EN BANC

[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.

Celso A. Fernandez for appellants.

Juan C. Jimenez for appellees.

SYLLABUS

1. NATURAL OBLIGATIONS; ELEMENT OF; VOLUNTARY FULFILLMENT; WHEN

RETENTION CAN BE ORDERED. — An element of natural obligation before it can be cognizable
by the court is voluntary fulfillment by the obligor. Retention can be ordered only after there has
been voluntary performance.
2. ID.; BONUS NOT DEMANDABLE AND ENFORCEABLE; EXCEPTION. — A bonus is not a
demandable and enforceable obligation, except 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 (NLU), 92 Phil., 381; 48 Off. Gaz. 5278.) Hence, the grant thereof does not generally
constitute a natural obligation on the part of the company.

DECISION

PARAS, C.J :p

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, issued the following order:
"Considering the motion to dismiss filed on 15 August, 1956, set for this morning;
considering that at the hearing thereof, only respondents appeared thru counsel and there
was no appearance for the plaintiffs although the court waited for sometime for them;
considering, however, that petitioners have submitted an opposition which the court will
consider together with the arguments presented by respondents and the Exhibits marked
and presented, namely, Exhibits 1 to 5, at the hearing of the motion to dismiss; considering
that the action in brief is one to compel respondents to declare a Christmas bonus for
petitioners workers in the National Development Company; considering that the Court does
not see how petitioners may have a cause of action to secure such bonus because:
1
 "(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).
"IN VIEW WHEREOF, dismissed. No pronouncement as to costs."
A motion for reconsideration of the afore-quoted order was denied. Hence this appeal.
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"
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.
At this point, we would like to reiterate what we said in the case of Philippine Education
Co. vs. CIR and the Union of Philippine Education Co., Employees (NUL) (92 Phil., 381; 48 Off.
Gaz., 5278) —
"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."
And while it is true that the subsequent case of H. E. Heacock vs. National Labor Union, et
al., 95 Phil., 553; 50 Off. Gaz., 4253, we stated that:.
"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."
still the facts in said Heacock case are not the same as in the instant one, and hence the ruling
applied in said case cannot be considered in the present action.
Premises considered, the order appealed from is hereby affirmed, without pronouncement
as to costs.
(Ansay v. Board of Directors of the National Development Co., G.R. No. L-13667, [April 29, 1960], 107
|||

PHIL 997-1000)

2
 FIRST DIVISION

[G.R. No. L-48889. May 11, 1988.]

DEVELOPMENT BANK OF THE PHILIPPINES (DBP), petitioner, vs. THE HONORABLE

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

SYLLABUS

1.CIVIL LAW; PRESCRIPTION OF ACTIONS; MAY BE EXPRESSLY RENOUNCED OR WAIVED; CASE

AT BAR. — The right to prescription may be waived or renounced. 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 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.
2.ID.; FAMILY RELATIONS; CONJUGAL PARTNERSHIP OF GAINS; HUSBAND AS ADMINISTRATOR
BINDS THE PARTNERSHIP FOR ALL DEBTS AND OBLIGATIONS CONTRACTED BY HIM. — 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. 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.

DECISION

GANCAYCO, J : p

The issue posed in this petition for review on certiorari is 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 Bank 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

3
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. The new promissory note reads as follows —
"I hereby promise to pay the amount covered by my promissory note on or before June 15,
1961. Upon my failure to do so, I hereby agree to the foreclosure of my mortgage. It is
understood that if I can secure a certificate of indebtedness from the government of my back
pay I will be allowed to pay the amount out of it."
Said spouses not having paid the obligation on the specified date, the DBP filed a complaint
dated September 11, 1970 in the City Court of Iloilo City against the spouses for the payment of
the loan. cdphil

