legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

....
Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint
that the director or officer assented to patently unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for
review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the
lower court are not supported by the evidence on record or are based on a misapprehension of
facts.53 (Emphasis supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for
obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant
is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such
negligence or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief
Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner
corporations obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face
of the check bearing the account name, Arco Pulp & Paper, Co., Inc.54 Any obligation arising from these
acts would not, ordinarily, be petitioner Santos personal undertaking for which she would be solidarily liable
with petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55 c ralaw red

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the
two corporations will be treated as identical.56 (Emphasis supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper,
stating that: chanRoblesvirtual Lawlib rary

In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to
honor their undertaking in favor of the [respondent]. After the check in the amount of P1,487,766.68 issued
by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner] corporation
denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies
provided by law in order to protect his rights.57

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate veil.
When petitioner Arco Pulp and Papers obligation to respondent became due and demandable, she not only
issued an unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and
Papers liability. She unjustifiably refused to honor petitioner corporations obligations to respondent. These
acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and petitioner Santos
may be held solidarily liable with petitioner Arco Pulp and Paper.

The rate of interest due on

the obligation must be reduced
in view of Nacar v. Gallery
Frames58 c ralawre d

In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v.
Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum to 6%
per annum from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have laid
down the following guidelines with regard to the rate of legal interest:c hanRoble svirtual Lawlib ra ry
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. 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 damages. The provisions under Title XVIII on Damages of
the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:

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 6% 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 courtat 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 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance
of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.61 (Emphasis supplied; citations omitted.)

According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at 6% per
annum, computed from May 5, 2007, when respondent sent his letter of demand to petitioners. This interest
shall continue to be due from the finality of this decision until its full satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the time of demand
until finality of judgment and its full satisfaction, with moral damages in the amount of P50,000.00,
exemplary damages in the amount of P50,000.00, and attorneys fees in the amount of P50,000.00.

SO ORDERED.

G.R. No. L-55138 September 28, 1984

ERNESTO V. RONQUILLO, petitioner,

vs.
HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.

Gloria A. Fortun for petitioner.

Roselino Reyes Isler for respondents.

CUEVAS, J.:

This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now the
Intermediate Appellate Court) in CA-G.R. No. SP-10573, entitled "Ernesto V. Ronquillo versus the
Hon. Florellana Castro-Bartolome, etc." and the Order of said court dated August 20, 1980, denying
petitioner's motion for reconsideration of the above resolution.

Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then
Court of First Instance of Rizal (now the Regional Trial Court), Branch XV filed by private respondent
Antonio P. So, on July 23, 1979, for the collection of the sum of P17,498.98 plus attorney's fees and
costs. The other defendants were Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount
of P117,498.98 sought to be collected represents the value of the checks issued by said defendants
in payment for foodstuffs delivered to and received by them. The said checks were dishonored by
the drawee bank.

On December 13, 1979, the lower court rendered its Decision 1 based on the compromise agreement submitted by
the parties, the pertinent portion of which reads as follows:

1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .00 and
defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P10,000.00 the amount of
P55,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from
January 1980, or before June 30, 1980; (Emphasis supplied)

xxx xxx xxx

4. That both parties agree that failure on the part of either party to comply with the
foregoing terms and conditions, the innocent party will be entitled to an execution of
the decision based on this compromise agreement and the defaulting party agrees
and hold themselves to reimburse the innocent party for attorney's fees, execution
fees and other fees related with the execution.

xxx xxx xxx

On December 26, 1979, herein private respondent (then plaintiff filed a Motion for Execution on the
ground that defendants failed to make the initial payment of P55,000.00 on or before December 24,
1979 as provided in the Decision. Said motion for execution was opposed by herein petitioner (as
one of the defendants) contending that his inability to make the payment was due to private
respondent's own act of making himself scarce and inaccessible on December 24, 1979. Petitioner
then prayed that private respondent be ordered to accept his payment in the amount of P13,750.00. 2

During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980,
petitioner, as one of the four defendants, tendered the amount of P13,750.00, as his prorata share in
the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount.
Because private respondent refused to accept their payments, demanding from them the full initial
installment of P 55,000.00, petitioner and Pilar Tan instead deposited the said amount with the Clerk
of Court. The amount deposited was subsequently withdrawn by private respondent. 3
On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for
the balance of the initial amount payable, against the other two defendants, Offshore Catertrade Inc.
and Johnny Tan 4 who did not pay their shares.

On January 22, 1980, private respondent moved for the reconsideration and/or modification of the
aforesaid Order of execution and prayed instead for the "execution of the decision in its entirety
against all defendants, jointly and severally." 5 Petitioner opposed the said motion arguing that under
the decision of the lower court being executed which has already become final, the liability of the
four (4) defendants was not expressly declared to be solidary, consequently each defendant is
obliged to pay only his own pro-rata or 1/4 of the amount due and payable.

On March 17, 1980, the lower court issued an Order reading as follows:

ORDER

Regardless of whatever the compromise agreement has intended the payment

whether jointly or individually, or jointly and severally, the fact is that only P27,500.00
has been paid. There appears to be a non-payment in accordance with the
compromise agreement of the amount of P27,500.00 on or before December 24,
1979. The parties are reminded that the payment is condition sine qua non to the
lifting of the preliminary attachment and the execution of an affidavit of desistance.

WHEREFORE, let writ of execution issue as prayed for

On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was
set for hearing on March 25,1980.

Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the
satisfaction of the sum of P82,500.00 as against the properties of the defendants (including
petitioner), "singly or jointly hable." 6

On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale, for
the sale of certain furnitures and appliances found in petitioner's residence to satisfy the sum of
P82,500.00. The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7

Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was
set for hearing on March 25, 1980, was upon motion of private respondent reset to April 2, 1980 at
8:30 a.m. Realizing the actual threat to property rights poised by the re-setting of the hearing of s
motion for reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for reconsideration
would be denied he would have no more time to obtain a writ from the appellate court to stop the
scheduled public sale of his personal properties at 10:00 a.m. of the same day, April 2, 1980,
petitioner filed on March 26, 1980 a petition for certiorari and prohibition with the then Court of
Appeals (CA-G.R. No. SP-10573), praying at the same time for the issuance of a restraining order to
stop the public sale. He raised the question of the validity of the order of execution, the writ of
execution and the notice of public sale of his properties to satisfy fully the entire unpaid obligation
payable by all of the four (4) defendants, when the lower court's decision based on the compromise
agreement did not specifically state the liability of the four (4) defendants to be solidary.

On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled
public sale in that same day did not proceed in view of the pendency of a certiorari proceeding
before the then Court of Appeals.
On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as follows:

This Court, however, finds the present petition to have been filed prematurely. The
rule is that before a petition for certiorari can be brought against an order of a lower
court, all remedies available in that court must first be exhausted. In the case at bar,
herein petitioner filed a petition without waiting for a resolution of the Court on the
motion for reconsideration, which could have been favorable to the petitioner. The
fact that the hearing of the motion for reconsideration had been reset on the same
day the public sale was to take place is of no moment since the motion for
reconsideration of the Order of March 17, 1980 having been seasonably filed, the
scheduled public sale should be suspended. Moreover, when the defendants,
including herein petitioner, defaulted in their obligation based on the compromise
agreement, private respondent had become entitled to move for an execution of the
decision based on the said agreement.

WHEREFORE, the instant petition for certiorari and prohibition with preliminary
injunction is hereby denied due course. The restraining order issued in our resolution
dated April 9, 1980 is hereby lifted without pronouncement as to costs.

SO ORDERED.

Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower
court had already denied the motion referred to and consequently, the legal issues being raised in
the petition were already "ripe" for determination. 8 The said motion was however denied by the
Court of Appeals in its Resolution dated August 20, 1980.

Hence, this petition for review, petitioner contending that the Court of Appeals erred in

(a) declaring as premature, and in denying due course to the petition to restrain implementation of a
writ of execution issued at variance with the final decision of the lower court filed barely four (4) days
before the scheduled public sale of the attached movable properties;

(b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature the
filing of the petition, although there is proof on record that as of April 2, 1980, the motion referred to
was already denied by the lower court and there was no more motion pending therein;

(c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the
defendants, under the final decision of the lower court, to be only joint;

(d) not holding the lower court's order of execution dated March 17, 1980, the writ of execution and
the notice of sheriff's sale, executing the lower court's decision against "all defendants, singly and
jointly", to be at variance with the lower court's final decision which did not provide for solidary
obligation; and

(e) not declaring as invalid and unlawful the threatened execution, as against the properties of
petitioner who had paid his pro-rata share of the adjudged obligation, of the total unpaid amount
payable by his joint co-defendants.

The foregoing assigned errors maybe synthesized into the more important issues of
1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order of
Execution issued by the lower court, dated March 17, 1980, proper, despite the pendency of a
motion for reconsideration of the same questioned Order?

2. What is the nature of the liability of the defendants (including petitioner), was it merely joint, or
was it several or solidary?

Anent the first issue raised, suffice it to state that while as a general rule, a motion for
reconsideration should precede recourse to certiorari in order to give the trial court an opportunity to
correct the error that it may have committed, the said rule is not absolutes 9 and may be dispensed
with in instances where the filing of a motion for reconsideration would serve no useful purpose,
such as when the motion for reconsideration would raise the same point stated in the motion 10 or
where the error is patent for the order is void 11 or where the relief is extremely urgent, as in cases where execution had already been
ordered 12 where the issue raised is one purely of law. 13

In the case at bar, the records show that not only was a writ of execution issued but petitioner's
properties were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m. The
records likewise show that petitioner's motion for reconsideration of the questioned Order of
Execution was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m., but
upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very
same clay when petitioner's properties were to be sold at public auction. Needless to state that
under the circumstances, petitioner was faced with imminent danger of his properties being
immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted
recourse to the Court of Appeals and the adequate and speedy remedy for petitioner under the
situation was to file a petition for certiorari with prayer for restraining order to stop the sale. For him
to wait until after the hearing of the motion for reconsideration on April 2, 1980 before taking
recourse to the appellate court may already be too late since without a restraining order, the public
sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower
court in its order dated April 2, 1980 and were it not for the pendency of the petition with the Court of
Appeals and the restraining order issued thereafter, the public sale scheduled that very same
morning could have proceeded.

The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in
Civil Case No. 33958, that is whether or not he is liable jointly or solidarily.

In this regard, Article 1207 and 1208 of the Civil Code provides

Art. 1207. The concurrence of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each one of
the latter is bound to render, entire compliance with the prestation. Then is a solidary
liability only when the obligation expressly so states, or when the law or the nature of
the obligation requires solidarity.

Art. 1208. If from the law,or the nature or the wording of the obligation to which the
preceding article refers the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors and debtors,
the credits or debts being considered distinct from one another, subject to the Rules
of Court governing the multiplicity of quits.

The decision of the lower court based on the parties' compromise agreement, provides:
 1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and
defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P110,000.00, the amount
of P5,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from
January 1980 or before June 30, 1980. (Emphasis supply)

Clearly then, by the express term of the compromise agreement and the decision based upon it, the
defendants obligated themselves to pay their obligation "individually and jointly".

The term "individually" has the same meaning as "collectively", "separately", "distinctively",
respectively or "severally". An agreement to be "individually liable" undoubtedly creates a several
obligation, 14 and a "several obligation is one by which one individual binds himself to perform the whole obligation. 15

In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente or in the promissory note is an
express statement making each of the persons who signed it individually liable for the payment of the fun amount of the obligation contained
therein." Likewise in Un Pak Leung vs. Negorra 17 We held that "in the absence of a finding of facts that the defendants made themselves
individually hable for the debt incurred they are each liable only for one-half of said amount

The obligation in the case at bar being described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED.

Cost against petitioner.

SO ORDERED.

[G.R. No. 119599. March 20, 1997]

MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON.

COURT OF APPEALS and TKC MARKETING
CORPORATION, respondents.

DECISION
ROMERO, J.:

Assailed in this petition for review on certiorari is the decision of the Court
of Appeals in CA-G.R. No. 43023 which affirmed, with slight modification, the
[1]

decision of the Regional Trial Court of Cebu, Branch 15.

Private respondent TKC Marketing Corp. was the owner/consignee of
some 3,189.171 metric tons of soya bean meal which was loaded on board
the ship MV Al Kaziemah on or about September 8, 1989 for carriage from the
port of Rio del Grande, Brazil, to the port of Manila. Said cargo was insured
against the risk of loss by petitioner Malayan Insurance Corporation for which
it issued two (2) Marine Cargo Policy Nos. M/LP 97800305 amounting
to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45, both
dated September 1989.
While the vessel was docked in Durban, South Africa on September 11,
1989 enroute to Manila, the civil authorities arrested and detained it because
of a lawsuit on a question of ownership and possession. As a result, private
respondent notified petitioner on October 4, 1989 of the arrest of the vessel
and made a formal claim for the amount of US$916,886.66, representing the
dollar equivalent on the policies, for non-delivery of the cargo. Private
respondent likewise sought the assistance of petitioner on what to do with the
cargo.
Petitioner replied that the arrest of the vessel by civil authority was not a
peril covered by the policies. Private respondent, accordingly, advised
petitioner that it might tranship the cargo and requested an extension of the
insurance coverage until actual transhipment, which extension was approved
upon payment of additional premium. The insurance coverage was extended
under the same terms and conditions embodied in the original policies while in
the process of making arrangements for the transhipment of the cargo from
Durban to Manila, covering the period October 4-December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban, South
Africa, for US$154.40 per metric ton or a total of P10,304,231.75 due to its
perishable nature which could no longer stand a voyage of twenty days to
Manila and another twenty days for the discharge thereof. On January 5, 1990,
private respondent forthwith reduced its claim to US$448,806.09 (or its peso
equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00)
representing private respondent's loss after the proceeds of the sale were
deducted from the original claim of $916,886.66 or P20,184,159.55.
Petitioner maintained its position that the arrest of the vessel by civil
authorities on a question of ownership was an excepted risk under the marine
insurance policies. This prompted private respondent to file a complaint for
damages praying that aside from its claim, it be reimbursed the amount
of P128,770.88 as legal expenses and the interest it paid for the loan it
obtained to finance the shipment totalling P942,269.30. In addition, private
respondent asked for moral damages amounting to P200,000.00, exemplary
damages amounting to P200,000.00 and attorney's fees equivalent to 30% of
what will be awarded by the court.
The lower court decided in favor of private respondent and required
petitioner to pay, aside from the insurance claim, consequential and liquidated
damages amounting to P1,024,233.88, exemplary damages amounting
to P100,000.00, reimbursement in the amount equivalent to 10% of whatever
is recovered as attorney's fees as well as the costs of the suit. On private
respondent's motion for reconsideration, petitioner was also required to further
pay interest at the rate of 12% per annum on all amounts due and owing to
the private respondent by virtue of the lower court decision counted from the
inception of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower court
stating that with the deletion of Clause 12 of the policies issued to private
respondent, the same became automatically covered under subsection 1.1 of
Section 1 of the Institute War Clauses. The arrests, restraints or detainments
contemplated in the former clause were those effected by political or
executive acts. Losses occasioned by riot or ordinary judicial processes were
not covered therein. In other words, arrest, restraint or detainment within the
meaning of Clause 12 (or F.C. & S. Clause) rules out detention by ordinary
legal processes. Hence, arrests by civil authorities, such as what happened in
the instant case, is an excepted risk under Clause 12 of the Institute Cargo
Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of the
Institute Cargo Clause and the consequent adoption or institution of the
Institute War Clauses (Cargo), the arrest and seizure by judicial processes
which were excluded under the former policy became one of the covered risks.
The appellate court added that the failure to deliver the consigned goods
in the port of destination is a loss compensable, not only under the Institute
War Clause but also under the Theft, Pilferage, and Non-delivery Clause
(TNPD) of the insurance policies, as read in relation to Section 130 of the
Insurance Code and as held in Williams v. Cole. [2]

Furthermore, the appellate court contended that since the vessel was
prevented at an intermediate port from completing the voyage due to its
seizure by civil authorities, a peril insured against, the liability of petitioner
continued until the goods could have been transhipped. But due to the
perishable nature of the goods, it had to be promptly sold to minimize loss.
Accordingly, the sale of the goods being reasonable and justified, it should not
operate to discharge petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance
policies.

2. In ruling that there was constructive total loss over the cargo.

3. In ruling that petitioner was in bad faith in declining private respondent's claim.
4. In giving undue reliance to the doctrine that insurance policies are strictly construed
against the insurer.

In assigning the first error, petitioner submits the following: (a) an arrest by
civil authority is not compensable since the term "arrest" refers to "political or
executive acts" and does not include a loss caused by riot or by ordinary
judicial process as in this case; (b) the deletion of the Free from Capture or
Seizure Clause would leave the assured covered solely for the perils specified
by the wording of the policy itself; (c) the rationale for the exclusion of an
arrest pursuant to judicial authorities is to eliminate collusion between
unscrupulous assured and civil authorities.
As to the second assigned error, petitioner submits that any loss which
private respondent may have incurred was in the nature and form of
unrecovered acquisition value brought about by a voluntary sacrifice sale and
not by arrest, detention or seizure of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim
was a result of its honest belief that the arrest of the vessel was not a
compensable risk under the policies issued. In fact, petitioner supported
private respondent by accommodating the latter's request for an extension of
the insurance coverage, notwithstanding that it was then under no legal
obligation to do so.
Private respondent, on the other hand, argued that when it appealed its
case to the Court of Appeals, petitioner did not raise as an issue the award of
exemplary damages. It cannot now, for the first time, raise the same before
this Court. Likewise, petitioner cannot submit for the first time on appeal its
argument that it was wrong for the Court of Appeals to have ruled the way it
did based on facts that would need inquiry into the evidence. Even if inquiry
into the facts were possible, such was not necessary because the coverage
as ruled upon by the Court of Appeals is evident from the very terms of the
policies.
It also argued that petitioner, being the sole author of the policies, "arrests"
should be strictly interpreted against it because the rule is that any ambiguity
is to be taken contra proferentum. Risk policies should be construed
reasonably and in a manner as to make effective the intentions and
expectations of the parties. It added that the policies clearly stipulate that they
cover the risks of non-delivery of an entire package and that it was petitioner
itself that invited and granted the extensions and collected premiums thereon.
 The resolution of this controversy hinges on the interpretation of the
"Perils" clause of the subject policies in relation to the excluded risks or
warranty specifically stated therein.
By way of a historical background, marine insurance developed as an all-
risk coverage, using the phrase "perils of the sea" to encompass the wide and
varied range of risks that were covered. The subject policies contain the
[3]

"Perils" clause which is a standard form in any marine insurance policy. Said
clause reads:

"Touching the adventures which the said MALAYAN INSURANCE CO., are content
to bear, and to take upon them in this voyage; they are of the Seas; Men-of-War, Fire,
Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart,
Suprisals, Takings of the Sea, Arrests, Restraints and Detainments of all Kings,
Princess and Peoples, of what Nation, condition, or quality soever, Barratry of the
Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come
to hurt, detriment, or damage of the said goods and merchandise or any part thereof .
AND in case of any loss or misfortune it shall be lawful to the ASSURED, their
factors, servants and assigns, to sue, labour, and travel for, in and about the defence,
safeguards, and recovery of the said goods and merchandises, and ship, & c., or any
part thereof, without prejudice to this INSURANCE; to the charges whereof the said
COMPANY, will contribute according to the rate and quantity of the sum herein
INSURED. AND it is expressly declared and agreed that no acts of the Insurer or
Insured in recovering, saving, or preserving the Property insured shall be considered
as a Waiver, or Acceptance of Abandonment. And it is agreed by the said COMPANY,
that this writing or Policy of INSURANCE shall be of as much Force and Effect as
the surest Writing or Policy of INSURANCE made in LONDON. And so the said
MALAYAN INSURANCE COMPANY, INC., are contented, and do hereby promise
and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his
or their Executors, Administrators, or Assigns, for the true Performance of the
Premises; confessing themselves paid the Consideration due unto them for this
INSURANCE at and after the rate arranged." (Underscoring supplied)

The exception or limitation to the "Perils" clause and the "All other perils"
clause in the subject policies is specifically referred to as Clause 12 called the
"Free from Capture & Seizure Clause" or the F.C. & S. Clause which reads,
thus:

"Warranted free of capture, seizure, arrest, restraint or detainment, and the

consequences thereof or of any attempt thereat; also from the consequences of
hostilities and warlike operations, whether there be a declaration of war or not; but
this warranty shall not exclude collision, contact with any fixed or floating object
(other than a mine or torpedo), stranding, heavy weather or fire unless caused directly
(and independently of the nature of the voyage or service which the vessel concerned
or, in the case of a collision, any other vessel involved therein is performing) by a
hostile act by or against a belligerent power and for the purpose of this warranty
'power' includes any authorities maintaining naval, military or air forces in association
with power.

Further warranted free from the consequences of civil war, revolution, insurrection, or
civil strike arising therefrom or piracy.

Should Clause 12 be deleted, the relevant current institute war clauses shall be
deemed to form part of this insurance." (Underscoring supplied)

However, the F. C. & S. Clause was deleted from the policies.

Consequently, the Institute War Clauses (Cargo) was deemed incorporated
which, in subsection 1.1 of Section 1, provides:

"1. This insurance covers:

1.1 The risks excluded from the standard form of English Marine Policy by the clause
warranted free of capture, seizure, arrest, restraint or detainment, and the
consequences thereof of hostilities or warlike operations, whether there be a
declaration of war or not; but this warranty shall not exclude collision, contact with
any fixed or floating object (other than a mine or torpedo), stranding, heavy weather
or fire unless caused directly (and independently of the nature on voyage or service
which the vessel concerned or, in the case of a collision any other vessel involved
therein is performing) by a hostile act by or against a belligerent power; and for the
purpose of this warranty 'power' includes any authority maintaining naval, military or
air forces in association with a power. Further warranted free from the consequences
of civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or
piracy."

According to petitioner, the automatic incorporation of subsection 1.1 of

section 1 of the Institute War Clauses (Cargo), among others, means that any
"capture, arrest, detention, etc." pertained exclusively to warlike operations if
this Court strictly construes the heading of the said Clauses. However, it also
claims that the parties intended to include arrests, etc. even if it were not the
result of hostilities or warlike operations. It further claims that on the strength
of jurisprudence on the matter, the term "arrests" would only cover those
arising from political or executive acts, concluding that whether private
respondent's claim is anchored on subsection 1.1 of Section 1 of the Institute
War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by
judicial authorities is an excluded risk.
[4]

This Court cannot agree with petitioner's assertions, particularly when it

alleges that in the "Perils" Clause, it assumed the risk of arrest caused solely
by executive or political acts of the government of the seizing state and
thereby excludes "arrests" caused by ordinary legal processes, such as in the
instant case.
With the incorporation of subsection 1.1 of Section 1 of the Institute War
Clauses, however, this Court agrees with the Court of Appeals and the private
respondent that "arrest" caused by ordinary judicial process is deemed
included among the covered risks. This interpretation becomes inevitable
when subsection 1.1 of Section 1 of the Institute War Clauses provided that
"this insurance covers the risks excluded from the Standard Form of English
Marine Policy by the clause 'Warranted free of capture, seizure, arrest, etc. x x
x'" or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by ordinary
judicial process is also a risk excluded from the Standard Form of English
Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary
judicial process is not included in the covered risk simply because the F.C. &
S. Clause under the Institute War Clauses can only be operative in case of
hostilities or warlike operations on account of its heading "Institute War
Clauses." This Court agrees with the Court of Appeals when it held that ". . .
Although the F.C. & S. Clause may have originally been inserted in marine
policies to protect against risks of war, (see generally G. Gilmore & C. Black,
The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation in
recent years to include seizure or detention by civil authorities seems
consistent with the general purposes of the clause, x x x" In fact, petitioner
[5]

itself averred that subsection 1.1 of Section 1 of the Institute War Clauses
included "arrest" even if it were not a result of hostilities or warlike
operations. In this regard, since what was also excluded in the deleted F.C. &
[6]

S. Clause was "arrest" occasioned by ordinary judicial process, logically, such

"arrest" would now become a covered risk under subsection 1.1 of Section 1
of the Institute War Clauses, regardless of whether or not said "arrest" by civil
authorities occurred in a state of war.
Petitioner itself seems to be confused about the application of the F.C. & S.
Clause as well as that of subsection 1.1 of Section 1 of the Institute War
Clauses (Cargo). It stated that "the F.C. & S. Clause was "originally
incorporated in insurance policies to eliminate the risks of warlike operations".
It also averred that the F.C. & S. Clause applies even if there be no war or
warlike operations x x x" In the same vein, it contended that subsection 1.1 of
[7]

Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to

warlike operations" and yet it also stated that "the deletion of the F.C. & S.
Clause and the consequent incorporation of subsection 1.1 of Section 1 of the
Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a
result of hostilities or warlike operations."[8]

This Court cannot help the impression that petitioner is overly straining its
interpretation of the provisions of the policy in order to avoid being liable for
private respondent's claim.
This Court finds it pointless for petitioner to maintain its position that it only
insures risks of "arrest" occasioned by executive or political acts of
government which is interpreted as not referring to those caused by ordinary
legal processes as contained in the "Perils" Clause; deletes the F.C. & S.
Clause which excludes risks of arrest occasioned by executive or political acts
of the government and naturally, also those caused by ordinary legal
processes; and, thereafter incorporates subsection 1.1 of Section 1 of the
Institute War Clauses which now includes in the coverage risks of arrest due
to executive or political acts of a government but then still excludes "arrests"
occasioned by ordinary legal processes when subsection 1.1 of Section 1 of
said Clauses should also have included "arrests" previously excluded from the
coverage of the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural and
forced, as to lead to an absurd conclusion or to render the policy nonsensical,
should, by all means, be avoided. Likewise, it must be borne in mind that
[9]

such contracts are invariably prepared by the companies and must be

accepted by the insured in the form in which they are written. Any [10]

construction of a marine policy rendering it void should be avoided. Such [11]

policies will, therefore, be construed strictly against the company in order to

avoid a forfeiture, unless no other result is possible from the language used. [12]

If a marine insurance company desires to limit or restrict the operation of

the general provisions of its contract by special proviso, exception, or
exemption, it should express such limitation in clear and unmistakable
language. Obviously, the deletion of the F.C. & S. Clause and the
[13]

consequent incorporation of subsection 1.1 of Section 1 of the Institute War

Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned by
ordinary judicial process was expressly indicated as an exception in the
subject policies, there would have been no controversy with respect to the
interpretation of the subject clauses.
 Be that as it may, exceptions to the general coverage are construed most
strongly against the company. Even an express exception in a policy is to be
[14]

construed against the underwriters by whom the policy is framed, and for
whose benefit the exception is introduced. [15]

An insurance contract should be so interpreted as to carry out the purpose

for which the parties entered into the contract which is, to insure against risks
of loss or damage to the goods. Such interpretation should result from the
natural and reasonable meaning of language in the policy. Where restrictive
[16]

provisions are open to two interpretations, that which is most favorable to the
insured is adopted. [17]

Indemnity and liability insurance policies are construed in accordance with

the general rule of resolving any ambiguity therein in favor of the insured,
where the contract or policy is prepared by the insurer. A contract of[18]

insurance, being a contract of adhesion, par excellence, any ambiguity therein

should be resolved against the insurer; in other words, it should be construed
liberally in favor of the insured and strictly against the insurer. Limitations of
liability should be regarded with extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance with its
obligations. [19]

In view of the foregoing, this Court sees no need to discuss the other
issues presented.
WHEREFORE, the petition for review is DENIED and the decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. L-28046 May 16, 1983

PHILIPPINE NATIONAL BANK, plaintiff-appellant,

vs.
INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO,
CEFERINO VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO, AURELIO VALENCIA,
LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and BONIFACIO
LAUREANA, defendants-appellees.

Basa, Ilao, del Rosario Diaz for plaintiff-appellant.

Laurel Law Office for Dimayuga.

Tomas Yumol for Fajardo, defendant-appellee.

PLANA, J.:

Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of First Instance
of Manila (Branch XX) in its Civil Case No. 46741 dismissing PNB's complaint against several
solidary debtors for the collection of a sum of money on the ground that one of the defendants
(Ceferino Valencia) died during the pendency of the case (i.e., after the plaintiff had presented its
evidence) and therefore the complaint, being a money claim based on contract, should be
prosecuted in the testate or intestate proceeding for the settlement of the estate of the deceased
defendant pursuant to Section 6 of Rule 86 of the Rules of Court which reads:

SEC. 6. Solidary obligation of decedent. the obligation of the decedent is solidary

with another debtor, the claim shall be filed against the decedent as if he were the
only debtor, without prejudice to the right of the estate to recover contribution from
the other debtor. In a joint obligation of the decedent, the claim shall be confined to
the portion belonging to him.

The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of
its solidary debtors under Article 1216 of the Civil Code

ART. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall not
be an obstacle to those which may subsequently be directed against the others, so
long as the debt has not been fully collected.

The sole issue thus raised is whether in an action for collection of a sum of money based on contract
against all the solidary debtors, the death of one defendant deprives the court of jurisdiction to
proceed with the case against the surviving defendants.

It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek
satisfaction of his credit from one, some or all of his solidary debtors, as he deems fit or convenient
for the protection of his interests; and if, after instituting a collection suit based on contract against
some or all of them and, during its pendency, one of the defendants dies, the court retains
jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants.
Thus in Manila Surety & Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court ruled:

Construing Section 698 of the Code of Civil Procedure from whence the aforequoted
provision (Sec. 6, Rule 86) was taken, this Court held that where two persons are
bound in solidum for the same debt and one of them dies, the whole indebtedness
can be proved against the estate of the latter, the decedent's liability being absolute
and primary; and if the claim is not presented within the time provided by the rules,
the same will be barred as against the estate. It is evident from the foregoing that
Section 6 of Rule 87 (now Rule 86) provides the procedure should the creditor desire
to go against the deceased debtor, but there is certainly nothing in the said provision
making compliance with such procedure a condition precedent before an ordinary
action against the surviving solidary debtors, should the creditor choose to demand
payment from the latter, could be entertained to the extent that failure to observe the
same would deprive the court jurisdiction to take cognizance of the action against the
surviving debtors. Upon the other hand, the Civil Code expressly allows the creditor
to proceed against any one of the solidary debtors or some or all of them
simultaneously. There is, therefore, nothing improper in the creditor's filing of an
action against the surviving solidary debtors alone, instead of instituting a proceeding
 for the settlement of the estate of the deceased debtor wherein his claim could be
filed.

Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice
Makasiar, reiterated the doctrine.

A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court

reveals that nothing therein prevents a creditor from proceeding
against the surviving solidary debtors. Said provision merely sets up
the procedure in enforcing collection in case a creditor chooses to
pursue his claim against the estate of the deceased solidary, debtor.

It is crystal clear that Article 1216 of the New Civil Code is the
applicable provision in this matter. Said provision gives the creditor
the right to 'proceed against anyone of the solidary debtors or some
or all of them simultaneously.' The choice is undoubtedly left to the
solidary, creditor to determine against whom he will enforce collection.
In case of the death of one of the solidary debtors, he (the creditor)
may, if he so chooses, proceed against the surviving solidary debtors
without necessity of filing a claim in the estate of the deceased
debtors. It is not mandatory for him to have the case dismissed
against the surviving debtors and file its claim in the estate of the
deceased solidary debtor . . .

As correctly argued by petitioner, if Section 6, Rule 86 of the Revised

Rules of Court were applied literally, Article 1216 of the New Civil
Code would, in effect, be repealed since under the Rules of Court,
petitioner has no choice but to proceed against the estate of Manuel
Barredo only. Obviously, this provision diminishes the Bank's right
under the New Civil, Code to proceed against any one, some or all of
the solidary debtors. Such a construction is not sanctioned by the
principle, which is too well settled to require citation, that a
substantive law cannot be amended by a procedural rule. Otherwise
stared, Section 6, Rule 86 of the Revised Rules of Court cannot be
made to prevail over Article 1216 of the New Civil Code, the former
being merely procedural, while the latter, substantive.

WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is
hereby set aside in respect of the surviving defendants; and the case is remanded to the
corresponding Regional Trial Court for proceedings. proceedings. No costs.

SO ORDERED.

THIRD DIVISION
 ROLITO CALANG and G.R. No. 190696
PHILTRANCO SERVICE
ENTERPRISES, INC., Present:
Petitioners,

CARPIO MORALES, J., Chairperson,

BRION,
- versus -
BERSAMIN,

ABAD, and

VILLARAMA, JR., JJ.

PEOPLE OF THE PHILIPPINES,

Respondent. -- -
Promulgated:

August 3, 2010

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

RESOLUTION

BRION, J.:

We resolve the motion for reconsideration filed by the petitioners,

Philtranco Service Enterprises, Inc. (Philtranco) and Rolito Calang, to challenge our
Resolution of February 17, 2010. Our assailed Resolution denied the petition for
review on certiorari for failure to show any reversible error sufficient to warrant
the exercise of this Courts discretionary appellate jurisdiction.
Antecedent Facts
At around 2:00 p.m. of April 22, 1989, Rolito Calang was driving Philtranco Bus No.
7001, owned by Philtranco along Daang Maharlika Highway in Barangay Lambao,
Sta. Margarita, Samar when its rear left side hit the front left portion of a Sarao
jeep coming from the opposite direction. As a result of the collision, Cresencio
Pinohermoso, the jeeps driver, lost control of the vehicle, and bumped and killed
Jose Mabansag, a bystander who was standing along the highways shoulder. The
jeep turned turtle three (3) times before finally stopping at about 25 meters from
the point of impact. Two of the jeeps passengers, Armando Nablo and an
unidentified woman, were instantly killed, while the other passengers sustained
serious physical injuries.

The prosecution charged Calang with multiple homicide, multiple serious physical
injuries and damage to property thru reckless imprudence before the Regional
Trial Court (RTC), Branch 31, Calbayog City. The RTC, in its decision dated May 21,
2001, found Calang guilty beyond reasonable doubt of reckless imprudence
resulting to multiple homicide, multiple physical injuries and damage to property,
and sentenced him to suffer an indeterminate penalty of thirty days of arresto
menor, as minimum, to four years and two months of prision correccional, as
maximum. The RTC ordered Calang and Philtranco, jointly and severally, to
pay P50,000.00 as death indemnity to the heirs of Armando; P50,000.00 as death
indemnity to the heirs of Mabansag; and P90,083.93 as actual damages to the
private complainants.

The petitioners appealed the RTC decision to the Court of Appeals (CA),
docketed as CA-G.R. CR No. 25522. The CA, in its decision dated November 20,
2009, affirmed the RTC decision in toto. The CA ruled that petitioner Calang failed
to exercise due care and precaution in driving the Philtranco bus. According to the
CA, various eyewitnesses testified that the bus was traveling fast and encroached
into the opposite lane when it evaded a pushcart that was on the side of the
road. In addition, he failed to slacken his speed, despite admitting that he had
already seen the jeep coming from the opposite direction when it was still half a
kilometer away. The CA further ruled that Calang demonstrated a reckless
attitude when he drove the bus, despite knowing that it was suffering from loose
compression, hence, not roadworthy.

The CA added that the RTC correctly held Philtranco jointly and severally liable
with petitioner Calang, for failing to prove that it had exercised the diligence of a
good father of the family to prevent the accident.

The petitioners filed with this Court a petition for review on certiorari. In
our Resolution dated February 17, 2010, we denied the petition for failure to
sufficiently show any reversible error in the assailed decision to warrant the
exercise of this Courts discretionary appellate jurisdiction.

The Motion for Reconsideration

In the present motion for reconsideration, the petitioners claim that there
was no basis to hold Philtranco jointly and severally liable with Calang because
the former was not a party in the criminal case (for multiple homicide with
multiple serious physical injuries and damage to property thru reckless
imprudence) before the RTC.

The petitioners likewise maintain that the courts below overlooked several
relevant facts, supported by documentary exhibits, which, if considered, would
have shown that Calang was not negligent, such as the affidavit and testimony of
witness Celestina Cabriga; the testimony of witness Rodrigo Bocaycay; the traffic
accident sketch and report; and the jeepneys registration receipt. The petitioners
also insist that the jeeps driver had the last clear chance to avoid the collision.

We partly grant the motion.

Liability of Calang

We see no reason to overturn the lower courts finding on Calangs

culpability. The finding of negligence on his part by the trial court, affirmed by the
CA, is a question of fact that we cannot pass upon without going into
factual matters touching on the finding of negligence. In petitions for review
on certiorari under Rule 45 of the Revised Rules of Court, this Court is limited to
reviewing only errors of law, not of fact, unless the factual findings complained of
are devoid of support by the evidence on record, or the assailed judgment is
based on a misapprehension of facts.

Liability of Philtranco

We, however, hold that the RTC and the CA both erred in holding
Philtranco jointly and severally liable with Calang. We emphasize that Calang was
charged criminally before the RTC. Undisputedly, Philtranco was not a direct party
in this case. Since the cause of action against Calang was based on delict, both the
RTC and the CA erred in holding Philtranco jointly and severally liable with Calang,
based on quasi-delict under Articles 2176[1] and 2180[2] of the Civil Code. Articles
2176 and 2180 of the Civil Code pertain to the vicarious liability of an employer
for quasi-delicts that an employee has committed. Such provision of law does not
apply to civil liability arising from delict.
 If at all, Philtrancos liability may only be subsidiary. Article 102 of the Revised
Penal Code states the subsidiary civil liabilities of innkeepers, tavernkeepers and
proprietors of establishments, as follows:

In default of the persons criminally liable, innkeepers, tavernkeepers, and

any other persons or corporations shall be civilly liable for crimes committed in
their establishments, in all cases where a violation of municipal ordinances or
some general or special police regulations shall have been committed by them or
their employees.

Innkeepers are also subsidiary liable for the restitution of goods taken by
robbery or theft within their houses from guests lodging therein, or for the
payment of the value thereof, provided that such guests shall have notified in
advance the innkeeper himself, or the person representing him, of the deposit of
such goods within the inn; and shall furthermore have followed the directions
which such innkeeper or his representative may have given them with respect to
the care of and vigilance over such goods. No liability shall attach in case of
robbery with violence against or intimidation of persons unless committed by the
innkeepers employees.

The foregoing subsidiary liability applies to employers, according to Article

103 of the Revised Penal Code, which reads:
The subsidiary liability established in the next preceding article shall also
apply to employers, teachers, persons, and corporations engaged in any kind of
industry for felonies committed by their servants, pupils, workmen, apprentices,
or employees in the discharge of their duties.

The provisions of the Revised Penal Code on subsidiary liability Articles 102
and 103are deemed written into the judgments in cases to which they are
applicable. Thus, in the dispositive portion of its decision, the trial court need not
expressly pronounce the subsidiary liability of the employer.[3] Nonetheless,
before the employers subsidiary liability is enforced, adequate evidence must
exist establishing that (1) they are indeed the employers of the convicted
employees; (2) they are engaged in some kind of industry; (3) the crime was
committed by the employees in the discharge of their duties; and (4) the
execution against the latter has not been satisfied due to insolvency. The
determination of these conditions may be done in the same criminal action in
which the employees liability, criminal and civil, has been pronounced, in a
hearing set for that precise purpose, with due notice to the employer, as part of
the proceedings for the execution of the judgment.[4]

WHEREFORE, we PARTLY GRANT the present motion. The Court of Appeals

decision that affirmed in toto the RTC decision, finding Rolito Calang guilty beyond
reasonable doubt of reckless imprudence resulting in multiple homicide, multiple
serious physical injuries and damage to property, is AFFIRMED, with
the MODIFICATION that Philtrancos liability should only be subsidiary. No costs.

SO ORDERED.
G.R. No. 204866 January 21, 2015

RUKS KONSULT AND CONSTRUCTION, Petitioner,

vs.
ADWORLD SIGN AND ADVERTISING CORPORATION* and TRANSWORLD MEDIA ADS,
INC., Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated November 16, 2011 and the
Resolution3dated December 10, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 94693 which
affirmed the Decision4dated August 25, 2009 of the Regional Trial Court of Makati City, Branch 142
(RTC) in Civil Case No. 03-1452 holding, inter alia, petitioner Ruks Konsult and Construction (Ruks)
and respondent Transworld Media Ads, Inc. (Transworld) jointly and severally liable to respondent
Adworld Sign and Advertising Corporation (Adworld) for damages.

The Facts

The instant case arose from a complaint for damages filed by Adworld against Transworld and
Comark International Corporation (Comark) before the RTC.5 In the complaint, Adworld alleged that
it is the owner of a 75 ft. x 60 ft. billboard structure located at EDSA Tulay, Guadalupe, Barangka
Mandaluyong, which was misaligned and its foundation impaired when, on August 11, 2003, the
adjacent billboard structure owned by Transworld and used by Comark collapsed and crashed
against it. Resultantly, on August 19, 2003, Adworld sent Transworld and Comark a letter
demanding payment for the repairs of its billboard as well asloss of rental income. On August 29,
2003, Transworld sent its reply, admitting the damage caused by its billboard structure on Adworlds
billboard, but nevertheless, refused and failed to pay the amounts demanded by Adworld. As
Adworlds final demand letter also went unheeded, it was constrained to file the instant complaint,
praying for damages in the aggregate amount of 474,204.00, comprised of 281,204.00 for
materials, 72,000.00 for labor, and 121,000.00 for indemnity for loss of income.6
In its Answer with Counterclaim, Transworld averred that the collapse of its billboard structure was
due to extraordinarily strong winds that occurred instantly and unexpectedly, and maintained that the
damage caused to Adworlds billboard structure was hardly noticeable. Transworld likewise filed a
Third-Party Complaint against Ruks, the company which built the collapsed billboard structure in the
formers favor. It was alleged therein that the structure constructed by Ruks had a weak and poor
1w phi1

foundation not suited for billboards, thus, prone to collapse, and as such, Ruks should ultimately be
held liable for the damages caused to Adworlds billboard structure.7

For its part, Comark denied liability for the damages caused to Adworlds billboard structure,
maintaining that it does not have any interest on Transworlds collapsed billboard structure as it only
contracted the use of the same. In this relation, Comark prayed for exemplary damages from
Transworld for unreasonably includingit as a party-defendant in the complaint.8

Lastly, Ruks admitted that it entered into a contract with Transworld for the construction of the
latters billboard structure, but denied liability for the damages caused by its collapse. It contended
that when Transworld hired its services, there was already an existing foundation for the billboard
and that it merely finished the structure according to the terms and conditions of its contract with the
latter.9

The RTC Ruling

In a Decision10 dated August 25, 2009, the RTC ultimately ruled in Adworlds favor, and accordingly,
declared, inter alia, Transworld and Ruks jointly and severally liable to Adworld in the amount of
474,204.00 as actual damages, with legal interest from the date of the filing of the complaint until
full payment thereof, plus attorneys fees in the amount of 50,000.00.11 The RTC found both
Transworld and Ruks negligent in the construction of the collapsed billboard as they knew that the
foundation supporting the same was weak and would pose danger to the safety of the motorists and
the other adjacent properties, such as Adworlds billboard, and yet, they did not do anything to
remedy the situation.12 In particular, the RTC explained that Transworld was made aware by Ruks
that the initial construction of the lower structure of its billboard did not have the proper foundation
and would require additional columns and pedestals to support the structure. Notwithstanding,
however, Ruks proceeded with the construction of the billboards upper structure and merely
assumed that Transworld would reinforce its lower structure.13 The RTC then concluded that these
negligent acts were the direct and proximate cause of the damages suffered by Adworlds billboard.14

Aggrieved, both Transworld and Ruks appealed to the CA. In a Resolution dated February 3, 2011,
the CA dismissed Transworlds appeal for its failure to file an appellants brief on time.15 Transworld
elevated its case before the Court, docketed as G.R. No. 197601.16 However, in a Resolution17 dated
November 23, 2011, the Court declared the case closed and terminated for failure of Transworld to
file the intended petition for review on certiorariwithin the extended reglementary period.
Subsequently, the Court issued an Entry of Judgment18 dated February 22, 2012 in G.R. No. 197601
declaring the Courts November 23, 2011 Resolution final and executory.

The CA Ruling

In a Decision19 dated November 16, 2011, the CA denied Rukss appeal and affirmed the ruling of the
RTC. It adhered to the RTCs finding of negligence on the part of Transworld and Ruks which
brought about the damage to Adworlds billboard. It found that Transworld failed to ensure that Ruks
will comply with the approved plans and specifications of the structure, and that Ruks continued to
install and finish the billboard structure despite the knowledge that there were no adequate columns
to support the same.20
Dissatisfied, Ruks moved for reconsideration,21 which was, however, denied in a Resolution22 dated
December 10, 2012,hence, this petition.

On the other hand, Transworld filed another appeal before the Court, docketed as G.R. No.
205120.23 However, the Court denied outright Transworlds petition in a Resolution24 dated April 15,
2013, holding that the same was already bound by the dismissal of its petition filed in G.R. No.
197601.

The Issue Before the Court

The primordial issue for the Courts resolution is whether or not the CA correctly affirmed the ruling
of the RTC declaring Ruks jointly and severally liable with Transworld for damages sustained by
Adworld.

The Courts Ruling

The petition is without merit.

At the outset, it must be stressed that factual findings of the RTC, when affirmed by the CA, are
entitled to great weight by the Court and are deemed final and conclusive when supported by the
evidence on record.25 Absent any exceptions to this rule such as when it is established that the trial
court ignored, overlooked, misconstrued, or misinterpreted cogent facts and circumstances that, if
considered, would change the outcome of the case26 such findings must stand.

After a judicious perusal of the records, the Court sees no cogent reason to deviate from the findings
of the RTC and the CA and their uniform conclusion that both Transworld and Ruks committed acts
resulting in the collapse of the formers billboard, which in turn, caused damage to the adjacent
billboard of Adworld.

Jurisprudence defines negligence as 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.27 It is the failure to observe
for the protection of the interest of another person that degree of care, precaution, and vigilance
which the circumstances justly demand, whereby such other person suffers injury.28

In this case, the CA correctly affirmed the RTCs finding that Transworlds initial construction of its
billboards lower structure without the proper foundation, and that of Rukss finishing its upper
structure and just merely assuming that Transworld would reinforce the weak foundation are the two
(2) successive acts which were the direct and proximate cause of the damages sustained by
Adworld. Worse, both Transworld and Ruks were fully aware that the foundation for the formers
billboard was weak; yet, neither of them took any positive step to reinforce the same. They merely
relied on each others word that repairs would be done to such foundation, but none was done at all.
Clearly, the foregoing circumstances show that both Transworld and Ruks are guilty of negligence in
the construction of the formers billboard, and perforce, should be held liable for its collapse and the
resulting damage to Adworlds billboard structure. As joint tortfeasors, therefore, they are solidarily
liable to Adworld. Verily, "[j]oint tortfeasors are those who command, instigate, promote, encourage,
advise, countenance, cooperate in, aid or abet the commission of a tort, or approve of it after it is
done, if done for their benefit. They are also referred to as those who act together in committing
wrong or whose acts, if independent of each other, unite in causing a single injury. Under Article
219429 of the Civil Code, joint tortfeasors are solidarily liable for the resulting damage. In other words,
joint tortfeasors are each liable as principals, to the same extent and in the same manner as if they
had performed the wrongful act themselves."30 The Courts pronouncement in People v. Velasco31 is
instructive on this matter, to wit:32

Where several causes producing an injury are concurrent and each is an efficient cause without
which the injury would not have happened, the injury may be attributed to all or any of the causes
and recovery may be had against any or all of the responsible persons although under the
circumstances of the case, it may appear that one of them was more culpable, and that the duty
owed by them to the injured person was not same. No actor's negligence ceases to be a proximate
cause merely because it does not exceed the negligence of other actors. Each wrongdoer is
responsible for the entire result and is liable as though his acts were the sole cause of the injury.

There is no contribution between joint [tortfeasors] whose liability is solidary since both of them are
liable for the total damage. Where the concurrent or successive negligent acts or omissions of two
1wphi1

or more persons, although acting independently, are in combination the direct and proximate cause
of a single injury to a third person, it is impossible to determine in what proportion each contributed
to the injury and either of them is responsible for the whole injury. x x x. (Emphases and
underscoring supplied)

In conclusion, the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and severally
liable with Transworld for damages sustained by Adworld.

WHEREFORE, the petition is DENIED. The Decision dated November 16, 2011 and the Resolution
dated December 10, 2012 of the Court of Appeals in CA-G.R. CV No. 94693 are hereby AFFIRMED.

SO ORDERED.

G.R. No. L-28497 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
FAUSTINO ESPIRITU, defendant-appellant.

------------------------------

G.R. No. L-28498 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
FAUSTINO ESPIRITU, defendant-appellant, and
ROSARIO ESPIRITU, intervenor-appellant.

Ernesto Zaragoza and Simeon Ramos for defendant-appellant.

Benito Soliven and Jose Varela Calderon for intervenor-appellant.
B. Francisco for appellee.

AVANCEA, C. J.:

These two cases, Nos. 28497 and 28948, were tried together.
It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino Espiritu
purchased of the plaintiff corporation a two-ton White truck for P11,983.50, paying P1,000 down to
apply on account of this price, and obligating himself to pay the remaining P10,983.50 within the
periods agreed upon. To secure the payment of this sum, the defendants mortgaged the said truck
purchased and, besides, three others, two of which are numbered 77197 and 92744 respectively,
and all of the White make (Exhibit A). These two trucks had been purchased from the same plaintiff
and were fully paid for by the defendant and his brother Rosario Espiritu. The defendant failed to pay
P10,477.82 of the price secured by this mortgage.

In connection with case 28498, it appears that on February 18, 1925 the defendant bought a one-
ton White truck of the plaintiff corporation for the sum of P7,136.50, and after having deducted the
P500 cash payment and the 12 per cent annual interest on the unpaid principal, obligated himself to
make payment of this sum within the periods agreed upon. To secure this payment the defendant
mortgaged to the plaintiff corporation the said truck purchased and two others, numbered 77197 and
92744, respectively, the same that were mortgaged in the purchase of the other truck referred to in
the other case. The defendant failed to pay P4,208.28 of this sum.

In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the
price at the executon of the contracts, and in case of non-payment of the total debt upon its maturity,
25 per cent thereon, as penalty.

In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff,
the defendant at the same time also signed a promissory note solidarily with his brother Rosario
Espiritu for the several sums secured by the two mortgages (Exhibits B and D).

Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive owner of the
two White trucks Nos. 77197 and 92744, which appear to have been mortgaged by the defendants
to the plaintiff.
lawphi1.net

While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of
the mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation
charges to Manila, the net sum of P3,269.58.

The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case
28497 the sum of P7,732.09 with interest at the rate of 12 per cent per annum from May 1, 1926
until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial court ordered
the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per
annum from December 1, 1925 until fully paid, and 25 per cent thereon as penalty.

The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the
defendant signed the mortgage deeds these trucks were not included in those documents, and were
only put in later, without defendant's knowledge. But there is positive proof that they were included at
the time the defendant signed these documents. Besides, there were presented two of defendant's
letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction,
acquiescing in the inclusion of all his White trucks already paid for, in the mortgage (Exhibit H-I).

Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos.
77197 and 92744 to the intervenor, and that as the latter did not sign the mortgage deeds, such
trucks cannot be considered as mortgaged. But the evidence shows that while the intervenor
Rosario Espiritu did not sign the two mortgage deeds (Exhibits A and C), yet, together with the
defendants Faustino Espiritu, he signed the two promissory notes (Exhibits B and D) secured by
these two mortgages. All these instruments were executed at the same time, and when the trucks
77197 and 92744 were included in the mortgages, the intervenor Rosario Espiritu was aware of it
and consented to such inclusion. These facts are supported by the testimony of Bachrach, manager
of the plaintiff corporation, of Agustin Ramirez, who witnessed the execution of all these documents,
and of Angel Hidalgo, who witnessed the execution of Exhibits B and D.

We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory notes
Exhibits B and C to be sufficient to overthrow this evidence. A comparison of his genuine signature
on Exhibit AA with those appearing on promissory notes B and C, convinces us that the latter are his
signatures. And such is our conclusion, notwithstanding the evidence presented to establish that on
the date when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor was in
Batac, Ilocos Norte, many miles away from Manila. And the fact that on the 24th of said month of
July, the plaintiff sent some truck accessory parts by rail to Ilocos for the intervenor does not
necessarily prove that the latter could not have been in Manila on the 25th of that month.

In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197
and 92744 and consented to the mortgage of the same, it is immaterial whether he was or was not
the exclusive owner thereof.

It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per
cent per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of
the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such
an agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not
include the interest, and which may be demamded separetely. According to this, the penalty is not to
be added to the interest for the determination of whether the interest exceeds the rate fixed by the
law, since said rate was fixed only for the interest. But considering that the obligation was partly
performed, and making use of the power given to the court by article 1154 of the Civil Code, this
penalty is reduced to 10 per cent of the unpaid debt.

With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay
only 10 per cent thereon as penalty, the judgment appealed from is affired in all other respects
without special pronouncement as to costs. So ordered.

G.R. No. L-41093 October 30, 1978

ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA MILLAN, respondents.

Purugganan & Bersamin for petitioner.

Salvador N. Beltran for respondent.

MUOZ PALMA, J.:

This is a direct appeal on questions of law from a decision of the Court of First Instance of Rizal,
Branch XXXIV, presided by the Honorable Bernardo P. Pardo, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered commanding the defendant to register

the deed of absolute sale it had executed in favor of plaintiff with the Register of
 Deeds of Caloocan City and secure the corresponding title in the name of plaintiff
within ten (10) days after finality of this decision; if, for any reason, this not possible,
defendant is hereby sentenced to pay plaintiff the sum of P5,193.63 with interest at 4%
per annum from June 22, 1972 until fully paid.