After trial on the merits a decision was rendered by the inferior court on December 27, 1976, the
dispositive part of which reads as follows:
"WHEREFORE, premises considered, this Court renders judgment, ordering the defendants
Patricio Confesor and Jovita Villafuerte Confesor to pay the plaintiff Development Bank of
the Philippines, jointly and severally, (a) the sum of P5,760.96 plus additional daily interest of
P1.04 from September 17, 1970, the date Complaint was filed, until said amount is paid; (b)
the sum of P576.00 equivalent to ten (10%) of the total claim by way of attorney's fees and
incidental expenses plus interest at the legal rate as of September 17, 1970, until fully paid;
and (c) the costs of the suit."
Defendants-spouses appealed therefrom to the Court of First Instance of Iloilo wherein in due course
a decision was rendered on April 28, 1978 reversing the appealed decision and dismissing the
complaint and counter-claim with costs against the plaintiff.
A motion for reconsideration of said decision filed by plaintiff was denied in an order of August 10,
1978.
Hence this petition wherein petitioner alleges that the decision of respondent judge is contrary to law
and runs counter to decisions of this Court when respondent judge (a) refused to recognize the law
that the right to prescription may be renounced or waived; and (b) that in signing the second
promissory note respondent Patricio Confesor can bind the conjugal partnership; or otherwise said
respondent became liable in his personal capacity.
The petition is impressed with merit.
The right to prescription may be waived or renounced. Article 1112 of Civil Code provides: prLL

"Art. 1112.Persons with capacity to alienate property may renounce prescription already
obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the renunciation results from
acts which imply the abandonment of the right acquired."
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

4
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 promise; 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
acknowledgment 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
cannot thereby bind his wife, respondent Jovita Villafuerte, citing Article 166 of the New Civil
Code which provides:
"Art. 166.Unless the wife has been declared a non compos mentis or a spendthrift, or is under
civil interdiction or is confined in a leprosarium, the husband cannot alienate or encumber
any real property of the conjugal partnership without the wife's consent. If she refuses
unreasonably to give her consent, the court may compel her to grant the same."
We disagree. 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.
WHEREFORE, the decision subject of the petition is reversed and set aside and another decision is
hereby rendered reinstating the decision of the City Court of Iloilo City of December 27, 1976,
without pronouncement as to costs in this instance. This decision is immediately executory and no
motion for extension of time to file motion for reconsideration shall be granted.
SO ORDERED.
5
||| (Development Bank of the Philippines v. Adil, G.R. No. L-48889, [May 11, 1988], 244 PHIL 318-323)

6
Sagrada Orden de Predicadores del Santisimo Rosario de Filipinas v. National Coconut Corp., G.R. No. L-
3756, [June 30, 1952]

7
 THIRD DIVISION

[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.

DECISION

YNARES-SANTIAGO, J : p

This Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court assails the June
29, 2007 Decision 2 of the Court of Appeals in CA-G.R. CV No. 87050, nullifying and setting aside
the November 10, 2004 Decision 3 of the Regional Trial Court of Manila, Branch 2, in Civil Case No.
98-89483 and dismissing the complaint filed by petitioner; as well as its August 23, 2007
Resolution 4 denying the Motion for Reconsideration. 5 cAEaSC

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. Petitioner was rushed to FEU-Dr. Nicanor Reyes
Medical Foundation (FEU-NRMF) due to the wound he sustained. 6 Meanwhile, 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 respondents 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
Complaint 7 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), Galaxy's President, 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 AECacS

On November 10, 2004, the trial court rendered a decision in favor of petitioner, the
dispositive portion of which reads:
WHEREFORE, from the foregoing, judgment is hereby rendered ordering:
1. 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;

8
 2. 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;
3. And the 4th party complaint is dismissed for lack of cause of action. No
pronouncement as to costs. cSEAHa

SO ORDERED. 9
Respondents appealed to the Court of Appeals which rendered the assailed Decision, the
decretal portion of which provides, viz:
WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10,
2004 is hereby REVERSED and SET ASIDE. The complaint filed by Joseph Saludaga against
appellant Far Eastern University and its President in Civil Case No. 98-89483 is DISMISSED.
SO ORDERED. 10
Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition
based on the following grounds: DaTICc

THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW

AND JURISPRUDENCE IN RULING THAT:
5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;
5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY
RESULTING FROM A GUNSHOT WOUND SUFFERED BY THE PETITIONER FROM THE
HANDS OF NO LESS THAN THEIR OWN SECURITY GUARD IN VIOLATION OF THEIR
BUILT-IN CONTRACTUAL OBLIGATION TO PETITIONER, BEING THEIR LAW STUDENT
AT THAT TIME, TO PROVIDE HIM WITH A SAFE AND SECURE EDUCATIONAL
ENVIRONMENT;
5.3. SECURITY GUARD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE
WAS WALKING ON HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT
THEIR EMPLOYEE BY VIRTUE OF THE CONTRACT FOR SECURITY SERVICES BETWEEN
GALAXY AND FEU NOTWITHSTANDING THE FACT THAT PETITIONER, NOT BEING A
PARTY TO IT, IS NOT BOUND BY THE SAME UNDER THE PRINCIPLE OF RELATIVITY OF
CONTRACTS; and CTaSEI

5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE

AGENCY WHICH WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF
RESPONDENT FEU. 11
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. This abject
indifference on the part of the defendants continued even after plaintiff was discharged
from the hospital when not even a word of consolation was heard from them. Plaintiff
waited for more than one (1) year for the defendants to perform their moral obligation but
the wait was fruitless. This indifference and total lack of concern of defendants served to
exacerbate plaintiff's miserable condition.
SaCIDT

9
 xxx xxx xxx
11.0. Defendants are responsible for ensuring the safety of its students while the
latter are within the University premises. And that should anything untoward happens to
any of its students while they are within the University's premises shall be the responsibility
of the defendants. In this case, defendants, despite being legally and morally bound,
miserably failed to protect plaintiff from injury and thereafter, to mitigate and compensate
plaintiff for said injury;
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 the instant case, the latter breached this
contract when defendant allowed harm to befall upon the plaintiff when he was shot at by,
of all people, their security guard who was tasked to maintain peace inside the campus. 12
In Philippine School of Business Administration v. Court of Appeals, 13 we held that: cCTAIE

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 ICASEH

It is undisputed that petitioner was enrolled as a sophomore law student in respondent

FEU. As such, there was created a contractual obligation between the two parties. On petitioner's
part, he was obliged to comply with the rules and regulations of the school. On the other hand,
respondent FEU, as a learning institution is mandated to impart knowledge and equip its students
with the necessary skills to pursue higher education or a profession. At the same time, it is obliged
to ensure and take adequate steps to maintain peace and order within the campus.
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; 16 and that they complied with their obligation to
10
ensure a safe learning environment for their students by having exercised due diligence in
selecting the security services of Galaxy.EDCcaS

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. Total reliance on the
security agency about these matters or failure to check the papers stating the qualifications of the
guards is negligence on the part of respondents. A learning institution should not be allowed to
completely relinquish or abdicate security matters in its premises to the security agency it hired.
To do so would result to contracting away its inherent obligation to ensure a safe learning
environment for its students. aCATSI

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
SECATH

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,
11
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. HAICTD

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 incident 23 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. The award is not meant to enrich the complainant at the expense of the defendant,
but to enable the injured party to obtain means, diversion, or amusements that will serve to
obviate the moral suffering he has undergone. It is aimed at the restoration, within the limits of
the possible, of the spiritual status quo ante, and should be proportionate to the suffering
inflicted. Trial courts must then guard against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity to avoid suspicion that it was due to
passion, prejudice, or corruption on the part of the trial court. 24 We deem it just and reasonable
under the circumstances to award petitioner moral damages in the amount of P100,000.00. HcISTE

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. 25However, 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.
InPowton 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 aDcEIH

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.

12
 xxx xxx xxx
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.
xxx xxx xxx
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. CADSHI

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. aETAHD

xxx xxx xxx

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
We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and
Rubber Company of the Philippines v. Tempengko, 32 we held that: HTScEI