In either case, defendant is sentenced to pay plaintiff nominal damages in the

amount of P20,000.00 plus attorney's fee in the amount of P5,000.00 and costs.

SO ORDERED.

Caloocan City, February 11, 1975. (rollo, p. 21)

Petitioner corporation questions the award for nominal damages of P20,000.00 and attorney's fee of
P5,000.00 which are allegedly excessive and unjustified.

In the Court's resolution of October 20, 1975, We gave due course to the Petition only as regards the
portion of the decision awarding nominal damages. 1

The following incidents are not in dispute:

In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner, agreed to sell to
private respondent Lolita Millan for and in consideration of the sum of P3,864.00, payable in
installments, a parcel of land containing an area of approximately 276 square meters, situated in
Barrio Camarin, Caloocan City, known as Lot No. 20, Block No. 11 of its Franville Subdivision. 2

Millan complied with her obligation under the contract and paid the installments stipulated therein,
the final payment having been made on December 22, 1971. The vendee made a total payment of
P5,193.63 including interests and expenses for registration of title.3

Thereafter, Lolita Millan made repeated demands upon the corporation for the execution of the final
deed of sale and the issuance to her of the transfer certificate of title over the lot. On March 2, 1973,
the parties executed a deed of absolute sale of the aforementioned parcel of land. The deed of
absolute sale contained, among others, this particular provision:

That the VENDOR further warrants that the transfer certificate of title of the above-
described parcel of land shall be transferred in the name of the VENDEE within the
period of six (6) months from the date of full payment and in case the VENDOR fails
to issue said transfer certificate of title, it shall bear the obligation to refund to the
VENDEE the total amount already paid for, plus an interest at the rate of 4% per
annum. (record on appeal, p. 9)

Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the
corporation failed to cause the issuance of the corresponding transfer certificate of title over the lot
sold to Millan, hence, the latter filed on August 14, 1974 a complaint for specific performance and
damages against Robes-Francisco Realty & Development Corporation in the Court of First Instance
of Rizal, Branch XXXIV, Caloocan City, docketed therein as Civil Case No. C-3268. 4

The complaint prayed for judgment (1) ordering the reformation of the deed of absolute sale; (2)
ordering the defendant to deliver to plaintiff the certificate of title over the lot free from any lien or
encumbrance; or, should this be not possible, to pay plaintiff the value of the lot which should not be
less than P27,600.00 (allegedly the present estimated value of the lot); and (3) ordering the
defendant to pay plaintiff damages, corrective and actual in the sum of P15 000.00. 5

The corporation in its answer prayed that the complaint be dismissed alleging that the deed of
absolute sale was voluntarily executed between the parties and the interest of the plaintiff was amply
protected by the provision in said contract for payment of interest at 4% per annum of the total
amount paid, for the delay in the issuance of the title. 6

At the pretrial conference the parties agreed to submit the case for decision on the pleadings after
defendant further made certain admissions of facts not contained in its answer. 7

Finding that the realty corporation failed to cause the issuance of the corresponding transfer
certificate of title because the parcel of land conveyed to Millan was included among other properties
of the corporation mortgaged to the GSIS to secure an obligation of P10 million and that the owner's
duplicate certificate of title of the subdivision was in the possession of the Government Service
Insurance System (GSIS), the trial court, on February 11, 1975, rendered judgment the dispositive
portion of which is quoted in pages 1 and 2 of this Decision. We hold that the trial court did not err in
awarding nominal damages; however, the circumstances of the case warrant a reduction of the
amount of P20,000.00 granted to private respondent Millan.

There can be no dispute in this case under the pleadings and the admitted facts that petitioner
corporation was guilty of delay, amounting to nonperformance of its obligation, in issuing the transfer
certificate of title to vendee Millan who had fully paid up her installments on the lot bought by her.
Article 170 of the Civil Code expressly provides that 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.

Petitioner contends that the deed of absolute sale executed between the parties stipulates that
should the vendor fail to issue the transfer certificate of title within six months from the date of full
payment, it shall refund to the vendee the total amount paid for with interest at the rate of 4% per
annum, hence, the vendee is bound by the terms of the provision and cannot recover more than
what is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which
provides that 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.

The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the
clause in question were to be considered as a penal clause. Nevertheless, for very obvious reasons,
said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil
Code, the vendee would be entitled to recover the amount paid by her with legal rate of interest
which is even more than the 4% provided for in the clause. 7-A

It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which
will preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work
to the advantage of petitioner corporation.

Unfortunately, the vendee, now private respondent, submitted her case below without presenting
evidence on the actual damages suffered by her as a result of the nonperformance of petitioner's
obligation under the deed of sale. Nonetheless, the facts show that the right of the vendee to acquire
title to the lot bought by her was violated by petitioner and this entitles her at the very least to
nominal damages.
The pertinent provisions of our Civil Code follow:

Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated or
recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered
by him.

Art. 2222. The court may award nominal damages in every obligation arising from
any source enumerated in article 1157, or in every case where any property right has
been invaded.

Under the foregoing provisions nominal damages are not intended for indemnification of loss
suffered but for the vindication or recognition of a right violated or invaded. They are recoverable
where some injury has been done the amount of which the evidence fails to show, the assessment
of damages being left to the discretion of the court according to the circumstances of the case. 8

It is true as petitioner claims that under American jurisprudence nominal damages by their very
nature are small sums fixed by the court without regard to the extent of the harm done to the injured
party.

It is generally held that a nominal damage is a substantial claim, if based upon the
violation of a legal right; in such case, the law presumes a damage, although actual
or compensatory damages are not proven; in truth nominal damages are damages in
name only and not in fact, and are allowed, not as an equivalent of a wrong inflicted,
but simply in recogniton of the existence of a technical injury. (Fouraker v. Kidd
Springs Boating and Fishing Club, 65 S. W. 2d 796-797, citing 17 C.J. 720, and a
number of authorities).9

In this jurisdiction, in Vda. de Medina, et al. v. Cresencia, et al. 1956, which was an action for
damages arising out of a vehicular accident, this Court had occasion to eliminate an award of
P10,000.00 imposed by way of nominal damages, the Court stating inter alia that the amount cannot,
in common sense, be demeed "nominal".10

In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court, however,
through then Justice Roberto Concepcion who later became Chief Justice of this Court, sustained an
award of P20,000.00 as nominal damages in favor of respnodent Cuenca. The Court there found
special reasons for considering P20,000.00 as "nominal". Cuenca who was the holder of a first class
ticket from Manila to Tokyo was rudely compelled by an agent of petitioner Airlines to move to the
tourist class notwithstanding its knowledge that Cuenca as Commissioner of Public Highways of the
Republic of the Philippines was travelling in his official capacity as a delegate of the country to a
conference in Tokyo." 11

Actually, as explained in the Court's decision in Northwest Airlines, there is no conflict between that
case and Medina, for in the latter, the P10,000.00 award for nominal damages was eliminated
principally because the aggrieved party had already been awarded P6,000.00 as compensatory
damages, P30,000.00 as moral damages and P10,000.00 as exemplary damages, and "nominal
damages cannot coexist with compensatory damages," while in the case of Commissioner Cuenca,
no such compensatory, moral, or exemplary damages were granted to the latter. 12

At any rate, the circumstances of a particular case will determine whether or not the amount
assessed as nominal damages is within the scope or intent of the law, more particularly, Article 2221
of the Civil Code.
In the situation now before Us, We are of the view that the amount of P20,000.00 is excessive. The
admitted fact that petitioner corporation failed to convey a transfer certificate of title to respondent
Millan because the subdivision property was mortgaged to the GSIS does not in itself show that
there was bad faith or fraud. Bad faith is not to be presumed. Moreover, there was the expectation of
the vendor that arrangements were possible for the GSIS to make partial releases of the subdivision
lots from the overall real estate mortgage. It was simply unfortunate that petitioner did not succeed in
that regard.

For that reason We cannot agree with respondent Millan Chat the P20,000.00 award may be
considered in the nature of exemplary damages.

In case of breach of contract, exemplary damages may be awarded if the guilty party acted in
wanton, fraudulent, reckless, oppressive or malevolent manner. 13 Furthermore, exemplary or
corrective damages are to be imposed by way of example or correction for the public good, only if
the injured party has shown that he is entitled to recover moral, temperate or compensatory
damages."

Here, respondent Millan did not submit below any evidence to prove that she suffered actual or
compensatory damages. 14

To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal
damages is fair and just under the following circumstances, viz: respondent Millan bought the lot
from petitioner in May, 1962, and paid in full her installments on December 22, 1971, but it was only
on March 2, 1973, that a deed of absolute sale was executed in her favor, and notwithstanding the
lapse of almost three years since she made her last payment, petitioner still failed to convey the
corresponding transfer certificate of title to Millan who accordingly was compelled to file the instant
complaint in August of 1974.

PREMISES CONSIDERED, We modify the decision of the trial court and reduce the nominal
damages to Ten Thousand Pesos (P10,000.00). In all other respects the aforesaid decision stands.

Without pronouncement as to costs.

G.R. No. L-26339 December 14, 1979

MARIANO C. PAMINTUAN, petitioner-appellant,

vs.
COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees.

V. E. del Rosario & Associates for appellant.

Sangco & Sangalang for private respondent.

AQUINO, J.:

This case is about the recovery compensatory, damages for breach of a contract of sale in addition
to liquidated damages.
Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he was ordered
to deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could not do so, to pay the
latter P100,559.28 as damages with six percent interest from the date of the filing of the complaint.
The facts and the findings of the Court of Appeals are as follows:

In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan
one thousand metric tons of white flint corn valued at forty-seven thousand United States dollars in
exchange for a collateral importation of plastic sheetings of an equivalent value.

By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd.
of Osaka, Japan in exchange for plastic sheetings. He contracted to sell the plastic sheetings to Yu
Ping Kun Co., Inc. for two hundred sixty-five thousand five hundred fifty pesos. The company
undertook to open an irrevocable domestic letter of credit for that amount in favor of Pamintuan.

It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its
bodegas in Manila or suburbs directly from the piers "within one month upon arrival of" the carrying
vessels. Any violation of the contract of sale would entitle the aggreived party to collect from the
offending party liquidated damages in the sum of ten thousand pesos (Exh. A).

On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka
Kaisha, Ltd. confirming the acceptance by Japanese suppliers of firm offers for the consignment to
Pamintuan of plastic sheetings valued at forty-seven thousand dollars. Acting on that information,
the company lost no time in securing in favor of Pamintuan an irrevocable letter of credit for two
hundred sixty-five thousand five hundred fifty pesos.

Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference
to the delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic
sheetings (p. 21, Record on Appeal).

On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan,
through Toyo Menka Kaisha, Ltd., the plastic sheetings in four shipments to wit: (1) Firm Offer No.
327 for 50,000 yards valued at $9,000; (2) Firm Offer No. 328 for 70,000 yards valued at $8,050; (3)
Firm Offers Nos. 329 and 343 for 175,000 and 18,440 yards valued at $22,445 and $2,305,
respectively, and (4) Firm Offer No. 330 for 26,000 yards valued at $5,200, or a total of 339,440
yards with an aggregate value of $47,000 (pp. 4-5 and 239-40, Record on Appeal).

The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments,
Pamintuan delivered to the company's warehouse only the following quantities of plastic sheetings:

November 11, 1960 140 cases, size 48 inches by 50 yards. November 14, 1960
258 cases out of 352 cases. November 15, 1960 11 cases out of 352 cases.
November 15, 1960 10 cases out of 100 cases. November 15, 1960 30 cases
out of 100 cases.

Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at
$5,200; (2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000
yards valued at $5,400 and (4) 83 cases containing 40,850 yards valued at $5,236.97. While the
plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc.
that he was in dire need of cash with which to pay his obligations to the Philippine National Bank.
Inasmuch as the computation of the prices of each delivery would allegedly be a long process,
Pamintuan requested that he be paid immediately.
Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the
price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value
thereof. The parties arrived at that figure by dividing the total price of P265,550 by 339,440 yards,
the aggregate quantity of the shipments.

After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87,
he refused to deliver the remainder of the shipments with a total value of P102,502.13 which were
covered by (i) Firm Offer No. 330, containing 26,000 yards valued at P29,380; (2) Firm Offer No. 343,
containing 18,440 yards valued at P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards
valued at P30,510 and (4) Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp.
243-2, Record on Appeal).

As justification for his refusal, Pamintuan said that the company failed to comply with the conditions
of the contract and that it was novated with respect to the price.

On December 2, 1960, the company filed its amended complaint for damages against Pamintuan.
After trial, the lower court rendered the judgment mentioned above but including moral damages.

The unrealized profits awarded as damages in the trial court's decision were computed as follows
(pp. 248-9, Record on Appeal):

(1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time
of delivery of Pl.75 a yard........................................................... P16,120.00

(2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20
per yard at the time of delivery......................................... 9,105.67

(3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70
per yard. 20,490.00

(4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of
P1.25 a yard at the time of delivery.............................................. 21,458.50 Total
unrealized profits....................... P67,174.17

The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards,
which the trial court regarded as an item of damages suffered by the company, was computed as
follows (p. 71, Record on Appeal):

Liquidation value of 224,150 yards at P0.7822 a

yard .............................................................................. P175,330.13

Actual peso value of 224,150 yards as per firm offers or as per

contract............................................163,047.87

Overpayment................................................................ P 12,282.26

To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment),
the trial court added (a) P10,000 as stipulated liquidated damages, (b) P10,000 as moral damages,
(c) Pl,102.85 as premium paid by the company on the bond of P102,502.13 for the issuance of the
writ of preliminary attachment and (d) P10,000 as attorney's fees, or total damages of P110,559.28)
p. 250, Record on Appeal). The Court of Appeals affirmed that judgment with the modification that
the moral damages were disallowed (Resolution of June 29, 1966).

Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that the contract
of sale between Pamintuan and the company was partly consummated. The company fulfilled its
obligation to obtain the Japanese suppliers' confirmation of their acceptance of firm offers totalling
$47,000. Pamintuan reaped certain benefits from the contract. Hence, he is estopped to repudiate it;
otherwise, he would unjustly enrich himself at the expense of the company.

The Court of Appeals found that the writ of attachment was properly issued. It also found that
Pamintuan was guilty of fraud because (1) he was able to make the company agree to change the
manner of paying the price by falsely alleging that there was a delay in obtaining confirmation of the
suppliers' acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in the
bonded warehouse of his brother and then required his brother to make him Pamintuan), his
attorney-in-fact so that he could control the disposal of the goods; (3) Pamintuan, as attorney-in-fact
of the warehouseman, endorsed to the customs broker the warehouse receipts covering the plastic
sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered to the
company.

The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting
another to accommodate him by agreeing to liquidate his deliveries on the basis of P0.7822 per yard,
irrespective of invoice value, on the pretense that he would deliver what in the first place he ought to
deliver anyway, when he knew all the while that he had no such intention, and in the process
delivered only the poorer or cheaper kind or those which he had predetermined to deliver and did not
conceal in his brother's name and thus deceived the unwary party into overpaying him the sum of P
1 2,282.26 for the said deliveries, and would thereafter refuse to make any further delivery in flagrant
violation of his plighted word, would now ask us to sanction his actuation" (pp. 61-62, Rollo).

The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to
recover only liquidated damages. That contention is based on the stipulation "that any violation of
the provisions of this contract (of sale) shall entitle the aggrieved party to collect from the offending
party liquidated damages in the sum of P10,000 ".

Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox
26 Phil. 588); that "in obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no stipulation to the
contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the
contrary in this case and that "liquidated damages are those agreed upon by the parties to a contract,
to be paid in case of breach thereof" (Art. 2226, Civil Code).

We hold that appellant's contention cannot be sustained because the second sentence of article
1226 itself provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the
fulfillment of the obligation". "Responsibility arising from fraud is demandable in all obligations" (Art.
1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for an damages which may be reasonably attributed to the non-performance of the
obligation" (Ibid, art. 2201).

The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not
make a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is
conclusive upon this Court.
There is no justification for the Civil Code to make an apparent distinction between penalty and
liquidated damages because the settled rule is that there is no difference between penalty and
liquidated damages insofar as legal results are concerned and that either may be recovered without
the necessity of proving actual damages and both may be reduced when proper (Arts. 1229, 2216
and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p.
251).

Castan Tobeas notes that the penal clause in an obligation has three functions: "1. Una funcion
coercitiva o de garantia, consistente en estimular al deudor al complimiento de la obligacion
principal, ante la amenaza de tener que pagar la pena. 2. Una funcion liquidadora del dao, o sea la
de evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o
cumplimiento inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en
sancionar o castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias
mas onerosas para el deudor que las que normalmente lleva aparejadas la infraccion contractual. "
(3 Derecho Civil Espanol, 9th Ed., p. 128).

The penalty clause is strictly penal or cumulative in character and does not partake of the nature of
liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el
supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y
perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en
que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).

After a conscientious consideration of the facts of the case, as found by Court of Appeals and the
trial court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true
nature of which is not easy to categorize, we further hold that justice would be adequately done in
this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to
award to it the stipulated liquidated damages of ten thousand pesos for any breach of the
contract. The proven damages supersede the stipulated liquidated damages.

This view finds support in the opinion of Manresa (whose comments were the bases of the new
matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the
difference between the proven damages and the stipulated penalty may be recovered (Vol. 8, part. 1,
Codigo Civil, 5th Ed., 1950, p. 483).

Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine
pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of the
complaint.

With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in
this instance.

SO ORDERED.

G.R. No. 204702 January 14, 2015

RICARDO C. HONRADO, Petitioner,

vs.
GMA NETWORK FILMS, INC., Respondent.

DECISION
CARPIO, J.:

The Case

We review1 the Decision2 of the Court of Appeals (CA) ordering petitioner Ricardo C. Honrado
(petitioner) to pay a sum of money to respondent GMA Network Films, Inc. for breach of contract
and breach of trust.

The Facts

On 11December 1998, respondent GMA Network Films, Inc. (GMA Films) entered into a "TV Rights
Agreement" (Agreement) with petitioner under which petitioner, as licensor of 36 films, granted to
GMA Films, for a fee of 60.75 million, the exclusive right to telecast the 36 films for a period of
three years. Under Paragraph 3 of the Agreement, the parties agreed that "all betacam copies of the
[films] should pass through broadcast quality test conducted by GMA-7," the TV station operated by
GMA Network, Inc. (GMA Network), an affiliate of GMA Films. The parties also agreed to submit the
films for review by the Movie and Television Review and Classification Board (MTRCB) and
stipulated on the remedies in the event that MTRCB bans the telecasting ofany of the films
(Paragraph 4):

The PROGRAMME TITLES listed above shall be subject to approval by the Movie and Television
Review and Classification Board (MTRCB) and, in the event of disapproval, LICENSOR [Petitioner]
will either replace the censored PROGRAMME TITLES with another title which is mutually
acceptable to both parties or, failure to do such, a proportionate reduction from the total price shall
either be deducted or refunded whichever is the case by the LICENSOR OR LICENSEE [GMA
Films].3 (Emphasis supplied)

Two of the films covered by the Agreement were Evangeline Katorse and Bubot for which GMA
Films paid 1.5 million each.

In 2003, GMA Films sued petitioner in the Regional Trial Court of Quezon City (trial court) to collect
1.6 million representing the fee it paid for Evangeline Katorse (1.5 million) and a portion of the fee
it paid for Bubot (350,0004). GMA Films alleged that it rejected Evangeline Katorse because "its
running time was too short for telecast"5 and petitioner only remitted 900,000 to the owner of Bubot
(Juanita Alano [Alano]), keeping for himself the balance of 350,000. GMA Films prayed for the
return of such amount on the theory that an implied trust arose between the parties as petitioner
fraudulently kept it for himself.6

Petitioner denied liability, counter-alleging that after GMA Films rejected Evangeline Katorse, he
replaced it with another film, Winasak na Pangarap, which GMA Films accepted. As proof of such
acceptance, petitioner invoked a certification of GMA Network, dated 30 March 1999, attesting that
such film "is of good broadcast quality"7 (Film Certification). Regarding the fee GMA Films paid for
Bubot, petitioner alleged that he had settled his obligation to Alano. Alternatively, petitioner alleged
that GMA Films, being a stranger to the contracts he entered into with the owners of the films in
question, has no personality to question his compliance with the terms of such contracts. Petitioner
counterclaimed for attorneys fees.

The Ruling of the Trial Court

The trial court dismissed GMA Films complaint and, finding merit in petitioners counterclaim,
ordered GMA Films to pay attorneys fees (100,000). The trial court gave credence to petitioners
defense that he replaced Evangeline Katorse with Winasak na Pangarap. On the disposal of the fee
GMA Films paid for Bubot, the trial court rejected GMA Films theory of implied trust, finding
insufficient GMA Films proof that petitioner pocketed any portion of the fee in question.

GMA Films appealed to the CA.

The Ruling of the Court of Appeals

The CA granted GMA Films appeal, set aside the trial courts ruling, and ordered respondent to pay
GMA Films 2 million8 as principal obligation with 12% annual interest, exemplary damages
(100,000), attorneys fees (200,000), litigation expenses (100,000) and the costs. Brushing
aside the trial courts appreciation of the evidence, the CA found that (1) GMA Films was authorized
under Paragraph 4 of the Agreement to reject Evangeline Katorse, and (2) GMA Films never
accepted Winasak na Pangarap as replacement because it was a "bold" film.9

On petitioners liability for the fee GMA Films paid for Bubot, the CA sustained GMA Films
contention that petitioner was under obligation to turn over to the film owners the fullamount GMA
Films paid for the films as "nowhere in the TV Rights Agreement does it provide that the licensor is
entitled to any commission x x x [hence] x x x [petitioner] Honrado cannot claim any portion of the
purchase price paid for by x x x GMA Films."10 The CA concluded that petitioners retention of a
portion of the fee for Bubot gave rise to an implied trust between him and GMA Films, obligating
petitioner, as trustee, to return to GMA Films, as beneficiary, the amount claimed by the latter.

Hence, this petition. Petitioner prays for the reinstatement of the trial courts ruling while GMA Films
attacks the petition for lack of merit.

The Issue

The question is whether the CA erred in finding petitioner liable for breach of the Agreement and
breach of trust.

The Ruling of the Court

We grant the petition. We find GMA Films complaint without merit and accordingly reinstate the trial
courts ruling dismissing it with the modification that the award of attorneys fees is deleted.
Petitioner Committed No Breach of Contract or Trust

MTRCB Disapproval the Stipulated

Basis for Film Replacement

The parties do not quarrel on the meaning of Paragraph 4 of the Agreement which states:

The PROGRAMME TITLES listed [in the Agreement] x x x shall be subject to approval by the Movie
and Television Review and Classification Board (MTRCB) and, in the event of disapproval,
LICENSOR [Petitioner] will either replace the censored PROGRAMME TITLES with another title
which is mutually acceptable to both parties or, failure to do such, a proportionate reduction from the
total price shall either be deducted or refunded whichever is the case by the LICENSOR OR
LICENSEE [GMA Films].11(Emphasis supplied)

Under this stipulation, what triggersthe rejection and replacement of any film listed in the Agreement
is the "disapproval" of its telecasting by MTRCB.
Nor is there any dispute that GMA Films rejected Evangeline Katorse not because it was
disapproved by MTRCB but because the films total running time was too short for telecast
(undertime). Instead of rejecting GMA Films demand for falling outside of the terms of Paragraph 4,
petitioner voluntarily acceded to it and replaced such film with Winasak na Pangarap. What is
disputed is whether GMA Films accepted the replacement film offered by petitioner.

Petitioner maintains that the Film Certification issued by GMA Network attesting to the "good
broadcast quality" of Winasak na Pangarap amounted to GMA Films acceptance of such film. On
the other hand, GMA Films insists that such clearance pertained only to the technical quality of the
film but not to its content which it rejected because it found the film as "bomba" (bold).12 The CA,
working under the assumption that the ground GMA Films invoked to reject Winasak na Pangarap
was sanctioned under the Agreement, found merit in the latters claim. We hold that regardless of
the import of the Film Certification, GMA Films rejection of Winasak na Pangarap finds no basis in
the Agreement.

In terms devoid of any ambiguity, Paragraph 4 of the Agreement requires the intervention of MTRCB,
the state censor, before GMA Films can reject a film and require its replacement. Specifically,
Paragraph 4 requires that MTRCB, after reviewing a film listed in the Agreement, disapprove or X-
rate it for telecasting. GMA Films does not allege, and we find no proof on record indicating, that
MTRCB reviewed Winasak na Pangarap and X-rated it. Indeed, GMA Films own witness, Jose
Marie Abacan (Abacan), then Vice-President for Program Management of GMA Network, testified
during trial that it was GMA Network which rejected Winasak na Pangarap because the latter
considered the film "bomba."13 In doing so, GMA Network went beyond its assigned role under the
Agreement of screening films to test their broadcast quality and assumed the function of MTRCB to
evaluate the films for the propriety of their content. This runs counter to the clear terms of
Paragraphs 3 and 4 of the Agreement.

Disposal of the Fees Paid to

Petitioner Outside of the Terms

of the Agreement

GMA Films also seeks refund for the balance of the fees it paid to petitioner for Bubot which
petitioner allegedly failed to turn-over to the films owner, Alano.14 Implicit in GMA Films claim is the
theory that the Agreement obliges petitioner to give to the film owners the entire amount he received
from GMA Films and that his failure to do so gave rise to an implied trust, obliging petitioner to hold
whatever amount he kept in trust for GMA Films. The CA sustained GMA Films interpretation, noting
that the Agreement "does not provide that the licensor is entitled to any commission."15

This is error.

The Agreement, as its full title denotes ("TV Rights Agreement"), is a licensing contract, the essence
of which is the transfer by the licensor (petitioner) to the licensee (GMA Films), for a fee, of the
exclusive right to telecast the films listed in the Agreement. Stipulations for payment of "commission"
to the licensor is incongruous to the nature of such contracts unless the licensor merely acted as
agent of the film owners. Nowhere in the Agreement, however, did the parties stipulate that
petitioner signed the contract in such capacity. On the contrary, the Agreement repeatedly refers to
petitioner as "licensor" and GMA Films as "licensee." Nor did the parties stipulate that the fees paid
by GMA Films for the films listed in the Agreement will be turned over by petitioner to the film owners.
Instead, the Agreement merely provided that the total fees will be paid in three installments
(Paragraph 3).16
We entertain no doubt that petitioner forged separate contractual arrangements with the owners of
the films listed in the Agreement, spelling out the terms of payment to the latter. Whether or not
petitioner complied with these terms, however, is a matter to which GMA Films holds absolutely no
interest. Being a stranger to such arrangements, GMA Films is no more entitled to complain of any
breach by petitioner of his contracts with the film owners than the film owners are for any breach by
GMA Films of its Agreement with petitioner.

We find it unnecessary to pass upon the question whether an implied trust arose between the parties,
as held by the CA. Such conclusion was grounded on the erroneous assumption that GMA Films
1wphi1

holds an interest in the disposition of the licensing fees it paid to petitioner.

Award of Attorney's Fees to Petitioner Improper

The trial court awarded attorney's fees to petitioner as it "deemed it just and reasonable"17 to do so,
using the amount provided by petitioner on the witness stand (100,000). Undoubtedly, attorney's
fees may be awarded if the trial court "deems it just and equitable."18 Such ground, however, must be
fully elaborated in the body of the ruling.19Its mere invocation, without more, negates the nature of
attorney's fees as a form of actual damages.

WHEREFORE, we GRANT the petition. The Decision, dated 30 April 2012 and Resolution, dated 19
November 2012, of the Court of Appeals are SET ASIDE. The Decision, dated 5 December 2008, of
the Regional Trial Court of Quezon City (Branch 223) is REINSTATED with the MODIFICATION that
the award of attorney's fees is DELETED.

SO ORDERED.

G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,

vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO,
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and
HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

PADILLA, J.:

Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R. No. CV-70245,
entitled "Ignacio Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of
the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C.
Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio
Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The
telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the
required fees or charges.
The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in
attendance. Neither the husband nor any of the other children of the deceased, then all residing in
the United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused the
defendant to send, had not been received. She and the other plaintiffs thereupon brought action for
damages arising from defendant's breach of contract. The case was filed in the Court of First
Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the
defendant was that it was unable to transmit the telegram because of "technical and atmospheric
factors beyond its control." 1 No evidence appears on record that defendant ever made any attempt
to advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay
the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:

1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and

P20,000.00 as moral damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages.

3. Ignacio Castro Jr., P20,000.00 as moral damages.

4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

8. Esmeralda C. Floro, P20,000.00 moral damages.

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of
P1,000.00 to each of the plaintiffs and costs. 2

On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but
eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of
P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as
moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also
reduced to P120,000. 00 for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or
recklessness."

In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges
paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof.

Petitioner's contention is without merit.

Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty
of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable
for damages." Art. 2176 also provides that "whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby,
for a fee, petitioner undertook to send said private respondent's message overseas by telegram.
This, petitioner did not do, despite performance by said private respondent of her obligation by
paying the required charges. Petitioner was therefore guilty of contravening its obligation to said
private respondent and is thus liable for damages.

This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in
this regard would result in an inequitous situation where petitioner will only be held liable for the
actual cost of a telegram fixed thirty (30) years ago.

We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of
the suffering private respondents had to undergo.

As the appellate court properly observed:

[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother after
she had already been interred, without being given the opportunity to even make a
choice on whether they wanted to pay her their last respects? There is no doubt that
these emotional sufferings were proximately caused by appellant's omission and
substantive law provides for the justification for the award of moral damages. 4

We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the United States to
testify before the trial court. Had petitioner not been remiss in performing its obligation, there would
have been no need for this suit or for Mrs. Crouch's testimony.

The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in
the amount of P1,000.00 for each of the private respondents, as a warning to all telegram
companies to observe due diligence in transmitting the messages of their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is
held liable to private respondents in the following amounts:

(1) P10,000.00 as moral damages, to each of private respondents;

(2) P1,000.00 as exemplary damages, to each of private respondents;

(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;

(4) P5,000.00 as attorney's fees; and

(5) Costs of suit.

SO ORDERED.

G.R. No. 158911 March 4, 2008

MANILA ELECTRIC COMPANY, Petitioner,

vs.
MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS,
ROSEMARIE RAMOY, OFELIA DURIAN and CYRENE PANADO, Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that
the Decision1 of the Court of Appeals (CA) dated December 16, 2002, ordering petitioner Manila
Electric Company (MERALCO) to pay Leoncio Ramoy2 moral and exemplary damages and
attorney's fees, and the CA Resolution3 dated July 1, 2003, denying petitioner's motion for
reconsideration, be reversed and set aside.

The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the facts as
culled from the records, thus:

The evidence on record has established that in the year 1987 the National Power Corporation (NPC)
filed with the MTC Quezon City a case for ejectment against several persons allegedly illegally
occupying its properties in Baesa, Quezon City. Among the defendants in the ejectment case was
Leoncio Ramoy, one of the plaintiffs in the case at bar. On April 28, 1989 after the defendants failed
to file an answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered
judgment for the plaintiff [MERALCO] and "ordering the defendants to demolish or remove the
building and structures they built on the land of the plaintiff and to vacate the premises." In the case
of Leoncio Ramoy, the Court found that he was occupying a portion of Lot No. 72-B-2-B with the
exact location of his apartments indicated and encircled in the location map as No. 7. A copy of the
decision was furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2,
1993, p. 5).

On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of electric power
supply to all residential and commercial establishments beneath the NPC transmission lines along
Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to the letter was a list of establishments
affected which included plaintiffs Leoncio and Matilde Ramoy (Exh. 9), as well as a copy of the court
decision (Exh. 2). After deliberating on NPC's letter, Meralco decided to comply with NPC's request
(Exhibits 6, 6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all establishments
affected including plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde
Macabagdal (Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-F), Ofelia Durian (Exh. 3-G), Jose
Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I).

In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to determine all the
establishments which are considered under NPC property in view of the fact that "the houses in the
area are very close to each other" (Exh. 12). Shortly thereafter, a joint survey was conducted and the
NPC personnel pointed out the electric meters to be disconnected (Exh. 13; TSN, October 8, 1993, p.
7; TSN, July 1994, p. 8).

In due time, the electric service connection of the plaintiffs [herein respondents] was disconnected
(Exhibits D to G, with submarkings, pp. 86-87, Record).

Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a parcel of land
covered by TCT No. 326346, a portion of which was occupied by plaintiffs Rosemarie Ramoy, Ofelia
Durian, Jose Valiza and Cyrene S. Panado as lessees. When the Meralco employees were
disconnecting plaintiffs' power connection, plaintiff Leoncio Ramoy objected by informing the
Meralco foreman that his property was outside the NPC property and pointing out the monuments
showing the boundaries of his property. However, he was threatened and told not to interfere by the
armed men who accompanied the Meralco employees. After the electric power in Ramoy's
apartment was cut off, the plaintiffs-lessees left the premises.

During the ocular inspection ordered by the Court and attended by the parties, it was found out that
the residence of plaintiffs-spouses Leoncio and Matilde Ramoy was indeed outside the NPC
property. This was confirmed by defendant's witness R.P. Monsale III on cross-examination (TSN,
October 13, 1993, pp. 10 and 11). Monsale also admitted that he did not inform his supervisor about
this fact nor did he recommend re-connection of plaintiffs' power supply (Ibid., p. 14).

The record also shows that at the request of NPC, defendant Meralco re-connected the electric
service of four customers previously disconnected none of whom was any of the plaintiffs (Exh. 14).4

The RTC decided in favor of MERALCO by dismissing herein respondents' claim for moral damages,
exemplary damages and attorney's fees. However, the RTC ordered MERALCO to restore the
electric power supply of respondents.

Respondents then appealed to the CA. In its Decision dated December 16, 2002, the CA faulted
MERALCO for not requiring from National Power Corporation (NPC) a writ of execution or demolition
and in not coordinating with the court sheriff or other proper officer before complying with the NPC's
request. Thus, the CA held MERALCO liable for moral and exemplary damages and attorney's fees.
MERALCO's motion for reconsideration of the Decision was denied per Resolution dated July 1,
2003.

Hence, herein petition for review on certiorari on the following grounds:

THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT WHEN
IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.
 II

THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO UNDER THE CIRCUMSTANCES
THAT THE LATTER ACTED IN GOOD FAITH IN THE DISCONNECTION OF THE ELECTRIC
SERVICES OF THE RESPONDENTS. 5

The petition is partly meritorious.

MERALCO admits6 that respondents are its customers under a Service Contract whereby it is
obliged to supply respondents with electricity. Nevertheless, upon request of the NPC, MERALCO
disconnected its power supply to respondents on the ground that they were illegally occupying the
NPC's right of way. Under the Service Contract, "[a] customer of electric service must show his right
or proper interest over the property in order that he will be provided with and assured a continuous
electric service."7 MERALCO argues that since there is a Decision of the Metropolitan Trial Court
(MTC) of Quezon City ruling that herein respondents were among the illegal occupants of the NPC's
right of way, MERALCO was justified in cutting off service to respondents.

Clearly, respondents' cause of action against MERALCO is anchored on culpa contractual or breach
of contract for the latter's discontinuance of its service to respondents under Article 1170 of the Civil
Code which provides:

Article 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.

In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on the nature
of culpa contractual, thus:

"In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set free from liability for any kind of
misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interests of the promissee that may include
his "expectation interest," which is his interest in having the benefit of his bargain by being put in as
good a position as he would have been in had the contract been performed, or his "reliance interest,"
which is his interest in being reimbursed for loss caused by reliance on the contract by being put in
as good a position as he would have been in had the contract not been made; or his "restitution
interest," which is his interest in having restored to him any benefit that he has conferred on the
other party. Indeed, agreements can accomplish little, either for their makers or for society, unless
they are made the basis for action. The effect of every infraction is to create a new duty, that is, to
make recompense to the one who has been injured by the failure of another to observe his
contractual obligation unless he can show extenuating circumstances, like proof of his exercise of
due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing
liability.9 (Emphasis supplied)

Article 1173 also provides that the fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the circumstances of
the persons, of the time and of the place. The Court emphasized in Ridjo Tape & Chemical
Corporation v. Court of Appeals10 that "as a public utility, MERALCO has the obligation to discharge
its functions with utmost care and diligence."11
The Court agrees with the CA that under the factual milieu of the present case, MERALCO failed to
exercise the utmost degree of care and diligence required of it. To repeat, it was not enough for
MERALCO to merely rely on the Decision of the MTC without ascertaining whether it had become
final and executory. Verily, only upon finality of said Decision can it be said with conclusiveness that
respondents have no right or proper interest over the subject property, thus, are not entitled to the
services of MERALCO.

Although MERALCO insists that the MTC Decision is final and executory, it never showed any
documentary evidence to support this allegation. Moreover, if it were true that the decision was final
and executory, the most prudent thing for MERALCO to have done was to coordinate with the proper
court officials in determining which structures are covered by said court order. Likewise, there is no
evidence on record to show that this was done by MERALCO.

The utmost care and diligence required of MERALCO necessitates such great degree of prudence
on its part, and failure to exercise the diligence required means that MERALCO was at fault and
negligent in the performance of its obligation. In Ridjo Tape,12 the Court explained:

[B]eing a public utility vested with vital public interest, MERALCO is impressed with certain
obligations towards its customers and any omission on its part to perform such duties would be
prejudicial to its interest. For in the final analysis, the bottom line is that those who do not exercise
such prudence in the discharge of their duties shall be made to bear the consequences of such
oversight.13

This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.

The next question is: Are respondents entitled to moral and exemplary damages and attorney's fees?

Article 2220 of the Civil Code provides:

Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith.

In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding from him and
his tenants the supply of electricity to which they were entitled under the Service Contract. This is
contrary to public policy because, as discussed above, MERALCO, being a vital public utility, is
expected to exercise utmost care and diligence in the performance of its obligation. It was incumbent
upon MERALCO to do everything within its power to ensure that the improvements built by
respondents are within the NPCs right of way before disconnecting their power supply. The Court
emphasized in Samar II Electric Cooperative, Inc. v. Quijano14 that:

Electricity is a basic necessity the generation and distribution of which is imbued with public interest,
and its provider is a public utility subject to strict regulation by the State in the exercise of police
power. Failure to comply with these regulations will give rise to the presumption of bad faith
or abuse of right.15 (Emphasis supplied)

Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the performance of
its obligation to Leoncio Ramoy, its customer, is tantamount to bad faith. Leoncio Ramoy testified
that he suffered wounded feelings because of MERALCO's actions.16 Furthermore, due to the lack of
power supply, the lessees of his four apartments on subject lot left the premises.17 Clearly, therefore,
Leoncio Ramoy is entitled to moral damages in the amount awarded by the CA.
Leoncio Ramoy, the lone witness for respondents, was the only one who testified regarding the
effects on him of MERALCO's electric service disconnection. His co-respondents Matilde Ramoy,
Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did not present any evidence of damages
they suffered.

It is a hornbook principle that damages may be awarded only if proven. In Mahinay v. Velasquez,
Jr.,18 the Court held thus:

In order that moral damages may be awarded, there must be pleading and proof of moral
suffering, mental anguish, fright and the like. While respondent alleged in his complaint that he
suffered mental anguish, serious anxiety, wounded feelings and moral shock, he failed to prove
them during the trial. Indeed, respondent should have taken the witness stand and should have
testified on the mental anguish, serious anxiety, wounded feelings and other emotional and mental
suffering he purportedly suffered to sustain his claim for moral damages. Mere allegations do not
suffice; they must be substantiated by clear and convincing proof. No other person could have
proven such damages except the respondent himself as they were extremely personal to him.

In Keirulf vs. Court of Appeals, we held:

"While no proof of pecuniary loss is necessary in order that moral damages may be awarded, the
amount of indemnity being left to the discretion of the court, it is nevertheless essential that the
claimant should satisfactorily show the existence of the factual basis of damages and its causal
connection to defendants acts. This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer. In Francisco vs. GSIS, the Court held
that there must be clear testimony on the anguish and other forms of mental suffering. Thus, if
the plaintiff fails to take the witness stand and testify as to his/her social humiliation, wounded
feelings and anxiety, moral damages cannot be awarded. In Cocoland Development Corporation vs.
National Labor Relations Commission, the Court held that "additional facts must be pleaded and
proven to warrant the grant of moral damages under the Civil Code, these being, x x x social
humiliation, wounded feelings, grave anxiety, etc. that resulted therefrom."

x x x The award of moral damages must be anchored to a clear showing that respondent actually
experienced mental anguish, besmirched reputation, sleepless nights, wounded feelings or similar
injury. There was no better witness to this experience than respondent himself. Since respondent
failed to testify on the witness stand, the trial court did not have any factual basis to award
moral damages to him.19 (Emphasis supplied)

Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may be awarded
moral damages.20

With regard to exemplary damages, Article 2232 of the Civil Code provides that in contracts and
quasi-contracts, the court may award exemplary damages if the defendant, in this case MERALCO,
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, while Article 2233 of the
same Code provides that such damages cannot be recovered as a matter of right and the
adjudication of the same is within the discretion of the court.
1avv phi 1

The Court finds that MERALCO fell short of exercising the due diligence required, but its actions
cannot be considered wanton, fraudulent, reckless, oppressive or malevolent. Records show that
MERALCO did take some measures, i.e., coordinating with NPC officials and conducting a joint
survey of the subject area, to verify which electric meters should be disconnected although these
measures are not sufficient, considering the degree of diligence required of it. Thus, in this case,
exemplary damages should not be awarded.

Since the Court does not deem it proper to award exemplary damages in this case, then the CA's
award for attorney's fees should likewise be deleted, as Article 2208 of the Civil Code states that in
the absence of stipulation, attorney's fees cannot be recovered except in cases provided for in
said Article, to wit:

Article 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendants act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiffs plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

(8) In actions for indemnity under workmens compensation and employers liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorneys fees and
expenses of litigation should be recovered.

In all cases, the attorneys fees and expenses of litigation must be reasonable.

None of the grounds for recovery of attorney's fees are present.

WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's fees
is DELETED.

SECOND DIVISION

MINDANAO TERMINAL AND G.R. No. 162467

BROKERAGE SERVICE, INC.
Petitioner, Present:

- versus - CARPIO MORALES ,* JJ.,

Acting Chairperson,
TINGA,
PHOENIX ASSURANCE VELASCO, JR.,
COMPANY OF NEW YORK/ LEONARDO DE CASTRO,** and
MCGEE & CO., INC., BRION, JJ.
Respondent.
Promulgated:
May 8, 2009
x------------------------------------------------------------------------------------x

DECISION
TINGA, J.:
Before us is a petition for review on certiorari[1] under Rule 45 of the 1997 Rules of
Civil Procedure of the 29 October 2003[2] Decision of the Court of Appeals and
the 26 February 2004 Resolution[3] of the same court denying petitioners motion
for reconsideration.

The facts of the case are not disputed.

Del Monte Philippines, Inc. (Del Monte) contracted petitioner Mindanao

Terminal and Brokerage Service, Inc. (Mindanao Terminal), a stevedoring
company, to load and stow a shipment of 146,288 cartons of fresh green Philippine
bananas and 15,202 cartons of fresh pineapples belonging to Del Monte Fresh
Produce International, Inc. (Del Monte Produce) into the cargo hold of the
vessel M/V Mistrau. The vessel was docked at the port of Davao City and the
goods were to be transported by it to the port of Inchon, Korea in favor of
consignee Taegu Industries, Inc. Del Monte Produce insured the shipment under an
open cargo policy with private respondent Phoenix Assurance Company of New
York (Phoenix), a non-life insurance company, and private respondent McGee &
Co. Inc. (McGee), the underwriting manager/agent of Phoenix.[4]

Mindanao Terminal loaded and stowed the cargoes aboard the M/V Mistrau. The
vessel set sail from the port of Davao City and arrived at the port of Inchon, Korea.
It was then discovered upon discharge that some of the cargo was in bad condition.
The Marine Cargo Damage Surveyor of Incok Loss and Average Adjuster of
Korea, through its representative Byeong Yong Ahn (Byeong), surveyed the extent
of the damage of the shipment. In a survey report, it was stated that 16,069 cartons
of the banana shipment and 2,185 cartons of the pineapple shipment were so
damaged that they no longer had commercial value.[5]

Del Monte Produce filed a claim under the open cargo policy for the damages to its
shipment. McGees Marine Claims Insurance Adjuster evaluated the claim and
recommended that payment in the amount of $210,266.43 be made. A check for
the recommended amount was sent to Del Monte Produce; the latter then issued a
subrogation receipt[6] to Phoenix and McGee.

Phoenix and McGee instituted an action for damages[7] against Mindanao Terminal
in the Regional Trial Court (RTC) of Davao City, Branch 12. After trial, the
RTC,[8] in a decision dated 20 October 1999, held that the only participation of
Mindanao Terminal was to load the cargoes on board the M/V Mistrau under the
direction and supervision of the ships officers, who would not have accepted the
cargoes on board the vessel and signed the foremans report unless they were
properly arranged and tightly secured to withstand voyage across the open seas.
Accordingly, Mindanao Terminal cannot be held liable for whatever happened to
the cargoes after it had loaded and stowed them. Moreover, citing the survey report,
it was found by the RTC that the cargoes were damaged on account of a typhoon
which M/V Mistrau had encountered during the voyage. It was further held
that Phoenix and McGee had no cause of action against Mindanao Terminal
because the latter, whose services were contracted by Del Monte, a distinct
corporation from Del Monte Produce, had no contract with the assured Del Monte
Produce. The RTC dismissed the complaint and awarded the counterclaim of
Mindanao Terminal in the amount of P83,945.80 as actual damages
and P100,000.00 as attorneys fees.[9]The actual damages were awarded as
reimbursement for the expenses incurred by Mindanao Terminals lawyer in
attending the hearings in the case wherein he had to travel all the way from Metro
Manila to Davao City.

Phoenix and McGee appealed to the Court of Appeals. The appellate court
reversed and set aside[10] the decision of the RTC in its 29 October 2003 decision.
The same court ordered Mindanao Terminal to pay Phoenix and McGee the total
amount of $210,265.45 plus legal interest from the filing of the complaint until
fully paid and attorneys fees of 20% of the claim.[11] It sustained Phoenixs and
McGees argument that the damage in the cargoes was the result of improper
stowage by Mindanao Terminal. It imposed on Mindanao Terminal, as the
stevedore of the cargo, the duty to exercise extraordinary diligence in loading and
stowing the cargoes. It further held that even with the absence of a contractual
relationship between Mindanao Terminal and Del Monte Produce, the cause of
action of Phoenix and McGee could be based on quasi-delict under Article 2176 of
the Civil Code.[12]

Mindanao Terminal filed a motion for reconsideration,[13] which the Court of

Appeals denied in its 26 February 2004[14] resolution. Hence, the present petition
for review.

Mindanao Terminal raises two issues in the case at bar, namely: whether it
was careless and negligent in the loading and stowage of the cargoes onboard M/V
Mistrau making it liable for damages; and, whether Phoenix and McGee has a
cause of action against Mindanao Terminal under Article 2176 of the Civil Code
on quasi-delict. To resolve the petition, three questions have to be answered: first,
whether Phoenix and McGee have a cause of action against Mindanao Terminal;
second, whether Mindanao Terminal, as a stevedoring company, is under
obligation to observe the same extraordinary degree of diligence in the conduct of
its business as required by law for common carriers[15] and warehousemen;[16] and
third, whether Mindanao Terminal observed the degree of diligence required by
law of a stevedoring company.

We agree with the Court of Appeals that the complaint filed by Phoenix and
McGee against Mindanao Terminal, from which the present case has arisen, states
a cause of action. The present action is based on quasi-delict, arising from the
negligent and careless loading and stowing of the cargoes belonging to Del Monte
Produce. Even assuming that both Phoenix and McGee have only been subrogated
in the rights of Del Monte Produce, who is not a party to the contract of service
between Mindanao Terminal and Del Monte, still the insurance carriers may have a
cause of action in light of the Courts consistent ruling that the act that breaks the
contract may be also a tort.[17] In fine, a liability for tort may arise even under a
contract, where tort is that which breaches the contract[18]. In the present
case, Phoenix and McGee are not suing for damages for injuries arising from the
breach of the contract of service but from the alleged negligent manner by which
Mindanao Terminal handled the cargoes belonging to Del Monte Produce. Despite
the absence of contractual relationship between Del Monte Produce and Mindanao
Terminal, the allegation of negligence on the part of the defendant should be
sufficient to establish a cause of action arising from quasi-delict.[19]

The resolution of the two remaining issues is determinative of the ultimate

result of this case.

Article 1173 of the Civil Code is very clear that if the law or contract does
not state the degree of diligence which is to be observed in the performance of an
obligation then that which is expected of a good father of a family or ordinary
diligence shall be required. Mindanao Terminal, a stevedoring company which was
charged with the loading and stowing the cargoes of Del Monte Produce
aboard M/V Mistrau, had acted merely as a labor provider in the case at bar. There
is no specific provision of law that imposes a higher degree of diligence than
ordinary diligence for a stevedoring company or one who is charged only with the
loading and stowing of cargoes. It was neither alleged nor proven by Phoenix and
McGee that Mindanao Terminal was bound by contractual stipulation to observe a
higher degree of diligence than that required of a good father of a family. We
therefore conclude that following Article 1173, Mindanao Terminal was required
to observe ordinary diligence only in loading and stowing the cargoes of Del
Monte Produce aboard M/V Mistrau.

The Court of Appeals erred when it cited the case of Summa Insurance
Corporation v. CA and Port Service Inc.[20] in imposing a higher degree of
diligence,[21] on Mindanao Terminal in loading and stowing the cargoes. The case
of Summa Insurance Corporation v. CA, which involved the issue of whether an
arrastre operator is legally liable for the loss of a shipment in its custody and the
extent of its liability, is inapplicable to the factual circumstances of the case at bar.
Therein, a vessel owned by the National Galleon Shipping Corporation (NGSC)
arrived at Pier 3, South Harbor, Manila, carrying a shipment consigned to the order
of Caterpillar Far East Ltd. with Semirara Coal Corporation (Semirara) as "notify
party." The shipment, including a bundle of PC 8 U blades, was discharged from
the vessel to the custody of the private respondent, the exclusive arrastre operator
at the South Harbor.Accordingly, three good-order cargo receipts were issued by
NGSC, duly signed by the ship's checker and a representative of private respondent.
When Semirara inspected the shipment at house, it discovered that the bundle of
PC8U blades was missing. From those facts, the Court observed:

x x x The relationship therefore between the consignee and the

arrastre operator must be examined. This relationship is much akin
to that existing between the consignee or owner of shipped goods and
the common carrier, or that between a depositor and a
warehouseman[[22]]. In the performance of its obligations, an arrastre
operator should observe the same degree of diligence as that
required of a common carrier and a warehouseman as enunciated
under Article 1733 of the Civil Code and Section 3(b) of the
Warehouse Receipts Law, respectively. Being the custodian of the
goods discharged from a vessel, an arrastre operator's duty is to
take good care of the goods and to turn them over to the party
entitled to their possession. (Emphasis supplied)[23]

There is a distinction between an arrastre and a stevedore.[24] Arrastre, a Spanish

word which refers to hauling of cargo, comprehends the handling of cargo on the
wharf or between the establishment of the consignee or shipper and the ship's
tackle. The responsibility of the arrastre operator lasts until the delivery of the
cargo to the consignee. The service is usually performed by longshoremen. On the
other hand, stevedoring refers to the handling of the cargo in the holds of the vessel
or between the ship's tackle and the holds of the vessel. The responsibility of the
stevedore ends upon the loading and stowing of the cargo in the vessel.

It is not disputed that Mindanao Terminal was performing purely

stevedoring function while the private respondent in the Summa case was
performing arrastre function. In the present case, Mindanao Terminal, as a
stevedore, was only charged with the loading and stowing of the cargoes from the
pier to the ships cargo hold; it was never the custodian of the shipment of Del
Monte Produce. A stevedore is not a common carrier for it does not transport
goods or passengers; it is not akin to a warehouseman for it does not store goods
for profit. The loading and stowing of cargoes would not have a far reaching public
ramification as that of a common carrier and a warehouseman; the public is
adequately protected by our laws on contract and on quasi-delict. The public policy
considerations in legally imposing upon a common carrier or a warehouseman a
higher degree of diligence is not present in a stevedoring outfit which mainly
provides labor in loading and stowing of cargoes for its clients.

In the third issue, Phoenix and McGee failed to prove by preponderance of

evidence[25] that Mindanao Terminal had acted negligently. Where the evidence on
an issue of fact is in equipoise or there is any doubt on which side the evidence
preponderates the party having the burden of proof fails upon that issue. That is to
say, if the evidence touching a disputed fact is equally balanced, or if it does not
produce a just, rational belief of its existence, or if it leaves the mind in a state of
perplexity, the party holding the affirmative as to such fact must fail. [26]
We adopt the findings[27] of the RTC,[28] which are not disputed
by Phoenix and McGee. The Court of Appeals did not make any new findings of
fact when it reversed the decision of the trial court. The only participation of
Mindanao Terminal was to load the cargoes on board M/V Mistrau.[29] It was not
disputed by Phoenix and McGee that the materials, such as ropes, pallets, and
cardboards, used in lashing and rigging the cargoes were all provided by M/V
Mistrau and these materials meets industry standard.[30]
It was further established that Mindanao Terminal loaded and stowed the
cargoes of Del Monte Produce aboard the M/V Mistrau in accordance with the
stowage plan, a guide for the area assignments of the goods in the vessels hold,
prepared by Del Monte Produce and the officers of M/V Mistrau.[31] The loading
and stowing was done under the direction and supervision of the ship officers. The
vessels officer would order the closing of the hatches only if the loading was done
correctly after a final inspection.[32] The said ship officers would not have accepted
the cargoes on board the vessel if they were not properly arranged and tightly
secured to withstand the voyage in open seas. They would order the stevedore to
rectify any error in its loading and stowing. A foremans report, as proof of work
done on board the vessel, was prepared by the checkers of Mindanao Terminal and
concurred in by the Chief Officer of M/V Mistrau after they were satisfied that the
cargoes were properly loaded.[33]

Phoenix and McGee relied heavily on the deposition of Byeong Yong Ahn[34] and
on the survey report[35] of the damage to the cargoes. Byeong, whose testimony
was refreshed by the survey report,[36] found that the cause of the damage was
improper stowage[37] due to the manner the cargoes were arranged such that there
were no spaces between cartons, the use of cardboards as support system, and the
use of small rope to tie the cartons together but not by the negligent conduct of
Mindanao Terminal in loading and stowing the cargoes. As admitted
by Phoenix and McGee in their Comment[38] before us, the latter is merely a
stevedoring company which was tasked by Del Monte to load and stow the
shipments of fresh banana and pineapple of Del Monte Produce aboard the M/V
Mistrau. How and where it should load and stow a shipment in a vessel is wholly
dependent on the shipper and the officers of the vessel. In other words, the work of
the stevedore was under the supervision of the shipper and officers of the vessel.
Even the materials used for stowage, such as ropes, pallets, and cardboards, are
provided for by the vessel. Even the survey report found that it was because of the
boisterous stormy weather due to the typhoon Seth, as encountered by M/V
Mistrau during its voyage, which caused the shipments in the cargo hold to
collapse, shift and bruise in extensive extent.[39] Even the deposition of Byeong
was not supported by the conclusion in the survey report that:

CAUSE OF DAMAGE

xxx

From the above facts and our survey results, we are of the opinion
that damage occurred aboard the carrying vessel during sea transit,
being caused by ships heavy rolling and pitching under boisterous
weather while proceeding from 1600 hrs on 7th October to 0700 hrs
on 12th October, 1994 as described in the sea protest.[40]

As it is clear that Mindanao Terminal had duly exercised the required degree
of diligence in loading and stowing the cargoes, which is the ordinary diligence of
a good father of a family, the grant of the petition is in order.

However, the Court finds no basis for the award of attorneys fees in favor of
petitioner. None of the circumstances enumerated in Article 2208 of the Civil Code
exists. The present case is clearly not an unfounded civil action against the plaintiff
as there is no showing that it was instituted for the mere purpose of vexation or
injury. It is not sound public policy to set a premium to the right to litigate where
such right is exercised in good faith, even if erroneously.[41] Likewise, the RTC
erred in awarding P83,945.80 actual damages to Mindanao Terminal. Although
actual expenses were incurred by Mindanao Terminal in relation to the trial of this
case in Davao City, the lawyer of Mindanao Terminal incurred expenses for plane
fare, hotel accommodations and food, as well as other miscellaneous expenses, as
he attended the trials coming all the way from Manila. But there is no showing
that Phoenix and McGee made a false claim against Mindanao Terminal resulting
in the protracted trial of the case necessitating the incurrence of expenditures.[42]

WHEREFORE, the petition is GRANTED. The decision of the Court of

Appeals in CA-G.R. CV No. 66121 is SET ASIDE and the decision of
the Regional Trial Court of DavaoCity, Branch 12 in Civil Case No. 25,311.97 is
hereby REINSTATED MINUS the awards of P100,000.00 as attorneys fees
and P83,945.80 as actual damages.
G.R. No. 71049 May 29, 1987

BERNARDINO JIMENEZ, petitioner,

vs.
CITY OF MANILA and INTERMEDIATE APPELLATE COURT, respondents.

PARAS, J.:

This is a petition for review on certiorari of: (1) the decision * of the Intermediate Appellate Court in AC-G.R. No.
013887-CV Bernardino Jimenez v. Asiatic Integrated Corporation and City of Manila, reversing the decision ** of the Court of First Instance
of Manila, Branch XXII in Civil Case No. 96390 between the same parties, but only insofar as holding Asiatic Integrated Corporation solely
liable for damages and attorney's fees instead of making the City of Manila jointly and solidarily liable with it as prayed for by the petitioner
and (2) the resolution of the same Appellate Court denying his Partial Motion for Reconsideration (Rollo, p. 2).

The dispositive portion of the Intermediate Appellate Court's decision is as follows:

WHEREFORE, the decision appealed from is hereby REVERSED. A new one is

hereby entered ordering the defendant Asiatic Integrated Corporation to pay the
plaintiff P221.90 actual medical expenses, P900.00 for the amount paid for the
operation and management of a school bus, P20,000.00 as moral damages due to
pains, sufferings and sleepless nights and P l0,000.00 as attorney's fees.

SO ORDERED. (p. 20, Rollo)

The findings of respondent Appellate Court are as follows:

The evidence of the plaintiff (petitioner herein) shows that in the morning of August 15, 1974 he,
together with his neighbors, went to Sta. Ana public market to buy "bagoong" at the time when the
public market was flooded with ankle deep rainwater. After purchasing the "bagoong" he turned
around to return home but he stepped on an uncovered opening which could not be seen because of
the dirty rainwater, causing a dirty and rusty four- inch nail, stuck inside the uncovered opening, to
pierce the left leg of plaintiff-petitioner penetrating to a depth of about one and a half inches. After
administering first aid treatment at a nearby drugstore, his companions helped him hobble home. He
felt ill and developed fever and he had to be carried to Dr. Juanita Mascardo. Despite the medicine
administered to him by the latter, his left leg swelled with great pain. He was then rushed to the
Veterans Memorial Hospital where he had to be confined for twenty (20) days due to high fever and
severe pain.

Upon his discharge from the hospital, he had to walk around with crutches for fifteen (15) days. His
injury prevented him from attending to the school buses he is operating. As a result, he had to
engage the services of one Bienvenido Valdez to supervise his business for an aggregate
compensation of nine hundred pesos (P900.00). (Decision, AC-G.R. CV No. 01387, Rollo, pp. 13-
20).

Petitioner sued for damages the City of Manila and the Asiatic Integrated Corporation under whose
administration the Sta. Ana Public Market had been placed by virtue of a Management and
Operating Contract (Rollo, p. 47).

The lower court decided in favor of respondents, the dispositive portion of the decision reading:

WHEREFORE, judgment is hereby rendered in favor of the defendants and against

the plaintiff dismissing the complaint with costs against the plaintiff. For lack of
sufficient evidence, the counterclaims of the defendants are likewise dismissed.
(Decision, Civil Case No. 96390, Rollo, p. 42).

As above stated, on appeal, the Intermediate Appellate Court held the Asiatic Integrated Corporation
liable for damages but absolved respondent City of Manila.

Hence this petition.

The lone assignment of error raised in this petition is on whether or not the Intermediate Appellate
Court erred in not ruling that respondent City of Manila should be jointly and severally liable with
Asiatic Integrated Corporation for the injuries petitioner suffered.

In compliance with the resolution of July 1, 1985 of the First Division of this Court (Rollo, p. 29)
respondent City of Manila filed its comment on August 13, 1985 (Rollo, p. 34) while petitioner filed its
reply on August 21, 1985 (Reno, p. 51).

Thereafter, the Court in the resolution of September 11, 1985 (Rollo, p. 62) gave due course to the
petition and required both parties to submit simultaneous memoranda

Petitioner filed his memorandum on October 1, 1985 (Rollo, p. 65) while respondent filed its
memorandum on October 24, 1985 (Rollo, p. 82).

In the resolution of October 13, 1986, this case was transferred to the Second Division of this Court,
the same having been assigned to a member of said Division (Rollo, p. 92).
The petition is impressed with merit.

As correctly found by the Intermediate Appellate Court, there is no doubt that the plaintiff suffered
injuries when he fell into a drainage opening without any cover in the Sta. Ana Public Market.
Defendants do not deny that plaintiff was in fact injured although the Asiatic Integrated Corporation
tries to minimize the extent of the injuries, claiming that it was only a small puncture and that as a
war veteran, plaintiff's hospitalization at the War Veteran's Hospital was free. (Decision, AC-G.R. CV
No. 01387, Rollo, p. 6).

Respondent City of Manila maintains that it cannot be held liable for the injuries sustained by the
petitioner because under the Management and Operating Contract, Asiatic Integrated Corporation
assumed all responsibility for damages which may be suffered by third persons for any cause
attributable to it.

It has also been argued that the City of Manila cannot be held liable under Article 1, Section 4 of
Republic Act No. 409 as amended (Revised Charter of Manila) which provides:

The City shall not be liable or held for damages or injuries to persons or property
arising from the failure of the Mayor, the Municipal Board, or any other City Officer, to
enforce the provisions of this chapter, or any other law or ordinance, or from
negligence of said Mayor, Municipal Board, or any other officers while enforcing or
attempting to enforce said provisions.

This issue has been laid to rest in the case of City of Manila v. Teotico (22 SCRA 269-272 [1968])
where the Supreme Court squarely ruled that Republic Act No. 409 establishes a general rule
regulating the liability of the City of Manila for "damages or injury to persons or property arising from
the failure of city officers" to enforce the provisions of said Act, "or any other law or ordinance or from
negligence" of the City "Mayor, Municipal Board, or other officers while enforcing or attempting to
enforce said provisions."

Upon the other hand, Article 2189 of the Civil Code of the Philippines which provides that:

Provinces, cities and municipalities shall be liable for damages for the death of, or
injuries suffered by any person by reason of defective conditions of roads, streets,
bridges, public buildings and other public works under their control or supervision.

constitutes a particular prescription making "provinces, cities and municipalities ... liable for damages
for the death of, or injury suffered by any person by reason" specifically "of the defective
condition of roads, streets, bridges, public buildings, and other public works under their control or
supervision." In other words, Art. 1, sec. 4, R.A. No. 409 refers to liability arising from negligence, in
general, regardless of the object, thereof, while Article 2189 of the Civil Code governs liability due to
"defective streets, public buildings and other public works" in particular and is therefore decisive on
this specific case.

In the same suit, the Supreme Court clarified further that under Article 2189 of the Civil Code, it is
not necessary for the liability therein established to attach, that the defective public works belong to
the province, city or municipality from which responsibility is exacted. What said article requires is
that the province, city or municipality has either "control or supervision" over the public building in
question.
In the case at bar, there is no question that the Sta. Ana Public Market, despite the Management
and Operating Contract between respondent City and Asiatic Integrated Corporation remained under
the control of the former.

For one thing, said contract is explicit in this regard, when it provides:

II

That immediately after the execution of this contract, the SECOND PARTY shall start
the painting, cleaning, sanitizing and repair of the public markets and talipapas and
within ninety (90) days thereof, the SECOND PARTY shall submit a program of
improvement, development, rehabilitation and reconstruction of the city public
markets and talipapas subject to prior approval of the FIRST PARTY. (Rollo, p. 44)

xxx xxx xxx

VI

That all present personnel of the City public markets and talipapas shall be retained
by the SECOND PARTY as long as their services remain satisfactory and they shall
be extended the same rights and privileges as heretofore enjoyed by them. Provided,
however, that the SECOND PARTY shall have the right, subject to prior approval of
the FIRST PARTY to discharge any of the present employees for cause. (Rollo, p.
45).

VII

That the SECOND PARTY may from time to time be required by the FIRST PARTY,
or his duly authorized representative or representatives, to report, on the activities
and operation of the City public markets and talipapas and the facilities and
conveniences installed therein, particularly as to their cost of construction, operation
and maintenance in connection with the stipulations contained in this Contract. (lbid)

The fact of supervision and control of the City over subject public market was admitted by Mayor
Ramon Bagatsing in his letter to Secretary of Finance Cesar Virata which reads:

These cases arose from the controversy over the Management and Operating
Contract entered into on December 28, 1972 by and between the City of Manila and
the Asiatic Integrated Corporation, whereby in consideration of a fixed service fee,
the City hired the services of the said corporation to undertake the physical
management, maintenance, rehabilitation and development of the City's public
markets and' Talipapas' subject to the control and supervision of the City.

xxx xxx xxx

It is believed that there is nothing incongruous in the exercise of these powers vis-a-
vis the existence of the contract, inasmuch as the City retains the power of
supervision and control over its public markets and talipapas under the terms of the
contract. (Exhibit "7-A") (Emphasis supplied.) (Rollo, p. 75).
In fact, the City of Manila employed a market master for the Sta. Ana Public Market whose primary
duty is to take direct supervision and control of that particular market, more specifically, to check the
safety of the place for the public.

Thus the Asst. Chief of the Market Division and Deputy Market Administrator of the City of Manila
testified as follows:

Court This market master is an employee of the City of Manila?

Mr. Ymson Yes, Your Honor.

Q What are his functions?

A Direct supervision and control over the market area assigned to

him."(T.s.n.,pp. 41-42, Hearing of May 20, 1977.)

xxx xxx xxx

Court As far as you know there is or is there any specific employee

assigned with the task of seeing to it that the Sta. Ana Market is safe
for the public?

Mr. Ymson Actually, as I stated, Your Honor, that the Sta. Ana has its
own market master. The primary duty of that market master is to
make the direct supervision and control of that particular market, the
check or verifying whether the place is safe for public safety is vested
in the market master. (T.s.n., pp. 2425, Hearing of July 27, 1977.)
(Emphasis supplied.) (Rollo, p. 76).

Finally, Section 30 (g) of the Local Tax Code as amended, provides:

The treasurer shall exercise direct and immediate supervision administration and
control over public markets and the personnel thereof, including those whose duties
concern the maintenance and upkeep of the market and ordinances and other
pertinent rules and regulations. (Emphasis supplied.) (Rollo, p. 76)

The contention of respondent City of Manila that petitioner should not have ventured to go to Sta.
Ana Public Market during a stormy weather is indeed untenable. As observed by respondent Court
of Appeals, it is an error for the trial court to attribute the negligence to herein petitioner. More
specifically stated, the findings of appellate court are as follows:

... The trial court even chastised the plaintiff for going to market on a rainy day just to
buy bagoong. A customer in a store has the right to assume that the owner will
comply with his duty to keep the premises safe for customers. If he ventures to the
store on the basis of such assumption and is injured because the owner did not
comply with his duty, no negligence can be imputed to the customer. (Decision, AC-
G. R. CV No. 01387, Rollo, p. 19).

As a defense against liability on the basis of a quasi-delict, one must have exercised the diligence of
a good father of a family. (Art. 1173 of the Civil Code).
There is no argument that it is the duty of the City of Manila to exercise reasonable care to keep the
public market reasonably safe for people frequenting the place for their marketing needs.

While it may be conceded that the fulfillment of such duties is extremely difficult during storms and
floods, it must however, be admitted that ordinary precautions could have been taken during good
weather to minimize the dangers to life and limb under those difficult circumstances.

For instance, the drainage hole could have been placed under the stalls instead of on the passage
ways. Even more important is the fact, that the City should have seen to it that the openings were
covered. Sadly, the evidence indicates that long before petitioner fell into the opening, it was already
uncovered, and five (5) months after the incident happened, the opening was still uncovered. (Rollo,
pp. 57; 59). Moreover, while there are findings that during floods the vendors remove the iron grills to
hasten the flow of water (Decision, AC-G.R. CV No. 0 1387; Rollo, p. 17), there is no showing that
such practice has ever been prohibited, much less penalized by the City of Manila. Neither was it
shown that any sign had been placed thereabouts to warn passersby of the impending danger.

To recapitulate, it appears evident that the City of Manila is likewise liable for damages under Article
2189 of the Civil Code, respondent City having retained control and supervision over the Sta. Ana
Public Market and as tort-feasor under Article 2176 of the Civil Code on quasi-delicts

Petitioner had the right to assume that there were no openings in the middle of the passageways
and if any, that they were adequately covered. Had the opening been covered, petitioner could not
have fallen into it. Thus the negligence of the City of Manila is the proximate cause of the injury
suffered, the City is therefore liable for the injury suffered by the peti- 4 petitioner.

Respondent City of Manila and Asiatic Integrated Corporation being joint tort-feasors are solidarily
liable under Article 2194 of the Civil Code.

PREMISES CONSIDERED, the decision of the Court of Appeals is hereby MODIFIED, making the
City of Manila and the Asiatic Integrated Corporation solidarily liable to pay the plaintiff P221.90
actual medical expenses, P900.00 for the amount paid for the operation and management of the
school bus, P20,000.00 as moral damages due to pain, sufferings and sleepless nights and
P10,000.00 as attorney's fees.

SO ORDERED.

G.R. No. L-47851 October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,

vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and
the PHILIPPINE BAR ASSOCIATION, respondents.

G.R. No. L-47863 October 3, 1986

THE UNITED CONSTRUCTION CO., INC., petitioner,

vs.
COURT OF APPEALS, ET AL., respondents.

G.R. No. L-47896 October 3, 1986

PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,
vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of
Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of
Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order
of the lower court dated December 8, 1971. The Court of Appeals in modifying the decision of
the lower court included an award of an additional amount of P200,000.00 to the Philippine
Bar Association to be paid jointly and severally by the defendant United Construction Co. and
by the third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally,
the sum of P989,335.68 with interest at the legal rate from November 29, 1968,
the date of the filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for

lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of

P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with
interest at the legal rate from November 29, 1968 until full payment to be paid
jointly and severally by defendant United Construction Co., Inc. and third party
defendants (except Roman Ozaeta). In all other respects, the judgment dated
September 21, 1971 as modified in the December 8, 1971 Order of the lower
court is hereby affirmed with COSTS to be paid by the defendant and third
party defendant (except Roman Ozaeta) in equal shares.

SO ORDERED.
Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J.
Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other
things, for exoneration from liability while petitioner Philippine Bar Association in L-47896
seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss
of the PBA building plus four (4) times such amount as damages resulting in increased cost
of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective
respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-
348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under

the Corporation Law, decided to construct an office building on its 840 square meters lot
located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction
was undertaken by the United Construction, Inc. on an "administration" basis, on the
suggestion of Juan J. Carlos, the president and general manager of said corporation. The
proposal was approved by plaintiff's board of directors and signed by its president Roman
Ozaeta, a third-party defendant in this case. The plans and specifications for the building
were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building was
completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its
environs and the building in question sustained major damage. The front columns of the
building buckled, causing the building to tilt forward dangerously. The tenants vacated the
building in view of its precarious condition. As a temporary remedial measure, the building
was shored up by United Construction, Inc. at the cost of P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages
arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the
collapse of the building was accused by defects in the construction, the failure of the
contractors to follow plans and specifications and violations by the defendants of the terms
of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans
and specifications, alleging in essence that the collapse of the building was due to the
defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff
Bar Association was included as a third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party

complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil &
Sons and Juan F. Nakpil personally as parties defendant.
 2. That in the event (unexpected by the undersigned) that the Court should find
after the trial that the above-named defendants Juan J. Carlos and United
Construction Co., Inc. are free from any blame and liability for the collapse of
the PBA Building, and should further find that the collapse of said building was
due to defects and/or inadequacy of the plans, designs, and specifications p
by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way
jointly and solidarily liable with the defendants, judgment may be rendered in
whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or
Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's
complaint has been duly amended by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil as parties defendant and by alleging causes of action
against them including, among others, the defects or inadequacy of the plans,
designs, and specifications prepared by them and/or failure in the performance
of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2,
1968 earthquake had been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by

third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and
specifications and how said deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of

materials and workmanship in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected
of the architect, the contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a

combination of the above-enumerated factors, the degree or proportion in
which each individual factor contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely

demolished or whether it may still be repaired and restored to a tenantable
condition. In the latter case, the determination of the cost of such restoration
or repair, and the value of any remaining construction, such as the foundation,
 which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo,
L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues
were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants
and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was
authorized to be demolished at the expense of the plaintiff, but not another earthquake of
high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970,
caused further damage to the property. The actual demolition was undertaken by the buyer of
the damaged building. (Record on Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA building
was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3
they were also caused by the defects in the plans and specifications prepared by the third-
party defendants' architects, deviations from said plans and specifications by the defendant
contractors and failure of the latter to observe the requisite workmanship in the construction
of the building and of the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered
by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full nine supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence,
these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers,
and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability of architects when a
building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties.
The motion having been granted, the amicus curiae were granted a period of 60 days within
which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.
The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion
that the defects in the plans and specifications indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in the constructionalone (and not in the plans and design) caused the damage to the
building, still the deficiency in the original design and jack of specific provisions against
torsion in the original plans and the overload on the ground floor columns (found by an the
experts including the original designer) certainly contributed to the damage which occurred.
(Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of
errors: Philippine Bar Association claimed that the measure of damages should not be
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss
of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of
God that caused the failure of the building which should exempt them from responsibility and
not the defective construction, poor workmanship, deviations from plans and specifications
and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the
design, plans and specifications prepared by petitioners in the case of the Nakpils. Both
UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed
by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of
shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of
damages jointly and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties who are
otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of
the New Civil Code, which provides:

Art. 1723. The engineer or architect who drew up the plans and specifications
for a building is liable for damages if within fifteen years from the completion
of the structure the same should collapse by reason of a defect in those plans
and specifications, or due to the defects in the ground. The contractor is
likewise responsible for the damage if the edifice fags within the same period
on account of defects in the construction or the use of materials of inferior
quality furnished by him, or due to any violation of the terms of the contract. If
the engineer or architect supervises the construction, he shall be solidarily
liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of
the causes of action by reason of any defect mentioned in the preceding
paragraph.

The action must be brought within ten years following the collapse of the
building.

On the other hand, the general rule is that no person shall be responsible for events which
could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil
Code).
An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to
have been expected, could have been prevented. (1 Corpus Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of
God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God," the following must concur: (a) the cause of the breach of
the obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable 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. (Vasquez v. Court of Appeals, 138
SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527;
Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the
tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss
or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded
from creating or entering into the cause of the mischief. When the effect, the cause of which
is to be considered, is found to be in part the result of the participation of man, whether it be
from active intervention or neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus
Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate
cause of the damage was the act of God. To be exempt from liability for loss because of an
act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129;
Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established
beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant
United Construction Co., Inc. was found to have made substantial deviations from the plans
and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party
defendants were found to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, the defects in the construction and
in the plans and specifications were the proximate causes that rendered the PBA building
unable to withstand the earthquake of August 2, 1968. For this reason the defendant and
third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp.
30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the
parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs.
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding
grounded entirely on speculation, surmise and conjectures; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the admissions of both
appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289,
291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the
Court of Appeals are contrary to those of the trial court; (8) said findings of facts are
conclusions without citation of specific evidence on which they are based; (9) the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned.
On the contrary, the records show that the lower court spared no effort in arriving at the
correct appreciation of facts by the referral of technical issues to a Commissioner chosen by
the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court
of Appeals that "while it is not possible to state with certainty that the building would not
have collapsed were those defects not present, the fact remains that several buildings in the
same area withstood the earthquake to which the building of the plaintiff was similarly
subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the
partial collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However,
while the trial court awarded the PBA said amount as damages, plus unrealized rental income
for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an
additional sum of P200,000.00 representing the damage suffered by the PBA building as a
result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the
total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L-
47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further
urges that the unrealized rental income awarded to it should not be limited to a period of one-
half year but should be computed on a continuing basis at the rate of P178,671.76 a year until
the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11
Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial
and it is undisputed that the building could then still be repaired and restored to its
tenantable condition. The PBA, however, in view of its lack of needed funding, was unable,
thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed
consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of
the Court of Appeals:

There is no question that an earthquake and other forces of nature such as

cyclones, drought, floods, lightning, and perils of the sea are acts of God. It
does not necessarily follow, however, that specific losses and suffering
resulting from the occurrence of these natural force are also acts of God. We
are not convinced on the basis of the evidence on record that from the
thousands of structures in Manila, God singled out the blameless PBA building
in Intramuros and around six or seven other buildings in various parts of the
city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs
and plans, defective construction, poor workmanship, deviation from plans
and specifications and other imperfections. These deficiencies are attributable
to negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party

defendants-appellants presented in their briefs are premised on legal
generalizations or speculations and on theological fatalism both of which
ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous
events and extraordinary fortuitous events leads to its argument that the
August 2, 1968 earthquake was of such an overwhelming and destructive
character that by its own force and independent of the particular negligence
alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a
situation scores of buildings in the vicinity and in other parts of Manila would
have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968
knowledge and appear inadequate only in the light of engineering information
acquired after the earthquake. If this were so, hundreds of ancient buildings
which survived the earthquake better than the two-year old PBA building must
have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the
collapse. The failure of the PBA building, as a unique and distinct construction
with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The
theological allusion of appellant United that God acts in mysterious ways His
wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about
these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the
architects and the people in the construction company. More relevant to our
mind is the lesson from the parable of the wise man in the Sermon on the
Mount "which built his house upon a rock; and the rain descended and the
floods came and the winds blew and beat upon that house; and it fen not; for it
was founded upon a rock" and of the "foolish upon the sand. And the rain
descended and man which built his house the floods came, and the winds blew,
and beat upon that house; and it fell and great was the fall of it. (St. Matthew 7:
24-27)." The requirement that a building should withstand rains, floods, winds,
earthquakes, and natural forces is precisely the reason why we have
professional experts like architects, and engineers. Designs and constructions
vary under varying circumstances and conditions but the requirement to
design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational
and accurate. Instead of laying the blame solely on the motions and forces
generated by the earthquake, it also examined the ability of the PBA building,
as designed and constructed, to withstand and successfully weather those
forces.

The evidence sufficiently supports a conclusion that the negligence and fault
of both United and Nakpil and Sons, not a mysterious act of an inscrutable
God, were responsible for the damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party Defendants' Objections to the
Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer,
Defendants' Reply to the Commissioner's Answer, Counter-Reply to
Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully
considered by the lower Court. A reiteration of these same arguments on
appeal fails to convince us that we should reverse or disturb the lower Court's
factual findings and its conclusions drawn from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to

the physical evidence before and after the earthquake showing the inadequacy
of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila
Fire Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns
reduces the cross-sectional area of each of the columns and the strength
thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the
rear, not only in columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner
parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum

sagging occurs at the column A7 where the floor is lower by 80 cm. than the
highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the

design, plans and specifications of the PBA building which involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too
conservative code or even a code that does not require a design for
earthquake forces mitigates in a large measure the responsibility or liability of
the architect and engineer designer.

The Third-party defendants, who are the most concerned with this portion of
the Commissioner's report, voiced opposition to the same on the grounds that
(a) the finding is based on a basic erroneous conception as to the design
concept of the building, to wit, that the design is essentially that of a heavy
rectangular box on stilts with shear wan at one end; (b) the finding that there
were defects and a deficiency in the design of the building would at best be
based on an approximation and, therefore, rightly belonged to the realm of
speculation, rather than of certainty and could very possibly be outright error;
(c) the Commissioner has failed to back up or support his finding with
extensive, complex and highly specialized computations and analyzes which
he himself emphasizes are necessary in the determination of such a highly
technical question; and (d) the Commissioner has analyzed the design of the
PBA building not in the light of existing and available earthquake engineering
knowledge at the time of the preparation of the design, but in the light of recent
and current standards.

The Commissioner answered the said objections alleging that third-party

defendants' objections were based on estimates or exhibits not presented
during the hearing that the resort to engineering references posterior to the
date of the preparation of the plans was induced by the third-party defendants
themselves who submitted computations of the third-party defendants are
erroneous.

The issue presently considered is admittedly a technical one of the highest

degree. It involves questions not within the ordinary competence of the bench
and the bar to resolve by themselves. Counsel for the third-party defendants
has aptly remarked that "engineering, although dealing in mathematics, is not
an exact science and that the present knowledge as to the nature of
earthquakes and the behaviour of forces generated by them still leaves much
to be desired; so much so "that the experts of the different parties, who are all
engineers, cannot agree on what equation to use, as to what earthquake co-
efficients are, on the codes to be used and even as to the type of structure that
the PBA building (is) was (p. 29, Memo, of third- party defendants before the
Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the
questions involved therein, constituted the reason for the reference of the said
issues to a Commissioner whose qualifications and experience have eminently
qualified him for the task, and whose competence had not been questioned by
the parties until he submitted his report. Within the pardonable limit of the
Court's ability to comprehend the meaning of the Commissioner's report on
this issue, and the objections voiced to the same, the Court sees no
compelling reasons to disturb the findings of the Commissioner that there
were defects and deficiencies in the design, plans and specifications prepared
by third-party defendants, and that said defects and deficiencies involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and
specifications, and how said deviations contributed to the damage sustained
by the building.

(b) The alleged failure of defendants to observe the requisite quality of

materials and workmanship in the construction of the building.

These two issues, being interrelated with each other, will be discussed
together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged
deficiencies or defects in the construction and violations or deviations from
the plans and specifications. All these may be summarized as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.
(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires
no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity

being 3" off when on one face the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5,

ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there
are no spirals or where spirals are cut. Columns suffered worst displacement
where the eccentricity of the columnar reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 No spiral up to a height of 22" from the ground floor,

(3) Column D6 Spacing of spiral over 4 l/2,

(4) Column D7 Lack of lateral ties,

(5) Column C7 Absence of spiral to a height of 20" from the ground level,
Spirals are at 2" from the exterior column face and 6" from the inner column
face,

(6) Column B6 Lack of spiral on 2 feet below the floor beams,

(7) Column B5 Lack of spirals at a distance of 26' below the beam,

(8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are
uneven 2" to 4",

(9) Column A3 Lack of lateral ties,

(10) Column A4 Spirals cut off and welded to two separate clustered vertical
bars,

(11) Column A4 (second floor Column is completely hollow to a height of 30"

(12) Column A5 Spirals were cut from the floor level to the bottom of the
spandrel beam to a height of 6 feet,

(13) Column A6 No spirals up to a height of 30' above the ground floor level,

(14) Column A7 Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party

defendants.

Ground floor columns.

(1) Column A4 Spirals are cut,

(2) Column A5 Spirals are cut,

(3) Column A6 At lower 18" spirals are absent,

(4) Column A7 Ties are too far apart,

(5) Column B5 At upper fourth of column spirals are either absent or

improperly spliced,

(6) Column B6 At upper 2 feet spirals are absent,

(7) Column B7 At upper fourth of column spirals missing or improperly

spliced.

(8) Column C7 Spirals are absent at lowest 18"

(9) Column D5 At lowest 2 feet spirals are absent,

(10) Column D6 Spirals are too far apart and apparently improperly spliced,

(11) Column D7 Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the

engineering experts for the defendants are either contrary to general principles
of engineering design for reinforced concrete or not applicable to the
requirements for ductility and strength of reinforced concrete in earthquake-
resistant design and construction.

We shall first classify and consider defects which may have appreciable
bearing or relation to' the earthquake-resistant property of the building.
As heretofore mentioned, details which insure ductility at or near the
connections between columns and girders are desirable in earthquake
resistant design and construction. The omission of spirals and ties or hoops at
the bottom and/or tops of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and specifications required that these
spirals and ties be carried from the floor level to the bottom reinforcement of
the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several
clear evidences where this was not done especially in some of the ground floor
columns which failed.

There were also unmistakable evidences that the spacings of the spirals and
ties in the columns were in many cases greater than those called for in the
plans and specifications resulting again in loss of earthquake-resistant
strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of
strength in the column cannot be maintained and is certainly contrary to the
general principles of column design and construction. And even granting that
there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the
loss of the plastic range or ductility in the column and it is precisely this
plastic range or ductility which is desirable and needed for earthquake-
resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second
floor, and although this column did not fail, this is certainly an evidence on the
part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column
and beam moments. The main effect of eccentricity is to change the beam or
girder span. The effect on the measured eccentricity of 2 inches, therefore, is
to increase or diminish the column load by a maximum of about 1% and to
increase or diminish the column or beam movements by about a maximum of
2%. While these can certainly be absorbed within the factor of safety, they
nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great
contention between the parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5,
ground floor, is the responsibility of the general contractor which is the UCCI.
The burden of proof, therefore, that this cutting was done by others is upon the
defendants. Other than a strong allegation and assertion that it is the plumber
or his men who may have done the cutting (and this was flatly denied by the
plumber) no conclusive proof was presented. The engineering experts for the
defendants asserted that they could have no motivation for cutting the bar
because they can simply replace the spirals by wrapping around a new set of
spirals. This is not quite correct. There is evidence to show that the pouring of
concrete for columns was sometimes done through the beam and girder
reinforcements which were already in place as in the case of column A4
second floor. If the reinforcement for the girder and column is to subsequently
wrap around the spirals, this would not do for the elasticity of steel would
 prevent the making of tight column spirals and loose or improper spirals would
result. The proper way is to produce correct spirals down from the top of the
main column bars, a procedure which can not be done if either the beam or
girder reinforcement is already in place. The engineering experts for the
defendants strongly assert and apparently believe that the cutting of the
spirals did not materially diminish the strength of the column. This belief
together with the difficulty of slipping the spirals on the top of the column once
the beam reinforcement is in place may be a sufficient motivation for the
cutting of the spirals themselves. The defendants, therefore, should be held
responsible for the consequences arising from the loss of strength or ductility
in column A5 which may have contributed to the damages sustained by the
building.

The lack of proper length of splicing of spirals was also proven in the visible
spirals of the columns where spalling of the concrete cover had taken place.
This lack of proper splicing contributed in a small measure to the loss of
strength.

The effects of all the other proven and visible defects although nor can
certainly be accumulated so that they can contribute to an appreciable loss in
earthquake-resistant strength. The engineering experts for the defendants
submitted an estimate on some of these defects in the amount of a few percent.
If accumulated, therefore, including the effect of eccentricity in the column the
loss in strength due to these minor defects may run to as much as ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at
the top of some of the ground floor columns contributed greatly to the collapse
of the PBA building since it is at these points where the greater part of the
failure occurred. The liability for the cutting of the spirals in column A5, ground
floor, in the considered opinion of the Commissioner rests on the shoulders of
the defendants and the loss of strength in this column contributed to the
damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies

and violations of the plans and specifications of the PBA building contributed
to the damages which resulted during the earthquake of August 2, 1968 and
the vice of these defects and deficiencies is that they not only increase but
also aggravate the weakness mentioned in the design of the structure. In other
words, these defects and deficiencies not only tend to add but also to multiply
the effects of the shortcomings in the design of the building. We may say,
therefore, that the defects and deficiencies in the construction contributed
greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of
the contractor is direct and positive, the presence of existence of all the major
defects and deficiencies noted and proven manifests an element of negligence
which may amount to imprudence in the construction work. (pp. 42-49,
Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner should
have specified the defects found by him to be "meritorious"; that the Commissioner failed to
indicate the number of cases where the spirals and ties were not carried from the floor level
to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties
in the columns were greater than that called for in the specifications; that the hollow in
column A4, second floor, the eccentricities in the columns, the lack of proper length of
splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or
contribute to the damage suffered by the building; that the defects in the construction were
within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground
floor, was done by the plumber or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were
minor only the totality of the defects was considered. As regards the objection as to failure to
state the number of cases where the spirals and ties were not carried from the floor level to
the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the
first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10
inches at the bottom. The Commissioner likewise specified the first storey columns where
the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-
7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the
number of columns where there was lack of proper length of splicing of spirals, the
Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less
than 1-1/2 turns and were not welded, resulting in some loss of strength which could be
critical near the ends of the columns. He answered the supposition of the defendants that the
spirals and the ties must have been looted, by calling attention to the fact that the missing
spirals and ties were only in two out of the 25 columns, which rendered said supposition to
be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate
or contribute to the damage, but averred that it is "evidence of poor construction." On the
claim that the eccentricity could be absorbed within the factor of safety, the Commissioner
answered that, while the same may be true, it also contributed to or aggravated the damage
suffered by the building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered
by the Commissioner by reiterating the observation in his report that irrespective of who did
the cutting of the spirals, the defendants should be held liable for the same as the general
contractor of the building. The Commissioner further stated that the loss of strength of the
cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the
spiral containment in the column and resulted in the loss of strength, as evidenced by the
actual failure of this column.

Again, the Court concurs in the findings of the Commissioner on these issues and fails to
find any sufficient cause to disregard or modify the same. As found by the Commissioner, the
"deviations made by the defendants from the plans and specifications caused indirectly the
damage sustained and that those deviations not only added but also aggravated the damage
caused by the defects in the plans and specifications prepared by third-party defendants.
(Rollo, Vol. I, pp. 128-142)

The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and
the third-party defendants in effecting the plans, designs, specifications, and construction of
the PBA building and We hold such negligence as equivalent to bad faith in the performance
of their respective tasks.
Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380)
which may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which
he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of
ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells
out the fatal difference; gross negligence and evident bad faith, without which the damage
would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, We deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with
the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in
favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception of attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality
of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum
shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.

G.R. No. 189563 April 7, 2014

GILAT SATELLITE NETWORKS, LTD., Petitioner,

vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.

DECISION

SERENO, CJ:

This is an appeal via a Petition for Review on Certiorari1 filed 6 November 2009 assailing the
Decision2 and Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed
the Decision4 of the Regional Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461,
ordering respondent to pay petitioner a sum of money.

The antecedent facts, as culled from the CA, are as follows:

On September 15, 1999, One Virtual placed with GILAT a purchase order for various
telecommunications equipment (sic), accessories, spares, services and software, at a total purchase
price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty Dollars
(US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay
a portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22
November 1999. To ensure the prompt payment of this amount, it obtained defendant UCPB
General Insurance Co., Inc.s surety bond dated 3 December 1999, in favor of GILAT.
During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to
One Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading
(Exhibits "F", "F-1" to "F-8"). All of the equipment (including the software components for which
payment was secured by the surety bond, was shipped by GILAT and duly received by One Virtual.
Under an endorsement dated December 23, 1999 (Exhibit "E"), the surety issued, with One Virtuals
conformity, an amendment to the surety bond, Annex "A" thereof, correcting its expiry date from May
30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on
the due date of May 30, 2000 in accordance with the payment schedule attached as Annex "A" to
the surety bond, prompting GILAT to write the surety defendant UCPB on June 5, 2000, a demand
letter (Exhibit "G") for payment of the said amount of US$400,000.00. No part of the amount set forth
in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise
failed to pay on the succeeding payment instalment date of 30 November 2000 as set out in Annex
"A" of the surety bond, prompting GILAT to send a second demand letter dated January 24, 2001,
for the payment of the full amount of US$1,200,000.00 guaranteed under the surety bond, plus
interests and expenses (Exhibits "H") and which letter was received by the defendant surety on
January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a
part thereof, hence, the instant complaint."5(Emphases in the original)

On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint6 against respondent
UCPB General Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond,
plus interests and expenses. After due hearing, the RTC rendered its Decision,7 the dispositive
portion of which is herein quoted:

WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and
against the defendant, ordering, to wit:

1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred
Thousand Dollars (US$1,200,000.00) representing the principal debt under the Surety Bond,
with legal interest thereon at the rate of 12% per annum computed from the time the
judgment becomes final and executory until the obligation is fully settled; and

2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars
and Four Cents (US$44,004.04) representing attorneys fees and litigation expenses.

Accordingly, defendants counterclaim is hereby dismissed for want of merit.

SO ORDERED. (Emphasis in the original)

In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the
subject equipments [sic] and the same was installed. Even with the delivery and installation made,
One Virtual failed to pay any of the payments agreed upon. Demand notwithstanding, defendant
failed and refused and continued to fail and refused to settle the obligation."8

Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed
by and between One Virtual as Principal, UCPB as Surety and GILAT as Creditor/Bond
Obligee,"9 respondent agreed and bound itself to pay in accordance with the Payment Milestones.
This obligation was not made dependent on any condition outside the terms and conditions of the
Surety Bond and Payment Milestones.10
Insofar as the interests were concerned, the RTC denied petitioners claim on the premise that while
a surety can be held liable for interest even if it becomes more onerous than the principal obligation,
the surety shall only accrue when the delay or refusal to pay the principal obligation is without any
justifiable cause.11 Here, respondent failed to pay its surety obligation because of the advice of its
principal (One Virtual) not to pay.12 The RTC then obligated respondent to pay petitioner the amount
of USD1,200,000.00 representing the principal debt under the Surety Bond, with legal interest at the
rate of 12% per annum computed from the time the judgment becomes final and executory, and
USD44,004.04 representing attorneys fees and litigation expenses.

On 18 October 2007, respondent appealed to the CA.13 The appellate court rendered a Decision14 in
the following manner:

WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial courts Decision
dated December 28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One
Virtual are ordered to proceed to arbitration, the outcome of which shall necessary bind the parties,
including the surety, defendant-appellant United Coconut Planters Bank General Insurance Co., Inc.

SO ORDERED. (Emphasis in the original)

The CA ruled that in "enforcing a surety contract, the complementary-contracts-construed-together

doctrine finds application." According to this doctrine, the accessory contract must be construed with
the principal agreement.15 In this case, the appellate court considered the Purchase Agreement
entered into between petitioner and One Virtual as the principal contract,16 whose stipulations are
also binding on the parties to the suretyship.17 Bearing in mind the arbitration clause contained in the
Purchase Agreement18 and pursuant to the policy of the courts to encourage alternative dispute
resolution methods,19 the trial courts Decision was vacated; petitioner and One Virtual were ordered
to proceed to arbitration.

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument.
The motion was denied for lack of merit in a Resolution20 issued by the CA on 16 September 2009.

Hence, the instant Petition.

On 31 August 2010, respondent filed a Comment21 on the Petition for Review. On 24 November 2010,
petitioner filed a Reply.22

ISSUES

From the foregoing, we reduce the issues to the following:

1. Whether or not the CA erred in dismissing the case and ordering petitioner and One
Virtual to arbitrate; and

2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by
respondent of its obligation under the Suretyship Agreement.

THE COURTS RULING

The existence of a suretyship agreement does not give the surety the right to intervene in the
principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a
non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party
entitled to it applies for this relief.23 This referral, however, can only be demanded by one who is a
party to the arbitration agreement.24 Considering that neither petitioner nor One Virtual has asked for
a referral, there is no basis for the CAs order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code25 clearly provide that the creditor may proceed
against the surety without having first sued the principal debtor.26 Even the Surety Agreement itself
states that respondent becomes liable upon "mere failure of the Principal to make such prompt
payment."27 Thus, petitioner should not be ordered to make a separate claim against One Virtual (via
arbitration) before proceeding against respondent.28

On the other hand, respondent maintains that a surety contract is merely an accessory contract,
which cannot exist without a valid obligation.29 Thus, the surety may avail itself of all the defenses
available to the principal debtor and inherent in the debt30 that is, the right to invoke the arbitration
clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the
principal debtor. This undertaking makes a surety agreement an ancillary contract, as it presupposes
the existence of a principal contract.31 Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, its liability to the creditor or "promise" of the principal is
said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the
principal.32 He becomes liable for the debt and duty of the principal obligor, even without possessing
a direct or personal interest in the obligations constituted by the latter.33Thus, a surety is not entitled
to a separate notice of default or to the benefit of excussion.34 It may in fact be sued separately or
together with the principal debtor.35

After a thorough examination of the pieces of evidence presented by both parties,36 the RTC found
that petitioner had delivered all the goods to One Virtual and installed them. Despite these
compliances, One Virtual still failed to pay its obligation,37 triggering respondents liability to petitioner
as the formers surety. In other words, the failure of One Virtual, as the principal debtor, to fulfill its
1w phi 1

monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the
surety.

Consequently, we cannot sustain respondents claim that the Purchase Agreement, being the
principal contract to which the Suretyship Agreement is accessory, must take precedence over
arbitration as the preferred mode of settling disputes.

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.,38 that "[the]
acceptance [of a surety agreement], however, does not change in any material way the creditors
relationship with the principal debtor nor does it make the surety an active party to the principal
creditor-debtor relationship. In other words, the acceptance does not give the surety the right to
intervene in the principal contract. The suretys role arises only upon the debtors default, at which
time, it can be directly held liable by the creditor for payment as a solidary obligor." Hence, the surety
remains a stranger to the Purchase Agreement. We agree with petitioner that respondent cannot
invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that
contract.39 An arbitration agreement being contractual in nature,40 it is binding only on the parties
thereto, as well as their assigns and heirs.41

Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only
take place "if at least one party so requests not later than the pre-trial conference, or upon the
request of both parties thereafter." Respondent has not presented even an iota of evidence to show
that either petitioner or One Virtual submitted its contesting claim for arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself.43 They are
contracted precisely to mitigate risks of non-performance on the part of the obligor. This
responsibility necessarily places a surety on the same level as that of the principal debtor.44 The
effect is that the creditor is given the right to directly proceed against either principal debtor or surety.
This is the reason why excussion cannot be invoked.45 To require the creditor to proceed to
arbitration would render the very essence of suretyship nugatory and diminish its value in commerce.
At any rate, as we have held in Palmares v. Court of Appeals,46 "if the surety is dissatisfied with the
degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself
and become subrogated to all the rights and remedies of the creditor."

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in
the payment of the latters obligation, provided that the delay is inexcusable.

Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per
annum from the time of its first demand on respondent on 5 June 2000 or at most, from the second
demand on 24 January 2001 because of the latters delay in discharging its monetary
obligation.47 Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from
the time it demanded the fulfilment of respondents obligation under the suretyship contract.
Significantly, respondent does not contest this point, but instead argues that it is only liable for legal
interest of 6% per annum from the date of petitioners last demand on 24 January 2001.

In rejecting petitioners position, the RTC stated that interests may only accrue when the delay or the
refusal of a party to pay is without any justifiable cause.48 In this case, respondents failure to heed
the demand was due to the advice of One Virtual that petitioner allegedly breached its undertakings
as stated in the Purchase Agreement.49 The CA, however, made no pronouncement on this matter.

We sustain petitioner.

Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money,
and the debtor incurs a delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest."

Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply.50 Delay, as used in Article 1169, is
synonymous with default or mora, which means delay in the fulfilment of obligations.51 It is the
nonfulfillment of an obligation with respect to time.52 In order for the debtor (in this case, the surety) to
be in default, it is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance judicially or extrajudicially.53

Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus
paying, its liability becomes more than the principal obligation.54 The increased liability is not because
of the contract, but because of the default and the necessity of judicial collection.55

However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la
Hotel,56 citing RCPI v. Verchez,57 we held thus:
In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory
force of contracts, will not permit a party to be set free from liability for any kind of misperformance of
the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract
confers upon the injured party a valid cause for recovering that which may have been lost or suffered.
The remedy serves to preserve the interests of the promissee that may include his "expectation
interest," which is his interest in having the benefit of his bargain by being put in as good a position
as he would have been in had the contract been performed, or his "reliance interest," which is his
interest in being reimbursed for loss caused by reliance on the contract by being put in as good a
position as he would have been in had the contract not been made; or his "restitution interest," which
is his interest in having restored to him any benefit that he has conferred on the other party. Indeed,
agreements can accomplish little, either for their makers or for society, unless they are made the
basis for action. The effect of every infraction is to create a new duty, that is, to make
RECOMPENSE to the one who has been injured by the failure of another to observe his contractual
obligation unless he can show extenuating circumstances, like proof of his exercise of due diligence
x x x or of the attendance of fortuitous event, to excuse him from his ensuing liability. (Emphasis
ours)

We agree with petitioner that records are bereft of proof to show that respondents delay was indeed
justified by the circumstances that is, One Virtuals advice regarding petitioners alleged breach of
obligations. The lower courts Decision itself belied this contention when it said that "plaintiff is not
disputing that it did not complete commissioning work on one of the two systems because One
Virtual at that time is already in default and has not paid GILAT."58Assuming arguendo that the
commissioning work was not completed, respondent has no one to blame but its principal, One
Virtual; if only it had paid its obligation on time, petitioner would not have been forced to stop
operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly stated
that petitioner had delivered all equipment, including the licensed software; and that the equipment
had been installed and in fact, gone into operation.59 Notwithstanding these compliances, respondent
still failed to pay.

As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from
the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the
provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an
extra-judicial demand before an action for performance was filed, interest on the amount due begins
to run, not from the date of the filing of the complaint, but from the date of that extra-judicial
demand.60 Considering that respondent failed to pay its obligation on 30 May 2000 in accordance
with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June
2000,61 we agree with the latter that interest must start to run from the time petitioner sent its first
demand letter (5 June 2000), because the obligation was already due and demandable at that time.

With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames,62 which
modified the guidelines established in Eastern Shipping Lines v. CA63 in relation to Bangko Sentral-
Monetary Board Circular No. 799 (Series of 2013), 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
1wphi 1

the absence of stipulation, the rate of interest shall be 6% 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.

xxxx
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 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

Applying the above-discussed concepts and in the absence of an agreement as to interests, we are
hereby compelled to award petitioner legal interest at the rate of 6% per annum from 5 June 2000,
its first date of extra judicial demand, until the satisfaction of the debt in accordance with the revised
guidelines enunciated in Nacar.

WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision
and Resolution of the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of
the Regional Trial Court, Branch 141, Makati City is REINSTATED, with MODIFICATION insofar as
the award of legal interest is concerned. Respondent is hereby ordered to pay legal interest at the
rate of 6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship
Contract and Purchase Agreement.

SO ORDERED.

G.R. No. 184458, January 14, 2015

RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA CHUA, Respondents.

[G.R. NO. 184472]

SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing
the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with modification the separate
rulings of the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and
the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for collection of a sum of
money due a promissory note. While all three (3) lower courts upheld the validity and authenticity of the
promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the
appellate court modified the trial courts consistent awards: (1) the stipulated interest rate of sixty percent
(60%) reduced to twelve percent (12%) per annum computed from the date of judicial or extrajudicial
demand, and (2) reinstatement of the award of attorneys fees also in a reduced amount of P50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions
the entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472, Spouses Salvador
and Violeta Chua (Spouses Chua), take exception to the appellate courts reduction of the stipulated interest
rate of sixty percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chuas son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua: chanroblesvi rtua llawli bra ry

PROMISSORY NOTE
120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY
CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (P120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty
percent (20%) of the total amount due and payable as and for attorneys fees which in no case shall be less
than P5,000.00 and to pay in addition the cost of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of
Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as
partial payment for the loan, issued and delivered to the Spouses Chua, as payee, a check numbered
012467, dated 30 December 1998, drawn against Riveras current account with the Philippine Commercial
International Bank (PCIB) in the amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise
drawn against Riveras PCIB current account, numbered 013224, duly signed and dated, but blank as to
payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued in
the amount of P133,454.00 with cash as payee. Purportedly, both checks were simply partial payment for
Riveras loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason account closed.

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal of
P120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because
of Riveras unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The
case was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject
Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were
always covered by a security; (3) at the time of the filing of the complaint, he still had an existing
indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB
Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should
have been issued in the amount of only P1,300.00, representing the amount he received from the Spouses
Chuas saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the check for
payment in the amount of P133,454.00; and (6) there was no demand for payment of the amount of
P120,000.00 prior to the encashment of PCIB Check No. 0132224. 5 chanRoblesv irtual Lawlib rary

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties respective witnesses: chan roblesv irtuallawl ib rary

[The spouses Chuas] evidence include[s] documentary evidence and oral evidence (consisting of the
testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner
(1989); NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate
of 18th Basic Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended
a seminar on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar
on Effective Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a
hundred thousand questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the
Promissory Note and compared the signature thereon with the specimen signatures of [Rivera] appearing on
several documents. After a thorough study, examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the documents submitted to him, he concluded
that the questioned signature appearing in the Promissory Note and the specimen signatures of [Rivera]
appearing on the other documents submitted were written by one and the same person. In connection with
his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with
the following conclusion: The questioned and the standard specimen signatures RODGRIGO RIVERA were
written by one and the same person.

[Rivera] testified as follows: he and [respondent] Salvador are kumpadres; in May 1998, he obtained a
loan from [respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of
[respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 from
Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of the
Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was not his
signature; [respondent Salvadors] claim that PCIB Check No. 0132224 was partial payment for the
Promissory Note was not true, the truth being that he delivered the check to [respondent Salvador] with the
space for amount left blank as he and [respondent] Salvador had agreed that the latter was to fill it in with
the amount of ?1,300.00 which amount he owed [the spouses Chua]; however, on 29 December 1998
[respondent] Salvador called him and told him that he had written P133,454.00 instead of P1,300.00; x x x.
To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that
the signature appearing on the Promissory Note was not his signature and that he did not execute the
Promissory Note.6

After trial, the MeTC ruled in favor of the Spouses Chua: chanroblesv irt uallawl ibra ry

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the
rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from
11 June 1999, as actual and compensatory damages; 20% of the whole amount due as attorneys fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the
award of attorneys fees to the Spouses Chua: chanroblesv irt uallawl ibra ry

WHEREFORE, except as to the amount of attorneys fees which is hereby deleted, the rest of the Decision
dated October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.

Undaunted, Rivera appealed to the Court of Appeals which affirmed Riveras liability under the Promissory
Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and reinstated the award
of attorneys fees in favor of the Spouses Chua: chanroblesvi rt uallawli bra ry

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the
interest rate of 60% per annum is hereby reduced to 12% per annum and the award of attorneys fees is
reinstated at the reduced amount of P50,000.00 Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorari of Rivera in G.R. No. 184458 and the Spouses
Chua in G.R. No. 184472, respectively raising the following issues: chan roble svirtuallaw lib rary

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC
AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO
LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEYS FEES
DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT
[THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE AWARD OF
ATTORNEYS FEES.10 chanRoblesvi rtual Lawli bra ry

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT
MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12%
PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE
SAID STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE,
ILLEGAL, IMMORAL OR VOID.11

As early as 15 December 2008, we already disposed of G.R. No. 184472 and denied the petition, via a
Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate court
specifically concerning the correct rate of interest on Riveras indebtedness under the Promissory Note.12 chanRob lesvi rtua lLawl ibra ry

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling
of the Court of Appeals in CA-G.R. SP No. 90609.