The third-party complaint is, therefore, a procedural device whereby a 'third party'
who is neither a party nor privy to the act or deed complained of by the plaintiff, may be
brought into the case with leave of court, by the defendant, who acts as third-party plaintiff
to enforce against such third-party defendant a right for contribution, indemnity,
subrogation or any other relief, in respect of the plaintiff's claim. The third-party complaint
13
 is actually independent of and separate and distinct from the plaintiff's complaint. Were it
not for this provision of the Rules of Court, it would have to be filed independently and
separately from the original complaint by the defendant against the third-party. But the
Rules permit defendant to bring in a third-party defendant or so to speak, to litigate his
separate cause of action in respect of plaintiff's claim against a third-party in the original
and principal case with the object of avoiding circuitry of action and unnecessary
proliferation of law suits and of disposing expeditiously in one litigation the entire subject
matter arising from one particular set of facts. 33
Respondents and Galaxy were able to litigate their respective claims and defenses in the
course of the trial of petitioner's complaint. Evidence duly supports the findings of the trial court
that Galaxy is negligent not only in the selection of its employees but also in their supervision.
Indeed, no administrative sanction was imposed against Rosete despite the shooting incident;
moreover, he was even allowed to go on leave of absence which led eventually to his
disappearance. 34 Galaxy also failed to monitor petitioner's condition or extend the necessary
assistance, other than the P5,000.00 initially given to petitioner. Galaxy and Imperial failed to
make good their pledge to reimburse petitioner's medical expenses. aIcDCT

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
WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of
Appeals in CA-G.R. CV No. 87050 nullifying the Decision of the trial court and dismissing the
complaint as well as the August 23, 2007 Resolution denying the Motion for Reconsideration are
REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch 2, in Civil
Case No. 98-89483 finding respondent FEU liable for damages for breach of its obligation to
provide students with a safe and secure learning atmosphere, is AFFIRMED with the following
MODIFICATIONS: cSTDIC

a. respondent Far Eastern University (FEU) is ORDERED to pay petitioner actual damages in
the amount of P35,298.25, plus 6% interest per annum from the filing of the
complaint until the finality of this Decision. After this decision becomes final and
executory, the applicable rate shall be twelve percent (12%) per annum until its
satisfaction;
b. respondent FEU is also ORDERED to pay petitioner temperate damages in the amount of
P20,000.00; moral damages in the amount of P100,000.00; and attorney's fees and
litigation expenses in the amount of P50,000.00;
c. the award of exemplary damages is DELETED.

14
 The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims
of respondents are likewise DISMISSED.
Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D.
Imperial are ORDERED to jointly and severally pay respondent FEU damages equivalent to the
above-mentioned amounts awarded to petitioner. ScAIaT

SO ORDERED.
||| (Saludaga v. Far Eastern University, G.R. No. 179337, [April 30, 2008], 576 PHIL 680-696)

15
 ECOND DIVISION

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

PEOPLE'S CAR, INC., plaintiff-appellant, vs. COMMANDO SECURITY SERVICE

AGENCY, defendant-appellee.