Rivera continues to deny that he executed the Promissory Note; he claims that given his friendship with the
Spouses Chua who were money lenders, he has been able to maintain a loan account with them. However,
each of these loan transactions was respectively secured by checks or sufficient collateral.

Rivera points out that the Spouses Chua never demanded payment for the loan nor interest thereof (sic)
from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December
31, 1995].13chanRoblesvi rtua lLaw lib rary

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower
courts uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only
that the signature is not his and varies from his usual signature. He likewise makes a confusing defense of
having previously obtained loans from the Spouses Chua who were money lenders and who had allowed him
a period of almost four (4) years before demanding payment of the loan under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of
Investigation (NBI) handwriting expert on the integrity of the promissory note.

On that score, the appellate court aptly disabled Riveras contention: chanro blesvi rt uallawl ibra ry

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a
forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and convincing
evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was forged.
Save for the denial of Rivera that the signature on the note was not his, there is nothing in the records to
support his claim of forgery. And while it is true that resort to experts is not mandatory or indispensable to
the examination of alleged forged documents, the opinions of handwriting experts are nevertheless helpful
in the courts determination of a documents authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the
testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in evidence
would lead to the conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by
preponderance of evidence, which simply means evidence which is of greater weight, or more convincing
than that which is offered in opposition to it.

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima
facie case in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of
forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14

Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed
by the appellate court, are accorded the highest degree of respect and are considered conclusive between
the parties.15 A review of such findings by this Court is not warranted except upon a showing of highly
meritorious circumstances, such as: (1) when the findings of a trial court are grounded entirely on
speculation, surmises or conjectures; (2) when a lower court's inference from its factual findings is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of
facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to notice certain
relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific
evidence on which they are based, are premised on the absence of evidence, or are contradicted by
evidence on record.16 None of these exceptions obtains in this instance. There is no reason to depart from
the separate factual findings of the three (3) lower courts on the validity of Riveras signature reflected in
the Promissory Note.

Indeed, Rivera had the burden of proving the material allegations which he sets up in his Answer to the
plaintiffs claim or cause of action, upon which issue is joined, whether they relate to the whole case or only
to certain issues in the case.17 chanRob lesvi rtual Lawli bra ry

In this case, Riveras bare assertion is unsubstantiated and directly disputed by the testimony of a
handwriting expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to
the examination or the comparison of handwriting, the trial courts in this case, on its own, using the
handwriting expert testimony only as an aid, found the disputed document valid.18 cha nRoblesvi rt ualLawl ibra ry

Hence, the MeTC ruled that: chanroble svirtual lawlib rary

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of
[respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Riveras]) house; the
conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the Promissory
Note) and standard specimen signatures Rodrigo Rivera were written by one and the same person;
actual view at the hearing of the enlarged photographs of the questioned signature and the standard
specimen signatures.19

Specifically, Rivera insists that: [i]f that promissory note indeed exists, it is beyond logic for a money
lender to extend another loan on May 4, 1998 secured by a real estate mortgage, when he was already in
default and has not been paying any interest for a loan incurred in February 1995.20 chanRoble svirtual Lawli bra ry

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as kumpadres,
Rivera was allowed another loan, albeit this time secured by a real estate mortgage, which will cover
Riveras loan should Rivera fail to pay. There is nothing inconsistent with the Spouses Chuas two (2) and
successive loan accommodations to Rivera: one, secured by a real estate mortgage and the other, secured
by only a Promissory Note.

Also completely plausible is that given the relationship between the parties, Rivera was allowed a substantial
amount of time before the Spouses Chua demanded payment of the obligation due under the Promissory
Note.

In all, Riveras evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant
defense to assail the authenticity and validity of the Promissory Note. Although the burden of proof rested
on the Spouses Chua having instituted the civil case and after they established a prima facie case against
Rivera, the burden of evidence shifted to the latter to establish his defense.21 Consequently, Rivera failed to
discharge the burden of evidence, refute the existence of the Promissory Note duly signed by him and
subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left
on where the respective evidence of the parties preponderatedin favor of plaintiffs, the Spouses Chua.

Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in
order to charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate
court to apply Section 70 of the Negotiable Instruments Law (NIL).22 chanRoblesvi rtua lLawl ibra ry
We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do
not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a
negotiable instrument: c hanro blesvi rt uallawli bra ry

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: chan roblesv irt uallawl ibra ry

SECTION 184. Promissory Note, Defined. A negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a
note is drawn to the makers own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua,
and not to order or to bearer, or to the order of the Spouses Chua as payees.

However, even if Riveras Promissory Note is not a negotiable instrument and therefore outside the coverage
of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the person
liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable
31 December 1995. As of 1 January 1996, Rivera had already incurred in delay when he failed to pay the
amount of P120,000.00 due to the Spouses Chua on 31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides: c hanro blesvi rt uallawl ibra ry

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply
in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is
an express stipulation to that effect; (2) where the law so provides; (3) when the period is the controlling
motive or the principal inducement for the creation of the obligation; and (4) where demand would be
useless. In the first two paragraphs, it is not sufficient that the law or obligation fixes a date for performance;
it must further state expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of interest: cha nrob lesvi rtu allawlib rary

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the date of default until
the entire obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a
date certain, 31 December 1995, will give rise to the obligation to pay interest. The Promissory Note
expressly provided that after 31 December 1995, default commences and the stipulation on payment of
interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the
due date of the obligation. On that date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not
necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter, on 1
January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of
stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance of
their obligations is laid down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for
damages when the obligor incurs in delay: chan roblesv irtuallaw lib rary

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum.
(Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the
debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and (3) the
Promissory Note provides for an indemnity for damages upon default of Rivera which is the payment of a 5%
monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as
obligor, assumed to pay additional 5% monthly interest on the principal amount of P120,000.00 upon
default.

Article 1226 of the Civil Code provides: chan roble svirtuallaw lib rary

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.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment
and reparation. It is an exception to the general rules on recovery of losses and damages. As an exception
to the general rule, a penal clause must be specifically set forth in the obligation.25 cha nRoblesvi rt u alLawli bra ry

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal
clause, and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted in
the payment of the amount of P120,000.00. The measure of damages for the Riveras delay is limited to the
interest stipulated in the Promissory Note. In apt instances, in default of stipulation, the interest is that
provided by law.26 c hanRoble svirtual Lawlib ra ry

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a
month or 60% per annum. On this score, the appellate court ruled: cha nrob lesvi rtua llawli bra ry

It bears emphasizing that the undertaking based on the note clearly states the date of payment to be 31
December 1995. Given this circumstance, demand by the creditor is no longer necessary in order that delay
may exist since the contract itself already expressly so declares. The mere failure of [Spouses Chua] to
immediately demand or collect payment of the value of the note does not exonerate [Rivera] from his
liability therefrom. Verily, the trial court committed no reversible error when it imposed interest from 1
January 1996 on the ratiocination that [Spouses Chua] were relieved from making demand under Article
1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal
interests and attorneys fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. Since
the interest rate agreed upon is void, the parties are considered to have no stipulation regarding the interest
rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or extrajudicial
demand.[27 chanRoblesvi rtua lLaw lib rary

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and
attorneys fees, steep, tantamount to it being illegal, iniquitous and unconscionable.

Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying
the petition of the Spouses Chua for failure to sufficiently show any reversible error in the ruling of the
appellate court, specifically the reduction of the interest rate imposed on Riveras indebtedness under the
Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its concept of
bar by prior judgment on whether the Court of Appeals correctly reduced the interest rate stipulated in the
Promissory Note.

Res judicata applies in the concept of bar by prior judgment if the following requisites concur: (1) the
former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision
must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4)
there must be, between the first and the second action, identity of parties, of subject matter and of causes
of action.28
chanRoblesvi rtua lLawl ibra ry

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter
raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals disposition on
the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our
ruling thereon affirming the Court of Appeals is a bar by prior judgment.

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then
prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases
involving the loan or forbearance of money.29 Thus, the legal interest accruing from the Promissory Note is
12% per annum from the date of default on 1 January 1996.

However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the advent
and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of
legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is
prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1 January 1996,
the date when Rivera defaulted, to date when this Decision becomes final and executor is divided into two
periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013; and
(2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this
Decision becomes final and executory, such is likewise divided into two periods: (1) 12% per annumfrom 11
June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date
when this Decision becomes final and executor.31 We base this imposition of interest on interest due
earning legal interest on Article 2212 of the Civil Code which provides that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent on this point.

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua
could already be determined with reasonable certainty given the wording of the Promissory Note.32 chanRob lesvi rtua lLawl ibra ry

We cite our recent ruling in Nacar v. Gallery Frames:33 chanRoble svirtua lLawli bra ry

I. 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 damages. The provisions under Title XVIII on Damages of
the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows: ChanRobles Vi rtua lawlib rary

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 6% 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 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein. (Emphasis supplied)

On the reinstatement of the award of attorneys fees based on the stipulation in the Promissory Note, we
agree with the reduction thereof but not the ratiocination of the appellate court that the attorneys fees are
in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note already
answers as liquidated damages for Riveras default in paying his obligation. We award attorneys fees, albeit
in a reduced amount, in recognition that the Spouses Chua were compelled to litigate and incurred expenses
to protect their interests.34 Thus, the award of P50,000.00 as attorneys fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the
Spouses Chua: chanroblesv irt uallawl ibra ry

Face value Stipulated Interest Interest due Attorneys Total

of the A&B earning legal fees Amount
Promissory interest A & B
Note
February A. January 1, 1996 A. June 11, 1999 Wholesale
24, 1995 to to June 30, 2013 (date of judicial amount
December demand) to June
31, 1995 B. July 1 2013 to 30, 2013
date when this B. July 1, 2013 to
Decision becomes date when this
final and executory Decision becomes
final and executory
P120,000.00 A. 12 % per A. 12% per P50,000.00 Total
annum on the annum on the total amount
principal amount of amount of column of
P120,000.00 2 Columns
B. 6% per B. 6% per 1-4
annum on the annum on the total
 principal amount of amount of column
P120,000.00 235

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the
rate of 6% per annum computed from its finality until full payment thereof, the interim period being deemed
to be a forbearance of credit. chanrob leslaw

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R.
SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and
Violeta Chua the following:chan rob lesvi rt uallawlib ra ry

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annum of the principal amount of P120,000.00
reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annum of the principal amount of P120,000.00
form 1 July 2013 to date when this Decision becomes final and
executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11 June
1999, date of judicial demand, to 30 June 2013, as interest due earning
legal interest;
(5) 6% per annum applied to the total amount of paragraphs 2 and 3 from 1
July 2013 to date when this Decision becomes final and executor, as
interest due earning legal interest;
(6) Attorneys fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the
finality of this Decision until full payment thereof.
Costs against petitioner Rodrigo Rivera.

SOLAR HARVEST, INC., G.R. No. 176868

Petitioner,
Present:

CARPIO, J.,

Chairperson,

NACHURA,
- versus -
PERALTA,

ABAD, and
 MENDOZA, JJ.

DAVAO CORRUGATED CARTON Promulgated:

CORPORATION,

Respondent.
July 26, 2010

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

DECISION

NACHURA, J.:

Petitioner seeks a review of the Court of Appeals (CA) Decision[1] dated

September 21, 2006 and Resolution[2] dated February 23, 2007, which denied
petitioners motion for reconsideration. The assailed Decision denied petitioners
claim for reimbursement for the amount it paid to respondent for the
manufacture of corrugated carton boxes.

The case arose from the following antecedents:

In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an
agreement with respondent, Davao Corrugated Carton Corporation, for the
purchase of corrugated carton boxes, specifically designed for petitioners
business of exporting fresh bananas, at US$1.10 each. The agreement was not
reduced into writing. To get the production underway, petitioner deposited, on
March 31, 1998, US$40,150.00 in respondents US Dollar Savings Account with
Westmont Bank, as full payment for the ordered boxes.

Despite such payment, petitioner did not receive any boxes from respondent. On
January 3, 2001, petitioner wrote a demand letter for reimbursement of the
amount paid.[3] On February 19, 2001, respondent replied that the boxes had
been completed as early as April 3, 1998 and that petitioner failed to pick them
up from the formers warehouse 30 days from completion, as agreed
upon. Respondent mentioned that petitioner even placed an additional order of
24,000 boxes, out of which, 14,000 had been manufactured without any
advanced payment from petitioner. Respondent then demanded petitioner to
remove the boxes from the factory and to pay the balance of US$15,400.00 for
the additional boxes and P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes
will be delivered within 30 days from payment but respondent failed to
manufacture and deliver the boxes within such time. It further alleged

6. That repeated follow-up was made by the plaintiff for the immediate
production of the ordered boxes, but every time, defendant [would]
only show samples of boxes and ma[k]e repeated promises to deliver
the said ordered boxes.

7. That because of the failure of the defendant to deliver the ordered

boxes, plaintiff ha[d] to cancel the same and demand payment and/or
refund from the defendant but the latter refused to pay and/or refund
the US$40,150.00 payment made by the former for the ordered boxes.[4]

In its Answer with Counterclaim,[5] respondent insisted that, as early as April 3,

1998, it had already completed production of the 36,500 boxes, contrary to
petitioners allegation. According to respondent, petitioner, in fact, made an
additional order of 24,000 boxes, out of which, 14,000 had been completed
without waiting for petitioners payment. Respondent stated that petitioner was
to pick up the boxes at the factory as agreed upon, but petitioner failed to do so.
Respondent averred that, on October 8, 1998, petitioners representative, Bobby
Que (Que), went to the factory and saw that the boxes were ready for pick up. On
February 20, 1999, Que visited the factory again and supposedly advised
respondent to sell the boxes as rejects to recoup the cost of the unpaid 14,000
boxes, because petitioners transaction to ship bananas to China did not
materialize. Respondent claimed that the boxes were occupying warehouse space
and that petitioner should be made to pay storage fee at P60.00 per square meter
for every month from April 1998. As counterclaim, respondent prayed that
judgment be rendered ordering petitioner to pay $15,400.00, plus interest, moral
and exemplary damages, attorneys fees, and costs of the suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500
boxes and 14,000 boxes out of the secondorder. It maintained that

respondent only manufactured a sample of the ordered boxes and that

respondent could not have produced 14,000 boxes without the required pre-
payments.[6]
During trial, petitioner presented Que as its sole witness. Que testified that he
ordered the boxes from respondent and deposited the money in respondents
account.[7] He specifically stated that, when he visited respondents factory, he
saw that the boxes had no print of petitioners logo.[8] A few months later, he
followed-up the order and was told that the company had full production, and
thus, was promised that production of the order would be rushed. He told
respondent that it should indeed rush production because the need for the boxes
was urgent. Thereafter, he asked his partner, Alfred Ong, to cancel the order
because it was already late for them to meet their commitment to ship the
bananas to China.[9] On cross-examination, Que further testified that China Zero
Food, the Chinese company that ordered the bananas, was sending a ship
to Davao to get the bananas, but since there were no cartons, the ship could not
proceed. He said that, at that time, bananas from Tagum Agricultural
Development Corporation (TADECO) were already there. He denied that
petitioner made an additional order of 24,000 boxes. He explained that it took
three years to refer the matter to counsel because respondent promised to pay.[10]

For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que

in Davao in October 1998 to inspect the boxes and that the latter got samples of
them. In February 2000, they inspected the boxes again and Que got more
samples. Estanislao said that petitioner did not pick up the boxes because the ship
did not arrive.[11] Jaime Tan (Tan), president of respondent, also testified that his
company finished production of the 36,500 boxes on April 3, 1998 and that
petitioner made a second order of 24,000 boxes. He said that the agreement was
for respondent to produce the boxes and for petitioner to pick them up from the
warehouse.[12] He also said that the reason why petitioner did not pick up the
boxes was that the ship that was to carry the bananas did not arrive.[13] According
to him, during the last visit of Que and Estanislao, he asked them to withdraw the
boxes immediately because they were occupying a big space in his plant, but they,
instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes
at P20.00 each for a total of P100,000.00. They then told him to apply the said
amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent
did not commit any breach of faith that would justify rescission of the contract
and the consequent reimbursement of the amount paid by petitioner. The RTC
said that respondent was able to produce the ordered boxes but petitioner failed
to obtain possession thereof because its ship did not arrive. It thus dismissed the
complaint and respondents counterclaims, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of defendant and against the plaintiff and, accordingly, plaintiffs
complaint is hereby ordered DISMISSED without pronouncement as to
cost. Defendants counterclaims are similarly dismissed for lack of merit.

SO ORDERED.[14]
Petitioner filed a notice of appeal with the CA.

On September 21, 2006, the CA denied the appeal for lack of merit.[15] The
appellate court held that petitioner failed to discharge its burden of proving what
it claimed to be the parties agreement with respect to the delivery of the boxes.
According to the CA, it was unthinkable that, over a period of more than two
years, petitioner did not even demand for the delivery of the boxes. The CA added
that even assuming that the agreement was for respondent to deliver the boxes,
respondent would not be liable for breach of contract as petitioner had not yet
demanded from it the delivery of the boxes.[16]
Petitioner moved for reconsideration,[17] but the motion was denied by the CA in
its Resolution of February 23, 2007.[18]
In this petition, petitioner insists that respondent did not completely manufacture
the boxes and that it was respondent which was obliged to deliver the boxes to
TADECO.
We find no reversible error in the assailed Decision that would justify the grant of
this petition.
Petitioners claim for reimbursement is actually one for rescission (or resolution)
of contract under Article 1191 of the Civil Code, which 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.
 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.

The right to rescind a contract arises once the other party defaults in the
performance of his obligation. In determining when default occurs, Art. 1191
should be taken in conjunction with Art. 1169 of the same law, which provides:

Art. 1169. Those obliged to deliver or to do something incur in delay

from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order

that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the

obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has

rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does

not comply or is not ready to comply in a proper manner with what is
 incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins.

In reciprocal obligations, as in a contract of sale, the general rule is that the

fulfillment of the parties respective obligations should be simultaneous. Hence,
no demand is generally necessary because, once a party fulfills his obligation and
the other party does not fulfill his, the latter automatically incurs in delay. But
when different dates for performance of the obligations are fixed, the default for
each obligation must be determined by the rules given in the first paragraph of
the present article,[19] that is, the other party would incur in delay only from the
moment the other party demands fulfillment of the formers obligation. Thus,
even in reciprocal obligations, if the period for the fulfillment of the obligation is
fixed, demand upon the obligee is still necessary before the obligor can be
considered in default and before a cause of action for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the
lack of demand by petitioner upon respondent to fulfill its obligation to
manufacture and deliver the boxes. The Complaint only alleged that petitioner
made a follow-up upon respondent, which, however, would not qualify as a
demand for the fulfillment of the obligation. Petitioners witness also testified that
they made a follow-up of the boxes, but not a demand. Note is taken of the fact
that, with respect to their claim for reimbursement, the Complaint alleged and
the witness testified that a demand letter was sent to respondent. Without a
previous demand for the fulfillment of the obligation, petitioner would not have a
cause of action for rescission against respondent as the latter would not yet be
considered in breach of its contractual obligation.
Even assuming that a demand had been previously made before filing the present
case, petitioners claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.

The existence of a breach of contract is a factual matter not usually reviewed in a

petition for review under Rule 45.[20] The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of
fact made by the trial court, especially when reiterated by the CA, must be given
great respect if not considered as final.[21] In dealing with this petition, we will not
veer away from this doctrine and will thus sustain the factual findings of the CA,
which we find to be adequately supported by the evidence on record.

As correctly observed by the CA, aside from the pictures of the finished boxes and
the production report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of Estanislao who
accompanied Que to the factory, attesting that, during their first visit to the
company, they saw the pile of petitioners boxes and Que took samples
thereof. Que, petitioners witness, himself confirmed this incident. He testified
that Tan pointed the boxes to him and that he got a sample and saw that it was
blank. Ques absolute assertion that the boxes were not manufactured is,
therefore, implausible and suspicious.

In fact, we note that respondents counsel manifested in court, during trial, that
his client was willing to shoulder expenses for a representative of the court to visit
the plant and see the boxes.[22] Had it been true that the boxes were not yet
completed, respondent would not have been so bold as to challenge the court to
conduct an ocular inspection of their warehouse. Even in its Comment to this
petition, respondent prays that petitioner be ordered to remove the boxes from
its factory site,[23] which could only mean that the boxes are, up to the present,
still in respondents premises.

We also believe that the agreement between the parties was for petitioner to
pick up the boxes from respondents warehouse, contrary to petitioners allegation.
Thus, it was due to petitioners fault that the boxes were not delivered to TADECO.

Petitioner had the burden to prove that the agreement was, in fact, for
respondent to deliver the boxes within 30 days from payment, as alleged in the
Complaint. Its sole witness, Que, was not even competent to testify on the terms
of the agreement and, therefore, we cannot give much credence to his
testimony. It appeared from the testimony of Que that he did not personally
place the order with Tan, thus:

Q. No, my question is, you went to Davao City and placed your order
there?

A. I made a phone call.

Q. You made a phone call to Mr. Tan?

A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a
contact with Mr. Tan.

Q. So, your first statement that you were the one who placed the order
is not true?

A. Thats true. The Solar Harvest made a contact with Mr. Tan and I
deposited the money in the bank.

Q. You said a while ago [t]hat you were the one who called Mr. Tan and
placed the order for 36,500 boxes, isnt it?

A. First time it was Mr. Alfred Ong.

Q. It was Mr. Ong who placed the order[,] not you?

A. Yes, sir.[24]

Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido
Estanislao?
 A. Yes, sir.[25]

Moreover, assuming that respondent was obliged to deliver the boxes, it

could not have complied with such obligation. Que, insisting that the boxes had
not been manufactured, admitted that he did not give respondent the authority
to deliver the boxes to TADECO:

Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?

A. No, sir. As I have said, before the delivery, we must have to check the
carton, the quantity and quality. But I have not seen a single
carton.

Q. Are you trying to impress upon the [c]ourt that it is only after the
boxes are completed, will you give authority to Mr. Tan to deliver
the boxes to TADECO[?]

A. Sir, because when I checked the plant, I have not seen any carton. I
asked Mr. Tan to rush the carton but not[26]

Q. Did you give any authority for Mr. Tan to deliver these boxes to
TADECO?

A. Because I have not seen any of my carton.

Q. You dont have any authority yet given to Mr. Tan?

A. None, your Honor.[27]

Surely, without such authority, TADECO would not have allowed respondent to
deposit the boxes within its premises.

In sum, the Court finds that petitioner failed to establish a cause of action for
rescission, the evidence having shown that respondent did not commit any
breach of its contractual obligation. As previously stated, the subject boxes are
still within respondents premises. To put a rest to this dispute, we therefore
relieve respondent from the burden of having to keep the boxes within its
premises and, consequently, give it the right to dispose of them, after petitioner is
given a period of time within which to remove them from the premises.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals

Decision dated September 21, 2006 and Resolution dated February 23, 2007
are AFFIRMED. In addition, petitioner is given a period
of 30 days from notice within which to cause the removal of the 36,500
boxes from respondents warehouse. After the lapse of said period and petitioner
fails to effect such removal, respondent shall have the right to dispose of the
boxes in any manner it may deem fit.

G.R. No. L-30056 August 30, 1988

MARCELO AGCAOILI, plaintiff-appellee

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.

Artemio L. Agcaoili for plaintiff-appellee.

Office of the Government Corporate Counsel for defendant-appellant.

NARVASA, J.:

The appellant Government Service Insurance System, (GSIS, for short) having approved the application of the appellee Agcaoili for the
purchase of a house and lot in the GSIS Housing Project at Nangka Marikina, Rizal, subject to the condition that the latter should forthwith
occupy the house, a condition that Agacoili tried to fulfill but could not for the reason that the house was absolutely uninhabitable; Agcaoili,
after paying the first installment and other fees, having thereafter refused to make further payment of other stipulated installments until GSIS
had made the house habitable; and appellant having refused to do so, opting instead to cancel the award and demand the vacation by
Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance of Manila for specific performance with damages
and having obtained a favorable judgment, the case was appealled to this Court by the GSIS. Its appeal must fail.

The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for
purchase 1 was contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager
Archimedes Villanueva in behalf of the Chairman-General Manager, reading as follows:

Please be informed that your application to purchase a house and lot in our GSIS
Housing Project at Nangka, Marikina, Rizal, has been approved by this Office. Lot No.
26, Block No. (48) 2, together with the housing unit constructed thereon, has been
allocated to you.

You are, therefore, advised to occupy the said house immediately.

If you fail to occupy the same within three (3) days from receipt of this notice, your
application shall be considered automatically disapproved and the said house and lot
will be awarded to another applicant.

Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the
very next day, because the house was nothing more than a shell, in such a state of incompleteness
that civilized occupation was not possible: ceiling, stairs, double walling, lighting facilities, water
connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask a homeless
friend, a certain Villanueva, to stay in the premises as some sort of watchman, pending completion
of the construction of the house. Agcaoili thereafter complained to the GSIS, to no avail.

The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first
monthly installment and the incidental fees, 3 but refused to make further payments until and unless
the GSIS completed the housing unit. What the GSIS did was to cancel the award and require
Agcaoili to vacate the premises. 4 Agcaoili reacted by instituting suit in the Court of First Instance of
Manila for specific performance and damages. 5 Pending the action, a written protest was lodged by
other awardees of housing units in the same subdivision, regarding the failure of the System to
complete construction of their own houses. 6 Judgment was in due course rendered ,7 on the basis of
the evidence adduced by Agcaoili only, the GSIS having opted to dispense with presentation of its
own proofs. The judgment was in Agcaoili's favor and contained the following dispositions, 8 to wit:

1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff
(Mariano Agcaoili) illegal and void;

2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the
plaintiff relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance
System (GSIS) low cost housing project at Nangka Marikina, Rizal;

3) Ordering the defendant to complete the house in question so as to make the same
habitable and authorizing it (defendant) to collect the monthly amortization thereon
only after said house shall have been completed under the terms and conditions
mentioned in Exhibit A ;and

4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for
attorney's fees, and costs.

Appellant GSIS would have this Court reverse this judgment on the argument that
1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of
his housing unit, since said unit had been sold "in the condition and state of completion then
existing ... (and) he is deemed to have accepted the same in the condition he found it when he
accepted the award;" and assuming indefiniteness of the contract in this regard, such circumstance
precludes a judgment for specific performance. 9

2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's
immediate occupancy of the house subject thereof, and the latter having failed to comply with the
condition, no contract ever came into existence between them ;10

3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or
subsequent knowledge or consent of the defendant (GSIS)" operated as a repudiation by Agcaoili of
the award and a deprivation of the GSIS at the same time of the reasonable rental value of the
property. 11

Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled
"Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, and submitted
it.12 The acceptance of the application was also set out in a form (mimeographed) also prepared by
the GSIS. As already mentioned, this form sent to Agcaoili, duly filled up, advised him of the
approval of his "application to purchase a house and lot in our GSIS Housing Project at NANGKA,
MARIKINA, RIZAL," and that "Lot No. 26, Block No. (48) 2, together with the housing unit
constructed thereon, has been allocated to you." Neither the application form nor the acceptance or
approval form of the GSIS nor the notice to commence payment of a monthly amortizations,
which again refers to "the house and lot awarded" contained any hint that the house was
incomplete, and was being sold "as is," i.e., in whatever state of completion it might be at the time.
On the other hand, the condition explicitly imposed on Agcaoili "to occupy the said house
immediately," or in any case within three (3) days from notice, otherwise his "application shall be
considered automatically disapproved and the said house and lot will be awarded to another
applicant" would imply that construction of the house was more or less complete, and it was by
reasonable standards, habitable, and that indeed, the awardee should stay and live in it; it could not
be interpreted as meaning that the awardee would occupy it in the sense of a pioneer or settler in a
rude wilderness, making do with whatever he found available in the envirornment.

There was then a perfected contract of sale between the parties; there had been a meeting of the
minds upon the purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project at
Nangka Marikina, Rizal at a definite price payable in amortizations at P31.56 per month, and from
that moment the parties acquired the right to reciprocally demand performance. 13 It was, to be sure,
the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by
the buyer for the purpose contemplated ,14 in other words, to deliver the house subject of the contract
in a reasonably livable state. This it failed to do.

It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of
the sale. Under the circumstances there can hardly be any doubt that the house contemplated was
one that could be occupied for purposes of residence in reasonable comfort and convenience. There
would be no sense to require the awardee to immediately occupy and live in a shell of a house, a
structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does,
that this was what was intended by the parties, since the contract did not clearly impose upon it the
obligation to deliver a habitable house, is to advocate an absurdity, the creation of an unfair situation.
By any objective interpretation of its terms, the contract can only be understood as imposing on the
GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for his undertaking
to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not willing to put the
house in habitable state, it cannot invoke Agcaoili's suspension of payment of amortizations as
cause to cancel the contract between them. It is axiomatic that "(i)n reciprocal obligations, neither
party incurs in delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him."15

Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the
latter had not complied with the condition of occupying the house within three (3) days. The record
shows that Agcaoili did try to fulfill the condition; he did try to occupy the house but found it to be so
uninhabitable that he had to leave it the following day. He did however leave a friend in the structure,
who being homeless and hence willing to accept shelter even of the most rudimentary sort, agreed
to stay therein and look after it. Thus the argument that Agcaoili breached the agreement by failing
to occupy the house, and by allowing another person to stay in it without the consent of the GSIS,
must be rejected as devoid of merit.

Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or
imprecise as to its exact prestation Blame for the imprecision cannot be imputed to Agcaoili; it was
after all the GSIS which caused the contract to come into being by its written acceptance of
Agcaoili's offer to purchase, that offer being contained in a printed form supplied by the GSIS. Said
appellant having caused the ambiguity of which it would now make capital, the question of
interpretation arising therefrom, should be resolved against it.

It will not do, however, to dispose of the controversy by simply declaring that the contract between
the parties had not been validly cancelled and was therefore still in force, and that Agcaoili could not
be compelled by the GSIS to pay the stipulated price of the house and lot subject of the contract until
and unless it had first completed construction of the house. This would leave the contract hanging or
in suspended animation, as it were, Agcaoili unwilling to pay unless the house were first completed,
and the GSIS averse to completing construction, which is precisely what has been the state of affairs
between the parties for more than twenty (20) years now. On the other hand, assuming it to be
feasible to still finish the construction of the house at this time, to compel the GSIS to do so so that
Agcaoili's prestation to pay the price might in turn be demanded, without modifying the price therefor,
would not be quite fair. The cost to the GSIS of completion of construction at present prices would
make the stipulated price disproportionate, unrealistic.

The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may
render complete justice to both parties.

As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579,
589 [1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and do
complete justice where courts of law, through the inflexibility of their rules and want
of power to adapt their judgments to the special circumstances of cases, are
incompetent so to do. Equity regards the spirit of and not the letter, the intent and not
the form, the substance rather than the circumstance, as it is variously expressed by
different courts... " 16

In this case, the Court can not require specific performance of the contract in question according to
its literal terms, as this would result in inequity. The prevailing rule is that in decreeing specific
performance equity requires 17

... not only that the contract be just and equitable in its provisions, but that the
consequences of specific performance likewise be equitable and just. The general
rule is that this equitable relief will not be granted if, under the circumstances of the
case, the result of the specific enforcement of the contract would be harsh,
inequitable, oppressive, or result in an unconscionable advantage to the plaintiff . .
In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with
the circumstances obtaining at the time of rendition of judgment, when these are significantly
different from those existing at the time of generation of those rights.

The Court is not restricted to an adjustment of the rights of the parties as they existed
when suit was brought, but will give relief appropriate to events occuring ending the
suit. 18

While equitable jurisdiction is generally to be determined with reference to the

situation existing at the time the suit is filed, the relief to be accorded by the decree is
governed by the conditions which are shown to exist at the time of making thereof,
and not by the circumstances attending the inception of the litigation. In making up
the final decree in an equity suit the judge may rightly consider matters arising after
suit was brought. Therefore, as a general rule, equity will administer such relief as
the nature, rights, facts and exigencies of the case demand at the close of the trial or
at the time of the making of the decree. 19

That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a
person must act with justice, give everyone his due, and observe honesty and good
faith. 20 Adjustment of rights has been held to be particularly applicable when there has been a
depreciation of currency.

Depreciation of the currency or other medium of payment contracted for has

frequently been held to justify the court in withholding specific performance or at least
conditioning it upon payment of the actual value of the property contracted for. Thus,
in an action for the specific performance of a real estate contract, it has been held
that where the currency in which the plaintiff had contracted to pay had greatly
depreciated before enforcement was sought, the relief would be denied unless the
complaint would undertake to pay the equitable value of the land. (Willard & Tayloe
[U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21

In determining the precise relief to give, the Court will "balance the equities" or the respective
interests of the parties, and take account of the relative hardship that one relief or another may
occasion to them .22

The completion of the unfinished house so that it may be put into habitable condition, as one form of relief to the plaintiff Agcaoili, no longer
appears to be a feasible option in view of the not inconsiderable time that has already elapsed. That would require an adjustment of the price
of the subject of the sale to conform to present prices of construction materials and labor. It is more in keeping with the realities of the
situation, and with equitable norms, to simply require payment for the land on which the house stands, and for the house itself, in its
unfinished state, as of the time of the contract. In fact, this is an alternative relief proposed by Agcaoili himself, i.e., "that judgment issue . .
(o)rdering the defendant (GSIS) to execute a deed of sale that would embody and provide for a reasonable amortization of payment on the
basis of the present actual unfinished and uncompleted condition, worth and value of the said house. 23

WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the
cancellation by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26, Block No.
(48) 2 of the GSIS low cost housing project at Nangka, Marikina, Rizal, and orders the former to
respect the aforesaid award and to pay damages in the amounts specified, is AFFIRMED as being in
accord with the facts and the law. Said judgments is however modified by deleting the requirement
for respondent GSIS "to complete the house in question so as to make the same habitable," and
instead it is hereby ORDERED that the contract between the parties relative to the property above
described be modified by adding to the cost of the land, as of the time of perfection of the contract,
the cost of the house in its unfinished state also as of the time of perfection of the contract, and
correspondingly adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be
effected after determination by the Court a quo of the value of said house on the basis of the
agreement of the parties, or if this is not possible by such commissioner or commissioners as the
Court may appoint. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-15645 January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

Teehankee and Carreon for plaintiffs-appellees.

The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated
February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for
breach of contract and dismissing the counterclaim and third party complaint of the defendant-
appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration
(NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not
inconsistent with the provisions of this Act, and all personnel are transferred "to the Rice and Corn
Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as
RCA pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest,
she was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P.
Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the terms of
which the former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at
$203.00 per metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the
imported rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency
in favor of the plaintiff-appellee and/or supplier in Burma, immediately." Despite the commitment to
pay immediately "by means of an irrevocable, confirmed and assignable Letter of Credit," however, it
was only on July 30, 1952, or a full month from the execution of the contract, that the defendant
corporation, thru its general manager, took the first to open a letter of credit by forwarding to the
Philippine National Bank its Application for Commercial Letter Credit. The application was
accompanied by a transmittal letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to
cover the amount required to be deposited as a condition for the opening of letters of credit,
we will appreciate it if this application could be considered special case.
 We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August
4, 1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that
date. We would therefore request your full cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation
of the extreme necessity for the immediate opening of the letter credit since she had by then made a
tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at
$180.70 and in compliance with the regulations in Rangoon this 5% will be confiscated if the
required letter of credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the
Board of Directors with the condition that marginal cash deposit be paid and that drafts are to be
paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank
represented that it "will hold your application in abeyance pending compliance with the above stated
requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the condition.
As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its
dilemma: "In this connection, please be advised that our application for opening of the letter of credit
has been presented to the bank since July 30th but the latter requires that we first deposit 50% of
the value of the letter amounting to aproximately $3,614,000.00 which we are not in a position to
meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of
Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months
from the execution of the contract) the party named by the appellee as beneficiary of the letter of
credit.
1wph1.t

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5%
deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection,
it must be made of record that although the Burmese authorities had set August 4, 1952, as the
deadline for the remittance of the required letter of credit, the cancellation of the allocation and the
confiscation of the 5% deposit were not effected until August 20, 1952, or, a full half month after the
expiration of the deadline. And yet, even with the 15-day grace, appellant corporation was unable to
make good its commitment to open the disputed letter of credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the
futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to the
defendant NARIC, communicating at the same time that the offer was "a solution which should be
beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38, Folder of
Exhibits). This offer for substitution, however, was rejected by the appellant in a resolution dated
November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the
damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The
demand having been rejected she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance bond
it executed in favor of the plaintiff-appellee.
We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the allocation
contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be
opened with the contemplated period. This failure must, therefore, be taken as the immediate cause
for the consequent damage which resulted. As it is then, the disposition of this case depends on a
determination of who was responsible for such failure. Stated differently, the issue is whether
appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the
contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On
the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed
negotiable instrument was not promptly secured because the appellee , failed to seasonably furnish
data necessary and required for opening the same, namely, "(1) the amount of the letter of credit, (2)
the person, company or corporation in whose favor it is to be opened, and (3) the place and bank
where it may be negotiated." Appellant would have this Court believe, therefore, that had these
informations been forthwith furnished it, there would have been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an
area of the proceedings into which We are not at liberty to encroach. The explanation refers to a
question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the
trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by the
evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to
the time-honored tradition of this Tribunal to hold trial judges better situated to make conclusions on
questions of fact. For the record, We quote hereunder the lower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of
plaintiff to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court
that these facts were known to defendant even before the contract was executed because
these facts were necessarily revealed to the defendant before she could qualify as a bidder.
She stated too that she had given the necessary data immediately after the execution of Exh.
"A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the
NARIC, both orally and in writing and that she also pressed for the opening of the letter of
credit on these occasions. These statements have not been controverted and defendant
NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte to
testify or refute this. ...

Secondly, from the correspondence and communications which form part of the record of this case,
it is clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn,
caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to
meet the condition importation by the Bank for granting the same. We do not think the appellant
corporation can refute the fact that had it been able to put up the 50% marginal cash deposit
demanded by the bank, then the letter of credit would have been approved, opened and released as
early as August 4, 1952. The letter of the Philippine National Bank to the NARIC was plain and
explicit that as of the said date, appellant's "application for a letter of credit ... has been approved by
the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are
to be paid upon presentment." (Emphasis supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake the
prestation. We base this judgment upon the letter which accompanied the application filed by the
appellant with the bank, a part of which letter was quoted earlier in this decision. In the said
accompanying correspondence, appellant admitted and owned that it did "not have sufficient deposit
with your institution (the PNB) with which to cover the amount required to be deposited as a
condition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also knew
it could not meet those requirement. When, therefore, despite this awareness that was financially
incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to
pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be
similarly held to have bound itself to answer for all and every consequences that would result from
the representation. aptly observed by the trial court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be
exact, it should have a certained its ability and capacity to comply with the inevitably
requirements in cash to pay for such importation. Having announced the bid, it must be
deemed to have impliedly assured suppliers of its capacity and facility to finance the
importation within the required period, especially since it had imposed the supplier the 90-
day period within which the shipment of the rice must be brought into the Philippines. Having
entered in the contract, it should have taken steps immediately to arrange for the letter of
credit for the large amount involved and inquired into the possibility of its issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference also to
Article 11 of the Civil Code which provides:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable in damages.

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations a decreed liable; in general, every debtor who fails in performance of his obligations is
bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of Manila, 18
Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982;
Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54
Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the
tenor" of the obligation includes any illicit act which impairs the strict and faithful fulfillment of the
obligation or every kind or defective performance. (IV Tolentino, Civil Code of the Philippines, citing
authorities, p. 103.)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for
the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she
might have derived from the breach of the contract. We disagree. Waivers are not presumed, but
must be clearly and convincingly shown, either by express stipulation or acts admitting no other
reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such
intent to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case
and upon which the lower court based its award. Under the contract, the NARIC bound itself to buy
20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight,
and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and other evidence
establish with equal certainty that the plaintiff-appellee was able to secure the contracted commodity
at the cost price of $180.70 per metric ton from her supplier in Burma. Considering freights,
insurance and charges incident to its shipment here and the forfeiture of the 5% deposit, the award
granted by the lower court is fair and equitable. For a clearer view of the equity of the damages
awarded, We reproduce below the testimony of the appellee, adequately supported by the evidence
and record:

Q. Will you please tell the court, how much is the damage you suffered?

A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my
rice is $180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So
adding the cost of the rice, the freight, the insurance, the total would be about $187.99 that
would be $15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my
supposed profit if I went through the contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved in the
transaction. A precise and more exact demonstration of the equity of the award herein is provided by
Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter
of credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred
Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars
($8.00) in the same currency per ton for shipping and other handling expenses, so that she is
already assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency,
per ton or a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S.
Currency, in the aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of
unrealized profit damages in the total sum of $406,000.00 from the failure of the projected contract
to materialize. This counterclaim was supported by a cost study made and submitted by the
appellant itself and wherein it was illustrated how indeed had the importation pushed thru, NARIC
would have realized in profit the amount asserted in the counterclaim. And yet, the said amount of
P406,000.00 was realizable by appellant despite a number of expenses which the appellee under
the contract, did not have to incur. Thus, under the cost study submitted by the appellant, banking
and unloading charges were to be shouldered by it, including an Import License Fee of 2% and
superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the
disputed transaction inspite of the extra expenditures from which the herein appellee was exempt,
we are convicted of the fairness of the judgment presently under appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the
decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin
or currency which at the time of payment is legal tender for public and private debts." In view of that
law, therefore, the award should be converted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here
decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the rate
of exchange prevailing on the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of
damages for breach of contract, even if the obligation assumed by the defendant was to pay the
plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of the judgment rather than at
the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can neither
be applied nor extended to the case at bar for the same was laid down when there was no law
against stipulating foreign currencies in Philippine contracts. But now we have Republic Act No. 529
which expressly declares such stipulations as contrary to public policy, void and of no effect. And, as
We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R.
No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other
than Philippine legal tender, the same is null and void as contrary to public policy (Republic Act 529),
and the most that could be demanded is to pay said obligation in Philippine currency "to be
measured in the prevailing rate of exchange at the time the obligation was incurred (Sec. 1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed.
The appellee insurance company, in the light of this judgment, is relieved of any liability under this
suit. No pronouncement as to costs.

G.R. No. 159617 August 8, 2007

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 de R.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.

Suspects after taking the money and jewelries fled on board a Marson Toyota unidentified
plate number.3

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 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-in-interest 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 THEIR BRIEF, WHICH ARGUMENT WAS PALPABLY UNSUSTAINABLE.

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

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

(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;

(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), 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 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 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 de R.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 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:

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.

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.

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.

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 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.

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:

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:

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.

The robbery in the pawnshop happened in 1987, and considering the above-quoted 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 of Austria 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 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.

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.

Costs against petitioners.

National Power Corporation v. Court of

Appeals 161 SCRA 334, G.R. No. L-47379
(May 16, 1998)
Facts:

1. Engineering Construction, Inc. (petitioner, ECI for brevity), being a successful

bidder, executed a contract in Manila with the National Waterworks and
Sewerage Authority (NAWASA), whereby the former undertook:
1. to furnish all tools, labor, equipment and materials, and
2. to construct the proposed 2nd Ipo-Bicti Tunnel, Intake and Outlet Structures,
and Appurtenant Structures, and Appurtenant Features at Norzagaray,
Bulacan and to complete said works within 800 calendar days. (Angat
Hydro-electric Project and Dam)
2. The project involves two (2) major phases: (1) tunnel work covering a distance of
7 kilometres and (2) the outworks at both ends of the tunnel.
3. The ECI already had completed the first major phase of the work (Tunnel
Excavation Work), all the equipment no longer needed there were transferred to
another site where some projects were yet to be completed. Some portion of the
Bicti site were still under construction (2nd phase).
4. On November 4, 1967, Typhoon Welming hit Central Luzon, passing through
corporations Angat Hydro-electric Project and Dam.
5. Due to the heavy downpour, the water in the reservoir of the Angat Dam was
rising perilously at the rate of 60 cm per hour. To prevent an overflow of water
from the dam, the National Power Corporation(NPC) caused the opening of the
spillway gates.
6. Extraordinary large volume of water rushed out of the gates, and hit the
installations and construction works of ECI at Ipo site with terrific impact, as a
result of which the latters stockpile of materials supplies, camp facilities and
permanent structures and accessories whether washed away, lost or destroyed.

Issue/s:

1. Whether or not the destruction and loss of ECIs equipment and facilities were
due to force majeure, which will exempt NPC from liability.
Ruling:

1. No, NPC will not be exempted from liability. NPC was undoubtedly negligent
because it opened the spillway gates of the Angat Dam only at the height of
typhoon Welming when it knew very well that it was safer to have opened the
same gradually and earlier, as it was also undeniable that NPC know of the
coming typhoon at least four days before it actually struck.

The typhoon was an act of God or what we may call force majeure, NPC cannot escape
liability because its negligence was the proximate cause of the loss and damage.

As we have ruled in Juan F. Nakpil & Sons v. Court of Appeals:

If upon the happening of a fortuitous event or an act of God, there concurs a

corresponding fraud, negligence, delay or violation or contravention in any manner of
the tenor of the obligation, which results in loss or damage, the obligor cannot escape
liability.

The principle embodied in the act of God doctrine strictly requires that the act must be
one occasioned exclusively by the violence of nature and human agencies are to be
excluded from creating or entering into the cause of the mischief. When the effect, the
cause of which is to be considered, is found to be in part the result of the participation
of man, whether it be from active intervention or neglect, or failure to act, the whole
occurrence is thereby HUMANIZED, as it were, and removed from the rules applicable
to the acts of God.

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 CA-G.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 (5,174,000.00). On 29 August
1997, respondents executed and signed a Reservation Application Agreement wherein they
deposited 200,000.00 as reservation fee. As agreed upon, respondents paid the full downpayment
of 1,552,200.00 and had been paying the 63,363.33 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 2,198,949.96 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 2,198,949.96 representing the total amortization payments, 200,000.00
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 (2,198,949.96) 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 (100,000.00) as moral damages,

c) FIFTY THOUSAND PESOS (50,000.00) as attorneys fees,

d) The costs of suit, and

e) An administrative fine of TEN THOUSAND PESOS (10,000.00) 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 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
2,198,949.96 WITH 12% INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID,
CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST
PETITIONERS-APPELLANTS.

II.

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 100,000.00 AS MORAL DAMAGES AND 50,000.00 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 PAY 10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY
FACTUAL OR LEGAL BASIS TO SUPPORT SUCH FINDING.8

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 100,000.00
AS MORAL DAMAGES, 50,000.00 AS ATTORNEYS FEES AND 10,000.00 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
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. No installment payment made by a buyer in a subdivision

1w phi 1

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 Fil-Estate Properties, Inc. v.
Spouses Go13promulgated 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 pre-selling 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 10,000.00 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 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.

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.

In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision and
Resolution.

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.

G.R. No. L-29155 May 13, 1970

UNIVERSAL FOOD CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N.
FRANCISCO, respondents.

Wigberto E. Taada for petitioner.

Teofilo Mendoza for respondents.

CASTRO, J.:

Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals
of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco,
plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the dispositive portion of
which reads as follows: "WHEREFORE the appealed decision is hereby reversed; the BILL OF
ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to
plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit
A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to him of
said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against
defendant."1

On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of
First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a
contract entitled "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as
without any right to the use of the Mafran trademark and formula, and order the latter to restore to
them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary
from December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit.1

On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3
thereof "admits the allegations contained in paragraph 3 of plaintiffs' complaint." The answer further
alleged that the defendant had complied with all the terms and conditions of the Bill of Assignment
and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V.
Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as
he is still its chief chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped
from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate acts
of the petitioner, particularly the resolution adopted by its board of directors at the special meeting
held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices
of raw materials, since the same plaintiff was present when that resolution was adopted and even
took part in the consideration thereof, 3) the actuations of its president and general manager in
enforcing and implementing the said resolution, 4) the fact that the same plaintiff was negligent in
the performance of his duties as chief chemist of the corporation, and 5) the further fact that the said
plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The
defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's
fees and P5,000 in exemplary or corrective damages.

On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim
for damages and attorney's fees, with costs against the former, who promptly appealed to the Court
of Appeals. On February 13, 1969 the appellate court rendered the judgment now the subject of the
present recourse.

The Court of Appeals arrived at the following "uncontroverted" findings of fact:

That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a
formula for the manufacture of a food seasoning (sauce) derived from banana fruits
popularly known as MAFRAN sauce; that the manufacture of this product was used
in commercial scale in 1942, and in the same year plaintiff registered his trademark
in his name as owner and inventor with the Bureau of Patents; that due to lack of
sufficient capital to finance the expansion of the business, in 1960, said plaintiff
secured the financial assistance of Tirso T. Reyes who, after a series of negotiations,
formed with others defendant Universal Food Corporation eventually leading to the
execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).
 Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco,
Sr. was appointed Chief Chemist with a salary of P300.00 a month, and plaintiff
Victoriano V. Francisco was appointed auditor and superintendent with a salary of
P250.00 a month. Since the start of the operation of defendant corporation, plaintiff
Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory,
never allowed anyone, not even his own son, or the President and General Manager
Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula
secret to himself. However, said plaintiff expressed a willingness to give the formula
to defendant provided that the same should be placed or kept inside a safe to be
opened only when he is already incapacitated to perform his duties as Chief Chemist,
but defendant never acquired a safe for that purpose. On July 26, 1960, President
and General Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or
two members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit
C), but said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes
did not compel or force plaintiff to accede to said request. Thereafter, however, due
to the alleged scarcity and high prices of raw materials, on November 28, 1960,
Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum
(Exhibit B), duly approved by the President and General Manager Tirso T. Reyes that
only Supervisor Ricardo Francisco should be retained in the factory and that the
salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being
until the corporation should resume its operation. Some five (5) days later, that is, on
December 3, 1960, President and General Manager Tirso T. Reyes, issued a
memorandom to Victoriano Francisco ordering him to report to the factory and
produce "Mafran Sauce" at the rate of not less than 100 cases a day so as to cope
with the orders of the corporation's various distributors and dealers, and with
instructions to take only the necessary daily employees without employing
permanent employees (Exhibit B). Again, on December 6, 1961, another
memorandum was issued by the same President and General Manager instructing
the Assistant Chief Chemist Ricardo Francisco, to recall all daily employees who are
connected in the production of Mafran Sauce and also some additional daily
employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960,
another memorandum was issued by the President and General Manager instructing
Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent,
to produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with
further instructions to hire daily laborers in order to cope with the full blast protection
(Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist
in the amount of P300.00 a month only until his services were terminated on
November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its President
and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a
buyer of the corporation including its trademarks, formula and assets at a price of not
less than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda,
without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed
the present action on February 14, 1961. About a month afterwards, in a letter dated
March 20, 1961, defendant, thru its President and General Manager, requested said
plaintiff to report for duty (Exhibit 3), but the latter declined the request because the
present action was already filed in court (Exhibit J).

1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued
that under article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not
absolute and can be demanded only if one is ready, willing and able to comply with his own
obligation and the other is not; that under article 1169 of the same Code, in reciprocal obligations,
neither party incurs in delay if the other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him; that in this case the trial court found that the respondents
not only have failed to show that the petitioner has been guilty of default in performing its contractual
obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco
who had been remiss in the compliance of his contractual obligation to cede and transfer to the
defendant the formula for Mafran sauce;" that even the respondent Court of Appeals found that as
"observed by the lower court, 'the record is replete with the various attempt made by the defendant
(herein petitioner) to secure the said formula from Magdalo V. Francisco to no avail; and that upon
the foregoing findings, the respondent Court of Appeals unjustly concluded that the private
respondents are entitled to rescind the Bill of Assignment.

The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent
Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran
sauce.2

The Bill of Assignment sets forth the following terms and conditions:

THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive
owner of the MAFRAN trade-mark and the formula for MAFRAN SAUCE;

THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net
annual profit which the PARTY OF THE Second Part [Universal Food Corporation]
may realize by and/or out of its production of MAFRAN SAUCE and other food
products and from other business which the Party of the Second Part may engage in
as defined in its Articles of Incorporation, and which its Board of Directors shall
determine and declare, said Party of the First Part hereby assign, transfer, and
convey all its property rights and interest over said Mafran trademark and formula for
MAFRAN SAUCE unto the Party of the Second Part;

THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net
profit which the Party of the Second Part obligates itself to pay unto the Party of the
First Part as founder and as owner of the MAFRAN trademark and formula for
MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after the proper
accounting and inventories has been undertaken by the Party of the Second Part and
after a competent auditor designated by the Board of Directors shall have duly
examined and audited its books of accounts and shall have certified as to the
correctness of its Financial Statement;

THAT it is hereby understood that the Party of the First Part, to improve the quality of
the products of the Party of the First Part and to increase its production, shall
endeavor or undertake such research, study, experiments and testing, to invent or
cause to invent additional formula or formulas, the property rights and interest
thereon shall likewise be assigned, transferred, and conveyed unto the Party of the
Second Part in consideration of the foregoing premises, covenants and stipulations:

THAT in the operation and management of the Party of the First Part, the Party of the
First Part shall be entitled to the following Participation:

(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President

and Chief Chemist of the Party of the Second Part, which appointments are
permanent in character and Mr. VICTORIANO V. FRANCISCO shall be appointed
Auditor thereof and in the event that the Treasurer or any officer who may have the
custody of the funds, assets and other properties of the Party of the Second Part
comes from the Party of the First Part, then the Auditor shall not be appointed from
 the latter; furthermore should the Auditor be appointed from the Party representing
the majority shares of the Party of the Second Part, then the Treasurer shall be
appointed from the Party of the First Part;

(b) THAT in case of death or other disabilities they should become incapacitated to
discharge the duties of their respective position, then, their shares or assigns and
who may have necessary qualifications shall be preferred to succeed them;

(c) That the Party of the First Part shall always be entitled to at least two (2)
membership in the Board of Directors of the Party of the Second Part;

(d) THAT in the manufacture of MAFRAN SAUCE and other food products by the
Party of the Second Part, the Chief Chemist shall have and shall exercise absolute
control and supervision over the laboratory assistants and personnel and in the
purchase and safekeeping of the Chemicals and other mixtures used in the
preparation of said products;

THAT this assignment, transfer and conveyance is absolute and irrevocable in no

case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its
rights and interest over said MAFRAN trademark and mafran formula, except when a
dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises,
in which case then the property rights and interests over said trademark and formula
shall automatically revert the Party of the First Part.

Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the
respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation
the formula for Mafran sauce. Thus, the last part of the second paragraph recites that the
respondent patentee "assign, transfer and convey all its property rights and interest over said Mafran
trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last
paragraph states that such "assignment, transfer and conveyance is absolute and irrevocable (and)
in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and
interest over said MAFRAN trademark and mafran formula."

However, a perceptive analysis of the entire instrument and the language employed therein3 would
lead one to the conclusion that what was actually ceded and transferred was only the use of the
Mafran sauce formula. This was the precise intention of the parties,4 as we shall presently show.

Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of
TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation may realize by
and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when
employed in connection with a license under a patent, means the compensation paid for the use of a
patented invention.

'Royalty,' when used in connection with a license under a patent, means the
compensation paid by the licensee to the licensor for the use of the licensor's
patented invention." (Hazeltine Corporation vs. Zenith Radio Corporation, 100 F. 2d
10, 16.)5

Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized
proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent patentee was to be
appointed "chief chemist ... permanent in character," and that in case of his "death or other
disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to
succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same
respondent shall have and shall exercise absolute control and supervision over the laboratory
assistants and personnel and over the purchase and safekeeping of the chemicals and other
mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment
clearly show that the intention of the respondent patentee at the time of its execution was to part, not
with the formula for Mafran sauce, but only its use, to preserve the monopoly and to effectively
prohibit anyone from availing of the invention.6

Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation
eventually take place, "the property rights and interests over said trademark and formula shall
automatically revert to the respondent patentee. This must be so, because there could be no
reversion of the trademark and formula in this case, if, as contended by the petitioner, the
respondent patentee assigned, ceded and transferred the trademark and formula and not merely
the right to use it for then such assignment passes the property in such patent right to the
petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become
part of the property in the hands of the receiver thereof.7

Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and
transferred by virtue of the Bill of Assignment is the "use of the formula" (and not the formula itself).
This incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner's answer.
Hence, it does "not require proof and cannot be contradicted."8 The last part of paragraph 3 of the
complaint and paragraph 3 of the answer are reproduced below for ready reference:

3. ... and due to these privileges, the plaintiff in return assigned to said corporation
his interest and rights over the said trademark and formula so that the defendant
corporation could use the formula in the preparation and manufacture of the mafran
sauce, and the trade name for the marketing of said project, as appearing in said
contract ....

3. Defendant admits the allegations contained in paragraph 3 of plaintiff's

complaint.

Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce
formula by the respondent patentee.

Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be
interpreted to effect "the least transmission of right,"9 and is there a better example of least
transmission of rights than allowing or permitting only the use, without transfer of ownership, of the
formula for Mafran sauce.

The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually
ceded and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the
petitioner corporation was only the use of the formula. Properly speaking, the Bill of Assignment
vested in the petitioner corporation no title to the formula. Without basis, therefore, is the observation
of the lower court that the respondent patentee "had been remiss in the compliance of his
contractual obligation to cede and transfer to the defendant the formula for Mafran sauce."

2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr.
was dismissed from his position as chief chemist of the corporation without justifiable cause, and in
violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is
"permanent in character."
The petitioner submits that there is nothing in the successive memoranda issued by the corporate
officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the
respondent patentee was being dismissed from his position as chief chemist of the corporation. The
fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation
held on October 14, 1960, when the board decided to suspend operations of the factory for two to
four months and to retain only a skeletal force to avoid further losses, the two private respondents
were present, and the respondent patentee was even designated as the acting superintendent, and
assigned the mission of explaining to the personnel of the factory why the corporation was stopping
operations temporarily and laying off personnel. The petitioner further submits that exhibit B
indicates that the salary of the respondent patentee would not be paid only during the time that the
petitioner corporation was idle, and that he could draw his salary as soon as the corporation
resumed operations. The clear import of this exhibit was allegedly entirely disregarded by the
respondent Court of Appeals, which concluded that since the petitioner resumed partial production of
Mafran sauce without notifying the said respondent formally, the latter had been dismissed as chief
chemist, without considering that the petitioner had to resume partial operations only to fill its
pending orders, and that the respondents were duly notified of that decision, that is, that exhibit B-1
was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V.
Francisco. Besides, the records will show that the respondent patentee had knowledge of the
resumption of production by the corporation, but in spite of such knowledge he did not report for
work.

The petitioner further submits that if the respondent patentee really had unqualified interest in
propagating the product he claimed he so dearly loved, certainly he would not have waited for a
formal notification but would have immediately reported for work, considering that he was then and
still is a member of the corporation's board of directors, and insofar as the petitioner is concerned, he
is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom
had been entrusted the performance of the duties of chief chemist, while the respondent Victoriano
V. Francisco is his brother, the respondent patentee could not feign ignorance of the resumption of
operations.

The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is
dated December 29, 1960, the records will show that the petitioner was set to resume full capacity
production only sometime in March or April, 1961, and the respondent patentee cannot deny that in
the very same month when the petitioner was set to resume full production, he received a copy of
the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a
later vintage as it is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the
acting chemist, and this was the situation on February 1, 1961, thirteen days before the filing of the
present action for rescission. The designation of Ricardo Francisco as the chief chemist carried no
weight because the president and general manager of the corporation had no power to make the
designation without the consent of the corporation's board of directors. The fact of the matter is that
although the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist,
this same exhibit clearly indicates that Ricardo Francisco was merely the acting chemist as he was
the one assisting his father.

In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28,
1960 the secretary-treasurer of the corporation issued a memorandum (exh. B), duly approved by its
president and general manager, directing that only Ricardo Francisco be retained in the factory and
that the salary of respondent patentee, as chief chemist, be stopped for the time being until the
corporation resumed operations. This measure was taken allegedly because of the scarcity and high
prices of raw materials. Five days later, however, or on December 3, the president and general
manager issued a memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report to
the factory and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the
orders of the various distributors and dealers of the corporation, and instructing him to take only the
necessary daily employees without employing permanent ones. Then on December 6, the same
president and general manager issued yet another memorandum (exh. B-2), instructing Ricardo
Francisco, as assistant chief chemist, to recall all daily employees connected with the production of
Mafran sauce and to hire additional daily employees for the production of Porky Pops. Twenty-three
days afterwards, or on December 29, the same president and general manager issued still another
memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as
acting superintendent, to produce Mafran sauce and, Porky Pops in full swing, starting January 2,
1961, with the further instruction to hire daily laborers in order to cope with the full blast production.
And finally, at the hearing held on October 24, 1961, the same president and general manager
admitted that "I consider that the two months we paid him (referring to respondent Magdalo V.
Francisco, Sr.) is the separation pay."

The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when
the complaint for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner,
acting through its corporate officers, 11 schemed and maneuvered to ease out, separate and
dismiss the said respondent from the service as permanent chief chemist, in flagrant violation of
paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the
action for rescission, the petitioner corporation, thru its president and general manager, requested
the respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of Appeals
correctly observed, such request was a "recall to placate said plaintiff."

3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote
for ready reference the following articles of the new Civil Code governing rescission of contracts:

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 of the Mortgage Law.

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for
the same.

ART. 1384. Rescission shall be only to the extent necessary to cover the damages
caused.

At the moment, we shall concern ourselves with the first two paragraphs of 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 fulfillment and rescission of
the obligation, with payment of damages in either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment are
reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph
5-(a) and (b), by terminating the services of the respondent patentee Magdalo V. Francisco, Sr.,
without lawful and justifiable cause.

Upon the factual milieu, is rescission of the Bill of Assignment proper?

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but
only for such substantial and fundamental breach as would defeat the very object of the parties in
making the agreement. 12 The question of whether a breach of a contract is substantial depends
upon the attendant circumstances. 13 The petitioner contends that rescission of the Bill of Assignment
should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be
instituted except when the party suffering damage has no other legal means to obtain reparation for
the same. However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr.
as the permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill
of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the
legal principle that the option to demand performance or ask for rescission of a contract
belongs to the injured party, 14 the fact remains that the respondents-appellees had no alternative but
to file the present action for rescission and damages. It is to be emphasized that the respondent
patentee would not have agreed to the other terms of the Bill of Assignment were it not for the basic
commitment of the petitioner corporation to appoint him as its Second Vice-President and Chief
Chemist on a permanent basis; that in the manufacture of Mafran sauce and other food products he
would have "absolute control and supervision over the laboratory assistants and personnel and in
the purchase and safeguarding of said products;" and that only by all these measures could the
respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy
its monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The
salient provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of
the formula; the appointment of the respondent patentee as Second Vice-President and chief
chemist on a permanent status; the obligation of the said respondent patentee to continue research
on the patent to improve the quality of the products of the corporation; the need of absolute control
and supervision over the laboratory assistants and personnel and in the purchase and safekeeping
of the chemicals and other mixtures used in the preparation of said product all these provisions of
the Bill of Assignment are so interdependent that violation of one would result in virtual nullification of
the rest.

4. The petitioner further contends that it was error for the Court of Appeals to hold that the
respondent patentee is entitled to payment of his monthly salary of P300 from December 1, 1960,
until the return to him of the Mafran trademark and formula, arguing that under articles 1191, the
right to specific performance is not conjunctive with the right to rescind a reciprocal contract; that a
plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both
remedies as it held that the respondents are entitled to rescind the Bill of Assignment and also that
the respondent patentee is entitled to his salary aforesaid; that this is a gross error of law, when it is
considered that such holding would make the petitioner liable to pay respondent patentee's salary
from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make
payment until it returns the formula which, the appellate court itself found, the corporation never had;
that, moreover, the fact is that the said respondent patentee refused to go back to work,
notwithstanding the call for him to return which negates his right to be paid his back salaries for
services which he had not rendered; and that if the said respondent is entitled to be paid any back
salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March
20, 1961 the petitioner had already formally called him back to work.

The above contention is without merit. Reading once more the Bill of Assignment in its entirety and
the particular provisions in their proper setting, we hold that the contract placed the use of the
formula for Mafran sauce with the petitioner, subject to defined limitations. One of the considerations
for the transfer of the use thereof was the undertaking on the part of the petitioner corporation to
employ the respondent patentee as the Second Vice-President and Chief Chemist on a permanent
status, at a monthly salary of P300, unless "death or other disabilities supervened. Under these
circumstances, the petitioner corporation could not escape liability to pay the private respondent
patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for
Mafran sauce remained with the corporation.

5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return
to the respondents the trademark and formula for Mafran sauce, when both the decision of the
appellate court and that of the lower court state that the corporation is not aware nor is in possession
of the formula for Mafran sauce, and the respondent patentee admittedly never gave the same to the
corporation. According to the petitioner these findings would render it impossible to carry out the
order to return the formula to the respondent patentee. The petitioner's predicament is
understandable. Article 1385 of the new Civil Code provides that rescission creates the obligation to
return the things which were the object of the contract. But that as it may, it is a logical inference
from the appellate court's decision that what was meant to be returned to the respondent patentee is
not the formula itself, but only its use and the right to such use. Thus, the respondents in their
complaint for rescission specifically and particularly pray, among others, that the petitioner
corporation be adjudged as "without any right to use said trademark and formula."

ACCORDINGLY, conformably with the observations we have above made, the judgment of the
Court of Appeals is modified to read as follows: "Wherefore the appealed decision is reversed. The
Bill of Assignment (Exhibit A) is hereby rescinded, and the defendant corporation is ordered to return
and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce
trademark and formula, subject-matter of the Bill of Assignment, and to this end the defendant
corporation and all its assigns and successors are hereby permanently enjoined, effective
immediately, from using in any manner the said Mafran sauce trademark and formula. The
defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from
December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to
earn legal interest from the date of the finality of this judgment until it shall have been fully paid, plus
attorney's fees in the amount of P500, with costs against the defendant corporation." As thus
modified, the said judgment is affirmed, with costs against the petitioner corporation.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur.

Teehankee J., took no part.

Separate Opinions

REYES, J.B.L., J., concurring:

I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the
argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo
Francisco, should be denied because under Article 1383 of the Civil Code of the Philippines
rescission can not be demanded except when the party suffering damage has no other legal means
to obtain reparation, is predicated on a failure to distinguish between a rescission for breach of
contract under Article 1191 of the Civil Code and a rescission by reason of lesion or economic
prejudice, under Article 1381, et seq. 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 in 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'etre 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.

It is probable that the petitioner's confusion arose from the defective technique of the new Code that
terms both instances as rescission without distinctions between them; unlike the previous Spanish
Civil Code of 1889, that differentiated "resolution" for breach of stipulations from "rescission" by
reason of lesion or damage.1 But the terminological vagueness does not justify confusing one case
with the other, considering the patent difference in causes and results of either action.

G.R. No. L-47774 March 14, 1941

MAGDALENA ESTATE, INC., petitioner-appellant,

vs.
LOUIS J. MYRICK, respondent-appellee.

Felipe Ysmael and Eusebio C. Encarnacion for petitioner.

Andres C. Aguilar for respondent.

LAUREL, J.:

On January 2, 1928, the Magdalena Estate, Inc., sold to Louis J. Myrick lots Nos. 28 and 29 of Block
1, Parcel 9 of the San Juan Subdivision, San Juan Rizal, their contract of sale No. SJ-639 (Exhibits
B and 1) providing that the price of P7,953 shall be payable in 120 equal monthly installments of
P96.39 each on the second day of every month beginning the date of execution of the agreement.
Simultaneously, the vendee executed and delivered to the vendor a promissory note (Exhibits C and
2) for the whole purchase price, wherein it was stipulated that "si cualquier pago o pagos de este
pagare quedasen en mora por mas de dos meses, entonces todos el saldo no pagado del mismo
con cualesquiera intereses que hubiese devengado, vercera y sera exigible inmediatamente y
devengara intereses al mismo tipo de 9 por ciento al ao hasta su completo pago, y en tal caso me
comprometo, ademas, a pagar al tenedor de este pagare el 10 por ciento de la cantidad en
concepto de honorarios de abogado."

In pursuance of said agreement, the vendee made several monthly payments amounting to
P2,596.08, the last being on October 4, 1930, although the first installment due and unpaid was that
of May 2, 1930. By reason of this default, the vendor, through its president, K.H. Hemady, on
December 14, 1932, notified the vendee that, in view of his inability to comply with the terms of their
contract, said agreement had been cancelled as of that date, thereby relieving him of any further
obligation thereunder, and that all amounts paid by him had been forfeited in favor of the vendor,
who assumes the absolute right over the lots in question. To this communication, the vendee did not
reply, and it appears likewise that the vendor thereafter did not require him to make any further
disbursements on account of the purchase price.

On July 22, 1936, Louis J. Myrick, respondent herein, commenced the present action in the Court of
First Instance of Albay, praying for an entry of judgment against the Magdalena Estate, Inc. for the
sum of P2,596.08 with legal interest thereon from the filing of the complaint until its payment, and for
costs of the suit. Said defendant, the herein petitioner, on September 7, 1936, filed his answer
consisting in a general denial and a cross-complaint and counterclaim, alleging that contract SJ-639
was still in full force and effect and that, therefore, the plaintiff should be condemned to pay the
balance plus interest and attorneys' fees. After due trial, the Court of First Instance of Albay, on
January 31, 1939, rendered its decision ordering the defendant to pay the plaintiff the sum of
P2,596.08 with legal interest from December 14, 1932 until paid and costs, and dismissing
defendant's counterclaim. From this judgment, the Magdalena Estate, Inc. appealed to the Court of
Appeals, where the cause was docketed as CA-G.R. No. 5037, and which, on August 23, 1940,
confirmed the decision of the lower court, with the only modification that the payment of interest was
to be computed from the date of the filing of the complaint instead of from the date of the
cancellation of the contract. A motion for reconsideration was presented, which was denied on
September 6, 1940. Hence, the present petition for a writ of certiorari.

Petitioner-appellant assigns several errors which we proceed to discuss in the course of this opinion.

Petitioner holds that contract SJ-639 has not been rendered inefficacious by its letter to the
respondent, dated December 14, 1932, and submits the following propositions: (1) That the intention
of the author of a written instrument shall always prevail over the literal sense of its wording; (2) that
a bilateral contract may be resolved or cancelled only by the prior mutual agreement of the parties,
which is approved by the judgment of the proper court; and (3) that the letter of December 14, 1932
was not assented to by the respondent, and therefore, cannot be deemed to have produced a
cancellation, even if it ever was intended. Petitioner contends that the letter in dispute is a mere
notification and, to this end, introduced in evidence the disposition of Mr. K.H. Hemady, president of
the Magdalena Estate, Inc. wherein he stated that the word "cancelled" in the letter of December 14,
1932, "es un error de mi interpretacion sin ninguna intencion de cancelar," and the testimony of
Sebastian San Andres, one of its employees, that the lots were never offered for sale after the
mailing of the letter aforementioned. Upon the other hand, the Court of Appeals, in its decision of
August 23, 1940, makes the finding that "notwithstanding the deposition of K.H. Hemady, president
of the defendant corporation, to the effect that the contract was not cancelled nor was his intention to
do so when he wrote the letter of December 14, 1932, marked Exhibit 6 and D (pp. 6-7, deposition
Exhibit 1-a), faith and credit cannot be given to such testimony in view of the clear terms of the letter
which evince his unequivocal intent to resolve the contract. His testimony is an afterthought. The
intent to resolve the contract is expressed unmistakably not only in the letter of December 14, 1932,
already referred to (Exhibit 6 and D), but is reiterated in the letters which the president of the
defendant corporation states that plaintiff lost his rights for the land for being behind more than two
years, and of April 10, 1035 (Exhibit G), where defendant's president makes the following statements:
"Confirming the verbal arrangement had between you and our Mr. K.H. Hemady regarding the
account of Mr. Louis J. Myrick under contract No. SJ-639, already cancelled."

This conclusion of fact of the Court of Appeals is final and should not be disturbed. (Guico vs.
Mayuga and Heirs of Mayuga, 63 Phil., 328; Mamuyac vs. Abena, XXXVIII Off. Gaz. 84.) Where the
terms of a writing are clear, positive and unambiguous, the intention of the parties should be gleaned
from the language therein employed, which is conclusive in the absence of mistake (13 C.J. 524;
City of Manila vs. Rizal Park Co., 52 Phil. 515). The proposition that the intention of the writer, once
ascertained, shall prevail over the literal sense of the words employed is not absolute and should be
deemed secondary to and limited by the primary rule that, when the text of the instrument is explicit
and leaves no doubt as to its intention, the court may not read into it any other which would
contradict its plain import. Besides, we have met with some circumstances of record which
demonstrate the unequivocal determination of the petitioner to cancel their contract. They are: (1)
the act of the petitioner in immediately taking possession of the lots in question and offering to resell
them to Judge M.V. del Rosario, as demonstrated by his letter marked Exhibit G, shortly after
December 14, 1932; (2) his failure to demand from the respondent the balance of the account after
the mailing of the disputed letter; and (3) the letters of January 10, 1933 (Exhibit F-2) and April 10,
1935 (Exhibit G) reiterate, in clear terms, the intention to cancel first announced by petitioner since
December 14, 1932.

It is next argued that contract SJ-639, being a bilateral agreement, in the absence of a stipulation
permitting its cancellation, may not be resolved by the mere act of the petitioner. The fact that the
contracting parties herein did not provide for resolution is now of no moment, for the reason that the
obligations arising from the contract of sale being reciprocal, such obligations are governed by article
1124 of the Civil Code which declares that the power to resolve, in the event that one of the obligors
should not perform his part, is implied. (Mateos vs. Lopez, 6 Phil., 206; Cortez vs. Bibao & Beramo,
41 Phil. 298; Cui. vs. Sun Chan, 41 Phil., 523; Po Pauco vs. Siguenza, 49 Phil., 404.) Upon the other
hand, where, as in this case, the petitioner cancelled the contract, advised the respondent that he
has been relieved of his obligations thereunder, and led said respondent to believe it so and act
upon such belief, the petitioner may not be allowed, in the language of section 333 of the Code of
Civil Procedure (now section 68 (a) of Rule 123 of the New Rules of Court), in any litigation the
course of litigation or in dealings in nais, be permitted to repudiate his representations, or occupy
inconsistent positions, or, in the letter of the Scotch law, to "approbate and reprobate." (Bigelow on
Estoppel, page 673; Toppan v. Cleveland, Co. & C.R. Co., Fed. Cas. 14,099.)

The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event of
failure of the vendee to continue in the payment of the stipulated monthly installments, to retain the
amounts paid to him on account of the purchase price. The claim, therefore, of the petitioner that it
has the right to forfeit said sums in its favor is untenable. Under article 1124 of the Civil Code,
however, he may choose between demanding the fulfillment of the contract or its resolution. These
remedies are alternative and not cumulative, and the petitioner in this case, having to cancel the
contract, cannot avail himself of the other remedy of exacting performance. (Osorio & Tirona vs.
Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua Jamco, 14 Phil., 602.) As a
consequence of the resolution, the parties should be restored, as far as practicable, to their original
situation (Po Pauco vs. Siguenza, supra) which can be approximated only by ordering, as we do
now, the return of the things which were the object of the contract, with their fruits and of the price,
with its interest (article 1295, Civil Code), computed from the date of the institution of the action.
(Verceluz vs. Edao, 46 Phil. 801.)

The writ prayed for is hereby denied, with costs against the petitioner. So ordered.

G.R. No. L-28602 September 29, 1970

UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE
IN QUEZON CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.

Norberto J. Quisumbing for private respondents.

REYES, J.B.L., J.:

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No.
9435, are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner
University of the Philippines (or UP) against the above-named respondent judge and the Associated
Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966,
enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the
Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967,
adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from
exercising logging rights or conducting logging operations on the concession; and the third order,
dated 12 December 1967, denied reconsideration of the order of contempt.

As prayed for in the petition, a writ of preliminary injunction against the enforcement or
implementation of the three (3) questioned orders was issued by this Court, per its resolution on 9
February 1968.

The petition alleged the following:

That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608;

That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under
which the latter was granted exclusive authority, for a period starting from the date of the agreement
to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut,
collect and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest
fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had
incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay;
that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO
executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments,"
dated 9 December 1964, which was approved by the president of UP, and which stipulated the
following:

3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not
sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the
CREDITOR, the balance outstanding after the said payments have been applied
shall be paid by the DEBTOR in full no later than June 30, 1965;

xxx xxx xxx

5. In the event that the DEBTOR fails to comply with any of its promises or
undertakings in this document, the DEBTOR agrees without reservation that the
CREDITOR shall have the right and the power to consider the Logging Agreement
dated December 2, 1960 as rescinded without the necessity of any judicial suit, and
 the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos
(P50,000.00) by way of and for liquidated damages;

ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from
9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that
it had previously acknowledged.

That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had entered
in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as
Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or
payment of the herein before stated sums of money and alleging the facts hereinbefore specified,
together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for
preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging
operations in the Land Grant.

That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another
concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging
contract was signed on 16 February 1966.

That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and
preliminary injunction but were denied by the court;

That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting
the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25
February 1966, respondent judge issued the first of the questioned orders, enjoining UP from
awarding logging rights over the concession to any other party.

That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara
Lumber Company, Inc., and said company had started logging operations.

That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14
January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta.
Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging
operations in the concession.

The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12
December 1967.

Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is
embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the
foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the
period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its second
amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the
court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not
turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94;
that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could
not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm,
and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed
Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order,
was invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the logs
previously cut during the management of Cesar Guy be first sold; that respondent was permitted to
cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15
July 1965; that it had made several offers to petitioner for respondent to resume logging operations
but respondent received no reply.

The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded,
and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO
contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific findings in this regard), that it is only after a
final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard
ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.

We find that position untenable.

In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has
"the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded
without the necessity of any judicial suit." As to such special stipulation, and in connection with
Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-
11897, 31 October 1964, 12 SCRA 276:

there is nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without
court intervention. In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.

Of course, it must be understood that the act of party in treating a contract as cancelled or resolved
on account of infractions by the other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the proper court. If the other party
denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission
is rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203).

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal
obligation,1 since in every case where the extrajudicial resolution is contested only the final award of
the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It
is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will
remain contestable and subject to judicial invalidation, unless attack thereon should become barred
by acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach
of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil
Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or
error by the rescinder the other party is not barred from questioning in court such abuse or error, the
practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting
suit, instead of the rescinder.

In fact, even without express provision conferring the power of cancellation upon one contracting
party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code
(of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that,
a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully
impugned in court.

El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones
reciprocas para el caso de que uno de los obligados no cumpliese lo que le
incumbe, facultad que, segun jurisprudencia de este Tribunal, surge
immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una
declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929;
106 Jur. Civ. 897).

Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una
"facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual
tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo
convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por
declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion
hecha por una de las partes se impugna por la otra, queda aquella sometida el
examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha
la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16
November 1956; Jurisp. Aranzadi, 3, 447).

La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una

de las partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la
declaracion de voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por
la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios
realmente causados, siempre quese acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la
satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el
art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre
otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non
est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).

In the light of the foregoing principles, and considering that the complaint of petitioner University
made out a prima facie case of breach of contract and defaults in payment by respondent ALUMCO,
to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging
operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the
respondent company had profited from its operations previous to the agreement of 5 December
1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the
second amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten
condition of the logs in private respondent's pond, which said respondent was in a better position to
know when it executed the acknowledgment of indebtedness, do not constitute on their face
sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by
respondent ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of
the court a quo in enjoining petitioner's measures to protect its interest without first receiving
evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the
injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available
or adequate. Such injunction, therefore, must be set aside.

For the reason that the order finding the petitioner UP in contempt of court has open appealed to the
Court of Appeals, and the case is pending therein, this Court abstains from making any
pronouncement thereon.

WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of
25 February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set
aside. Let the records be remanded for further proceedings conformably to this opinion.

G.R. No. L-29360 January 30, 1982

JOSE C. ZULUETA, petitioner,

vs.
HON. HERMINIO MARIANO, in his capacity as Presiding Judge of Branch X of the Court of
First Instance of Rizal; and LAMBERTO AVELLANA, respondents.

MELENCIO-HERRERA, J.:

In this action for mandamus and Prohibition, petitioner seeks to compel respondent Judge to
assume appellate, not original jurisdiction over an Ejectment case appealed from the Municipal
Court of Pasig (CC No. 1190 entitled Jose C. Zulueta vs. Lamberto Avellana), and to issue a Writ of
Execution in said case.

The antecedental facts follow:

Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated within the
Antonio Subdivision, Pasig, Rizal.

On November 6, 1964, petitioner Zulueta and private respondent Lamberto Avellana, a movie
director, entered into a "Contract to Sell" the aforementioned property for P75,000.00 payable in
twenty years with respondent buyer assuming to pay a down payment of P5,000.00 and a monthly
installment of P630.00 payable in advance before the 5th day of the corresponding month, starting
with December, 1964.

It was further stipulated:

12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated,
BUYER automatically and irrevocably authorizes OWNER to recover extra-judicially,
physical possession of the land, building and other improvements which are the
subject of this contract, and to take possession also extra-judicially whatever
personal properties may be found within the aforesaid premises from the date of said
failure to answer for whatever unfulfilled monetary obligations BUYER may have with
OWNER; and this contract shall be considered as without force and effect also from
said date; all payments made by the BUYER to OWNER shall be deemed as rental
payments without prejudice to OWNER's right to collect from BUYER whatever other
monthly installments and other money obligations which may have been paid until
BUYER vacates the aforesaid premises; upon his failure to comply with any of the
 herein conditions BUYER forfeits all money claims against OWNER and shall pay a
monthly rental equivalent to his monthly installment under Condition 1 of this
Contract from the date of the said failure to the date of recovery of physical
possession by OWNER of the land, building and other improvements which are the
subject of this Contract; BUYER shall not remove his personal properties without the
previous written consent of OWNER, who, should he take possession of such
properties following the aforesaid failure of BUYER, shall return the same to BUYER
only after the latter shall have fulfilled all money claims against him by OWNER; in all
cases herein, demand is waived;

Respondent Avellana occupied the property from December, 1964, but title remained with petitioner
Zulueta.

Upon the allegation that respondent Avellana had failed to comply with the monthly amortizations
stipulated in the contract, despite demands to pay and to vacate the premises, and that thereby the
contract was converted into one of lease, petitioner, on June 22, 1966, commenced an Ejectment
suit against respondent before the Municipal Court of Pasig (CC No. 1190), praying that judgment be
rendered ordering respondent 1) to vacate the premises; 2) to pay petitioner the sum of P11,751.30
representing respondent's balance owing as of May, 1966; 3) to pay petitioner the sum of P 630.00
every month after May, 1966, and costs.

Respondent controverted by contending that the Municipal Court had no jurisdiction over the nature
of the action as it involved the interpretation and/or rescission of the contract; that prior to the
execution of the contract to sell, petitioner was already indebted to him in the sum of P31,269.00
representing the cost of two movies respondent made for petitioner and used by the latter in his
political campaign in 1964 when petitioner ran for Congressman, as well as the cost of one 16
millimeter projector petitioner borrowed from respondent and which had never been returned, which
amounts, according to their understanding, would be applied as down payment for the property and
to whatever obligations respondent had with petitioner. The latter strongly denied such an
understanding. Respondent's total counterclaim against petitioner was in the amount of P42,629.99
representing petitioner's pleaded indebtedness to private respondent, claim for moral damages, and
attorney's fees.

The counterclaim was dismissed by the Municipal Court for being in an amount beyond its
jurisdiction. However, as a special defense, private respondent sought to offset the sum of
P31,269.00 against his obligations to petitioner.

Deciding the case on May 10, 1967, the Municipal Court found that respondent Avellana had failed
to comply with his financial obligations under the contract and ordered him to vacate the premises
and deliver possession thereof to petitioner; to pay petitioner the sum of P21,093.88 representing
arrearages as of April, 1967, and P630.00 as monthly rental from and after May, 1967 until delivery
of possession of that premises to petitioner. That conclusion was premised on title finding that
breach of any of the conditions by private respondent converted the agreement into a lease
contractual and upon the following considerations:

The question involved herein is that of possession, that who of the contending parties
has the better right to possession of the properly in question. The issue in this case
being that of possession, the claim of defendant against plaintiff or P 31,269.00
indebtedness, has no place as a defense here. It should be the subject- matter of a
separate action against, plaintiff Jose C. Zulueta. As it is, said indebtedness is only a
claim still debatable and controversial and not a final judgment. 'It is our considered
opinion that to admit and to allow such a defense would be tantamount to prejuding
 the claim on its merits prematurely in favor of defendant. This court can not do
without violating some rules of law. This is not the proper court and this is not the
proper case in which to ventilate the claim.

Respondent Avellana appealed to the Court of First Instance of Rizal presided by respondent Judge.
Thereat, petitioner summoned for execution alleging private respondent's failure to deposit in
accordance the monthly rentals, which the latter denied. Respondent Judge held resolution thereof
in abeyance.

On February 19, 1968, respondent Avellana filed a Motion to Dismiss Appeal alleging that, inasmuch
as the defense set up in his Answer was that he had not breached his contract with petitioner, the
case necessarily involved the interpretation and/or rescission of the contract and, therefore, beyond
the jurisdiction of the Municipal Court. Petitioner opposed claiming that the Complaint had set out a
clear case of unlawful detainer considering that judicial action for the rescission of the contract was
unnecessary due to the automatic rescission clause therein and the fact that petitioner had cancelled
said contract so that respondent's right to remain in the premises had ceased.

On March 21, 1968, respondent Judge dismissed the case on the ground of lack of jurisdiction of the
Municipal Court, explaining:

The decision of the lower court declared said Contract to Sell to have been converted
into a contract of lease. It is the contention of the defendant that the lower court had
no jurisdiction to entertain the case as the same involves the interpretation of
contract as to whether or not the same has been converted to lease contract.
Although the contract to sell object of this case states that the same may be
converted into a lease contract upon the failure of the defendant to pay the
amortization of the property in question, there is no showing that before filing this
case in the lower court, the plaintiff has exercised or has pursued his right pursuant
to the contract which should be the basis of the action in the lower court.

Petitioner's Motion for Reconsideration was denied by respondent Judge as follows:

The plaintiff having filed a motion for reconsideration of this Court's Order dismissing
the appeal, the Court, while standing pat on its Order dismissing this case for lack of
jurisdiction of the lower court over the subject matter, hereby takes cognizance of the
case and will try the case as if it has been filed originally in this Court.

WHEREFORE, let this case be set for pre-trial on July 12, 1968 at 8:30 a.m. with
notice to an parties.

Petitioner then availed of the instant recourse.

Was the action before the Municipal Court of Pasig essentially for detainer and, therefore, within its
exclusive original jurisdiction, or one for rescission or annulment of a contract, which should be
litigated before a Court of First Instance?

Upon a review of the attendant circumstances, we uphold the ruling of respondent Judge that the
Municipal Court of Pasig was bereft of jurisdiction to take cognizance of the case filed before it. In
his Complaint, petitioner had alleged violation by respondent Avellana of the stipulations of their
agreement to sell and thus unilaterally considered the contract rescinded. Respondent Avellana
denied any breach on his part and argued that the principal issue was one of interpretation and/or
rescission of the contract as well as of set-off. Under those circumstances, proof of violation is a
condition precedent to resolution or rescission. It is only when the violation has been established that
the contract can be declared resolved or rescinded. Upon such rescission, in turn, hinges a
pronouncement that possession of the realty has become unlawful. Thus, the basic issue is not
possession but one of rescission or annulment of a contract. which is beyond the jurisdiction of the
Municipal Court to hear and determine.

A violation by a party of any of the stipulations of a contract on agreement to sell real

property would entitle the other party to resolved or rescind it. An allegation of such
violation in a detainer suit may be proved by competent evidence. And if proved a
justice of the peace court might make a finding to that effect, but it certainly cannot
declare and hold that the contract is resolved or rescinded. It is beyond its power so
to do. And as the illegality of the possession of realty by a party to a contract to sell is
premised upon the resolution of the contract, it follows that an allegation and proof of
such violation, a condition precedent to such resolution or rescission, to render
unlawful the possession of the land or building erected thereon by the party who has
violated the contract, cannot be taken cognizance of by a justice of the peace
court. ... 1

True, the contract between the parties provided for extrajudicial rescission. This has legal effect, however,
where the other party does not oppose it. 2 Where it is objected to, a judicial determination of the issue is
still necessary.

A stipulation entitling one party to take possession of the land and building if the
other party violates the contract does not ex proprio vigore confer upon the former
the right to take possession thereof if objected to without judicial intervention and'
determination. 3

But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the case and
correctly dismissed the appeal, he erred in assuming original jurisdiction, in the face of the objection
interposed by petitioner. Section 11, Rule 40, leaves no room for doubt on this point:

Section 11. Lack of jurisdiction A case tried by an inferior court without jurisdiction
over the subject matter shall be dismiss on appeal by the Court of First Instance. But
instead of dismissing the case, the Court of First Instance may try the case on the
merits, if the parties therein file their pleadings and go to trial without any objection to
such jurisdiction.

There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal.

If an inferior court tries a case without jurisdiction over the subject-matter on appeal,
the only authority of the CFI is to declare the inferior court to have acted without
jurisdiction and dismiss the case, unless the parties agree to the exercise by the CFI
of its original jurisdiction to try the case on the merits. 4

The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment of the
Municipal Court of Pasig must perforce be denied.

WHEREFORE, the Writ of mandamus is denied, but the Writ of Prohibition is granted and
respondent Court hereby permanently enjoined from taking cognizance of Civil Case No. 10595 in
the exercise of its original jurisdiction. No costs.

SO ORDERED.
G.R. No. L-56076 September 21, 1983

PALAY, INC. and ALBERT ONSTOTT, petitioner,

vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and
NAZARIO DUMPIT respondents.

Santos, Calcetas-Santos & Geronimo Law Office for petitioner.

Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.:

The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P.
Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to
private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as
resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as
well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said
Resolution of May 2, 1980, are being assailed in this petition.

On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of
private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the
Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by
TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully
paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration of the grace period
of one month, without need of notice and with forfeiture of all installments paid.

Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The
last payment was made on December 5, 1967 for installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update
all his overdue accounts with interest, and seeking its written consent to the assignment of his rights
to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating
the same request. Replying petitioners informed respondent that his Contract to Sell had long been
rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.

Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the
National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No.
2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of
either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as
President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the
amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974.
Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated
October 23, 1979. 1

On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary
to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed
the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus,
the present petition wherein the following issues are raised:

Whether notice or demand is not mandatory under the circumstances and, therefore,
may be dispensed with by stipulation in a contract to sell.

II

Whether petitioners may be held liable for the refund of the installment payments
made by respondent Nazario M. Dumpit.

III

Whether the doctrine of piercing the veil of corporate fiction has application to the
case at bar.

IV

Whether respondent Presidential Executive Assistant committed grave abuse of

discretion in upholding the decision of respondent NHA holding petitioners solidarily
liable for the refund of the installment payments made by respondent Nazario M.
Dumpit thereby denying substantial justice to the petitioners, particularly petitioner
Onstott

We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the
questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On
October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal
and gave due course to the petition on March 15, 1982.

On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without
prior notice or demand upon respondent in view of paragraph 6 thereof which provides-

6. That in case the BUYER falls to satisfy any monthly installment or any other
payments herein agreed upon, the BUYER shall be granted a month of grace within
which to make the payment of the t in arrears together with the one corresponding to
the said month of grace. -It shall be understood, however, that should the month of
grace herein granted to the BUYER expire, without the payment & corresponding to
both months having been satisfied, an interest of ten (10%) per cent per annum shall
be charged on the amounts the BUYER should have paid; it is understood further,
that should a period of NINETY (90) DAYS elapse to begin from the expiration of the
month of grace hereinbefore mentioned, and the BUYER shall not have paid all the
amounts that the BUYER should have paid with the corresponding interest up to the
date, the SELLER shall have the right to declare this contract cancelled and of no
effect without notice, and as a consequence thereof, the SELLER may dispose of the
lot/lots covered by this Contract in favor of other persons, as if this contract had
never been entered into. In case of such cancellation of this Contract, all the
amounts which may have been paid by the BUYER in accordance with the
agreement, together with all the improvements made on the premises, shall be
considered as rents paid for the use and occupation of the above mentioned
 premises and for liquidated damages suffered by virtue of the failure of the BUYER
to fulfill his part of this agreement : and the BUYER hereby renounces his right to
demand or reclaim the return of the same and further obligates peacefully to vacate
the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a
contract is not necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions. However, even in the cited cases, there was at least a
written notice sent to the defaulter informing him of the rescission. As stressed in University of the
Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should
be made known to the other. We quote the pertinent excerpt:

Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved in account of infractions by the other contracting party must be
made known to the other and is always provisional being ever subject to scrutiny and
review by the proper court. If the other party denies that rescission is justified it is
free to resort to judicial action in its own behalf, and bring the matter to court.Then,
should the court, after due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in the contrary case,
the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article 2203).

We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of
a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil.
631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every
case where the extrajudicial resolution is contested only the final award of the court
of competent jurisdiction can conclusively settle whether the resolution was proper or
not. It is in this sense that judicial action win be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to judicial invalidation
unless attack thereon should become barred by acquiescense, estoppel or
prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in
case of breach of contract may render nugatory the general rule requiring judicial
action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140)
but, as already observed, in case of abuse or error by the rescinder the other party is
not barred from questioning in court such abuse or error, the practical effect of the
stipulation being merely to transfer to the defaulter the initiative of instituting suit,
instead of the rescinder (Emphasis supplied).
Of similar import is the ruling in Nera vs. Vacante 4 , reading:

A stipulation entitling one party to take possession of the land and building if the
other party violates the contract does not ex propio vigore confer upon the former the
right to take possession thereof if objected to without judicial intervention and
determination.

This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal
effect where the other party does not oppose it.6 Where it is objected to, a judicial determination of
the issue is still necessary.

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial
determination. 7

In this case, private respondent has denied that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether resolution of the contract by petitioners was
warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra

Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to
rescind in court because from the moment the petitioner defaulted in the timely payment of the
installments, the contract between the parties was deemed ipso facto rescinded." However, it should
be noted that even in that case notice in writing was made to the vendee of the cancellation and
annulment of the contract although the contract entitled the seller to immediate repossessing of the
land upon default by the buyer.

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic
Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14, 1972, when it specifically provided:

Sec. 3(b) ... 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. (Emphasis supplied).

The contention that private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully
accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment
payments against onerous and oppressive conditions. Waiver of notice is one such onerous and
oppressive condition to buyers of real estate on installment payments.

Regarding the second issue on refund of the installment payments made by private
respondent. Article 1385 of the Civil Code provides:

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 obliged to restore.

Neither sham 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.

As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no evidence on record that other lots
are still available, private respondent is entitled to the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action. 10 It would be most
inequitable if petitioners were to be allowed to retain private respondent's payments and at the same
time appropriate the proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who
was made jointly and severally liable with petitioner corporation for refund to private respondent of
the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by
law with a personality separate and distinct from those of the persons composing it as wen as from
that of any other legal entity to which it may be related. 11 As a general rule, a corporation may not be
made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may
be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used
as a shield to further an end subversive of justice 12 ; or for purposes that could not have been
intended by the law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or
defend crime. 14 ; or to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the law or
perpetuate deception 16; or as an alter ego, adjunct or business conduit for the sole benefit of the
stockholders. 17

We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on
paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.

In this case, petitioner Onstott was made liable because he was then the President of the
corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said
petitioner used the corporation to defraud private respondent. He cannot, therefore, be made
personally liable just because he "appears to be the controlling stockholder". Mere ownership by a
single stockholder or by another corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 18 In this respect then, a modification of the Resolution under review
is called for.

WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby
modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of
the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.

No costs.

SO ORDERED.

G.R. No. L-42283 March 18, 1985

BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.:

This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District,
Branch X, declaring the contract to sell as not having been validly cancelled and ordering the
defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay
P500.00 attorney's fees and costs.

The facts being undisputed, the Court of Appeals certified the case to us since only pure questions
of law have been raised for appellate review.

On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and
plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of
land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.

The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They
promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being
due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly
installments until July 1966, when their aggregate payment already amounted to P4,533.38. On
numerous occasions, the defendants-appellants accepted and received delayed installment
payments from the plaintiffs-appellees.

On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting

the remittance of past due accounts.

On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-
appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration
of the said cancellation was denied by the defendants-appellants.

The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh
Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final
deed of sale alleging inter alia that after computing all subsequent payments for the land in question,
they found out that they have already paid the total amount of P4,533.38 including interests, realty
taxes and incidental expenses for the registration and transfer of the land.

The defendants-appellants alleged in their answer that the complaint states no cause of action and
that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and
refused to pay and/or offer to pay the monthly installments corresponding to the month of August,
1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the
said contract.

The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the
decision reads:

WHEREFORE, based on the foregoing considerations, the Court hereby renders

judgment in favor of the plaintiffs and against the defendants declaring that the
 contract subject matter of the instant case was NOT VALIDLY cancelled by the
defendants. Consequently, the defendants are ordered to execute a final Deed of
Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees.
Costs against the defendants.

A motion for reconsideration filed by the defendants-appellants was denied.

As earlier stated, the then Court of Appeals certified the case to us considering that the appeal
involves pure questions of law.

The defendants-appellants assigned the following alleged errors of the lower court:

First Assignment of Error

THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL

(ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY
CANCELLED.

Second Assignment of Error

EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT
BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN
ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF
THE PLAINTIFF.

Third Assignment of Error

THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS

THE SUM OF P500.00 AS ATTORNEY'S FEES.

The main issue to be resolved is whether or not the contract to sell has been automatically and
validly cancelled by the defendants-appellants.

The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six
of the contract which provides:

xxx xxx xxx

SIXTH.In case the party of the SECOND PART fails to satisfy any monthly
installments, or any other payments herein agreed upon, he is granted a month of
grace within which to make the retarded payment, together with the one
corresponding to the said month of grace; it is understood, however, that should the
month of grace herein granted to the party of the SECOND PART expired; without
the payments corresponding to both months having been satisfied, an interest of 10%
per annum will be charged on the amounts he should have paid; it is understood
further, that should a period of 90 days elapse, to begin from the expiration of the
month of grace herein mentioned, and the party of SECOND PART has not paid all
the amounts he should have paid with the corresponding interest up to that date, the
party of the FIRST PART has the right to declare this contract cancelled and of no
effect, and as consequence thereof, the party of the FIRST PART may dispose of the
parcel of land covered by this contract in favor of other persons, as if this contract
 had never been entered into. In case of such cancellation of the contract, all the
amounts paid in accordance with this agreement together with all the improvements
made on the premises, shall be considered as rents paid for the use and occupation
of the above mentioned premises, and as payment for the damages suffered by
failure of the party of the SECOND PART to fulfill his part of the agreement; and the
party of the SECOND PART hereby renounces all his right to demand or reclaim the
return of the same and obliges himself to peacefully vacate the premises and deliver
the same to the party of the FIRST PART. (Emphasis supplied by appellant)

xxx xxx xxx

The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966
installment despite demands for more than four (4) months. The defendants-appellants point
to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the
right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision
or stipulation similar to paragraph 6 of the contract in this case. The defendants-appellants also
argue that even in the absence of the aforequoted provision, they had the right to cancel the contract
to sell under Article 1191 of the Civil Code of the Philippines.

The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state
that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of
specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no
effect, because it granted the sellers an absolute and automatic right of rescission.

Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:

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.

xxx xxx xxx

Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the
failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the
law that prohibits the parties from entering into an agreement that violation of the terms of the
contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental
Shipping, Co., et al., 12 SCRA 276)

Well settled is, however, the rule that a judicial action for the rescission of a contract
is not necessary where the contract provides that it may be revoked and cancelled
for violation of any of its terms and conditions' (Lopez v. Commissioner of Customs,
37 SCRA 327, and cases cited therein)

Resort to judicial action for rescission is obviously not contemplated . . . The validity
of the stipulation can not be seriously disputed. It is in the nature of a facultative
resolutory condition which in many cases has been upheld by this Court. (Ponce
Enrile v. Court of Appeals, 29 SCRA 504).
The rule that it is not always necessary for the injured party to resort to court for rescission of the
contract when the contract itself provides that it may be rescinded for violation of its terms and
conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA
102) where we explained that:

Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved on account of infractions by the other contracting party must be
made known to the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denies that rescission is justified, it
is free to resort to judicial action in its own behalf, and bring the matter to court. Then,
should the court, after due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in the contrary case,
the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.

In other words, the party who deems the contract violated many consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in
law. ... .

We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of
a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil.
631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every
case where the extrajudicial resolution is contested only the final award of the court
of competent jurisdiction can conclusively settle whether the resolution was proper or
not. It is in this sense that judicial action will be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to judicial invalidation,
unless attack thereon should become barred by acquiescence, estoppel or
prescription.

The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that

The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat
the very object of the parties in making the agreement. (Song Fo & Co. v. Hawaiian-
Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is
substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et
al., L-23707 & L-23720, Jan. 17, 1968). ... .

The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to
sell which provides:

SECOND.That in consideration of the agreement of sale of the above described

property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY
(P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as
follows:
 (a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this
contract is signed; and

(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of
each month, from this date until the total payment of the price above stipulated,
including interest.

because they failed to pay the August installment, despite demand, for more than four (4) months.

The breach of the contract adverted to by the defendants-appellants is so slight and casual when we
consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid
the monthly installments for a period of almost nine (9) years. In other words, in only a short time,
the entire obligation would have been paid. Furthermore, although the principal obligation was only P
3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate
amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work
injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would
unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that:

If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee.

also militates against the unilateral act of the defendants-appellants in cancelling the contract.

We agree with the observation of the lower court to the effect that:

Although the primary object of selling subdivided lots is business, yet, it cannot be
denied that this subdivision is likewise purposely done to afford those landless, low
income group people of realizing their dream of a little parcel of land which they can
really call their own.

The defendants-appellants cannot rely on paragraph 9 of the contract which provides:

NINTH.-That whatever consideration of the party of the FIRST PART may concede
to the party of the SECOND PART, as not exacting a strict compliance with the
conditions of paragraph 6 of this contract, as well as any other condonation that the
party of the FIRST PART may give to the party of the SECOND PART with regards
to the obligations of the latter, should not be interpreted as a renunciation on the part
of the party of the FIRST PART of any right granted it by this contract, in case of
default or non-compliance by the party of the SECOND PART.

The defendants-appellants argue that paragraph nine clearly allows the seller to waive the
observance of paragraph 6 not merely once, but for as many times as he wishes.

The defendants-appellants' contention is without merit. 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 De Guzman v.
Guieb (48 SCRA 68), we held that:

xxx xxx xxx

But defendants do not deny that in spite of the long arrearages, neither they nor their
predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject
the appellees from the home-lot in question. On the contrary, it is admitted that the
delayed payments were received without protest or qualification. ... Under these
circumstances, We cannot but agree with the lower court that at the time appellees
exercised their option, appellants had already forfeited their right to invoke the
above-quoted provision regarding the nullifying effect of the non-payment of six
months rentals by appellees by their having accepted without qualification on July 21,
1964 the full payment by appellees of all their arrearages.

The defendants-appellants contend in the second assignment of error that the ledger of payments
show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the
total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a
substantial portion of the said payments were applied to the interests since the contract specifically
provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on
paragraph 2 of the contract which provides:

SECOND.That in consideration of the agreement of sale of the above described

property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P
3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... .
(Emphasis supplied)

The plaintiffs-appellees on the other hand are firm in their submission that since they have already
paid the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be
compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which provides:

TWELFTH.That once the payment of the sum of P3,920.00, the total price of the
sale is completed, the party to the FIRST PART will execute in favor of the party of
the SECOND PART, the necessary deed or deeds to transfer to the latter the title of
the parcel of land sold, free from all hens and encumbrances other than those
expressly provided in this contract; it is understood, however, that au the expenses
which may be incurred in the said transfer of title shall be paid by the party of the
SECOND PART, as above stated.

Closely related to the second assignment of error is the submission of the plaintiffs-appellees that
the contract herein is a contract of adhesion.

We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed
their signatures and assented to the terms and conditions of the contract. They had no opportunity to
question nor change any of the terms of the agreement. It was offered to them on a "take it or leave
it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:

xxx xxx xxx

 ... (W)hile generally, stipulations in a contract come about after deliberate drafting by
the parties thereto. . . . there are certain contracts almost all the provisions of which
have been drafted only by one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the party is the signing of his
signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of
sale of lots on the installment plan fall into this category. (Paras, Civil Code of the
Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)

While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the
defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that
under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the
P3,920.00 price sale.

The contract to sell, being a contract of adhesion, must be construed against the party causing it.
We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract
must be interpreted against the party who drafted the same, especially where such interpretation will
help effect justice to buyers who, after having invested a big amount of money, are now sought to be
deprived of the same thru the prayed application of a contract clever in its phraseology,
condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is
most unfair to the buyers."

Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees
have already paid an aggregate amount of P4,533.38, the courts should only order the payment of
the few remaining installments but not uphold the cancellation of the contract. Upon payment of the
balance of P671.67 without any interest thereon, the defendants-appellants must immediately
execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer
documents as provided in paragraph 12 of the contract. The attorney's fees are justified.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is
AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX
HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any
interests. Costs against the defendants-appellants.

SO ORDERED.

G.R. No. L-22590 March 20, 1987

SOLOMON BOYSAW and ALFREDO M. YULO, JR., plaintiffs-appellants,

vs.
INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR., and MANUEL NIETO, JR., defendants-
appellees.

Felipe Torres and Associates for plaintiffs-appellants.

V.E. Del Rosario & Associates for defendant-appellee M. Nieto, Jr.

A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee Interphil Promotions, Inc.

RESOLUTION
FERNAN, J.:

This is an appeal interposed by Solomon Boysaw and Alfredo Yulo, Jr., from the decision dated July
25, 1963 and other rulings and orders of the then Court of First Instance [CFI] of Rizal, Quezon City,
Branch V in Civil Case No. Q-5063, entitled "Solomon Boysaw and Alfredo M. Yulo, Jr., Plaintiffs
versus Interphil Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto, Jr., Defendants," which,
among others, ordered them to jointly and severally pay defendant-appellee Manuel Nieto, Jr., the
total sum of P25,000.00, broken down into P20,000.00 as moral damages and P5,000.00 as
attorney's fees; the defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr.,
P250,000.00 as unrealized profits, P33,369.72 as actual damages and P5,000.00 as attorney's fees;
and defendant-appellee Lope Sarreal, Sr., the additional amount of P20,000.00 as moral damages
aside from costs.