DECISION

TEEHANKEE, J : p

In this appeal from the adverse judgment of the Davao court of first instance limiting plaintiff-
appellant's recovery under its complaint to the sum of P1,000.00 instead of the actual damages of
P8,489.10 claimed and suffered by it as a direct result of the wrongful acts of defendant security
agency's guard assigned at plaintiff's premises in pursuance of their "Guard Service Contract", the
Court finds merit in the appeal and accordingly reverses the trial court's judgment.
The appeal was certified to this Court by a special division of the Court of Appeals on a four-to-one
vote as per its resolution of April 14, 1973 that "since the case was submitted to the court a quo for
decision on the strength of the stipulation of facts, only questions of law can he involved in the
present appeal."
The Court has accepted such certification and docketed this appeal on the strength of its own finding
from the records that plaintiff's notice of appeal was expressly to this Court (not to the appellate
court) "on pure questions of law" 1 and its record on appeal accordingly prayed that "the
corresponding records be certified and forwarded to the Honorable Supreme Court." 2 The trial court
so approved the same 3 on July 3, 1971 instead of having required the filing of a petition for review of
the judgment sought to be appealed from directly with this Court, in accordance with the provisions
of Republic Act 5440. By some unexplained and hitherto undiscovered error of the clerk of court,
furthermore, the record on appeal was erroneously forwarded to the appellate court rather than to
this Court.
The parties submitted the case for judgment on a stipulation of facts. There is thus no dispute as to
the factual bases of plaintiff's complaint for recovery of actual damages against defendant, to wit,
that under the subsisting "Guard Service Contract" between the parties, defendant-appellee as a duly
licensed security service agency undertook in consideration of the payments made by plaintiff "to
safeguard and protect the business premises of (plaintiff) from theft, pilferage, robbery, vandalism
and all other unlawful acts of any person or persons prejudicial to the interest of (plaintiff)." 4
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,
16
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
As a result of these wrongful acts of defendant's security guard, the car of plaintiff's customer,
Joseph Luy, which had been left with plaintiff for servicing and maintenance, "suffered extensive
damage in the total amount of P7,07910" 6 besides the car rental value "chargeable to defendant" in
the sum of P1,410.00 for a car that plaintiff had to rent and make available to its said customer to
enable him to pursue his business and occupation for the period of forty-seven (47) days (from April
25 to June 10, 1970) that it took plaintiff to repair the damaged car, 7 or total actual damages incurred
by plaintiff in the sum of P8,489.10.
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.
The parties thus likewise stipulated on this sole issue submitted by them for adjudication, as follows:
"Interpretation of the contract, as to the extent of the liability of the defendant to the
plaintiff by reason of the acts of the employees of the defendant is the only issue to be
resolved.
"The defendant relies on Par. 4 of the contract to support its contention while the plaintiff
relies on Par. 5 of the same contract in support of its claims against the defendant. For ready
reference they are quoted hereunder:
'Par. 4. — Party of the Second Part (defendant) through the negligence of its guards,
after an investigation has been conducted by the Party of the First Part (plaintiff)
wherein the Party of the Second Part has been duly represented, shall assume full
responsibilities for any loss or damages that may occur to any property of the Party of
the First Part for which it is accountable, during the watch hours of the Party of the
Second Part, provided the same is reported to the Party of the Second Part within
twenty-four (24) hours of the occurrence, except where such loss or damage is due to
force majeure, provided however that after the proper investigation to be made
thereof that the guard on post is found negligent and that the amount of the loss shall
not exceed ONE THOUSAND (P1,000.00) PESOS per guard post.'
'Par. 5— The party of the Second Part assumes the responsibility for the proper
performance by the guards employed, of their duties and (shall) be solely responsible
for the acts done during their watch hours, the Party of the First Part being
specifically released from any and all liabilities to the former's employee or to the
third parties arising from the acts or omissions done by the guards during their tour of
duty.'" 8
The trial court, misreading the above-quoted contractual provisions, held that "the liability of the
defendant in favor of the plaintiff falls under paragraph 4 of the Guard Service Contract" and
rendered judgment "funding the defendant liable to the plaintiff in the amount of P1,000.00 with
costs."
17
Hence, this appeal, which, as already indicated, is 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 negligence of 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 plaintiff's 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."
As plaintiff had duly discharged its liability to the third party, its customer, Joseph Luy, for the
undisputed damages of P8,489.10 caused said customer, due to the wanton and unlawful act of
defendant's guard, defendant in turn was clearly liable under the terms of paragraph 5 of their
contract to indemnify plaintiff in the same amount.
The trial court's approach that "had plaintiff understood the liability of the defendant to fall under
paragraph 5, it should have told Joseph Luy, owner of the car, that under the Guard Service Contract,
it was not liable for the damage but the defendant and had Luy insisted on the liability of the
plaintiff, the latter should have challenged him to bring the matter to court. If Luy accepted the
challenge and instituted an action against the plaintiff, it should have filed a third-party complaint
against the Commando Security Service Agency. But if Luy instituted the action against the plaintiff
and the defendant, the plaintiff should have filed a crossclaim against the latter," 9 was unduly
technical and unrealistic and untenable.
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
18
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.
(People's Car, Inc. v. Commando Security Service Agency, G.R. No. L-36840, [May 22, 1973], 151-A
|||

PHIL 527-533)

19
 SECOND DIVISION

[G.R. No. L-23749. April 29, 1977.]

FAUSTINO CRUZ, plaintiff-appellant, vs. J. M. TUASON & COMPANY, INC., and

GREGORIO ARANETA, INC., defendants-appellees.