The antecedent facts of the case are as follows:

On May 1, 1961, Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil
Promotions, Inc. represented by Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a
boxing contest for the junior lightweight championship of the world.

It was stipulated that the bout would be held at the Rizal Memorial Stadium in Manila on September
30, 1961 or not later than thirty [30] days thereafter should a postponement be mutually agreed upon,
and that Boysaw would not, prior to the date of the boxing contest, engage in any other such contest
without the written consent of Interphil Promotions, Inc.

On May 3, 1961, a supplemental agreement on certain details not covered by the principal contract
was entered into by Ketchum and Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde to a
similar agreement, that is, to engage Boysaw in a title fight at the Rizal Memorial Stadium on
September 30, 1961.

On June 19, 1961, Boysaw fought and defeated Louis Avila in a ten-round non-title bout held in Las
Vegas, Nevada, U.S.A. [pp. 26-27, t.s.n., session of March 14, 1963].

On July 2, 1961, Ketchum on his own behalf and on behalf of his associate Frank Ruskay, assigned
to J. Amado Araneta the managerial rights over Solomon Boysaw.

Presumably in preparation for his engagement with Interphil, Solomon Boysaw arrived in the
Philippines on July 31, 1961.

On September 1, 1961, J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the managerial rights over
Boysaw that he earlier acquired from Ketchum and Ruskay. The next day, September 2, 1961,
Boysaw wrote Lope Sarreal, Sr. informing him of his arrival and presence in the Philippines.

On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him of his acquisition of the
managerial rights over Boysaw and indicating his and Boysaw's readiness to comply with the boxing
contract of May 1, 1961. On the same date, on behalf of Interphil Sarreal wrote a letter to the Games
and Amusement Board [GAB] expressing concern over reports that there had been a switch of
managers in the case of Boysaw, of which he had not been formally notified, and requesting that
Boysaw be called to an inquiry to clarify the situation.
The GAB called a series of conferences of the parties concerned culminating in the issuance of its
decision to schedule the Elorde-Boysaw fight for November 4, 1961. The USA National Boxing
Association which has supervisory control of all world title fights approved the date set by the GAB

Yulo, Jr. refused to accept the change in the fight date, maintaining his refusal even after Sarreal on
September 26, 1961, offered to advance the fight date to October 28, 1961 which was within the 30-
day period of allowable postponements provided in the principal boxing contract of May 1, 1961.

Early in October 1961, Yulo, Jr. exchanged communications with one Mamerto Besa, a local boxing
promoter, for a possible promotion of the projected Elorde-Boysaw title bout. In one of such
communications dated October 6, 1961, Yulo informed Besa that he was willing to approve the fight
date of November 4,1961 provided the same was promoted by Besa.

While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961
boxing contract never materialized.

As a result of the foregoing occurrences, on October 12, 1961, Boysaw and Yulo, Jr. sued Interphil,
Sarreal, Sr. and Manuel Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages allegedly
occasioned by the refusal of Interphil and Sarreal, aided and abetted by Nieto, Jr., then GAB
Chairman, to honor their commitments under the boxing contract of May 1,1961.

On the first scheduled date of trial, plaintiff moved to disqualify Solicitor Jorge Coquia of the Solicitor
General's Office and Atty. Romeo Edu of the GAB Legal Department from appearing for defendant
Nieto, Jr. on the ground that the latter had been sued in his personal capacity and, therefore, was
not entitled to be represented by government counsel. The motion was denied insofar as Solicitor
General Coquia was concerned, but was granted as regards the disqualification of Atty. Edu.

The case dragged into 1963 when sometime in the early part of said year, plaintiff Boysaw left the
country without informing the court and, as alleged, his counsel. He was still abroad when, on May
13, 1963, he was scheduled to take the witness stand. Thus, the lower court reset the trial for June
20, 1963. Since Boysaw was still abroad on the later date, another postponement was granted by
the lower court for July 23, 1963 upon assurance of Boysaw's counsel that should Boysaw fail to
appear on said date, plaintiff's case would be deemed submitted on the evidence thus far presented.

On or about July 16, 1963, plaintiffs represented by a new counsel, filed an urgent motion for
postponement of the July 23, 1963 trial, pleading anew Boysaw's inability to return to the country on
time. The motion was denied; so was the motion for reconsideration filed by plaintiffs on July 22,
1963.

The trial proceeded as scheduled on July 23, 1963 with plaintiff's case being deemed submitted after
the plaintiffs declined to submit documentary evidence when they had no other witnesses to present.
When defendant's counsel was about to present their case, plaintiff's counsel after asking the court's
permission, took no further part in the proceedings.

After the lower court rendered its judgment dismissing the plaintiffs' complaint, the plaintiffs moved
for a new trial. The motion was denied, hence, this appeal taken directly to this Court by reason of
the amount involved.

From the errors assigned by the plaintiffs, as having been committed by the lower court, the
following principal issues can be deduced:
 1. Whether or not there was a violation of the fight contract of May 1, 1961; and if
there was, who was guilty of such violation.

2. Whether or not there was legal ground for the postponement of the fight date from
September 1, 1961, as stipulated in the May 1, 1961 boxing contract, to November
4,1961,

3. Whether or not the lower court erred in the refusing a postponement of the July 23,
1963 trial.

4. Whether or not the lower court erred in denying the appellant's motion for a new
trial.

5. Whether or not the lower court, on the basis of the evidence adduced, erred in
awarding the appellees damages of the character and amount stated in the decision.

On the issue pertaining to the violation of the May 1, 1961 fight contract, the evidence established
that the contract was violated by appellant Boysaw himself when, without the approval or consent of
Interphil, he fought Louis Avila on June 19, 1961 in Las Vegas Nevada. Appellant Yulo admitted this
fact during the trial. [pp. 26-27, t.s.n., March 14, 1963].

While the contract imposed no penalty for such violation, this does not grant any of the parties the
unbridled liberty to breach it with impunity. Our law on contracts recognizes the principle that
actionable injury inheres in every contractual breach. Thus:

Those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the terms thereof, are liable for
damages. [Art. 1170, Civil Code].

Also:

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. [Part 1, Art. 1191, Civil
Code].

There is no doubt that the contract in question gave rise to reciprocal obligations. "Reciprocal
obligations are those which arise from the same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent upon the obligation of the other.
They are to be performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1

The power to rescind is given to the injured party. "Where the plaintiff is the party who did not
perform the undertaking which he was bound by the terms of the agreement to perform 4 he is not
entitled to insist upon the performance of the contract by the defendant, or recover damages by
reason of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581, Emphasis supplied].

Another violation of the contract in question was the assignment and transfer, first to J. Amado
Araneta, and subsequently, to appellant Yulo, Jr., of the managerial rights over Boysaw without the
knowledge or consent of Interphil.
The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the
original contract which, to be valid, should have been consented to by Interphil.

Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor.[Art. 1293, Civil Code, emphasis supplied].

That appellant Yulo, Jr., through a letter, advised Interphil on September 5, 1961 of his acquisition of
the managerial rights over Boysaw cannot change the fact that such acquisition, and the prior
acquisition of such rights by Araneta were done without the consent of Interphil. There is no showing
that Interphil, upon receipt of Yulo's letter, acceded to the "substitution" by Yulo of the original
principal obligor, who is Ketchum. The logical presumption can only be that, with Interphil's letter to
the GAB expressing concern over reported managerial changes and requesting for clarification on
the matter, the appellees were not reliably informed of the changes of managers. Not being reliably
informed, appellees cannot be deemed to have consented to such changes.

Under the law when a contract is unlawfully novated by an applicable and unilateral substitution of
the obligor by another, the aggrieved creditor is not bound to deal with the substitute.

The consent of the creditor to the change of debtors, whether

in expromision or delegacion is an, indispensable requirement . . . Substitution of one
debtor for another may delay or prevent the fulfillment of the obligation by reason of
the inability or insolvency of the new debtor, hence, the creditor should agree to
accept the substitution in order that it may be binding on him.

Thus, in a contract where x is the creditor and y is the debtor, if y enters into a
contract with z, under which he transfers to z all his rights under the first contract,
together with the obligations thereunder, but such transfer is not consented to or
approved by x, there is no novation. X can still bring his action against y for
performance of their contract or damages in case of breach. [Tolentino, Civil Code of
the Philippines, Vol. IV, p. 3611.

From the evidence, it is clear that the appellees, instead of availing themselves of the options given
to them by law of rescission or refusal to recognize the substitute obligor Yulo, really wanted to
postpone the fight date owing to an injury that Elorde sustained in a recent bout. That the appellees
had the justification to renegotiate the original contract, particularly the fight date is undeniable from
the facts aforestated. Under the circumstances, the appellees' desire to postpone the fight date
could neither be unlawful nor unreasonable.

We uphold the appellees' contention that since all the rights on the matter rested with the appellees,
and appellants' claims, if any, to the enforcement of the contract hung entirely upon the former's
pleasure and sufferance, the GAB did not act arbitrarily in acceding to the appellee's request to reset
the fight date to November 4, 1961. It must be noted that appellant Yulo had earlier agreed to abide
by the GAB ruling.

In a show of accommodation, the appellees offered to advance the November 4, 1961 fight to
October 28, 1961 just to place it within the 30- day limit of allowable postponements stipulated in the
original boxing contract.

The refusal of appellants to accept a postponement without any other reason but the implementation
of the terms of the original boxing contract entirely overlooks the fact that by virtue of the violations
they have committed of the terms thereof, they have forfeited any right to its enforcement.
On the validity of the fight postponement, the violations of the terms of the original contract by
appellants vested the appellees with the right to rescind and repudiate such contract altogether. That
they sought to seek an adjustment of one particular covenant of the contract, is under the
circumstances, within the appellee's rights.

While the appellants concede to the GAB's authority to regulate boxing contests, including the
setting of dates thereof, [pp. 44-49, t.s.n., Jan. 17, 1963], it is their contention that only Manuel Nieto,
Jr. made the decision for postponement, thereby arrogating to himself the prerogatives of the whole
GAB Board.

The records do not support appellants' contention. Appellant Yulo himself admitted that it was the
GAB Board that set the questioned fight date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it must be
stated that one of the strongest presumptions of law is that official duty has been regularly performed.
In this case, the absence of evidence to the contrary, warrants the full application of said
presumption that the decision to set the Elorde-Boysaw fight on November 4, 1961 was a GAB
Board decision and not of Manuel Nieto, Jr. alone.

Anent the lower court's refusal to postpone the July 23, 1963 trial, suffice it to say that the same
issue had been raised before Us by appellants in a petition for certiorari and prohibition docketed as
G.R. No. L-21506. The dismissal by the Court of said petition had laid this issue to rest, and
appellants cannot now hope to resurrect the said issue in this appeal.

On the denial of appellant's motion for a new trial, we find that the lower court did not commit any
reversible error.

The alleged newly discovered evidence, upon which the motion for new trial was made to rest,
consists merely of clearances which Boysaw secured from the clerk of court prior to his departure for
abroad. Such evidence cannot alter the result of the case even if admitted for they can only prove
that Boysaw did not leave the country without notice to the court or his counsel.

The argument of appellants is that if the clearances were admitted to support the motion for a new
trial, the lower court would have allowed the postponement of the trial, it being convinced that
Boysaw did not leave without notice to the court or to his counsel. Boysaw's testimony upon his
return would, then, have altered the results of the case.

We find the argument without merit because it confuses the evidence of the clearances and the
testimony of Boysaw. We uphold the lower court's ruling that:

The said documents [clearances] are not evidence to offset the evidence adduced
during the hearing of the defendants. In fact, the clearances are not even material to
the issues raised. It is the opinion of the Court that the 'newly discovered evidence'
contemplated in Rule 37 of the Rules of Court, is such kind of evidence which has
reference to the merits of the case, of such a nature and kind, that if it were
presented, it would alter the result of the judgment. As admitted by the counsel in
their pleadings, such clearances might have impelled the Court to grant the
postponement prayed for by them had they been presented on time. The question of
the denial of the postponement sought for by counsel for plaintiffs is a moot issue . . .
The denial of the petition for certiorari and prohibition filed by them, had he effect of
sustaining such ruling of the court . . . [pp. 296-297, Record on Appeal].

The testimony of Boysaw cannot be considered newly discovered evidence for as appellees rightly
contend, such evidence has been in existence waiting only to be elicited from him by questioning.
We cite with approval appellee's contention that "the two qualities that ought to concur or dwell on
each and every of evidence that is invoked as a ground for new trial in order to warrant the
reopening . . . inhered separately on two unrelated species of proof" which "creates a legal
monstrosity that deserves no recognition."

On the issue pertaining to the award of excessive damages, it must be noted that because the
appellants wilfully refused to participate in the final hearing and refused to present documentary
evidence after they no longer had witnesses to present, they, by their own acts prevented
themselves from objecting to or presenting proof contrary to those adduced for the appellees.

On the actual damages awarded to appellees, the appellants contend that a conclusion or finding
based upon the uncorroborated testimony of a lone witness cannot be sufficient. We hold that in civil
cases, there is no rule requiring more than one witness or declaring that the testimony of a single
witness will not suffice to establish facts, especially where such testimony has not been contradicted
or rebutted. Thus, we find no reason to disturb the award of P250,000.00 as and for unrealized
profits to the appellees.

On the award of actual damages to Interphil and Sarreal, the records bear sufficient evidence
presented by appellees of actual damages which were neither objected to nor rebutted by appellants,
again because they adamantly refused to participate in the court proceedings.

The award of attorney's fees in the amount of P5,000.00 in favor of defendant-appellee Manuel Nieto,
Jr. and another P5,000.00 in favor of defendants-appellees Interphil Promotions, Inc. and Lope
Sarreal, Sr., jointly, cannot also be regarded as excessive considering the extent and nature of
defensecounsels' services which involved legal work for sixteen [16] months.

However, in the matter of moral damages, we are inclined to uphold the appellant's contention that
the award is not sanctioned by law and well- settled authorities. Art. 2219 of the Civil Code provides:

Art. 2219. Moral damages may be recovered in the following analogous cases:

1) A criminal offense resulting in physical injuries;

2) Quasi-delict causing physical injuries;

3) Seduction, abduction, rape or other lascivious acts;

4) Adultery or concubinage;

5) Illegal or arbitrary detention or arrest;

6) Illegal search;

7) Libel, slander or any other form of defamation;

8) Malicious prosecution;

9) Acts mentioned in Art. 309.

10) Acts and actions referred to in Arts., 21, 26, 27, 28, 29, 30, 32, 34 and 35.
The award of moral damages in the instant case is not based on any of the cases enumerated in Art.
2219 of the Civil Code. The action herein brought by plaintiffs-appellants is based on a perceived
breach committed by the defendants-appellees of the contract of May 1, 1961, and cannot, as such,
be arbitrarily considered as a case of malicious prosecution.

Moral damages cannot be imposed on a party litigant although such litigant exercises it erroneously
because if the action has been erroneously filed, such litigant may be penalized for costs.

The grant of moral damages is not subject to the whims and caprices of judges or
courts. The court's discretion in granting or refusing it is governed by reason and
justice. In order that a person may be made liable to the payment of moral damages,
the law requires that his act be wrongful. The adverse result of an action does not
per se make the act wrongful and subject the actor to the payment of moral damages.
The law could not have meant to impose a penalty on the right to litigate; such right
is so precious that moral damages may not be charged on those who may exercise it
erroneously. For these the law taxes costs. [Barreto vs. Arevalo, et. al. No. L-7748,
Aug. 27, 1956, 52 O.G., No. 13, p. 5818.]

WHEREFORE, except for the award of moral damages which is herein deleted, the decision of the
lower court is hereby affirmed.

SO ORDERED.

G.R. No. L-67881

PILIPINAS BANK as Successor-In-Interest Of And/Or In substitution to, The

MANUFACTURERS BANK AND TRUST COMPANY, petitioner-appellant
vs.
INTERMEDIATE APPELLATE COURT (Fourth Civil Cases Division), and JOSE W. DIOKNO and
CARMEN I. DIOKNO, respondents-appellees.

PARAS, J.:

This is an appeal by certiorari from the Decision 1 of the respondent court dated May 31, 1984 in CA-
G.R. CV No. 67205 entitled "Jose W. Diokno and Carmen I. Diokno, plaintiffs-appellees, vs. The
Manufacturers Bank and Trust Company, defendant-appellant" which affirmed the decision 2 of the
Court of First Instance of Rizal (Pasig Branch XXI) in Civil Case No. 19660, the dispositive portion of
which reads:

WHEREFORE, judgment is rendered in favor of the plaintiffs and against the defendant,
ordering the defendant Manufacturers Bank & Trust Company:

1. To deliver to the plaintiffs the parcel of land described in Contract to Sell No. VV-18-(a) in
the total area of 5,936 square meters and to execute in their favor the necessary deed of
absolute sale therefor;

2. To pay the sum of P556,160.00 less the amount due on the contract (i.e., the unpaid
installments from December, 1966 until the contract would have been fully paid together with
 interest thereon up to March 25, 1974) with legal interest on said balance from April 22, 1974
until the same is fully paid;

3. P50,000.00 by way of moral damages;

4. P50,000.00 by way of exemplary damages;

5. Ten per cent (10%) of the judgment by way of attorney's fees; and

6. Costs of suit.

SO ORDERED. (Rollo, pp. 14-15)

The following are the undisputed facts of the case:

1. On April 18, 1961, Hacienda Benito, Inc. (petitioner's predecessor-in-interest) as vendor, and
private respondents, as vendees executed Contract to Sell No. VV-18 (a) (Exh. A) over a parcel of
land with an area of 5,936 square meters of the Victoria Valley Subdivision in Antipolo, Rizal, subject
to the following terms and conditions, among others, relevant to this petition:

(a) The total contract price for the entire 5,936 square-meter-lot was P47,488.00;

(b) Of the total sum, an amount of Pl2,182.00 was applied thereto so as to reduce the
balance on the principal to P35,306.00;

(c) The aforesaid balance, together with the stipulated interest of 6% per annum, was to be
paid over a period of 8-1/2 years starting on May 1, 1961 at a monthly installment of P446.10
until fully paid-although this monthly installment was later adjusted to the higher amount of
P797.86, starting on April 1, 1965;

(d) Upon complete payment by the vendee of the total price of the lot the vendor shall
execute a deed of sale in favor of the vendee;

(e) The contract shall be considered automatically rescinded and cancelled and of no further
force and effect upon failure of the vendee to pay when due, three or more consecutive
installments as stipulated therein or to comply with any of the terms and conditions thereof,
in which case the vendor shall have right to resell the said parcel of land to any person
interested, forfeiting payments made by the vendee as liquidated damages.

2. On July 27, 1965, petitioner sent to private respondents a Statement of Account (Exh. F-1)
requesting remittance of installment arrears showing partial payments for the month of April 1965
and May 1965 and complete default for June, July and August, 1965;

3. Likewise, on August 31, 1965, petitioner sent to private respondents another Statement of
Account with the additional entries of interests and the incoming installment for September, 1965;

4. In partial compliance with the aforesaid Statements of Account, private respondents paid on
September 3, 1965 the sum of Pl,397.00 which answers for the installments for the months of June
1965 to August 1965;
5. On March 17, 1967, petitioner sent private respondents a simple demand letter showing a
delinquency in their monthly amortizations for 19 months (Exh. 9);

6. On April 17, 1967, petitioner again sent private respondents a demand letter showing total
arrearages of 20 months as of April 1965, but this time advising that unless they up-date their
installment payments, petitioner shall be constrained to avail of the automatic rescission clause (Exh.
10);

7. On May 17, 1967, private respondents made a partial payment of P2,000.00 with the request for
an extension of 60 days from May 17, 1967 within which to up-date their account (Exh. 10-a);

8. On July 17, 1967, private respondents wrote a letter to petitioner asking another extension of sixty
(60) days to pay all their arrearages and update their payments under Contract No. VV-18 (a);

9. On September 18, 1967, private respondents paid P5,000.00 as partial payment and requested
an extension of another 30 days from September 18, 1967 within which to update their account (Exh.
10-c);

10. On October 19, 1967, however, private respondents failed to update their arrearages and did not
request for any further extension of time within which to update their account;

11. After almost three (3) years, or on July 16, 1970, private respondents wrote a letter to petitioner
requesting for a Statement of Account as of date in arrears and interests(Exh. 10-d), to which
petitioner made a reply on July 22, 1970 (Exh. 11);

12. On May 19, 1971, petitioner wrote a letter to private respondents, reminding them of their
balance which will be due on the 31st instant (Exh. J);

13. More than two (2) years from May 19, 1971 or on July 5, 1973, private respondents wrote a letter
to petitioner expressing their desire to fully settle their obligation, requesting for a complete
statement of all the balance due including interests;

14. On March 14, 1974, private respondents wrote a letter reiterating their request in their letter
dated July 5, 1973, which has not been complied with despite several follow-ups (Exh. O);

15. On March 25, 1974, private respondent Carmen I. Diokno went to see the Chairman of
petitioner's Board of Directors on the matter informing him that she had a buyer who was ready to
purchase the property,

16. On March 27, 1974, petitioner wrote a letter to private respondents, informing them that the
contract to sell had been rescinded/cancelled by a notarial act, to which letter was annexed a
"Demand for Rescission of Contract", notarized on March 25, 1974 (Exh. 12);

17. In view of the foregoing, private respondents filed Complaint for Specific Performance with
Damages to compel petitioner to execute a deed of sale in their favor, and to deliver to them the title
of the lot in question.

18. Petitioner filed an Answer with counterclaim for damages in the form of attorney's fees, claiming
that Contract to Sell No. VV-18(a) has been automatically rescinded or cancelled by virtue of private
respondents' failure to pay the installments due in the contract under the automatic rescission clause.
19. After trial, the lower court rendered a decision in private respondents' favor, holding that
petitioner could not rescind the contract to sell, because: (a) petitioner waived the automatic
rescission clause by accepting payment on September 1967, and by sending letters advising private
respondents of the balances due, thus, looking forward to receiving payments thereon; (b) in any
event, until May 18, 1977 (when petitioner made arrangements for the acquisition of additional 870
square meters) petitioner could not have delivered the entire area contracted for, so, neither could
private respondents be liable in default, citing Art. 1 189 of the New Civil Code. (Decision, pp. 141-
148, Amended Record on Appeal).

Said decision was affirmed on appeal.

Hence, this Petition For Review on Certiorari, raising the main issue of whether or not the Contract
to Sell No. VV-18(a) was rescinded or cancelled, under the automatic rescission clause contained
therein.

We find the petition meritless. While it is true that in the leading case of Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc. and Myers Building Co., 43 SCRA 93 the Supreme Court reiterated
among other things that a contractual provision allowing "automatic rescission" (without prior need of
judicial rescission, resolution or cancellation) is VALID, the remedy of one who feels aggrieved being
to go to Court for the cancellation of the rescission itself, in case the rescission is found unjustified
under the circumstances, still in the instant case there is a clear WAIVER of the stipulated right of
"automatic rescission," as evidenced by the many extensions granted private respondents by the
petitioner. In all these extensions, the petitioner never called attention to the proviso on "automatic
rescission."

WHEREFORE the assailed decision is hereby AFFIRMED but the actual damages are hereby
reduced to P250,000.00 (the profit private respondents could have earned had the land been
delivered to them at the time they were ready to pay all their arrearages) minus whatever private
respondents still owe the petitioner (with the stipulated 6% annual interest up to March 25, 1974) as
a result of the contract.

SO ORDERED.

G.R. No. 207133, March 09, 2015

SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner, v. JAYNE YU, Respondent.

DECISION

PERALTA, J.:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure which seeks to
reverse and set aside the Decision 1 dated January 24, 2013 and Resolution 2 dated April 30, 2013 of the
Court of Appeals (CA) in CA-G.R. SP No. 121175.

The facts follow.

Respondent Jayne Yu and petitioner Swire Realty Development Corporation entered into a Contract to Sell
on July 25, 1995 covering one residential condominium unit, specifically Unit 3007 of the Palace of Makati,
located at P. Burgos corner Caceres Sts., Makati City, with an area of 137.30 square meters for the total
contract price of P7,519,371.80, payable in equal monthly installments until September 24, 1997.
Respondent likewise purchased a parking slot in the same condominium building for P600,000.00.

On September 24, 1997, respondent paid the full purchase price of P7,519,371.80 for the unit while making
a down payment of P20,000.00 for the parking lot. However, notwithstanding full payment of the contract
price, petitioner failed to complete and deliver the subject unit on time. This prompted respondent to file a
Complaint for Rescission of Contract with Damages before the Housing and Land Use Regulatory Board
(HLURB) Expanded National Capital Region Field Office (ENCRFO).

On October 19, 2004, the HLURB ENCRFO rendered a Decision 3 dismissing respondents complaint. It ruled
that rescission is not permitted for slight or casual breach of the contract but only for such breaches as are
substantial and fundamental as to defeat the object of the parties in making the agreement. It disposed of
the case as follows: chanRoblesvi rtua lLawl ibra ry

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered ordering [petitioner] the following:

1. To finish the subject unit as pointed out in the inspection Report

2. To pay [respondent] the following:

a. the amount of P100,000 as compensatory damages for the minor irreversible

defects in her unit [respondent], or, in the alternative, conduct the necessary
repairs on the subject unit to conform to the intended specifications;
b. moral damages of P20,000.00
c. Attorneys fees of P20,000.00

On the other hand, [respondent] is hereby directed to immediately update her account insofar as the
parking slot is concerned, without interest, surcharges or penalties charged therein.

All other claims and counterclaims are hereby dismissed for lack of merit.

IT IS SO ORDERED. 4
cralawlawlib rary

Respondent then elevated the matter to the HLURB Board of Commissioners.

In a Decision 5 dated March 30, 2006, the HLURB Board of Commissioners reversed and set aside the ruling
of the HLURB ENCRFO and ordered the rescission of the Contract to Sell, ratiocinating: chanRob lesvi rtual Lawl ibra ry

We find merit in the appeal. The report on the ocular inspection conducted on the subject condominium
project and subject unit shows that the amenities under the approved plan have not yet been provided as of
May 3, 2002, and that the subject unit has not been delivered to [respondent] as of August 28, 2002, which
is beyond the period of development of December 1999 under the license to sell. The delay in the
completion of the project as well as of the delay in the delivery of the unit are breaches of statutory and
contractual obligations which entitles [respondent] to rescind the contract, demand a refund and payment of
damages.

The delay in the completion of the project in accordance with the license to sell also renders [petitioner]
liable for the payment of administrative fine.

Wherefore, the decision of the Office below is set aside and a new decision is rendered as follows:

1. Declaring the contract to sell as rescinded and directing [petitioner] to refund to [respondent] the
amount of P7,519,371.80 at 6% per annum from the time of extrajudicial demand on January 05,
2001: subject to computation and payment of the correct filing fee; Cha nRobles Vi rtua lawlib rary

2. Directing [petitioner] to pay respondent attorneys fees in the amount of P20,000.00; ChanRobles Vi rtua lawlib rary

3. Directing [petitioner] to pay an administrative fine of P10,000.00 for violation of Section 20, in
relation to Section 38 of P.D. 957:

SO ORDERED.
cralawlawl ibra ry
6
cralawred

Petitioner moved for reconsideration, but the same was denied by the HLURB Board of Commissioners in a
Resolution 7
dated June 14, 2007.

Unfazed, petitioner appealed to the Office of the President (OP) on August 7, 2007.

In a Decision 8 dated November 21, 2007, the OP, through then Deputy Executive Secretary Manuel Gaite,
dismissed petitioners appeal on the ground that it failed to promptly file its appeal before the OP. It
held: cha nRoblesv irt ual Lawlib rary

Records show that [petitioner] received its copy of the 30 March 2006 HLURB Decision on 17 April 2006 and
instead of filing an appeal, it opted first to file a Motion for Reconsideration on 28 April 2006 or eleven (11)
days thereafter. The said motion interrupted the 15-day period to appeal.

On 23 July 2007, [petitioner] received the HLURB Resolution dated 14 June 2007 denying the Motion for
Reconsideration.

Based on the ruling in United Overseas Bank Philippines, Inc. v. Ching (486 SCRA 655), the period to
appeal decisions of the HLURB Board of Commissioners to the Office of the President is 15 days from receipt
thereof pursuant to Section 15 of P.D. No. 957 and Section 2 of P.D. No. 1344 which are special laws that
provide an exception to Section 1 of Administrative Order No. 18.

Corollary thereto, par. 2, Section 1 of Administrative Order No. 18, Series of 1987 provides that:
The time during which a motion for reconsideration has been pending with the Ministry/Agency concerned
shall be deducted from the period of appeal. But where such a motion for reconsideration has been filed
during office hours of the last day of the period herein provided, the appeal must be made within the day
following receipt of the denial of said motion by the appealing party. (Underscoring supplied)

xxxx
Accordingly, the [petitioner] had only four (4) days from receipt on 23 July 2007 of HLURB Resolution dated
14 June 2007, or until 27 July 2007 to file the Notice of Appeal before this Office. However, [petitioner] filed
its appeal only on 7 August 2007 or eleven (11) days late.

Thus, this Office need not delve on the merits of the appeal filed as the records clearly show that the said
appeal was filed out of time.

WHEREFORE, premises considered, [petitioner]s appeal is hereby DISMISSED, and the HLURB Decision
dated 30 March 2006 and HLURB Resolution dated 14 June 2007 are hereby AFFIRMED.

SO ORDERED. 9
cralawlawlibra ry

Immediately thereafter, petitioner filed a motion for reconsideration against said decision.

In a Resolution 10 dated February 17, 2009, the OP, through then Executive Secretary Eduardo Ermita,
granted petitioners motion and set aside Deputy Executive Secretary Gaites decision. It held that after a
careful and thorough evaluation and study of the records of the case, the OP was more inclined to agree
with the earlier decision of the HLURB ENCRFO as it was more in accord with facts, law and jurisprudence
relevant to the case. Thus: chanRoblesvi rtualLaw lib rary

WHEREFORE, premises considered, the instant Motion for Reconsideration is hereby GRANTED. The
Decision and Resolution of the HLURB Third Division Board of Commissioners, dated March 30, 2006 and
June 14, 2007, respectively, are hereby SET ASIDE, and the HLURB ENCRFO Decision dated October 19,
2004 is hereby REINSTATED.

SO ORDERED.
cralawlawl ibra ry
11
cralawred

Respondent sought reconsideration of said resolution, however, the same was denied by the OP in a
Resolution 12 dated August 18, 2011.

Consequently, respondent filed an appeal to the CA.

In a Decision dated January 24, 2013, the CA granted respondents appeal and reversed and set aside the
Order of the OP. The fallo of its decision reads: c hanRoble svirtual Lawlib ra ry
WHEREFORE, the Petition is hereby GRANTED. The assailed Resolution dated 17 February 2009
and Order dated 18 August 2011 of the Office of the President, in O.P. Case No. 07-H-283, are
hereby REVERSED and SET ASIDE. Accordingly, the Decision dated 30 March 2006 and Resolution dated
14 June 2007 of the HLURB Board of Commissioners in HLURB Case No. REM-A-050127-0014,
are REINSTATED.

SO ORDERED.
cralawlawl ibra ry
cralawlawlibra ry
13
c ralawre d

Petitioner moved for reconsideration, however, the CA denied the same in a Resolution dated April 30, 2013.

Hence, the present petition wherein petitioner raises the following grounds to support its petition: c hanRoble svirtual Lawlib ra ry

THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE LEGAL PRECEPTS THAT:

1. TECHNICAL RULES ARE NOT BINDING UPON ADMINISTRATIVE AGENCIES; and

2. RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH COMPLAINED OF IS SUBSTANTIAL AS

TO DEFEAT THE OBJECT OF THE PARTIES IN ENTERING INTO THE AGREEMENT. 14
cralawlawl ibra ry

In essence, the issues are: (1) whether petitioners appeal was timely filed before the OP; and (2) whether
rescission of the contract is proper in the instant case.

We shall resolve the issues in seriatim.

First, the period to appeal the decision of the HLURB Board of Commissioners to the Office of the President
has long been settled in the case of SGMC Realty Corporation v. Office of the President, 15 as reiterated in
the cases of Maxima Realty Management and Development Corporation v. Parkway Real Estate Development
Corporation 16 and United Overseas Bank Philippines, Inc. v. Ching. 17 cralawred

In the aforementioned cases, we ruled that the period to appeal decisions of the HLURB Board of
Commissioners is fifteen (15) days from receipt thereof pursuant to Section 15 18 of PD No. 957 19 and
Section 2 20 of PD No. 1344 21 which are special laws that provide an exception to Section 1 of
Administrative Order No. 18. Thus, in the SGMC Realty Corporation v. Office of the President case, the Court
explained: c hanRoble svirtual Lawlib ra ry

As pointed out by public respondent, the aforecited administrative order allows aggrieved party to file its
appeal with the Office of the President within thirty (30) days from receipt of the decision complained of.
Nonetheless, such thirty-day period is subject to the qualification that there are no other statutory periods of
appeal applicable. If there are special laws governing particular cases which provide for a shorter or longer
reglementary period, the same shall prevail over the thirty-day period provided for in the administrative
order. This is in line with the rule in statutory construction that an administrative rule or regulation, in order
to be valid, must not contradict but conform to the provisions of the enabling law.

We note that indeed there are special laws that mandate a shorter period of fifteen (15) days within which
to appeal a case to public respondent. First, Section 15 of Presidential Decree No. 957 provides that the
decisions of the National Housing Authority (NHA) shall become final and executory after the lapse of fifteen
(15) days from the date of receipt of the decision. Second, Section 2 of Presidential Decree No. 1344 states
that decisions of the National Housing Authority shall become final and executory after the lapse of fifteen
(15) days from the date of its receipt. The latter decree provides that the decisions of the NHA is appealable
only to the Office of the President. Further, we note that the regulatory functions of NHA relating to housing
and land development has been transferred to Human Settlements Regulatory Commission, now known as
HLURB. x x x 22 cralawlawli bra ry

Records show that petitioner received a copy of the HLURB Board of Commissioners decision on April 17,
2006. Correspondingly, it had fifteen days from April 17, 2006 within which to file its appeal or until May 2,
2006. However, on April 28, 2006, or eleven days after receipt of the HLURB Board of Commissioners
decision, it filed a Motion for Reconsideration, instead of an appeal.

Concomitantly, Section 1 of Administrative Order No. 18 23 provides that the time during which a motion for
reconsideration has been pending with the ministry or agency concerned shall be deducted from the period
for appeal. Petitioner received the HLURB Board Resolution denying its Motion for Reconsideration on July 23,
2007 and filed its appeal only on August 7, 2007. Consequently therefore, petitioner had only four days from
July 23, 2007, or until July 27, 2007, within which to file its appeal to the OP as the filing of the motion for
reconsideration merely suspended the running of the 15-day period. However, records reveal that petitioner
only appealed to the OP on August 7, 2007, or eleven days late. Ergo, the HLURB Board of Commissioners
decision had become final and executory on account of the fact that petitioner did not promptly appeal with
the OP.

In like manner, we find no cogent reason to exempt petitioner from the effects of its failure to comply with
the rules.

In an avuncular case, we have held that while the dismissal of an appeal on purely technical grounds is
concededly frowned upon, it bears emphasizing that the procedural requirements of the rules on appeal are
not harmless and trivial technicalities that litigants can just discard and disregard at will. Neither being a
natural right nor a part of due process, the rule is settled that the right to appeal is merely a statutory
privilege which may be exercised only in the manner and in accordance with the provisions of the law. 24 cralawre d

Time and again, we have held that rules of procedure exist for a noble purpose, and to disregard such rules,
in the guise of liberal construction, would be to defeat such purpose. Procedural rules are not to be
disdained as mere technicalities. They may not be ignored to suit the convenience of a party. 25 The reason
for the liberal application of the rules before quasi-judicial agencies cannot be used to perpetuate injustice
and hamper the just resolution of the case. Neither is the rule on liberal construction a license to disregard
the rules of procedure. 26 c ralaw red

Thus, while there may be exceptions for the relaxation of technical rules principally geared to attain the
ends of justice, petitioners fatuous belief that it had a fresh 15-day period to elevate an appeal with the OP
is not the kind of exceptional circumstance that merits relaxation.

Second, Article 1191 of the Civil Code sanctions the right to rescind the obligation in the event that specific
performance becomes impossible, to wit: c hanRoble svirtual Lawlib ra ry

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 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. cralawlawlibra ry

Basic is the rule that the right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between them. The breach
contemplated in the said provision is the obligors failure to comply with an existing obligation. When the
obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence
of any just cause for the court to determine the period of compliance, the court shall decree the
rescission. 27 c ralawred

In the instant case, the CA aptly found that the completion date of the condominium unit was November
1998 pursuant to License No. 97-12-3202 dated November 2, 1997 but was extended to December 1999 as
per License to Sell No. 99-05-3401 dated May 8, 1999. However, at the time of the ocular inspection
conducted by the HLURB ENCRFO, the unit was not yet completely finished as the kitchen cabinets and
fixtures were not yet installed and the agreed amenities were not yet available. Said inspection report
states: chanRoblesvi rtua lLawl ibrary

1. The unit of the [respondent] is Unit 3007, which was labeled as P2-07, at the Palace of Makati,
located at the corner of P. Burgos Street and Caceres Street, Poblacion, Makati City. Based on the
approved plans, the said unit is at the 26thFloor.
2. During the time of inspection, the said unit appears to be completed except for the installation of
kitchen cabinets and fixtures.
 3. Complainant pinpointed to the undersigned the deficiencies as follows:

a. The delivered unit has high density fiber (HDF) floorings instead of narra wood parquet.

b. The [petitioners] have also installed baseboards as borders instead of pink porrino granite
boarders.

c. Walls are newly painted by the respondent and the alleged obvious signs of cladding could
not be determined.

d. Window opening at the master bedroom conforms to the approved plans. As a result it
leaves a 3 inches (sic) gap between the glass window and partitioning of the masters
bedroom.

e. It was verified and confirmed that a square column replaced the round column, based on
the approved plans.

f. At the time of inspection, amenities such as swimming pool and change room are seen at
the 31st floor only. These amenities are reflected on the 27th floor plan of the approved
condominium plans. Health spa for men and women, Shiatsu Massage Room, Two-Level
Sky Palace Restaurant and Hall for games and entertainments, replete with billiard tables, a
bar, indoor golf with spectacular deck and karaoke rooms were not yet provided by the
[petitioner].

g. The [masters] bedroom door bore sign of poor quality of workmanship as seen below.

h. The stairs have been installed in such manner acceptable to the undersigned.

i. Bathrooms and powder room have been installed in such manner acceptable to the
undersigned. 28
cralawlawl ibra ry

From the foregoing, it is evident that the report on the ocular inspection conducted on the subject
condominium project and subject unit shows that the amenities under the approved plan have not yet been
provided as of May 3, 2002, and that the subject unit has not been delivered to respondent as of August 28,
2002, which is beyond the period of development of December 1999 under the license to sell.
Incontrovertibly, petitioner had incurred delay in the performance of its obligation amounting to breach of
contract as it failed to finish and deliver the unit to respondent within the stipulated period. The delay in the
completion of the project as well as of the delay in the delivery of the unit are breaches of statutory and
contractual obligations which entitle respondent to rescind the contract, demand a refund and payment of
damages.

WHEREFORE, premises considered, the instant petition is DENIED. The Decision dated January 24, 2013
and Resolution dated April 30, 2013 of the Court of Appeals in CA-G.R. SP No. 121175 are
hereby AFFIRMED, with MODIFICATION that moral damages be awarded in the amount of
P20,000.00

SO ORDERED. cralawlawlibra ry

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent
Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said
title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable
in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other
property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12%
annual interest, payable within 3 years from the date of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-
month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this
pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed
by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47,
rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its
deposit liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments
in government securities] excluding extensions or renewals of already approved
loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind
the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the

promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real
estate mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is not
ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take
over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is
never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the
contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-
deducted interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less
neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned
by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party,
that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that is,
Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of
real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a
valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release
on the loan, does not make the real estate mortgage void for lack of consideration. It is not
necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter.
But when the consideration is subsequent to the mortgage, the mortgage can take effect only when
the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p.
583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs.
Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually
owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol.
19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent
of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for
the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of other heirs who have not been
paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS
HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12%
INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE

COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED

UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.

NO COSTS. SO ORDERED.

UNLAD RESOURCES DEVELOPMENT G.R. No. 149338

CORPORATION, UNLAD RURAL BANK OF
NOVELETA, INC., UNLAD COMMODITIES,
INC., HELENA Z. BENITEZ, and CONRADO L.
BENITEZ II,

Petitioners,

Present:

- versus -
YNARES-SANTIAGO, J.,

RENATO P. DRAGON, TARCISIUS R. Chairperson,

RODRIGUEZ, VICENTE D. CASAS, ROMULO AUSTRIA-MARTINEZ,
M. VIRATA, FLAVIANO PERDITO, TEOTIMO
BENITEZ, ELENA BENITEZ, and ROLANDO CHICO-NAZARIO,
SUAREZ, NACHURA, and
Respondents. REYES, JJ.

Promulgated:

July 28, 2008

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

DECISION

NACHURA, J.:
 Before this Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Civil Procedure seeking the reversal of the November 29, 2000
Decision[1] and August 2, 2001 Resolution[2] of the Court of Appeals (CA) in CA-G.R.
CV No. 54226.

The facts, as found by the CA, are as follows:

On December 29, 1981, the Plaintiffs (herein respondents) and

defendant (herein petitioner) Unlad Resources, through its Chairman[,]
Helena Z. Benitez[,] entered into a Memorandum of Agreement
wherein it is provided that [respondents], as controlling stockholders of
the Rural Bank [of Noveleta] shall allow Unlad Resources to invest four
million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank
in the form of additional equity. On the other hand, [petitioner] Unlad
Resources bound itself to invest the said amount of 4.8 million pesos in
the Rural Bank; upon signing, it was, likewise, agreed that [petitioner]
Unlad Resources shall subscribe to a minimum of four hundred eighty
thousand pesos (P480,000.00) (sic) common or preferred non-voting
shares of stock with a total par value of four million eight hundred
thousand pesos (P4,800,000.00) and pay up immediately one million
two hundred thousand pesos (P1,200,000.00) for said subscription; that
the [respondents], upon the signing of the said agreement shall transfer
control and management over the Rural Bank to Unlad Resources.
According to the [respondents], immediately after the signing of the
agreement, they complied with their obligation and transferred control
of the Rural Bank to Unlad Resources and its nominees and the Bank
was renamed the Unlad Rural Bank of Noveleta, Inc. However,
[respondents] claim that despite repeated demands, Unlad Resources
has failed and refused to comply with their obligation under the said
Memorandum of Agreement when it did not invest four million eight
hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form
of additional equity and, likewise, it failed to immediately infuse one
million two hundred thousand pesos (P1,200,000.00) as paid in capital
upon signing of the Memorandum of Agreement.

On August 10, 1984, the Board of Directors of [petitioner] Unlad

Resources passed Resolution No. 84-041 authorizing the President and
the General Manager to lease a mango plantation situated in
Naic, Cavite. Pursuant to this Resolution, the Bank as [lessee] entered
into a Contract of Lease with the [petitioner] Helena Z. Benitez as
[lessor]. The management of the mango plantation was undertaken by
Unlad Commodities, Inc., a subsidiary of Unlad Resources[,] under a
Management Contract Agreement. The Management Contract provides
that Unlad Commodities, Inc. would receive eighty percent (80%) of the
net profits generated by the operation of the mango plantation while
the Banks share is twenty percent (20%). It was further agreed that at
the end of the lease period, the Rural Bank shall turn over to the lessor
all permanent improvements introduced by it on the plantation.

xxxx

On May 20, 1987, [petitioner] Unlad Rural Bank wrote

[respondents] regarding [the] Central Banks approval to retire its
[Development Bank of the Philippines] preferred shares in the amount
of P219,000.00 and giving notice for subscription to proportionate
shares. The [respondents] objected on the grounds that there is already
 a sinking fund for the retirement of the said DBP-held preferred shares
provided for annually and that it could deprive the Rural Bank of a
cheap source of fund. (sic)

[Respondents] alleged compliance with all of their obligations

under the Memorandum of Agreement in that they have transferred
control and management over the Rural bank to the [petitioners] and
are ready, willing and able to allow [petitioners] to subscribe to a
minimum of four hundred eighty thousand (P480,000.00) (sic) common
or preferred non-voting shares of stocks with a total par value of four
million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank.
However, [petitioners] have failed and refused to subscribe to the said
shares of stock and to pay the initial amount of one million two
hundred thousand pesos (P1,200,000.00) for said subscription.[3]

On July 3, 1987, herein respondents filed before the Regional Trial Court
(RTC) of MakatiCity, Branch 61 a Complaint[4] for rescission of the agreement and
the return of control and management of the Rural Bank from petitioners to
respondents, plus damages. After trial, the RTC rendered a Decision,[5] the
dispositive portion of which provides:

WHEREFORE, Premises Considered, judgment is hereby rendered,

as follows:

1. The Memorandum of Agreement dated 29 December

1991 (sic) is hereby declared rescinded and:
 (a) Defendant Unlad Resources Development
Corporation is hereby ordered to immediately return
control and management over the Rural Bank of Noveleta,
Inc. to Plaintiffs; and

(b) Unlad Rural Bank of Noveleta, Inc. is hereby

ordered to return to Defendants the sum of One Million
Three Thousand Seventy Pesos (P1,003,070.00)

2. The Director for Rural Banks of the Bangko Sentral ng

Pilipinas is hereby appointed as Receiver of the Rural Bank;

3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from

placing the retired DBP-held preferred shares available for subscription
and the same is hereby ordered to be placed under a sinking fund;

4. Defendant Unlad Resources Development Corporation is

hereby ordered to pay plaintiffs the following:

(a) actual compensatory damages amounting to Four

Million Six Hundred One Thousand Seven Hundred Sixty-
Five and 38/100 Pesos (P4,601,765.38);

(b) moral damages in the amount of Five Hundred

Thousand Pesos (P500,000.00);
 (c) exemplary and corrective damages in the amount
of One Hundred Thousand Pesos (P100,000.00); and

(d) attorneys fees in the sum of (P100,000.00), plus

cost of suit.

SO ORDERED.[6]

Herein petitioners appealed the ruling to the CA. Respondents filed a

Motion to Dismiss and, subsequently, a Supplemental Motion to Dismiss, which
were both denied. Later, however, the CA, in a Decision dated November 29,
2000, dismissed the appeal for lack of merit and affirmed the RTC Decision in all
respects. Petitioners motion for reconsideration was denied in CA Resolution
dated August 2, 2001.

Petitioners are now before this Court alleging that the CA committed a
grave and serious reversible error in issuing the assailed Decision. Petitioners
question the jurisdiction of the trial court, something they have done from the
beginning of the controversy, contending that the issues that respondents raised
before the trial court are intra-corporate in nature and are, therefore, beyond the
jurisdiction of the trial court. They point out that respondents complaint charged
them with mismanagement and alleged dissipation of the assets of the Rural
Bank. Since the complaint challenges corporate actions and decisions of the Board
of Directors and prays for the recovery of the control and management of the
Rural Bank, these matters fall outside the jurisdiction of the trial court. Thus, they
posit that the judgment of the trial court, as affirmed by the CA, is null and void
and may be impugned at any time.
 Petitioners further argue that the action instituted by respondents had
already prescribed, because Article 1389 of the Civil Code provides that an action
for rescission must be commenced within four years. They claim that the trial
court and the CA mistakenly applied Article 1144 of the Civil Code which treats of
prescription of actions in general. They submit that Article 1389, which deals
specifically with actions for rescission, is the applicable law.

Moreover, petitioners assert that they have fully complied with their
undertaking under the subject Memorandum of Agreement, but that the
undertaking has become a legal and factual impossibility because the authorized
capital stock of the Rural Bank was increased from P1.7 million to only P5 million,
and could not accommodate the subscription by petitioners of P4.8 million worth
of shares. Such deficiency, petitioners contend, is with the knowledge and
approval of respondent Renato P. Dragon and his nominees to the Board of
Directors.

Petitioners, without conceding the propriety of the judgment of rescission,

also argue that the subject Memorandum of Agreement could not just be ordered
rescinded without the corresponding order for the restitution of the parties total
contributions and/or investments in the Rural Bank. Finally, they assail the award
for moral and exemplary damages, as well as the award for attorneys fees, as
bereft of factual and legal bases given that, in the body of the Decision, it was
merely stated that respondents suffered moral damages without any discussion
or explanation of, nor any justification for such award. Likewise, the matter of
attorneys fees was not at all discussed in the body of the Decision. Petitioners
claim that pursuant to the prevailing rule, attorneys fees cannot be recovered in
the absence of stipulation.

On the other hand, respondents declare that immediately after the signing
of the Memorandum of Agreement, they complied with their obligation and
transferred control of the Rural Bank to petitioner Unlad Resources and its
nominees, but that, despite repeated demands, petitioners have failed and
refused to comply with their concomitant obligations under the Agreement.

Respondents narrate that shortly after taking over the Rural Bank,
petitioners Conrado L. Benitez II and Jorge C. Cerbo, as President and General
Manager, respectively, entered into a Contract of Lease over the Naic, Cavite
mango plantation, and that, as a consequence of this venture, the bank incurred
expenses amounting to P475,371.57, equivalent to 25.76% of its capital and
surplus. The respondents further assert that the Central Bank found this
undertaking not inherently connected with bona fide rural banking operations,
nor does it fall within the allied undertakings permitted under Section 26 of
Central Bank Circular No. 741 and Section 3379 of the Manual of Regulations of
the Central Bank. Thus, respondents contend that this circumstance, coupled with
the fact that petitioners Helena Z. Benitez and Conrado L. Benitez II were also
stockholders and members of the Board of Directors of Unlad Resources, Unlad
Rural Bank, and Unlad Commodities at that time, is adequate proof that the Rural
Banks management had every intention of diverting, dissipating, and/or wasting
the banks assets for petitioners own gain.

They likewise allege that because of the failure of petitioners to comply

with their obligations under the Memorandum of Agreement, respondents, with
the exception of Tarcisius Rodriguez, lodged a complaint with the Securities and
Exchange Commission (SEC), seeking rescission of the Agreement, damages, and
the appointment of a management committee, but the SEC dismissed the
complaint for lack of jurisdiction.

Furthermore, when the Rural Bank informed respondents of the Central

Banks approval of its plan to retire its DBP-held preferred shares, giving notices
for subscription to proportionate shares, respondents objected on the ground
that there was already a sinking fund for the retirement of said shares provided
for annually, and that the retirement would deprive the petitioner Rural Bank of a
cheap source of fund. It was at that point, respondents claim, that they instituted
the aforementioned Complaint against petitioners before the RTC of Makati.

The respondents also seek the outright dismissal of this Petition for lack of
verification as to petitioners Helena Z. Benitez and Conrado L. Benitez II; lack of
proper verification as to petitioners Unlad Resources Development Corporation,
Unlad Rural Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper
verified statement of material dates; and lack of proper sworn certification of
non-forum shopping.

They support the proposition that Tijam v. Sibonghanoy[7] applies, and that
petitioners are indeed estopped from questioning the jurisdiction of the trial
court. They also share the lower courts view that it is Article 1144 of the Civil
Code, and not Article 1389, that is applicable to this case. Finally, respondents
allege that the failure of petitioner Unlad Resources to comply with its
undertaking under the Agreement, as uniformly found by the trial court and the
CA, may no longer be assailed in the instant Petition, and that the award of moral
and exemplary damages and attorneys fees is justified.

The Petition is bereft of merit. We uphold the Decision of the CA affirming

that of the RTC.

First, the subject of jurisdiction. The main issue in this case is the rescission
of the Memorandum of Agreement. This is to be distinguished from respondents
allegation of the alleged mismanagement and dissipation of corporate assets by
the petitioners which is based on the prayer for receivership over the bank. The
two issues, albeit related, are obviously separate, as they pertain to different acts
of the parties involved. The issue of receivership does not arise from the parties
obligations under the Memorandum of Agreement, but rather from specific acts
attributed to petitioners as members of the Board of Directors of the
Bank. Clearly, the rescission of the Memorandum of Agreement is a cause of
action within the jurisdiction of the trial courts, notwithstanding the fact that the
parties involved are all directors of the same corporation.

Still, the petitioners insist that the trial court had no jurisdiction over the
complaint because the issues involved are intra-corporate in nature.

This argument miserably fails to persuade. The law in force at the time of
the filing of the case was Presidential Decree (P.D.) 902-A, Section 5(b) of which
vested the Securities and Exchange Commission with original and exclusive
jurisdiction to hear and decide cases involving controversies arising out of intra-
corporate relations.[8] Interpreting this statutorily conferred jurisdiction on the
SEC, this Court had occasion to state:

Nowhere in said decree do we find even so much as an [intimation] that

absolute jurisdiction and control is vested in the Securities and
Exchange Commission in all matters affecting corporations. To uphold
the respondents arguments would remove without legal imprimatur
from the regular courts all conflicts over matters involving or affecting
corporations, regardless of the nature of the transactions which give
rise to such disputes. The courts would then be divested of jurisdiction
not by reason of the nature of the dispute submitted to them for
adjudication, but solely for the reason that the dispute involves a
corporation. This cannot be done.[9]

It is well to remember that the respondents had actually filed with the SEC
a case against the petitioners which, however, was dismissed for lack of
jurisdiction due to the pendency of the case before the RTC.[10] The SECs Order
dismissing the respondents complaint is instructive:
 From the foregoing allegations, it is apparent that the present
action involves two separate causes of action which are interrelated,
and the resolution of which hinges on the very document sought to be
rescinded. The assertion that the defendants failed to comply with their
contractual undertaking and the claim for rescission of the contract by
the plaintiffs has, in effect, put in issue the very status of the herein
defendants as stockholders of the Rural Bank. The issue as to whether
or not the defendants are stockholders of the Rural Bank is a pivotal
issue to be determined on the basis of the Memorandum of Agreement.
It is a prejudicial question and a logical antecedent to confer jurisdiction
to this Commission.

It is to be noted, however, that determination of the contractual

undertaking of the parties under a contract lies with the Regional Trial
Courts and not with this Commission. x x x[11]

Be that as it may, this point has been rendered moot by Republic Act (R.A.)
No. 8799, also known as the Securities Regulation Code. This law, which took
effect in 2000, has transferred jurisdiction over such disputes to the RTC.
Specifically, R.A. 8799 provides:

Sec. 5. Powers and Functions of the Commission

xxxx
5.2. The Commissions jurisdiction over all cases enumerated under
Section 5 of Presidential Decree No. 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.

Section 5 of P.D. No. 902-A reads, thus:

Sec. 5. In addition to the regulatory and adjudicative functions of

the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases involving:

a) Devices and schemes employed by or any acts of the

board of directors, business associates, its officers or partnership,
amounting to fraud and misrepresentation which may be detrimental
to the interest of the public and/or of the stockholder, partners,
members of associations or organizations registered with the
Commission;
 b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or associates;
between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association
and the state insofar as it concerns their individual franchise or right to
exist as such entity;

c) Controversies in the election or appointment of directors,

trustees, officers or managers of such corporations, partnerships or
associations.

Consequently, whether the cause of action stems from a contractual

dispute or one that involves intra-corporate matters, the RTC already has
jurisdiction over this case. In this light, the question of whether the doctrine of
estoppel by laches applies, as enunciated by this Court in Tijam v. Sibonghanoy,
no longer finds relevance.

Second, the issue of prescription. Petitioners further contend that the

action for rescission has prescribed under Article 1398 of the Civil Code, which
provides:

Article 1389. The action to claim rescission must be commenced

within four years x x x.
 This is an erroneous proposition. Article 1389 specifically refers to
rescissible contracts as, clearly, this provision is under the chapter entitled
Rescissible Contracts.

In a previous case,[12] this Court has held that Article 1389:

applies to rescissible contracts, as enumerated and defined in Articles

1380 and 1381. We must stress however, that the rescission in Article
1381 is not akin to the term rescission in Article 1191 and Article 1592.
In Articles 1191 and 1592, the rescission is a principal action which
seeks the resolution or cancellation of the contract while in Article 1381,
the action is a subsidiary one limited to cases of rescission for lesion as
enumerated in said article.

The prescriptive period applicable to rescission under Articles

1191 and 1592, is found in Article 1144, which provides that the action
upon a written contract should be brought within ten years from the
time the right of action accrues.

Article 1381 sets out what are rescissible contracts, to wit:

Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value of the
things which are the object thereof;
 (2) Those agreed upon in representation of absentees, if the latter suffer
the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the litigants
or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.

The Memorandum of Agreement subject of this controversy does not fall

under the above enumeration. Accordingly, the prescriptive period that should
apply to this case is that provided for in Article 1144, to wit:

Article 1144. The following actions must be brought within ten years
from the time the right of action accrues:

(1) Upon a written contract;

xxxx

Based on the records of this case, the action was commenced on July 3,
1987, while the Memorandum of Agreement was entered into on December 29,
1981. Article 1144 specifically provides that the 10-year period is counted from
the time the right of action accrues. The right of action accrues from the moment
the breach of right or duty occurs.[13] Thus, the original Complaint was filed well
within the prescriptive period.
 We now proceed to determine if the trial court, as affirmed by the CA,
correctly ruled for the rescission of the subject Agreement.

Petitioners contend that they have fully complied with their obligation
under the Memorandum of Agreement. They allege that due to respondents
failure to increase the capital stock of the corporation to an amount that will
accommodate their undertaking, it had become impossible for them to perform
their end of the Agreement.

Again, petitioners contention is untenable. There is no question that

petitioners herein failed to fulfill their obligation under the Memorandum of
Agreement. Even they admit the same, albeit laying the blame on respondents.

It is true that respondents increased the Rural Banks authorized capital

stock to only P5 million, which was not enough to accommodate the P4.8 million
worth of stocks that petitioners were to subscribe to and pay for. However,
respondents failure to fulfill their undertaking in the agreement would have given
rise to the scenario contemplated by Article 1191 of the Civil Code, which reads:

Article 1191. The power to rescind reciprocal 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.

Thus, petitioners should have exacted fulfillment from the respondents or

asked for the rescission of the contract instead of simply not performing their part
of the Agreement. But in the course of things, it was the respondents who availed
of the remedy under Article 1191, opting for the rescission of the Agreement in
order to regain control of the Rural Bank.

Having determined that the rescission of the subject Memorandum of

Agreement was in order, the trial court ordered petitioner Unlad Resources to
return to respondents the management and control of the Rural Bank and for the
latter to return the sum of P1,003,070.00 to petitioners.

Mutual restitution is required in cases involving rescission under Article

1191. This means bringing the parties back to their original status prior to the
inception of the contract.[14] 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:

[S]ince 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.[15]

Rescission has the effect of unmaking a contract, or its undoing from the
beginning, and not merely its termination.[16] Hence, rescission creates the
obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to
restore. To rescind is to declare a contract void at its inception and to put an end
to it as though it never was. It is not merely to terminate it and release the parties
from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.[17]
 Accordingly, when a decree for rescission is handed down, it is the duty of
the court to require both parties to surrender that which they have respectively
received and to place each other as far as practicable in his original situation. The
rescission has the effect of abrogating the contract in all parts.[18]

Clearly, the petitioners failed to fulfill their end of the agreement, and thus,
there was just cause for rescission. With the contract thus rescinded, the parties
must be restored to the status quo ante, that is, before they entered into the
Memorandum of Agreement.

Finally, we must resolve the question of the propriety of the award for
damages and attorneys fees.

The trial courts Decision mentioned that the evidence is clear and
convincing that Plaintiffs (herein respondents) suffered actual compensatory
damages amounting to Four Million Six Hundred One Thousand Seven Hundred
Sixty-Five and 38/100 Pesos (P4,601,765.38) moral damages and attorneys fees.

Though not discussed in the body of the Decision, the records show that the
amount of P4,601,765.38 pertains to actual losses incurred by respondents as a
result of petitioners non-compliance with their undertaking under the
Memorandum of Agreement. On this point, respondent Dragon presented
testimonial and documentary evidence to prove the actual amount of damages,
thus:

Atty. Cruz
Q: Was there any consequence to you Mr. Dragon due to any breach of
the agreement marked as Exhibit A?

A: Yes sir I could have earned thru the shares of stock that I have, or we
have or we had by this time amounting to several millions pesos
(sic). They have only put in the whole amount that we have
agreed upon (sic).

Q: In this connection did you cause computation of these losses that

you incured (sic)?

A: Yes sir.

xxxx

Q: Will you please kindly go through this computation and explain the
same to the Honorable Court?

A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only
Three Hundred Ninety Nine Thousand Two hundred for Nineteen
Thousand Nine Hundred Sixty shares which should have been
sold if it were sold to others for P50.00 each for a total of Nine
Hundred Ninety Eight Thousand but sold to them for Three
Hundred Ninety nine (sic) Thousand two (sic) Hundred only and
of which only Three Hundred Twenty Four Thousand Six Hundred
was paid to me. Therefore, there was a difference of Six Hundred
Seven Three (sic) Thousand Four Hundred (P673,400.00). On the
 basis of the commulative (sic) lost income every year from March
1982 from the amount of Seven Six Hundred (sic) Seventy Three
Thousand four (sic) Hundred (P673,400.) (sic) there would be a
discommulative (sic) lost (sic) of One Million Ninety Three
Thousand Nine Hundred Fifty Two Pesos and forty two (sic)
centavos (P1,093,952.42). Please note that the interest imputed
is only at 12% per annum but it should had (sic) been much
higher. In 1984 to 1986 (sic) alone rates went as higher (sic) as 40%
per annum from the so called (sic) Jobo Bills and yet we only
computed the imputed income or lost income at 12% per annum
and then there is a 40% participation on the unrealized earnings
due to their failure to put in an stabilized (sic) earnings. You will
note that if they put in 4.8 million Pesos and it would be earning
money, 40% of that will go to us because 40% of the bank would
be ours and 60% would be there (sic). But because they did put in
the 4.8 million our 40% did not earn up to that extent and
computed again on the basis of 12% the amount (sic) on the
commulative (sic) basis up to September 1990 is 2 million three
hundred fifty two thousand sixty five pesos and four centavos
(sic). (P2,352,065.04). You will note again that the average return
of investment of any Cavite based (sic) Rural Bank has been no
less than 20% or about 30% per annum. And we computed only
the earnings at 12%.

xxxx

There were loans granted fraudulently to members of the board

and some borrowers which were not all charged interest for
several years and on this basis we computed a 40% shares (sic)
on the foregone income interest income (sic) on all these
fraudulently granted loans, without interest being collected and
none a project (sic) among a plantation project (sic), which was
 funded by the bank but nothing was given back to the bank for
several hundred thousand of pesos (sic). And we arrived an (sic)
estimate of the foregone interest income a total of One Million
Two Hundred Five Thousand Eight Hundred Sixty None Pesos and
eighty one (sic) centavos and 40 percent share of this (sic) would
be Four Hundred Eighty Two Thousand Three Hundred Forty
Seven Pesos and Ninety Two Centavos. All in all our estimate of
the damages we have suffered is Four Million Six Hundred one
(sic) Thousand Seven Hundred Sixty Five Pesos and thirty eight
(sic) centavos (P4,601,765.38).[19]

More importantly, petitioners never raised in issue before the CA this award of
actual compensatory damages. They did not raise the matter of damages in their
Appellants Brief, while in their Motion for Reconsideration, they questioned only
the award of moral and exemplary damages, not the award of actual damages.
Even in the present Petition for Review, what petitioners raised was the propriety
of the award of moral and exemplary damages and attorneys fees.

On the grant of moral and exemplary damages and attorneys fees, we note
that the trial courts Decision did not discuss the basis for the award. No mention
of these damages awarded or their factual basis is made in the body of the
Decision, only in the dispositive portion. Be that as it may, we have examined the
records of the case and found that the award must be sustained.

It should be remembered that there are two separate causes of action in

this case: one for rescission of the Memorandum of Agreement and the other for
receivership based on alleged mismanagement of the company by the plaintiffs.
While the award of actual compensatory damages was based on the breach of
duty under the Memorandum of Agreement, the award of moral damages
appears to be based on petitioners mismanagement of the company when they
became members of the Board of Directors of the Rural Bank.

Thus, the trial court said:

Under the Rural Banks management, a systematic diversion of

the banks assets was conceived whereby: (a) The Rural Banks funds
would be funneled in the development and improvements of the
Benitez Mango Plantation in the guise of an investment in said
plantation; (b) Of the net profits earned from the plantations
operations, the Rural Banks share therein, although it shoulders all of
the financial risks, would be a measly twenty percent (20%) thereof
while UCI, without investing a single centavo, would earn eighty percent
(80%) of the said profits. Thus, the bulk of the profits of the mango
plantation was also sought to be diverted to an entity wherein Helena Z.
Benitez and Conrado L. Benitez II are not only principal stockholders but
also the Chairman of the Board of Directors and President, respectively.
Moreover, Defendant Helena Z. Benitez would be entitled to receive,
under the lease contract, rentals in the total amount of Three Hundred
Thousand Pesos (P300,000.00) or ten percent (10%) of gross profits,
whichever is higher. (c) Finally, at the end of the lease period, the Rural
Bank was obliged to turn over to the lessor (Helena Z. Benitez) all
permanent improvements introduced by it on the plantation at no cost
to Ms. Benitez.

Further, in its report dated March 13, 1985, the [Central Bank]
after conducting its general examination upon the Rural Bank ordered
the latter to explain satisfactorily why the bank engage (sic) in an
undertaking not inherently connected with [bona fide] rural banking
operations nor within the allowed allied undertakings, contrary to the
provisions of Section 3379 of the CB Manual of Regulations and Section
26 of CB Circular No. 741, otherwise known as the Circular on Rural
Banks[.]

The aforestated CB report states that total exposure to this

project now amounts to P475,371.57 or 25.76% of its capital and
surplus[.] Notwithstanding a finding by the CB of the undertakings
illegality, the defendants nevertheless persisted in pursuing the Mango
Plantation Project and never acceded to the call of [the] CB for it to
desist from further implementing the said project. It was only after
another letter from the CB was received when defendant finally shelved
the mango plantation project.

The result of the aforestated report, as well as the actuations of

the Defendants in not yielding to the order of the CB, adequately
establishes not only a violation of CB Rules (specifically Section 26,
Circular 741 and Section 3379 of the CB Manual of Regulations, but also,
that it has caused undue damage both to the Rural bank as well as its
stockholders.

The initial CB report should have sufficiently apprised Defendants

of the illegality of the undertaking. Defendants, therefore have the duty
to terminate the Mango Plantation Project. They, however, [chose] to
continue it, apparently to further their [own] interest in the scheme for
their own personal benefit and gain, an act which is clearly contrary to
the fiduciary nature of their relationship with the corporation in which
they are officers. Such persistence proves evident bad faith, or a breach
of a known duty through some motive or ill-will, which resulted in the
 further dissipation and wastage of the Rural Banks assets, unjustly
depriving Plaintiffs of their fair share in the assets of the bank.

All the foregoing satisfactorily affirms the allegations of Plaintiffs

to the effect that these contracts were but part of a device employed by
Defendants to siphon [off] the Rural bank for their personal gain.[20]

Moral damages include physical suffering, mental anguish, fright, serious

anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Though incapable of precise pecuniary
computation, moral damages may be recovered if they are the proximate result
of the defendants wrongful act or omission.[21] Article 2220 of the Civil Code
further provides that moral damages may be recovered in case of a breach of
contract where the defendant acted in bad faith.[22]

To award moral damages, a court must be satisfied with proof of the

following requisites: (1) an injury whether physical, mental, or psychological
clearly sustained by the claimant; (2) a culpable act or omission factually
established; (3) a wrongful act or omission of the defendant as the proximate
cause of the injury sustained by the claimant; and (4) the award of damages
predicated on any of the cases stated in Article 2219.[23]

Accordingly, based upon the findings of the trial court, it is clear that
respondents are entitled to moral damages. The acts attributed to the petitioners
as directors of the Rural Bank manifestly prejudiced the respondents causing
detriment to their standing as directors and stockholders of the Rural Bank.
 Exemplary damages cannot be recovered as a matter of right.[24] While
these need not be proved, respondents must show that they are entitled to moral,
temperate or compensatory damages before the court may consider the question
of awarding exemplary damages.[25] We find that respondents are indeed entitled
to moral damages; thus, the award for exemplary damages is in order.

Anent the award for attorneys fees, Article 2208 of the Civil Code states:

In the absence of stipulation, attorneys fees and expenses of

litigation, other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded.

Hence, the award of exemplary damages is in itself sufficient justification

for the award of attorneys fees.[26]

WHEREFORE, the foregoing premises considered, the petition is

hereby DENIED. The assailed Decision and Resolution of the Court of Appeals in
CA-G.R. CV No. 54226 are AFFIRMED.

SO ORDERED.
G.R. No. 196251 July 9, 2014
OLIVAREZ REALTY CORPORATION and DR. PABLO R. OLIVAREZ, Petitioner,
vs.
BENJAMIN CASTILLO, Respondent.

DECISION

LEONEN, J.:

Trial may be dispensed with and a summary judgment rendered if the case can be resolved
judiciously by plain resort to the pleadings, affidavits, depositions, and other papers filed by the
parties.

This is a petition for review on certiorari1 of the Court of Appeals' decision2 dated July 20, 2010 and
resolution3dated March 18, 2011 in CAG.R. CV No. 91244.

The facts as established from the pleadings of the parties are as follows:

Benjamin Castillo was the registered owner of a 346,918-squaremeter parcel of land located in
Laurel, Batangas, covered by Transfer Certificate of Title No. T-19972.4 The Philippine Tourism
Authority allegedly claimed ownership of the sameparcel of land based on Transfer Certificate of
Title No. T-18493.5 On April 5, 2000, Castillo and Olivarez Realty Corporation, represented by Dr.
Pablo R. Olivarez, entered into a contract of conditional sale6 over the property. Under the deed of
conditional sale, Castillo agreed to sell his property to Olivarez Realty Corporation for
19,080,490.00. Olivarez Realty Corporation agreed toa down payment of 5,000,000.00, to be
paid according to the following schedule:

DATE AMOUNT

April 8, 2000 500,000.00

May 8, 2000 500,000.00

May 16, 2000 500,000.00

1,000,000.0
June 8, 2000
0
July 8, 2000 500,000.00
August 8, 2000 500,000.00

September 8, 2000 500,000.00

October 8, 2000 500,000.00

November 8, 2000 500,000.00 7

As to the balance of 14,080,490.00, Olivarez Realty Corporation agreed to pay in 30 equal monthly
installments every eighth day of the month beginning in the month that the parties would receive a
decision voiding the Philippine Tourism Authoritys title to the property.8 Under the deed of
conditional sale, Olivarez RealtyCorporation shall file the action against the Philippine Tourism
Authority "with the full assistance of [Castillo]."9 Paragraph C of the deed of conditional sale provides:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru
Court to have the claim/title TCT T-18493 of Philippine Tourism Authority over the above-described
property be nullified and voided; with the full assistance of [Castillo][.]10

Should the action against the Philippine Tourism Authority be denied, Castillo agreed to reimburse
all the amounts paid by Olivarez Realty Corporation. Paragraph D of the deed of conditional sale
provides:

D. In the event that the Court denie[s] the petition against the Philippine Tourism Authority, all sums
received by [Castillo] shall be reimbursed to [Olivarez Realty Corporation] without interest[.]11

As to the "legitimate tenants" occupying the property, Olivarez Realty Corporation undertook to pay
them "disturbance compensation," while Castillo undertook to clear the land of the tenants within six
months from the signing of the deed of conditional sale. Should Castillo fail to clear the land within
six months, Olivarez Realty Corporation may suspend its monthly down payment until the tenants
vacate the property. Paragraphs E and F of the deed of conditional sale provide: E. That [Olivarez
Realty Corporation] shall pay the disturbance compensation to legitimate agricultural tenants and
fishermen occupants which in no case shall exceed ONE MILLION FIVE HUNDRED THOUSAND
(1,500,000.00) PESOS. Said amountshall not form part of the purchase price. In excess of this
amount, all claims shall be for the account of [Castillo];

F. That [Castillo] shall clear the land of [the] legitimate tenants within a period of six (6) months upon
signing of this Contract, and in case [Castillo] fails, [Olivarez Realty Corporation] shall have the right
to suspend the monthly down payment until such time that the tenants [move] out of the land[.]12

The parties agreed thatOlivarez Realty Corporation may immediately occupy the property upon
signing of the deed of conditional sale. Should the contract be cancelled, Olivarez RealtyCorporation
agreed to return the propertys possession to Castillo and forfeit all the improvements it may have
introduced on the property. Paragraph I of the deed of conditional sale states:

I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy,
possess and develop the subject property. In case this Contract is canceled [sic], any improvement
introduced by [the corporation] on the property shall be forfeited in favor of [Castillo][.]13

On September 2, 2004, Castillo filed a complaint14 against Olivarez Realty Corporation and Dr.
Olivarez with the Regional Trial Court of Tanauan City, Batangas.

Castillo alleged that Dr. Olivarez convinced him into selling his property to Olivarez Realty
Corporation on the representation that the corporation shall be responsible in clearing the property of
the tenants and in paying them disturbance compensation. He further alleged that Dr. Olivarez solely
prepared the deed of conditional sale and that he was made to sign the contract with its terms "not
adequately explained [to him] in Tagalog."15

After the parties had signed the deed of conditional sale, Olivarez Realty Corporation immediately
took possession of the property. However, the corporation only paid 2,500,000.00 ofthe purchase
price. Contrary to the agreement, the corporation did not file any action against the Philippine
Tourism Authority to void the latters title to the property. The corporation neither cleared the land of
the tenants nor paid them disturbance compensation. Despite demand, Olivarez Realty Corporation
refused to fully pay the purchase price.16

Arguing that Olivarez Realty Corporation committed substantial breach of the contract of conditional
sale and that the deed of conditional sale was a contract of adhesion, Castillo prayed for rescission
of contract under Article 1191 of the Civil Code of the Philippines. He further prayed that Olivarez
Realty Corporation and Dr. Olivarez be made solidarily liable for moral damages, exemplary
damages, attorneys fees, and costs of suit.17

In their answer,18 Olivarez Realty Corporation and Dr. Olivarez admitted that the corporation only
paid 2,500,000.00 ofthe purchase price. In their defense, defendants alleged that Castillo failed to
"fully assist"19 the corporation in filing an action against the Philippine Tourism Authority. Neither did
Castillo clear the property of the tenants within six months from the signing of the deed of conditional
sale. Thus, according to defendants, the corporation had "all the legal right to withhold the
subsequent payments to [fully pay] the purchase price."20

Olivarez Realty Corporation and Dr. Olivarez prayedthat Castillos complaint be dismissed. By way
of compulsory counterclaim, they prayed for 100,000.00 litigation expenses and 50,000.00
attorneys fees.21

Castillo replied to the counterclaim,22 arguing that Olivarez Realty Corporation and Dr. Olivarez had
no right to litigation expenses and attorneys fees. According to Castillo, the deed of conditional sale
clearly states that the corporation "assume[d] the responsibility of taking necessary legal
action"23 against the Philippine Tourism Authority, yet the corporation did not file any case. Also, the
corporation did not pay the tenants disturbance compensation. For the corporations failure to fully
pay the purchase price, Castillo claimed that hehad "all the right to pray for the rescission of the
[contract],"24 and he "should not be held liable . . . for any alleged damages by way of litigation
expenses and attorneys fees."25

On January 10, 2005, Castillo filed a request for admission,26 requesting Dr. Olivarez to admit under
oath the genuineness of the deed of conditional sale and Transfer Certificate of Title No. T-19972.
He likewise requested Dr. Olivarez to admit the truth of the following factual allegations:

1. That Dr. Olivarez is the president of Olivarez Realty Corporation;

2. That Dr. Olivarez offered to purchase the parcel of land from Castillo and that he
undertook to clear the property of the tenants and file the court action to void the Philippine
Tourism Authoritys title to the property;

3. That Dr. Olivarez caused the preparation of the deed of conditional sale;

4. That Dr. Olivarez signed the deed of conditional sale for and on behalf of Olivarez Realty
Corporation;

5. That Dr. Olivarez and the corporation did not file any action against the Philippine Tourism
Authority;

6. That Dr. Olivarez and the corporation did not pay the tenants disturbance compensation
and failed to clear the property of the tenants; and

7. That Dr. Olivarez and the corporation only paid 2,500,000.00 of the agreed purchase
price.27

On January 25, 2005, Dr. Olivarez and Olivarez Realty Corporation filed their objections to the
request for admission,28 stating that they "reiterate[d] the allegations [and denials] in their [answer]."29
The trial court conducted pre-trial conference on December 17, 2005.

On March 8, 2006, Castillo filed a motion for summary judgment and/or judgment on the
pleadings.30 He argued that Olivarez Realty Corporation and Dr. Olivarez "substantially admitted the
material allegations of [his] complaint,"31specifically:

1. That the corporation failed to fully pay the purchase price for his property;32

2. That the corporation failed to file an action to void the Philippine Tourism Authoritys title to
his property;33and

3. That the corporation failed to clear the property of the tenants and pay them disturbance
compensation.34

Should judgment on the pleadings beimproper, Castillo argued that summary judgment may still be
rendered asthere is no genuine issue as to any material fact.35 He cited Philippine National Bank v.
Noahs Ark Sugar Refinery36 as authority.

Castillo attached to his motion for summary judgment and/or judgment on the pleadings his
affidavit37 and the affidavit of a Marissa Magsino38 attesting to the truth of the material allegations of
his complaint.

Olivarez Realty Corporation and Dr. Olivarez opposed39 the motion for summary judgment and/or
judgment on the pleadings, arguing that the motion was "devoid of merit."40 They reiterated their
claim that the corporation withheld further payments of the purchase price because "there ha[d] been
no favorable decision voiding the title of the Philippine Tourism Authority."41 They added that Castillo
sold the property to another person and that the sale was allegedly litigated in Quezon City.42

Considering that a title adverse to that of Castillos existed, Olivarez Realty Corporation and Dr.
Olivarez argued that the case should proceed to trial and Castillo be required to prove that his title to
the property is "not spurious or fake and that he had not sold his property to another person."43

In reply to the opposition to the motion for summary judgment and/or judgment on the
pleadings,44 Castillo maintained that Olivarez Realty Corporation was responsible for the filing of an
action against the Philippine Tourism Authority. Thus, the corporation could not fault Castillo for not
suing the PhilippineTourism Authority.45 The corporation illegally withheld payments of the purchase
price.

As to the claim that the case should proceed to trial because a title adverse to his title existed,
Castillo argued that the Philippine Tourism Authoritys title covered another lot, not his property.46

During the hearing on August 3, 2006, Olivarez Realty Corporation and Dr. Olivarez prayed that they
be given 30 days to file a supplemental memorandum on Castillos motion for summary judgment
and/or judgment on the pleadings.47

The trial court granted the motion. Itgave Castillo 20 days to reply to the memorandum and the
corporation and Dr. Olivarez 15 days to respond to Castillos reply.48

In their supplemental memorandum,49 Olivarez Realty Corporation and Dr. Olivarez argued that there
was "an obvious ambiguity"50 as to which should occur first the payment of disturbance
compensation to the tenants or the clearing of the property of the tenants.51 This ambiguity,
according to defendants, is a genuine issue and "oughtto be threshed out in a full blown trial."52

Olivarez Realty Corporation and Dr. Olivarez added that Castillo prayed for irreconcilable reliefs of
reformation of instrument and rescission of contract.53 Thus, Castillos complaint should be dismissed.

Castillo replied54 to the memorandum, arguing that there was no genuine issue requiring trial of the
case. According to Castillo, "common sense dictates . . . that the legitimate tenants of the [property]
shall not vacate the premises without being paid any disturbance compensation . . ."55 Thus, the
payment of disturbance compensation should occur first before clearing the property of the tenants.

With respect to the other issuesraised in the supplemental memorandum, specifically, that Castillo
sold the property to another person, he argued that these issues should not be entertained for not
having been presented during pre-trial.56

In their comment on the reply memorandum,57 Olivarez Realty Corporation and Dr. Olivarez
reiterated their arguments that certain provisions of the deed of conditional sale were ambiguous
and that the complaint prayed for irreconcilable reliefs.58

As to the additional issues raised in the supplemental memorandum, defendants argued that issues
not raised and evidence not identified and premarked during pre-trial may still be raised and
presented during trial for good cause shown. Olivarez Realty Corporation and Dr. Olivarez prayed
that Castillos complaint be dismissed for lack of merit.59

Ruling of the trial court

The trial court found that Olivarez Realty Corporation and Dr. Olivarezs answer "substantially
[admitted the material allegations of Castillos] complaint and [did] not . . . raise any genuine issue
[as to any material fact]."60

Defendants admitted that Castillo owned the parcel of land covered by Transfer Certificate of Title
No. T-19972. They likewise admitted the genuineness of the deed of conditional sale and that the
corporation only paid 2,500,000.00 of the agreed purchase price.61

According to the trial court, the corporation was responsible for suing the Philippine Tourism
Authority and for paying the tenants disturbance compensation. Since defendant corporation neither
filed any case nor paid the tenants disturbance compensation, the trial court ruled that defendant
corporation had no right to withhold payments from Castillo.62

As to the alleged ambiguity of paragraphs E and F of the deed of conditional sale, the trial court
ruled that Castillo and his witness, Marissa Magsino, "clearly established"63 in their affidavits that the
deed of conditional sale was a contract of adhesion. The true agreement between the parties was
that the corporation would both clear the land of the tenants and pay them disturbance
compensation.

With these findings, the trial court ruled that Olivarez Realty Corporation breached the contract
ofconditional sale. In its decision64 dated April 23, 2007, the trial court ordered the deed of
1wphi 1

conditional sale rescinded and the 2,500,000.00 forfeited in favor of Castillo "as damages under
Article 1191 of the Civil Code."65
The trial court declared Olivarez Realty Corporation and Dr. Olivarez solidarily liable to Castillo for
500,000.00 as moral damages, 50,000.00 as exemplary damages, and 50,000.00 as costs of
suit.66

Ruling of the Court of Appeals

Olivarez Realty Corporation and Dr. Olivarez appealed to the Court of Appeals.67

In its decision68 dated July 20, 2010, the Court of Appeals affirmed in totothe trial courts decision.
According to the appellate court, the trial court "did not err in its finding that there is no genuine
controversy as to the facts involved [in this case]."69 The trial court, therefore, correctly rendered
summary judgment.70

As to the trial courts award of damages, the appellatecourt ruled that a court may award damages
through summary judgment "if the parties contract categorically [stipulates] the respective
obligations of the parties in case of default."71 As found by the trial court,paragraph I of the deed of
conditional sale categorically states that "in case [the deed of conditional sale] is cancelled, any
improvementintroduced by [Olivarez Realty Corporation] on the property shall be forfeited infavor of
[Castillo]."72 Considering that Olivarez Realty Corporation illegally retained possession of the property,
Castillo forewent rentto the property and "lost business opportunities."73 The 2,500,000.00 down
payment, according to the appellate court, shouldbe forfeited in favor of Castillo. Moral and
exemplary damages and costs ofsuit were properly awarded.

On August 11, 2010, Olivarez RealtyCorporation and Dr. Olivarez filed their motion for
reconsideration,74 arguing that the trial court exceeded its authority in forfeiting the 2,500,000.00
down payment and awarding 500,000.00 in moral damages to Castillo. They argued that Castillo
only prayed for a total of 500,000.00 as actual and moral damages in his complaint.75 Appellants
prayed that the Court of Appeals "take a second hard look"76 at the case and reconsider its decision.

In the resolution77 dated March 18, 2011, the Court of Appeals denied the motion for reconsideration.

Proceedings before this court

Olivarez Realty Corporation and Dr. Olivarez filed their petition for review on certiorari78 with this
court. Petitionersargue that the trial court and the Court of Appeals erred in awarding damages to
Castillo. Under Section 3, Rule 35 of the 1997 Rules ofCivil Procedure, summary judgment may be
rendered except as to the amountof damages. Thus, the Court of Appeals "violated the procedural
steps in rendering summary judgment."79

Petitioners reiterate that there are genuine issues ofmaterial fact to be resolved in this case. Thus, a
full-blown trial is required, and the trial court prematurely decided the case through summary
judgment. They cite Torres v. Olivarez Realty Corporation and Dr. Pablo Olivarez,80 a case decided
by the Ninth Division of the Court of Appeals.

In Torres, Rosario Torres was the registeredowner of a parcel of land covered by Transfer Certificate
of Title No. T-19971. Under a deed of conditional sale, she sold her property to OlivarezRealty
Corporation for 17,345,900.00. When the corporation failed to fully pay the purchase price, she
sued for rescission of contractwith damages. In their answer, the corporation and Dr. Olivarez
argued thatthey discontinued payment because Rosario Torres failed to clear the land of the tenants.
Similar to Castillo, Torres filed a motion for summary judgment, which the trial court granted. On
appeal, the Court of Appeals set aside the trial courts summary judgment and remanded the case to
the trial court for further proceedings.81 The Court of Appeals ruled that the material allegations of the
complaint "were directly disputed by [the corporation and Dr. Olivarez] in their answer"82 when they
argued that they refused to pay because Torres failed to clear the land of the tenants.

With the Court of Appeals decision in Torres,Olivarez Realty Corporation and Dr. Olivarez argue
that this case should likewise be remanded to the trial court for further proceedings under the
equipoise rule.

Petitioners maintain that Castillo availed himself of the irreconcilable reliefs of reformation of
instrument and rescission of contract.83 Thus, the trial court should have dismissed the case outright.

Petitioners likewise argue that the trial court had no jurisdiction to decide the case as Castillo failed
topay the correct docket fees.84 Petitioners argue that Castillo should have paid docket fees based on
the propertys fair market value since Castillos complaint is a real action.85

In his comment,86 Castillo maintains that there are no genuine issues as to any material fact inthis
case. The trial court, therefore, correctly rendered summary judgment.

As to petitioners claim that the trial court had no jurisdiction to decide the case, Castillo argues that
he prayed for rescission of contract in his complaint. This action is incapable of pecuniary estimation,
and the Clerk of Court properly computed the docket fees based on this prayer.87 Olivarez Realty
Corporation and Dr. Olivarez replied,88reiterating their arguments in the petition for review on
certiorari.

The issues for our resolution are the following:

I. Whether the trial court erred in rendering summary judgment;

II. Whether proper docket fees were paid in this case.

The petition lacks merit.

I
The trial court correctly rendered
summary judgment, as there were no

genuine issues of material fact in this case

Trial "is the judicial examination and determination of the issues between the parties to the
action."89 During trial, parties "present their respective evidence of their claims and
defenses."90 Parties to an action have the right "to a plenary trial of the case"91 to ensure that they
were given a right to fully present evidence on their respective claims.

There are instances, however, whentrial may be dispensed with. Under Rule 35 of the 1997 Rules of
Civil Procedure, a trial court may dispense with trial and proceed to decide a case if from the
pleadings, affidavits, depositions, and other papers on file, there is no genuine issue as to any
material fact. In such a case, the judgment issued is called a summary judgment.
A motion for summary judgment is filed either by the claimant or the defending party.92 The trial court
then hears the motion for summary judgment. If indeed there are no genuine issues of material fact,
the trial court shall issue summary judgment. Section 3, Rule 35 of the 1997 Rules of Civil Procedure
provides:

SEC. 3. Motion and proceedings thereon. The motion shall be served at least ten (10) days
beforethe time specified for the hearing. The adverse party may serve opposing affidavits,
depositions, or admission at least three (3) days before the hearing. After the hearing, the judgment
sought shall be rendered forthwith ifthe pleadings, supporting affidavits, depositions, and admissions
on file, showthat, except as to the amount of damages, there is no genuine issue as to any material
fact and that the moving party is entitled to a judgment as a matter of law.

An issue of material fact exists if the answer or responsive pleading filed specifically denies the
material allegations of fact set forth in the complaint or pleading. If the issue offact "requires the
presentation of evidence, it is a genuine issue of fact."93 However, if the issue "could be resolved
judiciously by plain resort"94 to the pleadings, affidavits, depositions, and other paperson file, the
issue of fact raised is sham, and the trial court may resolve the action through summary judgment.

A summary judgment is usually distinguished from a judgment on the pleadings. Under Rule 34 of
the 1997 Rules of Civil Procedure, trial may likewise be dispensed with and a case decided through
judgment on the pleadings if the answer filed fails to tender an issue or otherwise admits the material
allegations of the claimants pleading.95

Judgment on the pleadings is proper when the answer filed fails to tender any issue, or otherwise
admitsthe material allegations in the complaint.96 On the other hand, in a summary judgment, the
answer filed tenders issues as specific denials and affirmative defenses are pleaded, but the issues
raised are sham, fictitious, or otherwise not genuine.97

In this case, Olivarez Realty Corporation admitted that it did not fully pay the purchase price as
agreed upon inthe deed of conditional sale. As to why it withheld payments from Castillo, it set up
the following affirmative defenses: First, Castillo did not filea case to void the Philippine Tourism
Authoritys title to the property; second,Castillo did not clear the land of the tenants; third, Castillo
allegedly sold the property to a third person, and the subsequent sale is currently being litigated
beforea Quezon City court.

Considering that Olivarez RealtyCorporation and Dr. Olivarezs answer tendered an issue, Castillo
properly availed himself of a motion for summary judgment.

However, the issues tendered by Olivarez Realty Corporation and Dr. Olivarezs answer are not
genuine issues of material fact. These are issues that can be resolved judiciously by plain resort to
the pleadings, affidavits, depositions, and other papers on file; otherwise, these issues are sham,
fictitious, or patently unsubstantial.

Petitioner corporation refused to fully pay the purchase price because no court case was filed to void
the Philippine Tourism Authoritys title on the property. However, paragraph C of the deed of
conditional sale is clear that petitioner Olivarez Realty Corporation is responsible for initiating court
action against the Philippine Tourism Authority:

C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru
Court to have the claim/title TCT T-18493 of Philippine Tourism Authority over the above-described
property be nullified and voided; with the full assistance of [Castillo].98
Castillos alleged failureto "fully assist"99 the corporation in filing the case is not a defense. As the trial
court said, "how can [Castillo] assist [the corporation] when [the latter] did not file the action [in the
first place?]"100

Neither can Olivarez Realty Corporation argue that it refused to fully pay the purchase price due to
the Philippine Tourism Authoritys adverse claim on the property. The corporation knew of this
adverse claim when it entered into a contract of conditional sale. It even obligated itself under
paragraph C of the deed of conditional sale to sue the Philippine Tourism Authority. This defense,
therefore, is sham.

Contrary to petitioners claim, there is no "obvious ambiguity"101 as to which should occur first the
payment of the disturbance compensation or the clearing of the land within six months from the
signing of the deed of conditional sale. The obligations must be performed simultaneously. In this
case, the parties should have coordinated to ensure that tenants on the property were paid
disturbance compensation and were made to vacate the property six months after the signingof the
deed of conditional sale.

On one hand, pure obligations, or obligations whose performance do not depend upon a future or
uncertainevent, or upon a past event unknown to the parties, are demandable at once.102 On the
other hand, obligations with a resolutory period also take effect at once but terminate upon arrival of
the day certain.103

Olivarez Realty Corporations obligation to pay disturbance compensation is a pure obligation. The
performance of the obligation to pay disturbance compensation did not depend on any condition.
Moreover, the deed of conditional sale did not give the corporation a period to perform the obligation.
As such, the obligation to pay disturbance compensation was demandable at once. Olivarez
RealtyCorporation should have paid the tenants disturbance compensation upon execution of the
deed of conditional sale.

With respect to Castillos obligation to clear the land of the tenants within six months from the signing
of the contract, his obligation was an obligation with a resolutory period. The obligation to clear the
land of the tenants took effect at once, specifically, upon the parties signing of the deed of
conditional sale. Castillo had until October 2, 2000, six months from April 5, 2000 when the parties
signed the deed of conditional sale, to clear the land of the tenants.

Olivarez Realty Corporation, therefore, had no right to withhold payments of the purchase price. As
the trial court ruled, Olivarez Realty Corporation "can only claim non-compliance [of the obligation to
clear the land of the tenants in] October 2000."104 It said:

. . . it is clear that defendant [Olivarez Realty Corporation] should have paid the installments on the
5 million downpayment up to October 8, 2000, or a total of 4,500,000.00. That is the agreement
because the only time that defendant [corporation] can claim non-compliance of the condition is after
October, 2000 and so it has the clear obligation topay up to the October 2000 the agreed
installments. Since it paid only 2,500,000.00, then a violation of the contract has already been
committed. . . .105

The claim that Castillo sold the property to another is fictitious and was made in bad faith to prevent
the trial court from rendering summary judgment. Petitioners did not elaborate on this defense and
insisted on revealing the identity of the buyer only during trial.106 Even in their petition for review on
certiorari, petitioners never disclosed the name of this alleged buyer. Thus, as the trial court ruled,
this defense did not tender a genuine issue of fact, with the defense "bereft of details."107
Castillos alleged prayer for the irreconcilable reliefs of rescission of contract and reformation of
instrument is not a ground to dismiss his complaint. A plaintiff may allege two or more claims in the
complaint alternatively or hypothetically, either in one cause of action or in separate causes of action
per Section 2, Rule 8 of the 1997 Rules of Civil Procedure.108 It is the filing of two separatecases for
each of the causes of action that is prohibited since the subsequently filed case may be dismissed
under Section 4, Rule 2 of the 1997 Rules of Civil Procedure109 on splitting causes of action.

As demonstrated, there are no genuineissues of material fact in this case. These are issues that can
be resolved judiciously by plain resort to the pleadings, affidavits, depositions, and other papers on
file. As the trial court found, Olivarez Realty Corporation illegally withheld payments of the purchase
price. The trial court did not err in rendering summary judgment.

II
Castillo is entitled to cancel the contract
of conditional sale

Since Olivarez Realty Corporation illegally withheld payments of the purchase price, Castillo is
entitled to cancel his contract with petitioner corporation. However, we properly characterize the
parties contract as a contract to sell, not a contract of conditional sale.

In both contracts to sell and contracts of conditional sale, title to the property remains with the seller
until the buyer fully pays the purchase price.110 Both contracts are subject to the positive suspensive
condition of the buyers full payment of the purchase price.111

In a contract of conditional sale, the buyer automatically acquires title to the property upon full
payment of the purchase price.112 This transfer of title is "by operation of law without any further act
having to be performed by the seller."113 In a contract to sell, transfer of title to the prospective buyer
is not automatic.114 "The prospective seller [must] convey title to the property [through] a deed of
conditional sale."115

The distinction is important to determine the applicable laws and remedies in case a party does not
fulfill his or her obligations under the contract. In contracts of conditional sale, our laws on sales
under the Civil Code of the Philippines apply. On the other hand, contracts to sell are not governed
by our law on sales116 but by the Civil Code provisions on conditional obligations.

Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not
apply to contracts to sell.117 As this court explained in Ong v. Court of Appeals,118 failure to fully pay
the purchase price in contracts to sell is not the breach of contract under Article 1191.119 Failure to
fully pay the purchase price is "merely an event which prevents the [sellers] obligation to convey title
from acquiring binding force."120 This is because "there can be no rescission of an obligation that is
still nonexistent, the suspensive condition not having [happened]."121

In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute
sale upon Olivarez Realty Corporations full payment of the purchase price.122 Since Castillo still has
to execute a deed of absolute sale to Olivarez RealtyCorporation upon full payment of the purchase
price, the transfer of title is notautomatic. The contract in this case is a contract to sell.

As this case involves a contract tosell, Article 1191 of the Civil Code of the Philippines does not
apply. The contract to sell is instead cancelled, and the parties shall stand as if the obligation to sell
never existed.123
Olivarez Realty Corporation shall return the possession of the property to Castillo. Any improvement
that Olivarez Realty Corporation may have introduced on the property shall be forfeited in favor of
Castillo per paragraph I of the deed of conditional sale:

I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy,
possess and develop the subject property. In case this Contract is cancelled, any improvement
introduced by [Olivarez Realty Corporation] on the property shall be forfeited in favor of [Castillo.]124

As for prospective sellers, thiscourt generally orders the reimbursement of the installments paidfor
the property when setting aside contracts to sell.125 This is true especially ifthe propertys possession
has not been delivered to the prospective buyer prior to the transfer of title.

In this case, however, Castillo delivered the possession of the property to Olivarez Realty
Corporation prior to the transfer of title. We cannot order the reimbursement of the installments paid.

In Gomez v. Court of Appeals,126 the City of Manila and Luisa Gomez entered into a contract to sell
over a parcel of land. The city delivered the propertys possession to Gomez. She fully paid the
purchase price for the property but violated the terms of the contract to sell by renting out the
property to other persons. This court set aside the contract to sell for her violation of the terms of the
contract to sell. It ordered the installments paid forfeited in favor of the City of Manila "as reasonable
compensation for [Gomezs] use of the [property]"127 for eight years.

In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It only
paid 2,500,000.00 out of the 19,080,490.00 agreed purchase price. Worse, petitioner corporation
has been in possession of Castillos property for 14 years since May 5, 2000 and has not paid for its
use of the property.

Similar to the ruling in Gomez, we order the 2,500,000.00 forfeited in favor of Castillo as
reasonable compensation for Olivarez Realty Corporations use of the property.

III
Olivarez Realty Corporation is liable for
moral and exemplary damages and
attorneys fees

We note that the trial court erred in rendering summary judgment on the amount of damages. Under
Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may be rendered,
except as to the amount of damages.

In this case, the trial court erred in forfeiting the 2,500,000.00 in favor of Castillo as damages under
Article 1191 of the Civil Code of the Philippines. As discussed, there is nobreach of contract under
Article 1191 in this case.

The trial court likewise erred inrendering summary judgment on the amount of moral and exemplary
damages and attorneys fees.

Nonetheless, we hold that Castillois entitled to moral damages, exemplary damages, and attorneys
fees.
Moral damages may be awarded in case the claimant experienced physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury.128

As for exemplary damages, they are awarded in addition to moral damages by way of example or
correction for the public good.129 Specifically in contracts, exemplary damages may be awarded if the
defendant acted in a wanton, fraudulent,reckless, oppressive, or malevolent manner.130

Under the deed of conditional sale, Olivarez Realty Corporation may only suspend the monthly down
payment in case Castillo fails to clear the land of the tenants six months from the signing of the
instrument. Yet, even before the sixth month arrived, Olivarez Realty Corporation withheld payments
for Castillos property. It evenused as a defense the fact that no case was filed against the
PhilippineTourism Authority when, under the deed of conditional sale, Olivarez Realty Corporation
was clearly responsible for initiating action against the Philippine Tourism Authority. These are
oppressive and malevolent acts, and we find Castillo entitled to 500,000.00 moral damages and
50,000.00 exemplary damages:

Plaintiff Castillo is entitled to moral damages because of the evident bad faith exhibited by
defendants in dealing with him regarding the sale of his lot to defendant [Olivarez Realty
Corporation]. He suffered much prejudice due to the failure of defendants to pay him the balance of
purchase price which he expected touse for his needs which caused him wounded feelings, sorrow,
mental anxiety and sleepless nights for which defendants should pay 500,000.00 as moral
damages more than six (6) years had elapsed and defendants illegally and unfairly failed and
refused to pay their legal obligations to plaintiff, unjustly taking advantage of a poor uneducated man
like plaintiff causing much sorrow and financial difficulties. Moral damages in favor of plaintiff is
clearly justified . . . [Castillo] is also entitled to 50,000.00 as exemplary damages to serve as a
deterrent to other parties to a contract to religiously comply with their prestations under the
contract.131

We likewise agree that Castillo is entitled to attorneys fees in addition to the exemplary
damages.132 Considering that Olivarez Realty Corporation refused to satisfy Castillosplainly valid,
just, and demandable claim,133 the award of 50,000.00 as attorneys fees is in order. However, we
find that Dr. Pablo R.Olivarez is not solidarily liable with Olivarez Realty Corporation for the amount
of damages.

Under Article 1207 of the Civil Code of the Philippines, there is solidary liability only when the
obligation states it or when the law or the nature of the obligation requires solidarity.134 In case of
corporations, they are solely liable for their obligations.135 The directors or trustees and officers are
not liable with the corporation even if it is through their acts that the corporation incurred the
obligation. This is because a corporation is separate and distinct from the persons comprising it.136

As an exception to the rule, directors or trustees and corporate officers may be solidarily liable with
the corporation for corporate obligations if they acted "in bad faith or with gross negligence in
directing the corporate affairs."137

In this case, we find that Castillo failed to prove with preponderant evidence that it was through Dr.
Olivarezs bad faith or gross negligence that Olivarez Realty Corporation failed to fully pay the
purchase price for the property. Dr. Olivarezs alleged act of making Castillo sign the deed of
conditional sale without explaining to the latter the deeds terms in Tagalog is not reason to hold Dr.
Olivarez solidarily liable with the corporation. Castillo had a choice not to sign the deed of conditional
sale. He could have asked that the deed of conditional sale be written in Tagalog. Thus, Olivarez
Realty Corporation issolely liable for the moral and exemplary damages and attorneys fees to
Castillo.

IV
The trial court acquired jurisdiction over
Castillos action as he paid the correct
docket fees

Olivarez Realty Corporation and Dr. Olivarez claimed that the trial court had no jurisdiction to take
cognizance of the case. In the reply/motion to dismiss the complaint138 they filed with the Court of
Appeals, petitioners argued that Castillo failed to pay the correct amount of docket fees. Stating that
this action is a real action, petitioners argued that the docket fee Castillo paid should have been
based on the fair market value of the property. In this case, Castillo only paid 4,297.00, which is
insufficient "if the real nature of the action was admitted and the fair market value of the property was
disclosed and made the basis of the amount of docket fees to be paid to the court."139Thus, according
to petitioners, the case should be dismissed for lack of jurisdiction.

Castillo countered that his action for rescission is an action incapable of pecuniary estimation. Thus,
the Clerk of Court of the Regional Trial Court of Tanauan City did not err in assessing the docket
fees based on his prayer.

We rule for Castillo. In De Leon v. Court of Appeals,140 this court held that an action for rescission of
contract of sale of real property is an action incapable of pecuniary estimation. In De Leon, the
action involved a real property. Nevertheless, this court held that "it is the nature of the action as one
for rescission of contract which is controlling."141 Consequently, the docket fees to be paid shall be for
actions incapableof pecuniary estimation, regardless if the claimant may eventually recover the real
property. This court said:

. . . the Court in Bautista v.Lim, held that an action for rescission of contract is one which cannot be
estimated and therefore the docket fee for its filing should be the flat amount of 200.00 as then
fixed in the former Rule 141, 141, 5(10). Said this Court:

We hold that Judge Dalisay did not err in considering Civil Case No. V-144 as basically one for
rescission or annulment of contract which is not susceptible of pecuniary estimation (1 Moran's
Comments on the Rules of Court, 1970 Ed, p. 55; Lapitan vs. Scandia, Inc., L-24668, July 31, 1968,
24 SCRA 479, 781-483).

Consequently, the fee for docketing it is 200, an amount already paid by plaintiff, now respondent
Matilda Lim. (She should pay also the two pesos legal research fund fee, if she has not paid it, as
1wphi 1

required in Section 4 of Republic Act No. 3870, the charter of the U.P. Law Center).

Thus, although eventually the result may be the recovery of land, it is the nature of the action as one
for rescission of contract which is controlling. The Court of Appeals correctly applied these cases to
the present one. As it said:

We would like to add the observations that since the action of petitioners [private respondents]
against private respondents [petitioners] is solely for annulment or rescission which is not
susceptible of pecuniary estimation, the action should not be confused and equated with the "value
of the property" subject of the transaction; that by the very nature of the case, the allegations, and
specific prayer in the complaint, sans any prayer for recovery of money and/or value of the
transaction, or for actual or compensatory damages, the assessment and collection of the legal fees
should not be intertwined with the merits of the case and/or what may be its end result; and that to
sustain private respondents' [petitioners'] position on what the respondent court may decide after all,
then the assessment should be deferred and finally assessed only after the court had finally decided
the case, which cannot be done because the rules require that filing fees should be based on what is
alleged and prayed for in the face of the complaint and paid upon the filing of the complaint.142

Although we discussed that there isno rescission of contract to speak of in contracts of conditional
sale, we hold that an action to cancel a contract to sell, similar to an action for rescission of contract
of sale, is an action incapable of pecuniary estimation. Like any action incapable of pecuniary
estimation, an action to cancel a contract to sell "demands an inquiry into other factors"143 aside from
the amount of money to be awarded to the claimant. Specifically in this case, the trial court
principally determined whether Olivarez Realty Corporation failed to pay installments of the
propertys purchase price as the parties agreed upon in the deed of conditional sale. The principal
natureof Castillos action, therefore, is incapable of pecuniary estimation.

All told, there is no issue that the parties in this case entered into a contract to sell a parcel of land
and that Olivarez Realty Corporation failed to fully pay the installments agreed upon.Consequently,
Castillo is entitled to cancel the contract to sell.

WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals decision dated
July 20, 2010 and in CA-G.R. CV No. 91244 is AFFIRMEDwith MODIFICATION.

The deed of conditional sale dated April 5, 2000 is declared CANCELLED. Petitioner Olivarez Realty
Corporation shall RETURN to respondent Benjamin Castillo the possession of the property covered
by Transfer Certificate of Title No. T-19972 together with all the improvements that petitioner
corporation introduced on the property. The amount of 2,500,000.00 is FORFEITED in favor of
respondent Benjamin Castillo as reasonable compensation for the use of petitioner Olivarez Realty
Corporation of the property.

Petitioner Olivarez Realty Corporation shall PAY respondent Benjamin Castillo 500,000.00 as
moral damages, 50,000.00 as exemplary damages, and 50,000.00 as attorney's fees with interest
at 6% per annum from the time this decision becomes final and executory until petitioner

corporation fully pays the amount of damages.144

SO ORDERED.

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.

Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant
Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the
amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00.
The present appeal is from that judgment.

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used
as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by
Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived
in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc.
executed a trust receipt in favor of the said bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00,
to be secured by a first mortgage on the factory building to be constructed, the land site thereof, and
the machinery and equipment to be installed. Among the other terms spelled out in the resolution
were the following:

1. That the proceeds of the loan shall be utilized exclusively for the following
purposes:

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and
China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to
availability of funds, and as the construction of the factory buildings progresses, to be certified to by
an appraiser of this Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC,
requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers,
Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.)
sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for
P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be
substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares
in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan ... with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operations of jute mills, and to submit
his findings thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-
signer for the loan, and asked that the necessary documents be prepared in accordance with the
terms and conditions specified in Resolution No. 145. In connection with the reexamination of the
project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named
their respective committees of engineers and technical men to meet with each other and undertake
the necessary studies, although in appointing its own committee Saura, Inc. made the observation
that the same "should not be taken as an acquiescence on (its) part to novate, or accept new
conditions to, the agreement already) entered into," referring to its acceptance of the terms and
conditions mentioned in Resolution No. 145.

On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17.