DECISION

BARREDO, J : p

Appeal from the order dated August 13, 1964 of the Court of First Instance of Quezon City in Civil
Case No. Q-7751, Faustino Cruz vs. J.M. Tuason & Co., Inc., and Gregorio Araneta, Inc., dismissing the
complaint of appellant Cruz for the recovery of improvements he has made on appellees' land and to
compel appellees to convey to him 3,000 square meters of land on three grounds: (1) failure of the
complaint to state a cause of action; (2) the cause of action of plaintiff is unenforceable under the
Statute of Frauds; and (3) the action of the plaintiff has already prescribed.
Actually, a perusal of plaintiff-appellant's complaint below shows that he alleged two separate
causes of action, namely: (1) 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 20
quiñones and for which he also incurred expenses in the amount of P7,781.74, and since defendants-
appellees are being benefited by said improvements, he is entitled to reimbursement from them of
said amounts; and (2) that in 1952, defendants availed of plaintiff's services as an intermediary with
the Deudors to work for the amicable settlement of Civil Case No. Q-135, then pending also in the
Court of First Instance of Quezon City, and involving 50 quinones of land, of which the 20 quinones
aforementioned form part, and notwithstanding his having performed his services, as in fact, a
compromise agreement entered into on March 16, 1963 between the Deudors and the defendants
was approved by the court, the latter have refused to convey to him the 3,000 square meters of land
occupied by him, (a part of the 20 quinones above) which said defendants had promised to do "within
ten years from and after date of signing of the compromise agreement", as consideration for his
services.
Within the period allowed by the rules, the defendants filed separate motions to dismiss alleging
three identical grounds: (1) As regards the improvements made by plaintiff, that the complaint states
no cause of action, the agreement regarding the same having been made by plaintiff with the
Deudors and not with the defendants, hence the theory of plaintiff based on Article 2142 of the Civil
Code on unjust enrichment is untenable; and (2) anent the alleged agreement about plaintiff's
services as intermediary in consideration of which, defendants promised to convey to him 3,000
square meters of land, that the same is unenforceable under the Statute of Frauds, there being
nothing in writing about it, and, in any event, (3) that the action of plaintiff to compel such
conveyance has already prescribed. Cdpr

20
Plaintiff opposed the motion, insisting that Article 2142 of the Civil Code is 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.
Ruling on the motion to dismiss, the trial court issued the herein impugned order of August 13, 1964:
"In the motion, dated January 31, 1964, defendant Gregorio Araneta, Inc. prayed that the
complaint against it be dismissed on the ground that (1) the claim on which the action is
founded is unenforceable under the provision of the Statute of Frauds; and (2) the plaintiff's
action, if any has already prescribed. In the other motion of February 11, 1964, defendant J.
M. Tuason & Co., Inc. sought the dismissal of the plaintiff's complaint on the ground that it
states no cause of action and on the identical grounds stated in the motion to dismiss of
defendant Gregorio Araneta, Inc. The said motions are duly opposed by the plaintiff.
"From the allegations of the complaint, it appears that, by virtue of an agreement arrived at
in 1948 by the plaintiff and the Deudors, the former assisted the latter in clearing, improving,
subdividing and selling the large tract of land consisting of 50 quinones covered by
the informacion posesoria in the name of the late Telesforo Deudor and incurred expenses,
which are valued approximately at P38,400.00 and P7,781.74, respectively; and, for the
reasons that said improvements are being used and enjoyed by the defendants, the plaintiff
is seeking the reimbursement for the services and expenses stated above from the
defendants.
"Defendant J. M. Tuason & Co., Inc. claimed that, insofar as the plaintiff's 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 in 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 on the property itself.
"On the issue that the complaint insofar as it claims the reimbursement for the services
rendered and expenses incurred by the plaintiff, states no cause of action, the Court is of the
opinion that the same is well-founded. 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 be considered a lien or charge on the property, the same should have
been made in good faith and under the mistake as to the 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. This fact is confirmed in the decision rendered by the Supreme Court on
July 31, 1956 in Case G. R. No. L-5079 entitled 'J. M. Tuason & Co. Inc. vs. Geronimo Santiago,
et al'. Such being the case, the plaintiff cannot claim good faith and mistake as to the title of
the land.