It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on
June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to
reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under
Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s.,
authorizing the re-examination of all the various aspects of the loan granted the Saura Import &
Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks
in Davao, with special reference as to the advisability of financing this particular project based on
present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura
and after extensive discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to
P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to
time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution
No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for
China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the
loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter
dated July 2 requested RFC that the registration of the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted.
The request was denied by RFC, which added in its letter-reply that it was "constrained to consider
as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that
China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC
releases to us the P500,000.00 originally approved by you.".

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount
of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes
jointly with the borrower-corporation," but with the following proviso:
 That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to the
following:

1. That the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately for

the requirements of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural
Resources was required "as the intention of the original approval (of the loan) is to develop the
manufacture of sacks on the basis of locally available raw materials." This point is important, and
sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he
was building in Davao was for the manufacture of bags from local raw materials. The cover page of
its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao
Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate
a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies;
out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same
brochure states that, the venture "is the first serious attempt in this country to use 100% locally
grown raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao
where the proposed jutemill is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the
first place, and to require, in its Resolution No. 9083, a certification from the Department of
Agriculture and Natural Resources as to the availability of local raw materials to provide adequately
for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its
letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of
Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2)
requesting "assurances (from RFC) that my company and associates will be able to bring in
sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking
that releases of the loan be made as follows:

a) For the payment of the receipt for jute mill

machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip-

ment per attached list to enable the jute
mill to operate 182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the open-

ing of the letter of credit for raw jute
for $25,000.00.
 2) P25,000.00 to be released upon arrival
of raw jute.

3) P17,586.09 to be released as soon as the

mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21, 1955, regarding the
release of your loan under consideration of P500,000. As stated in
our letter of December 22, 1954, the releases of the loan, if revived,
are proposed to be made from time to time, subject to availability of
funds towards the end that the sack factory shall be placed in actual
operating status. We shall be able to act on your request for revised
purpose and manner of releases upon re-appraisal of the securities
offered for the loan.

With respect to our requirement that the Department of Agriculture

and Natural Resources certify that the raw materials needed are
available in the immediate vicinity and that there is prospect of
increased production thereof to provide adequately the requirements
of the factory, we wish to reiterate that the basis of the original
approval is to develop the manufacture of sacks on the basis of the
locally available raw materials. Your statement that you will have to
rely on the importation of jute and your request that we give you
assurance that your company will be able to bring in sufficient jute
materials as may be necessary for the operation of your factory,
would not be in line with our principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed
the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of
Saura, Inc.

It appears that the cancellation was requested to make way for the registration of a mortgage
contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and
Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to
pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay
the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request
of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as
predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan
applied for and approved, thereby preventing the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute mill project.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between
the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and
reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had
been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there
was, the plaintiff itself did not comply with the terms thereof.

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the
Civil Code, which provides:

ART. 1954. An accepted promise to deliver something, by way of commodatum or

simple loan is binding upon the parties, but the commodatum or simple loan itself
shall not be perferted until the delivery of the object of the contract.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was
executed and registered. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that
the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no
serious dispute about this. It was in line with such assumption that when RFC, by Resolution No.
9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it
imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to
carry out its operation are available in the immediate vicinity; and (2) that there is prospect of
increased production thereof to provide adequately for the requirements of the factory." The
imposition of those conditions was by no means a deviation from the terms of the agreement, but
rather a step in its implementation. There was nothing in said conditions that contradicted the terms
laid down in RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of
the loan shall be utilized exclusively for the following purposes: for construction of factory building
P250,000.00; for payment of the balance of purchase price of machinery and equipment
P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized that it could not meet
the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute
"will not be able in sufficient quantity this year or probably next year," and asking that out of the loan
agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as
it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had
been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously
was in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan
be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on
June 15, 1955. The action thus taken by both parties was in the nature cf mutual desistance what
Manresa terms "mutuo disenso"1 which is a mode of extinguishing obligations. It is a concept that
derives from the principle that since mutual agreement can create a contract, mutual disagreement
by the parties can cause its extinguishment.2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any
alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its
request for cancellation of the mortgage carried no reservation of whatever rights it believed it might
have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan
to finance a rice and corn project, which application was disapproved. It was only in 1964, nine years
after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action
for damages.All these circumstances demonstrate beyond doubt that the said agreement had been
extinguished by mutual desistance and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other issues
raised in the respective briefs of the parties.

WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs
against the plaintiff-appellee.

G.R. No. 175863, February 18, 2015

NATIONAL POWER CORPORATION, Petitioner, v. LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM,

ELIAS G. MARUHOM, BUCAY G. MARUHOM, MAMOD G. MARUHOM, FAROUK G. MARUHOM,
HIDJARA G. MARUHOM, ROCANIA G. MARUHOM, POTRISAM G. MARUHOM, LUMBA G. MARUHOM,
SINAB G. MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G. MARUHOM, MOHAMAD M. IBRAHIM,
CAIRONESA M. IBRAHIM AND MACAPANTON K. MANGONDATO, Respondents.

DECISION

PEREZ, J.:

At bench is a petition for review on certiorari1 assailing the Decision2 dated 24 June 2005 and
Resolution3 dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061.

The facts:

The Subject Land

In 1978, petitioner took possession of a 21,995 square meter parcel of land in Marawi City (subject land) for
the purpose of building thereon a hydroelectric power plant pursuant to its Agus 1 project. The subject land,
while in truth a portion of a private estate registered under Transfer Certificate of Title (TCT) No. 378-A4 in
the name of herein respondent Macapanton K. Mangondato (Mangondato),5 was occupied by petitioner
under the mistaken belief that such land is part of the vast tract of public land reserved for its use by the
government under Proclamation No. 1354, s. 1974.6 cralawred

Mangondato first discovered petitioners occupation of the subject land in 1979the year that petitioner
started its construction of the Agus 1 plant. Shortly after such discovery, Mangondato began demanding
compensation for the subject land from petitioner.

In support of his demand for compensation, Mangondato sent to petitioner a letter7 dated 28 September
1981 wherein the former detailed the origins of his ownership over the lands covered by TCT No. 378-A,
including the subject land. The relevant portions of the letter read:
cha nRoblesvi rt ualLaw lib rary

Now let me trace the basis of the title to the land adverted to for particularity. The land titled in my name
was originally consisting of seven (7) hectares. This piece of land was particularly set aside by the Patriarch
Maruhom, a fact recognized by all royal datus of Guimba, to belong to his eldest son, Datu Magayo-ong
Maruhom. This is the very foundation of the right and ownership over the land in question which was titled
in my name because as the son-in-law of Hadji Ali Maruhom the eldest son of, and only lawyer among the
descendants of Datu Magayo-ong Maruhom, the authority and right to apply for the title to the land was
given to me by said heirs after mutual agreement among themselves besides the fact that I have already
bought a substantial portion of the original seven (7) hectares.

The original title of this seven (7) hectares has been subdivided into several TCTs for the other children of
Datu Magayo-ong Maruhom with whom I have executed a quit claim. Presently, only three (3) hectares is
left to me out of the original seven (7) hectares representing those portion [sic] belonging to my wife and
those I have bought previously from other heirs. This is now the subject of this case.8 cralawlawl ibra ry

Petitioner, at first, rejected Mangondatos claim of ownership over the subject land; the former then
adamant in its belief that the said land is public land covered by Proclamation No. 1354, s. 1974. But, after
more than a decade, petitioner finally acquiesced to the fact that the subject land is private land covered by
TCT No. 378-A and consequently acknowledged Mangondatos right, as registered owner, to receive
compensation therefor.
Thus, during the early 1990s, petitioner and Mangondato partook in a series of communications aimed at
settling the amount of compensation that the former ought to pay the latter in exchange for the subject land.
Ultimately, however, the communications failed to yield a genuine consensus between petitioner and
Mangondato as to the fair market value of the subject land. chanrob lesvi rtua llawli bra ry

Civil Case No. 605-92 and Civil Case No. 610-92

With an agreement basically out of reach, Mangondato filed a complaint for reconveyance against petitioner
before the Regional Trial Court (RTC) of Marawi City in July 1992. In his complaint, Mangondato asked for,
among others, the recovery of the subject land and the payment by petitioner of a monthly rental from 1978
until the return of such land. Mangondatos complaint was docketed as Civil Case No. 605-92.

For its part, petitioner filed an expropriation complaint9 before the RTC on 27 July 1992. Petitioners
complaint was docketed as Civil Case No. 610-92.

Later, Civil Case No. 605-92 and Civil Case No. 610-92 were consolidated before Branch 8 of the Marawi City
RTC.

On 21 August 1992, Branch 8 of the Marawi City RTC rendered a Decision10 in Civil Case No. 605-92 and
Civil Case No. 610-92. The decision upheld petitioners right to expropriate the subject land: it denied
Mangondatos claim for reconveyance and decreed the subject land condemned in favor of the petitioner,
effective July of 1992, subject to payment by the latter of just compensation in the amount of
P21,995,000.00. Anent petitioners occupation of the subject land from 1978 to July of 1992, on the other
hand, the decision required the former to pay rentals therefor at the rate of P15,000.00 per month with 12%
interest per annum. The decisions fallo reads: cha nRoblesv irt ual Lawlib rary

WHEREFORE, the prayer in the recovery case for [petitioners] surrender of the property is denied but
[petitioner] is ordered to pay monthly rentals in the amount of P15,000.00 from 1978 up to July 1992 with
12% interest per annum xxx and the property is condemned in favor of [petitioner] effective July 1992 upon
payment of the fair market value of the property at One Thousand (P1,000.00) Pesos per square meter or a
total of Twenty-One Million Nine Hundred Ninety-Five Thousand (P21,995,000.00) [P]esos.11
cralawlawl ibra ry
cralaw red

Disagreeing with the amount of just compensation that it was adjudged to pay under the said decision,
petitioner filed an appeal with the Court of Appeals. This appeal was docketed in the Court of Appeals as CA-
G.R. CV No. 39353.

Respondents Ibrahims and Maruhoms and Civil Case No. 967-93

During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993, herein respondents the Ibrahims and
Maruhoms12 filed before the RTC of Marawi City a complaint13 against Mangondato and petitioner. This
complaint was docketed as Civil Case No. 967-93 and was raffled to Branch 10 of the Marawi City RTC.

In their complaint, the Ibrahims and Maruhoms disputed Mangondatos ownership of the lands covered by
TCT No. 378-A, including the subject land. The Ibrahims and Maruhoms asseverate that they are the real
owners of the lands covered by TCT No. 378-A; they being the lawful heirs of the late Datu Magayo-ong
Maruhom, who was the original proprietor of the said lands.14 They also claimed that Mangondato actually
holds no claim or right over the lands covered by TCT No. 378-A except that of a trustee who merely holds
the said lands in trust for them.15 cralaw red

The Ibrahims and Maruhoms submit that since they are the real owners of the lands covered by TCT No.
378-A, they should be the ones entitled to any rental fees or expropriation indemnity that may be found due
for the subject land.

Hence, the Ibrahims and Maruhoms prayed for the following reliefs in their complaint:16 cralaw red

1. That Mangondato be ordered to execute a Deed of Conveyance transferring to them the ownership
of the lands covered by TCT No. 378-A; ChanRoblesVi rt ualawlib ra ry

2. That petitioner be ordered to pay to them whatever indemnity for the subject land it is later on
adjudged to pay in Civil Case No. 605-92 and Civil Case No. 610-92; ChanRobles Vi rtua lawlib rary
 3. That Mangondato be ordered to pay to them any amount that the former may have received from
the petitioner by way of indemnity for the subject land; Chan RoblesVirt ualawli bra ry

4. That petitioner and Mangondato be ordered jointly and severally liable to pay attorneys fees in the
sum of P200,000.00.

In the same complaint, the Ibrahims and Maruhoms also prayed for the issuance of a temporary restraining
order (TRO) and a writ of preliminary injunction to enjoin petitioner, during the pendency of the suit, from
making any payments to Mangondato concerning expropriation indemnity for the subject land.17 cral awred

On 30 March 1993, Branch 10 of the Marawi City RTC granted the prayer of the Ibrahims and Maruhoms for
the issuance of a TRO.18 On 29 May 1993, after conducting an appropriate hearing for the purpose, the
same court likewise granted the prayer for the issuance of a writ of preliminary injunction.19 cralaw red

In due course, trial then ensued in Civil Case No. 967-93. chanrob lesvi rtua llawli bra ry

The Decision of the Court of Appeals in CA-G.R. CV No. 39353

and the Decision of this Court in G.R. No. 113194

On 21 December 1993, the Court of Appeals rendered a Decision in CA-G.R. CV No. 39353 denying the
appeal of petitioner and affirming in toto the 21 August 1992 Decision in Civil Case No. 605-92 and Civil
Case No. 610-92. Undeterred, petitioner next filed a petition for review on certiorari with this Court that was
docketed herein as G.R. No. 113194.20 cralaw red

On 11 March 1996, we rendered our Decision in G.R. No. 113194 wherein we upheld the Court of Appeals
denial of petitioners appeal.21 In the same decision, we likewise sustained the appellate courts affirmance
of the decision in Civil Case No. 605-92 and Civil Case No. 610-92 subject only to a reduction of the rate of
interest on the monthly rental fees from 12% to 6% per annum.22 cralawred

Our decision in G.R. No. 113194 eventually became final and executory on 13 May 1996.23 cralaw red

Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and
Civil Case No. 610-92, as Modified

In view of the finality of this Courts decision in G.R. No. 113194, Mangondato filed a motion for execution of
the decision in Civil Case No. 605-92 and Civil Case No. 610-92.24 Against this motion, however, petitioner
filed an opposition.25 c ralaw red

In its opposition, petitioner adverted to the existence of the writ of preliminary injunction earlier issued in
Civil Case No. 967-93 that enjoins it from making any payment of expropriation indemnity over the subject
land in favor of Mangondato.26 Petitioner, in sum, posits that such writ of preliminary injunction constitutes a
legal impediment that effectively bars any meaningful execution of the decision in Civil Case No. 605-92 and
Civil Case No. 610-92.

Finding no merit in petitioners opposition, however, Branch 8 of the Marawi City RTC rendered a
Resolution27 dated 4 June 1996 ordering the issuance of a writ of execution in favor of Mangondato in Civil
Case No. 605-92 and Civil Case No. 610-92. Likewise, in the same resolution, the trial court ordered the
issuance of a notice of garnishment against several of petitioners bank accounts28 for the amount
of P21,801,951.00the figure representing the total amount of judgment debt due from petitioner in Civil
Case No. 605-92 and Civil Case No. 610-92 less the amount then already settled by the latter. The
dispositive portion of the resolution reads: chanRob lesvi rtua lLawl ibra ry

WHEREFORE, let a Writ of Execution and the corresponding order or notice of garnishment be immediately
issued against [petitioner] and in favor of [Mangondato] for the amount of Twenty One Million Eight Hundred
One Thousand and Nine Hundred Fifty One (P21,801,951.00) Pesos. chanroble slaw

x x x.29 cralawlawli bra ry

Pursuant to the above resolution, a notice of garnishment30 dated 5 June 1996 for the amount of
P21,801,951.00 was promptly served upon the Philippine National Bank (PNB)the authorized depositary of
petitioner. Consequently, the amount thereby garnished was paid to Mangondato in full satisfaction of
petitioners judgment debt in Civil Case No. 605-92 and Civil Case No. 610-92. chanroble svirtual lawlib rary

Decision in Civil Case No. 967-93

Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City RTC decided Civil Case No. 967-
93.31 In its decision, Branch 10 of the Marawi City RTC made the following relevant findings:32 c ralaw red

1. The Ibrahims and Maruhomsnot Mangondatoare the true owners of the lands covered by TCT No.
378-A, which includes the subject land.

2. The subject land, however, could no longer be reconveyed to the Ibrahims and Maruhoms since the
same was already expropriated and paid for by the petitioner under Civil Case No. 605-92 and Civil
Case No. 610-92.

3. Be that as it may, the Ibrahims and Maruhoms, as true owners of the subject land, are the rightful
recipients of whatever rental fees and indemnity that may be due for the subject land as a result of
its expropriation.

Consistent with the foregoing findings, Branch 10 of the Marawi City RTC thus required payment of all the
rental fees and expropriation indemnity due for the subject land, as previously adjudged in Civil Case No.
605-92 and Civil Case No. 610-92, to the Ibrahims and Maruhoms.

Notable in the trial courts decision, however, was that it held both Mangondato and the
petitioner solidarily liable to the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity adjudged in Civil Case No. 605-92 and Civil Case No. 610-92.33 c ralaw red

In addition, Mangondato and petitioner were also decreed solidarily liable to the Ibrahims and Maruhoms for
attorneys fees in the amount of P200,000.00.34 cralawred

The pertinent dispositions in the decision read: cha nRoblesv irt ual Lawlib rary

WHEREFORE, premises considered, judgment is hereby rendered in favor of [the Ibrahims and Maruhoms]
and against [Mangondato and petitioner] as follows:

1. xxx

2. Ordering [Mangondato and petitioner] to pay jointly and severally [the Ibrahims and Maruhoms] all
forms of expropriation indemnity as adjudged for [the subject land] consisting of 21,995 square
meters in the amount of P21,801,051.00 plus other forms of indemnity such as rentals and
interests; ChanRoble sVirtualawl ibra ry

3. Ordering [Mangondato and petitioner] to pay [the Ibrahims and Maruhoms] jointly and severally the
sum of P200,000.00 as attorneys fees; ChanRobles Vi rt ualawlib ra ry

4. xxx

5. xxx

6. xxx

SO ORDERED.35
cralawlawl ibra ry
cralawred

Petitioners Appeal to the Court of Appeals and the Execution

Pending Appeal of the Decision in Civil Case No. 967-93

Petitioner appealed the decision in Civil Case No. 967-93 with the Court of Appeals: contesting mainly the
holding in the said decision that it ought to be solidarily liable with Mangondato to pay to the Ibrahims and
Maruhoms the rental fees and expropriation indemnity adjudged due for the subject land. This appeal was
docketed as CA-G.R. CV No. 68061.

While the foregoing appeal was still pending decision by the Court of Appeals, however, the Ibrahims and
Maruhoms were able to secure with the court a quo a writ of execution pending appeal36 of the decision in
Civil Case No. 967-93. The enforcement of such writ led to the garnishment of Mangondatos moneys in the
possession of the Social Security System (SSS) in the amount of P2,700,000.00 on 18 September
1998.37 Eventually, the amount thereby garnished was paid to the Ibrahims and Mangondato in partial
satisfaction of the decision in Civil Case No. 967-93.

On 24 June 2005, the Court of Appeals rendered its Decision38 in CA-G.R. CV No. 68061 denying petitioners
appeal. The appellate court denied petitioners appeal and affirmed the decision in Civil Case No. 967-93,
subject to the right of petitioner to deduct the amount of P2,700,000.00 from its liability as a consequence
of the partial execution of the decision in Civil Case No. 967-93.39 cra lawred

Hence, the present appeal by petitioner. c hanro blesvi rt uallawli bra ry

The Present Appeal

The present appeal poses the question of whether it is correct, in view of the facts and circumstances in this
case, to hold petitioner liable in favor of the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity adjudged due for the subject land.

In their respective decisions, both Branch 10 of the Marawi City RTC and the Court of Appeals had answered
the foregoing question in the affirmative. The two tribunals postulated that, notwithstanding petitioners
previous payment to Mangondato of the rental fees and expropriation indemnity as a consequence of the
execution of the decision in Civil Case No. 605-92 and 610-92, petitioner may still be held liable to the
Ibrahims and Maruhoms for such fees and indemnity because its previous payment to Mangondato was
tainted with bad faith.40 As proof of such bad faith, both courts cite the following considerations:41 c ralawre d

1. Petitioner allowed payment to Mangondato despite its prior knowledge, which dates back as early
as 28 September 1981, by virtue of Mangondatos letter of even date, that the subject land was
owned by a certain Datu Magayo-ong Maruhom and not by Mangondato; and

2. Petitioner allowed such payment despite the issuance of a TRO and a writ of preliminary injunction
in Civil Case No. 967-93 that precisely enjoins it from doing so.

For the two tribunals, the bad faith on the part of petitioner rendered its previous payment to Mangondato
invalid insofar as the Ibrahims and Maruhoms are concerned. Hence, both courts concluded that petitioner
may still be held liable to the Ibrahims and Maruhoms for the rental fees and expropriation indemnity
previously paid to Mangondato.42 cralawred

Petitioner, however, argues otherwise. It submits that a finding of bad faith against it would have no basis in
fact and law, given that it merely complied with the final and executory decision in Civil Case No. 605-92
and Civil Case No. 610-92 when it paid the rental fees and expropriation indemnity due the subject to
Mangondato.43 Petitioner thus insists that it should be absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms and prays for the dismissal of Civil Case No. 967-93
against it.
chanroble svirtual lawlib rary

OUR RULING

We grant the appeal.

No Bad Faith On The Part

of Petitioner

Petitioner is correct. No bad faith may be taken against it in paying Mangondato the rental fees and
expropriation indemnity due the subject land.

Our case law is not new to the concept of bad faith. Decisions of this Court, both old and new, had been
teeming with various pronouncements that illuminate the concept amidst differing legal contexts. In any
attempt to understand the basics of bad faith, it is mandatory to take a look at some of these
pronouncements:

In Lopez, et al. v. Pan American World Airways,44 a 1966 landmark tort case, we defined the concept of bad
faith as:
chanRoblesvirtual Lawli bra ry

a breach of a known duty through some motive of interest or ill will.45 cra lawlawlib ra ry

Just months after the promulgation of Lopez, however, came the case of Air France v. Carrascoso, et
al.,46 In Air France, we expounded on Lopezs definition by describing bad faith as: chanRoble svirtua lLawli bra ry

xxx a state of mind affirmatively operating with furtive design or with some motive of self-interest or will or
for ulterior purpose.47 cralaw lawlib rary

Air Frances articulation of the meaning of bad faith was, in turn, echoed in a number subsequent
cases,48 one of which, is the 2009 case of Balbuena, et al. v. Sabay, et al.49 cralawred

In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw,50 on the other hand, we enunciated one of the
more oft-repeated formulations of bad faith in our case law: chanRoblesvi rt ualLaw lib rary

xxx bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means breach of a known duty thru some motive or
interest of ill will; it partakes of the nature of fraud.51 cralawlawlibra ry

As a testament to its enduring quality, the foregoing pronouncement in Board of Liquidators had been
reiterated in a slew of later cases,52 more recently, in the 2009 case of Nazareno, et al. v. City of
Dumaguete53 and the 2012 case of Aliling v. Feliciano.54 crala wred

Still, in 1995, the case of Far East Bank and Trust Company v. Court of Appeals55 contributed the following
description of bad faith in our jurisprudence: chanRob lesvi rtua lLawl ibra ry

Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose
or moral obliquity;xxx.56 cralawlawl ibra ry

The description of bad faith in Far East Bank and Trust Company then went on to be repeated in subsequent
cases such as 1995s Ortega v. Court of Appeals,57 1997s Laureano Investment and Development
Corporation v. Court of Appeals,58 2010s Lambert Pawnbrokers v. Binamira59 and 2013s California Clothing,
Inc., v. Quiones,60 to name a few.

Verily, the clear denominator in all of the foregoing judicial pronouncements is that the essence of bad faith
consists in the deliberate commission of a wrong. Indeed, the concept has often been equated with
malicious or fraudulent motives, yet distinguished from the mere unintentional wrongs resulting from mere
simple negligence or oversight.61 cralawre d

A finding of bad faith, thus, usually assumes the presence of two (2) elements: first, that the actor knew or
should have known that a particular course of action is wrong or illegal, and second, that despite such actual
or imputable knowledge, the actor, voluntarily, consciously and out of his own free will, proceeds with such
course of action. Only with the concurrence of these two elements can we begin to consider that the wrong
committed had been done deliberately and, thus, in bad faith.

In this case, both Branch 10 of the Marawi City RTC and the Court of Appeals held that petitioner was in bad
faith when it paid to Mangondato the rental fees and expropriation indemnity due the subject land. The two
tribunals, in substance, fault petitioner when it allowed such payment to take place despite the latters
alleged knowledge of the existing claim of the Ibrahims and Maruhoms upon the subject land and the
issuance of a TRO in Civil Case No. 967-93. Hence, the two tribunals claim that petitioners payment to
Mangondato is ineffective as to the Ibrahims and Maruhoms, whom they found to be the real owners of the
subject land.

We do not agree.

Branch 10 of the Marawi City RTC and the Court of Appeals erred in their finding of bad faith because they
have overlooked the utter significance of one important fact: that petitioners payment to Mangondato
of the rental fees and expropriation indemnity adjudged due for the subject land in Civil Case No. 605-
92 and Civil Case No. 610-92, was required by the final and executory decision in the said two cases
and was compelled thru a writ of garnishment issued by the court that rendered such decision. In
other words, the payment to Mangondato was not a product of a deliberate choice on the part of the
petitioner but was made only in compliance to the lawful orders of a court with jurisdiction.

Contrary then to the view of Branch 10 of the Marawi City RTC and of the Court of Appeals, it was not the
petitioner that allowed the payment of the rental fees and expropriation indemnity to Mangondato. Indeed,
given the circumstances, the more accurate rumination would be that it was the trial court in Civil Case No.
605-92 and Civil Case No. 610-92 that ordered or allowed the payment to Mangondato and that petitioner
merely complied with the order or allowance by the trial court. Since petitioner was only acting under the
lawful orders of a court in paying Mangondato, we find that no bad faith can be taken against it,
even assuming that petitioner may have had prior knowledge about the claims of the Ibrahims and
Maruhoms upon the subject land and the TRO issued in Civil Case No. 967-93.

Sans Bad Faith, Petitioner

Cannot Be Held Liable to the
Ibrahims and Maruhoms

Without the existence of bad faith, the ruling of the RTC and of the Court of Appeals apropos petitioners
remaining liability to the Ibrahims and Maruhoms becomes devoid of legal basis. In fact, petitioners
previous payment to Mangondato of the rental fees and expropriation indemnity due the subject land
pursuant to the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92 may be considered to
have extinguished the formers obligation regardless of who between Mangondato, on one hand, and
the Ibrahims and Maruhoms, on the other, turns out to be the real owner of the subject
land.62 Either way, petitioner cannot be made liable to the Ibrahims and Maruhoms:

First. If Mangondato is the real owner of the subject land, then the obligation by petitioner to pay for the
rental fees and expropriation indemnity due the subject land is already deemed extinguished by the latters
previous payment under the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92. This would
be a simple case of an obligation being extinguished through payment by the debtor to its creditor.63 Under
this scenario, the Ibrahims and Maruhoms would not even be entitled to receive anything from anyone for
the subject land. Hence, petitioner cannot be held liable to the Ibrahims and Maruhoms.

Second. We, however, can reach the same conclusion even if the Ibrahims and Maruhoms turn out to be the
real owners of the subject land.

Should the Ibrahims and Maruhoms turn out to be the real owners of the subject land, petitioners previous
payment to Mangondato pursuant to Civil Case No. 605-92 and Civil Case No. 610-92given the absence of
bad faith on petitioners part as previously discussedmay nonetheless be considered as akin to a payment
made in good faith to a person in possession of credit per Article 1242 of the Civil Code that,
just the same, extinguishes its obligation to pay for the rental fees and expropriation indemnity due for the
subject land. Article 1242 of the Civil Code reads:
chanRoble svi rtual Lawli bra ry

Payment made in good faith to any person in possession of the credit shall release the debtor. cralawlawli bra ry

Article 1242 of the Civil Code is an exception to the rule that a valid payment of an obligation can only be
made to the person to whom such obligation is rightfully owed.64 It contemplates a situation where a debtor
pays a possessor of credit i.e., someone who is not the real creditor but appears, under the circumstances,
to be the real creditor.65 In such scenario, the law considers the payment to the possessor of credit as
valid even as against the real creditor taking into account the good faith of the debtor.

Borrowing the principles behind Article 1242 of the Civil Code, we find that Mangondatobeing the
judgment creditor in Civil Case No. 605-92 and Civil Case No. 610-92 as well as the registered owner of the
subject land at the time66may be considered as a possessor of credit with respect to the rental fees and
expropriation indemnity adjudged due for the subject land in the two cases, if the Ibrahims and Maruhoms
turn out to be the real owners of the subject land. Hence, petitioners payment to Mangondato of the fees
and indemnity due for the subject land as a consequence of the execution of Civil Case No. 605-92 and Civil
Case No. 610-92 could still validly extinguish its obligation to pay for the same even as against the Ibrahims
and Maruhoms.
Effect of Extinguishment of
Petitioners Obligation

The extinguishment of petitioners obligation to pay for the rental fees and expropriation indemnity due the
subject land carries with it certain legal effects:

First. If Mangondato turns out to be the real owner of the subject land, the Ibrahims and Maruhoms would
not be entitled to recover anything from anyone for the subject land. Consequently, the partial execution of
the decision in Civil Case No. 967-93 that had led to the garnishment of Mangondatos moneys in the
possession of the Social Security System (SSS) in the amount of P2,700,000.00 in favor of the Ibrahims and
Maruhoms, becomes improper and unjustified. In this event, therefore, the Ibrahims and Maruhoms may be
ordered to return the amount so garnished to Mangondato.

Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners of the subject land, they may only
recover the rental fees and expropriation indemnity due the subject land against Mangondato but only up to
whatever payments the latter had previously received from petitioner pursuant to Civil Case No. 605-92 and
Civil Case No. 610-92.

Second. At any rate, the extinguishment of petitioners obligation to pay for the rental fees and
expropriation indemnity due the subject land negates whatever cause of action the Ibrahims and Maruhoms
might have had against the former in Civil Case No. 967-93. Hence, regardless of who between
Mangondato, on one hand, and the Ibrahims and Maruhoms, on the other, turns out to be the real
owner of the subject land, the dismissal of Civil Case No. 967-93 insofar as petitioner is
concerned is called for.

Re: Attorneys Fees

The dismissal of Civil Case No. 967-93 as against petitioner necessarily absolves the latter from paying
attorneys fees to the Ibrahims and Maruhoms arising from that case.

WHEREFORE, premises considered, the instant petition is GRANTED. The Decision dated 24 June 2005 and
Resolution dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET
ASIDE. The Decision dated 16 April 1998 of the Regional Trial Court in Civil Case No. 967-93
is MODIFIED in that petitioner is absolved from any liability in that case in favor of the respondents
Lucman M. Ibrahim, Atty. Omar G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom, Mamod G. Maruhom,
Farouk G. Maruhom, Hidjara G. Maruhom, Rocania G. Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom,
Sinab G. Maruhom, Acmad G. Maruhom, Solayman G. Maruhom, Mohamad M. Ibrahim and Caironesa M.
Ibrahim. Civil Case No. 967-93 is DISMISSED as against petitioner.

LAND BANK OF THE G.R. No. 190755

PHILIPPINES,
Petitioner, Present:

CORONA, C.J., Chairperson,

VELASCO, JR.,
- versus - LEONARDO-DE CASTRO,
PERALTA,* and
PEREZ, JJ.

ALFREDO ONG, Promulgated:

Respondent. November 24, 2010

x-----------------------------------------------------------------------------------------x
 DECISION

VELASCO, JR., J.:

This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA)
in CA-G.R. CR-CV No. 84445 entitled Alfredo Ong v. Land Bank of the
Philippines, which affirmed the Decision of the Regional Trial Court (RTC),
Branch 17 in Tabaco City.

The Facts

On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan

from Land Bank Legazpi City in the amount of PhP 16 million. The loan was
secured by three (3) residential lots, five (5) cargo trucks, and a warehouse.
Under the loan agreement, PhP 6 million of the loan would be short-term and
would mature on February 28, 1997, while the balance of PhP 10 million would
be payable in seven (7) years. The Notice of Loan Approval dated February 22,
1996 contained an acceleration clause wherein any default in payment of
amortizations or other charges would accelerate the maturity of the loan.[1]

Subsequently, however, the Spouses Sy found they could no longer pay

their loan. On December 9, 1996, they sold three (3) of their mortgaged parcels
of land for PhP 150,000 to Angelina Gloria Ong, Evangelines mother, under a
Deed of Sale with Assumption of Mortgage. The relevant portion of the
document[2] is quoted as follows:

WHEREAS, we are no longer in a position to settle our obligation

with the bank;
NOW THEREFORE, for and in consideration of the sum of ONE
HUNDRED FIFTY THOUSAND PESOS (P150,000.00) Philippine
Currency, we hereby these presents SELL, CEDE, TRANSFER and
CONVEY, by way of sale unto ANGELINA GLORIA ONG, also of legal
age, Filipino citizen, married to Alfredo Ong, and also a resident of
Tabaco, Albay, Philippines, their heirs and assigns, the above-mentioned
 debt with the said LAND BANK OF THE PHILIPPINES, and by reason
hereof they can make the necessary representation with the bank for the
proper restructuring of the loan with the said bank in their favor;

That as soon as our obligation has been duly settled, the bank is
authorized to release the mortgage in favor of the vendees and for this
purpose VENDEES can register this instrument with the Register of
Deeds for the issuance of the titles already in their names.

IN WITNESS WHEREOF, we have hereunto affixed our signatures

th
this 9 day of December 1996 at Tabaco, Albay, Philippines.

(signed) (signed)
EVANGELINE O. SY JOHNSON B. SY
Vendor Vendor

Evangelines father, petitioner Alfredo Ong, later went to Land Bank to

inform it about the sale and assumption of mortgage.[3] Atty. Edna Hingco, the
Legazpi City Land Bank Branch Head, told Alfredo and his counsel Atty. Ireneo
de Lumen that there was nothing wrong with the agreement with the Spouses Sy
but provided them with requirements for the assumption of mortgage. They were
also told that Alfredo should pay part of the principal which was computed at
PhP 750,000 and to update due or accrued interests on the promissory notes so
that Atty. Hingco could easily approve the assumption of mortgage. Two weeks
later, Alfredo issued a check for PhP 750,000 and personally gave it to Atty.
Hingco. A receipt was issued for his payment. He also submitted the other
documents required by Land Bank, such as financial statements for 1994 and
1995. Atty. Hingco then informed Alfredo that the certificate of title of the
Spouses Sy would be transferred in his name but this never materialized. No
notice of transfer was sent to him.[4]

Alfredo later found out that his application for assumption of mortgage was
not approved by Land Bank. The bank learned from its credit investigation report
that the Ongs had a real estate mortgage in the amount of PhP 18,300,000 with
another bank that was past due. Alfredo claimed that this was fully paid later on.
Nonetheless, Land Bank foreclosed the mortgage of the Spouses Sy after several
months. Alfredo only learned of the foreclosure when he saw the subject
mortgage properties included in a Notice of Foreclosure of Mortgage and
Auction Sale at the RTC in Tabaco, Albay. Alfredos other counsel, Atty.
Madrilejos, subsequently talked to Land Banks lawyer and was told that the PhP
750,000 he paid would be returned to him.[5]

On December 12, 1997, Alfredo initiated an action for recovery of sum of

money with damages against Land Bank in Civil Case No. T-1941, as Alfredos
payment was not returned by Land Bank. Alfredo maintained that Land Banks
foreclosure without informing him of the denial of his assumption of the
mortgage was done in bad faith. He argued that he was lured into believing that
his payment of PhP 750,000 would cause Land Bank to approve his assumption
of the loan of the Spouses Sy and the transfer of the mortgaged properties in his
and his wifes name.[6] He also claimed incurring expenses for attorneys fees of
PhP 150,000, filing fee of PhP 15,000, and PhP 250,000 in moral damages.[7]

Testifying for Land Bank, Atty. Hingco claimed during trial that as branch
manager she had no authority to approve loans and could not assure anybody that
their assumption of mortgage would be approved. She testified that the breakdown
of Alfredos payment was as follows:

PhP 101,409.59 applied to principal

216,246.56 accrued interests receivable
396,571.77 interests
18,766.10 penalties
16,805.98 accounts receivable
----------------
Total: 750,000.00

According to Atty. Hingco, the bank processes an assumption of mortgage as a

new loan, since the new borrower is considered a new client. They used character,
capacity, capital, collateral, and conditions in determining who can qualify to
assume a loan. Alfredos proposal to assume the loan, she explained, was referred
to a separate office, the Lending Center. [8]
During cross-examination, Atty. Hingco testified that several months after Alfredo
made the tender of payment, she received word that the Lending Center rejected
Alfredos loan application. She stated that it was the Lending Center and not her
that should have informed Alfredo about the denial of his and his wifes assumption
of mortgage. She added that although she told Alfredo that the agreement between
the spouses Sy and Alfredo was valid between them and that the bank would
accept payments from him, Alfredo did not pay any further amount so the
foreclosure of the loan collaterals ensued. She admitted that Alfredo demanded the
return of the PhP 750,000 but said that there was no written demand before the
case against the bank was filed in court. She said that Alfredo had made the
payment of PhP 750,000 even before he applied for the assumption of mortgage
and that the bank received the said amount because the subject account was past
due and demandable; and the Deed of Assumption of Mortgage was not used as the
basis for the payment. [9]

The Ruling of the Trial Court

The RTC held that the contract approving the assumption of mortgage was not
perfected as a result of the credit investigation conducted on Alfredo. It noted that
Alfredo was not even informed of the disapproval of the assumption of mortgage
but was just told that the accounts of the spouses Sy had matured and gone unpaid.
It ruled that under the principle of equity and justice, the bank should return the
amount Alfredo had paid with interest at 12% per annum computed from the filing
of the complaint. The RTC further held that Alfredo was entitled to attorneys fees
and litigation expenses for being compelled to litigate.[10]

The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, a decision is rendered,

ordering defendant bank to pay plaintiff, Alfredo Ong the amount of
P750,000.00 with interest at 12% per annum computed from Dec. 12,
1997 and attorneys fees and litigation expenses of P50,000.00.

Costs against defendant bank.

SO ORDERED.[11]

The Ruling of the Appellate Court

On appeal, Land Bank faulted the trial court for (1) holding that the payment of
PhP 750,000 made by Ong was one of the requirements for the approval of his
proposal to assume the mortgage of the Sy spouses; (2) erroneously ordering Land
Bank to return the amount of PhP 750,000 to Ong on the ground of its failure to
effect novation; and (3) erroneously affirming the award of PhP 50,000 to Ong as
attorneys fees and litigation expenses.

The CA affirmed the RTC Decision.[12] It held that Alfredos recourse is not against
the Sy spouses. According to the appellate court, the payment of PhP 750,000 was
for the approval of his assumption of mortgage and not for payment of arrears
incurred by the Sy spouses. As such, it ruled that it would be incorrect to consider
Alfredo a third person with no interest in the fulfillment of the obligation under
Article 1236 of the Civil Code. Although Land Bank was not bound by the Deed
between Alfredo and the Spouses Sy, the appellate court found that Alfredo and
Land Banks active preparations for Alfredos assumption of mortgage essentially
novated the agreement.

On January 5, 2010, the CA denied Land Banks motion for reconsideration for lack
of merit. Hence, Land Bank appealed to us.

The Issues

Whether the Court of Appeals erred in holding that Art. 1236 of the Civil
Code does not apply and in finding that there is no novation.

II

Whether the Court of Appeals misconstrued the evidence and the law
when it affirmed the trial court decisions ordering Land Bank to pay Ong
the amount of Php750,000.00 with interest at 12% annum.

III

Whether the Court of Appeals committed reversible error when it

affirmed the award of Php50,000.00 to Ong as attorneys fees and
expenses of litigation.
 The Ruling of this Court

We affirm with modification the appealed decision.

Recourse is against Land Bank

Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo
should have sought recourse against the Spouses Sy instead of Land Bank. Art.
1236 provides:

The creditor is not bound to accept payment or performance by a third

person who has no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial to
the debtor.

We agree with Land Bank on this point as to the first part of paragraph 1 of
Art. 1236. Land Bank was not bound to accept Alfredos payment, since as far as
the former was concerned, he did not have an interest in the payment of the loan
of the Spouses Sy. However, in the context of the second part of said paragraph,
Alfredo was not making payment to fulfill the obligation of the Spouses
Sy. Alfredo made a conditional payment so that the properties subject of the Deed
of Sale with Assumption of Mortgage would be titled in his name. It is clear from
the records that Land Bank required Alfredo to make payment before his
assumption of mortgage would be approved. He was informed that the certificate
of title would be transferred accordingly. He, thus, made payment not as a debtor
but as a prospective mortgagor. But the trial court stated:

[T]he contract was not perfected or consummated because of the

adverse finding in the credit investigation which led to the disapproval of
the proposed assumption. There was no evidence presented that plaintiff
was informed of the disapproval. What he received was a letter dated
 May 22, 1997 informing him that the account of spouses Sy had matured
but there [were] no payments. This was sent even before the conduct of
the credit investigation on June 20, 1997 which led to the disapproval of
the proposed assumption of the loans of spouses Sy.[13]

Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of
the obligation of the Spouses Sy, since his interest hinged on Land Banks approval
of his application, which was denied. The circumstances of the instant case show
that the second paragraph of Art. 1236 does not apply. As Alfredo made the
payment for his own interest and not on behalf of the Spouses Sy, recourse is not
against the latter. And as Alfredo was not paying for another, he cannot demand
from the debtors, the Spouses Sy, what he has paid.

Novation of the loan agreement

Land Bank also faults the CA for finding that novation applies to the instant
case. It reasons that a substitution of debtors was made without its consent; thus, it
was not bound to recognize the substitution under the rules on novation.

On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B.

Finance Corporation[14] provides the following discussion:

Novation, in its broad concept, may either be extinctive or

modificatory. It is extinctive when an old obligation is terminated by the
creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it
remains compatible with the amendatory agreement. An extinctive
novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor (subjective or
personal). Under this mode, novation would have dual functions one
to extinguish an existing obligation, the other to substitute a new one in
its place requiring a conflux of four essential requisites: (1) a previous
valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation. x x x
 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 obligations be on every point
incompatible with each other. The test of incompatibility is whether or
not the two obligations can stand together, each one having its
independent existence. x x x (Emphasis supplied.)

Furthermore, Art. 1293 of the Civil Code states:

Novation which consists in substituting a new debtor in the place of the

original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor.Payment by
the new debtor gives him rights mentioned in articles 1236 and 1237.

We do not agree, then, with the CA in holding that there was a novation in the
contract between the parties. Not all the elements of novation were
present. Novation must be expressly consented to.Moreover, the conflicting
intention and acts of the parties underscore the absence of any express disclosure
or circumstances with which to deduce a clear and unequivocal intent by the
parties to novate the old agreement.[15] Land Bank is thus correct when it argues
that there was no novation in the following:

[W]hether or not Alfredo Ong has an interest in the obligation and

payment was made with the knowledge or consent of Spouses Sy, he may
still pay the obligation for the reason that even before he paid the amount
of P750,000.00 on January 31, 1997, the substitution of debtors was
already perfected by and between Spouses Sy and Spouses Ong as
evidenced by a Deed of Sale with Assumption of Mortgage executed by
them on December 9, 1996. And since the substitution of debtors was
made without the consent of Land Bank a requirement which is
indispensable in order to effect a novation of the obligation, it is therefore
not bound to recognize the substitution of debtors. Land Bank did not
intervene in the contract between Spouses Sy and Spouses Ong and did
not expressly give its consent to this substitution.[16]

Unjust enrichment
 Land Bank maintains that the trial court erroneously applied the principle of
equity and justice in ordering it to return the PhP 750,000 paid by Alfredo. Alfredo
was allegedly in bad faith and in estoppel. Land Bank contends that it enjoyed the
presumption of regularity and was in good faith when it accepted Alfredos tender
of PhP 750,000. It reasons that it did not unduly enrich itself at Alfredos expense
during the foreclosure of the mortgaged properties, since it tendered its bid by
subtracting PhP 750,000 from the Spouses Sys outstanding loan obligation.
Alfredos recourse then, according to Land Bank, is to have his payment
reimbursed by the Spouses Sy.

We rule that Land Bank is still liable for the return of the PhP 750,000 based
on the principle of unjust enrichment. Land Bank is correct in arguing that it has no
obligation as creditor to recognize Alfredo as a person with interest in the
fulfillment of the obligation. But while Land Bank is not bound to accept the
substitution of debtors in the subject real estate mortgage, it is estopped by its
action of accepting Alfredos payment from arguing that it does not have to
recognize Alfredo as the new debtor. The elements of estoppel are:

First, the actor who usually must have knowledge, notice or

suspicion of the true facts, communicates something to another in a
misleading way, either by words, conduct or silence; second, the other in
fact relies, and relies reasonably or justifiably, upon that communication;
third, the other would be harmed materially if the actor is later permitted
to assert any claim inconsistent with his earlier conduct; and fourth, the
actor knows, expects or foresees that the other would act upon the
information given or that a reasonable person in the actors position
would expect or foresee such action.[17]

By accepting Alfredos payment and keeping silent on the status of Alfredos

application, Land Bank misled Alfredo to believe that he had for all intents and
purposes stepped into the shoes of the Spouses Sy.

The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that
it was the banks Lending Center that should have notified Alfredo of his
assumption of mortgage disapproval is unavailing. The Lending Centers lack of
notice of disapproval, the Tabaco Branchs silence on the disapproval, and the
banks subsequent actions show a failure of the bank as a whole, first, to notify
Alfredo that he is not a recognized debtor in the eyes of the bank; and second, to
apprise him of how and when he could collect on the payment that the bank no
longer had a right to keep.
We turn then on the principle upon which Land Bank must return Alfredos
payment. Unjust enrichment exists when a person unjustly retains a benefit to the
loss of another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience.[18] There is unjust
enrichment under Art. 22 of the Civil Code when (1) a person is unjustly benefited,
and (2) such benefit is derived at the expense of or with damages to another.[19]

Additionally, unjust enrichment has been applied to actions called accion in

rem verso. In order that the accion in rem verso may prosper, the following
conditions must concur: (1) that the defendant has been enriched; (2) that the
plaintiff has suffered a loss; (3) that the enrichment of the defendant is without just
or legal ground; and (4) that the plaintiff has no other action based on contract,
quasi-contract, crime, or quasi-delict.[20] The principle of unjust enrichment
essentially contemplates payment when there is no duty to pay, and the person who
receives the payment has no right to receive it.[21]

The principle applies to the parties in the instant case, as, Alfredo, having
been deemed disqualified from assuming the loan, had no duty to pay petitioner
bank and the latter had no right to receive it.

Moreover, the Civil Code likewise requires under Art. 19 that [e]very 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. Land Bank, however,
did not even bother to inform Alfredo that it was no longer approving his
assumption of the Spouses Sys mortgage. Yet it acknowledged his interest in the
loan when the branch head of the bank wrote to tell him that his daughters loan had
not been paid.[22] Land Bank made Alfredo believe that with the payment of PhP
750,000, he would be able to assume the mortgage of the Spouses Sy. The act of
receiving payment without returning it when demanded is contrary to the adage of
giving someone what is due to him. The outcome of the application would have
been different had Land Bank first conducted the credit investigation before
accepting Alfredos payment. He would have been notified that his assumption of
mortgage had been disapproved; and he would not have taken the futile action of
paying PhP 750,000. The procedure Land Bank took in acting on Alfredos
application cannot be said to have been fair and proper.

As to the claim that the trial court erred in applying equity to Alfredos case, we
hold that Alfredo had no other remedy to recover from Land Bank and the lower
court properly exercised its equity jurisdiction in resolving the collection suit. As
we have held in one case:

Equity, as the complement of legal jurisdiction, seeks to reach and

complete justice where courts of law, through the inflexibility of their
rules and want of power to adapt their judgments to the special
circumstances of cases, are incompetent to do so. Equity regards the
spirit and not the letter, the intent and not the form, the substance rather
than the circumstance, as it is variously expressed by different courts.[23]

Another claim made by Land Bank is the presumption of regularity it enjoys

and that it was in good faith when it accepted Alfredos tender of PhP 750,000.

The defense of good faith fails to convince given Land Banks

actions. Alfredo was not treated as a mere prospective borrower. After he had paid
PhP 750,000, he was made to sign bank documents including a promissory note
and real estate mortgage. He was assured by Atty. Hingco that the titles to the
properties covered by the Spouses Sys real estate mortgage would be transferred in
his name, and upon payment of the PhP 750,000, the account would be considered
current and renewed in his name.[24]

Land Bank posits as a defense that it did not unduly enrich itself at Alfredos
expense during the foreclosure of the mortgaged properties, since it tendered its bid
by subtracting PhP 750,000 from the Spouses Sys outstanding loan obligation. It is
observed that this is the first time Land Bank is revealing this defense. However,
issues, arguments, theories, and causes not raised below may no longer be posed
on appeal.[25] Land Banks contention, thus, cannot be entertained at this point.
 Land Bank further questions the lower courts decision on the basis of the
inconsistencies made by Alfredo on the witness stand. It argues that Alfredo was
not a credible witness and his testimony failed to overcome the presumption of
regularity in the performance of regular duties on the part of Land Bank.

This claim, however, touches on factual findings by the trial court, and we defer to
these findings of the trial court as sustained by the appellate court. These are
generally binding on us. While there are exceptions to this rule, Land Bank has not
satisfactorily shown that any of them is applicable to this issue.[26] Hence, the rule
that the trial court is in a unique position to observe the demeanor of witnesses
should be applied and respected[27] in the instant case.

In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as
it had already foreclosed on the mortgaged lands.

Interest and attorneys fees

As to the applicable interest rate, we reiterate the guidelines found

in Eastern Shipping Lines, Inc. v. Court of Appeals:[28]

II. With regard particularly to an award of interest in the concept

of actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:

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.

No evidence was presented by Alfredo that he had sent a written demand to Land
Bank before he filed the collection suit. Only the verbal agreement between the
lawyers of the parties on the return of the payment was
mentioned.[29] Consequently, the obligation of Land Bank to return the payment
made by Alfredo upon the formers denial of the latters application for assumption
of mortgage must be reckoned from the date of judicial demand on December 12,
1997, as correctly determined by the trial court and affirmed by the appellate court.

The next question is the propriety of the imposition of interest and the proper
imposable rate of applicable interest. The RTC granted the rate of 12% per annum
which was affirmed by the CA.From the above-quoted guidelines, however, the
proper imposable interest rate is 6% per annum pursuant to Art. 2209 of the Civil
Code. Sunga-Chan v. Court of Appeals is illuminating in this regard:

In Reformina v. Tomol, Jr., the Court held that the legal interest at
12% per annum under Central Bank (CB) Circular No. 416 shall be
adjudged only in cases involving the loan or forbearance of money.
And for transactions involving payment of indemnities in the concept
of damages arising from default in the performance of obligations in
general and/or for money judgment not involving a loan or forbearance
of money, goods, or credit, the governing provision is Art. 2209 of the
 Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently
provides:

Art. 2209. If the obligation consists in the payment of a

sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.

The term forbearance, within the context of usury law, has been
described as a contractual obligation of a lender or creditor to refrain,
during a given period of time, from requiring the borrower or debtor to
repay the loan or debt then due and payable.

Eastern Shipping Lines, Inc. synthesized the rules on the

imposition of interest, if proper, and the applicable rate, as follows: The
12% per annum rate under CB Circular No. 416 shall apply only to loans
or forbearance of money, goods, or credits, as well as to judgments
involving such loan or forbearance of money, goods, or credit, while the 6%
per annum under Art. 2209 of the Civil Code applies when the
transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of
obligations in general, with the application of both rates reckoned from
the time the complaint was filed until the [adjudged] amount is fully paid.
In either instance, the reckoning period for the commencement of the
running of the legal interest shall be subject to the condition that the
courts are vested with discretion, depending on the equities of each case,
on the award of interest.[30] (Emphasis supplied.)

Based on our ruling above, forbearance of money refers to the contractual

obligation of the lender or creditor to desist for a fixed period from requiring the
borrower or debtor to repay the loan or debt then due and for which 12% per
annum is imposed as interest in the absence of a stipulated rate. In the instant case,
Alfredos conditional payment to Land Bank does not constitute forbearance of
money, since there was no agreement or obligation for Alfredo to pay Land Bank
the amount of PhP 750,000, and the obligation of Land Bank to return what
Alfredo has conditionally paid is still in dispute and has not yet been determined.
Thus, it cannot be said that Land Banks alleged obligation has become a
forbearance of money.
 On the award of attorneys fees, attorneys fees and expenses of litigation
were awarded because Alfredo was compelled to litigate due to the unjust refusal
of Land Bank to refund the amount he paid. There are instances when it is just and
equitable to award attorneys fees and expenses of litigation.[31] Art. 2208 of the
Civil Code pertinently states:

In the absence of stipulation, attorneys fees and expenses of

litigation, other than judicial costs, cannot be recovered, except:

xxxx

(2) When the defendants act or omission has compelled the

plaintiff to litigate with third persons or to incur expenses to protect his
interest.

Given that Alfredo was indeed compelled to litigate against Land Bank and
incur expenses to protect his interest, we find that the award falls under the
exception above and is, thus, proper given the circumstances.

On a final note. The instant case would not have been litigated had Land Bank
been more circumspect in dealing with Alfredo. The bank chose to accept payment
from Alfredo even before a credit investigation was underway, a procedure
worsened by the failure to even inform him of his credit standings impact on his
assumption of mortgage. It was, therefore, negligent to a certain degree in handling
the transaction with Alfredo. It should be remembered that the business of a bank
is affected with public interest and it should observe a higher standard of diligence
when dealing with the public.[32]

WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No.

84445 is AFFIRMED with MODIFICATION in that the amount of PhP 750,000
will earn interest at 6% per annum reckoned from December 12, 1997, and the
total aggregate monetary awards will in turn earn 12% per annum from the finality
of this Decision until fully paid.