21
 "On the issue of statute of fraud, the Court believes that game 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 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.
"On the issue of statute of limitations, the Court holds that the plaintiff a action has
prescribed. It is alleged in par. 11 of the complaint that, sometime in 1952, the defendants
approached the plaintiff to prevail upon the Deudors to enter into a compromise agreement
in Civil Case No. Q-135 and allied cases. Furthermore, par. 13 and 14 of the complaint alleged
that the plaintiff acted as emissary of both parties in conveying their respective proposals
and counter-proposals until the final settlement was effected on March 16, 1953 and
approved by the Court on April 11, 1953. In the present action, which was instituted on
January 24, 1964, the plaintiff is seeking to enforce the supposed agreement entered into
between him and the defendants in 1952, which has already prescribed.
"WHEREFORE, the plaintiff's complaint is hereby ordered DISMISSED without
pronouncement as to costs.
"SO ORDERED." (Pp. 65-69, Rec. on Appeal.).
On August 22, 1964, plaintiff's counsel filed a motion for reconsideration dated August 20, 1964 as
follows:
"Plaintiff through undersigned counsel and to this Honorable Court, respectfully moves to
reconsider its Order hearing date of 13 August 1964, on the following grounds:
"I. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION
AGAINST DEFENDANTS IN SO FAR AS PLAINTIFF'S CLAIM PAYMENT OF SERVICES
AND REIMBURSEMENT OF HIS EXPENSES, IS CONCERNED;
"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;
"ARGUMENT
"Plaintiff's complaint contains two (2) causes of action — the first being an action for sum of
money in the amount of P7,781.74 representing actual expenses and P38,400.00 as
reasonable compensation for services in improving the 50 quinones now in the possession of
defendants. The second cause of action deals with the 3,000 sq. ms. which defendants have
agreed to transfer into plaintiff for services rendered in effecting the compromise between
the Deudors and defendants;
"Under its order of August 3, 1964, this Honorable Court dismissed the claim for sum of
money on the ground that the complaint does not state a cause of action against defendants.
We respectfully submit:
"1. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION
AGAINST DEFENDANTS IN SO FAR AS PLAINTIFF'S CLAIM FOR PAYMENT OF
SERVICES AND REIMBURSEMENT OF HIS EXPENSES, IS CONCERNED.
22
"Said this Honorable Court (at p. 2, Order):
"ORDER
xxx xxx xxx
"On the issue that the complaint, in so far as it claims the reimbursement for the services
rendered and expenses incurred by the plaintiff, states no cause of action, the Court is of the
opinion that the same is well-founded. 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 be 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. This fact is confirmed in the decision rendered by the Supreme Court on July 31,
1956 in case G. R. No. L-5079 entitled 'J. M. Tuason & Co., Inc. vs. Geronimo Santiago, et al.'
Such being the case, the plaintiff cannot claim good faith and mistake as to the title of the
land.'

"The position of this Honorable Court (supra) is that the complaint does not state a cause of
action in so far as the claim for services and expenses is concerned because the contract for
the improvement of the properties was solely between the Deudors and plaintiff, and
defendants are not privies to it. Now, plaintiff's theory is that defendants are nonetheless
liable since they are utilizing and enjoying the benefits of said improvements. Thus, under
paragraph 16 of the complaint, it is alleged:.
'(16) That the services and personal expenses of plaintiff mentioned in
paragraph 7 hereof were rendered and in fact paid by him to improve, as they in fact
resulted in considerable improvement of the 50 quinones, and defendants being now
in possession of and utilizing said improvements should reimburse and pay plaintiff
for such services and expenses.
"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 shall 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 everyone 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

23
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:
"ORDER
xxx xxx xxx
'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, we shall reproduce not only paragraph 12 of the
complaint but also the other pertinent paragraphs therein contained. Paragraph 12 states
thus:
"COMPLAINT
xxx xxx xxx
'12). That plaintiff conferred with the aforesaid representatives of defendants
several times and on these occasions, the latter promised and agreed to cede,
transfer and convey unto plaintiff the 3,000 sq. ms. (now known as Lots 16-B, 17 and
18) which plaintiff was then occupying and continues to occupy as of this writing, for
and in consideration of the following conditions:
(a) That plaintiff succeed in convincing the DEUDORS to enter
into a compromise agreement and that such agreement be actually
entered into by and between the DEUDORS and defendant companies;
(b) That as of date of signing the compromise agreement,
plaintiff shall be the owner of the 3,000 sq. ms. but the documents
evidencing his title over this property shall be executed and delivered by
defendants to plaintiff within ten (10) years from and after date of
signing of the compromise agreement;
(c) That plaintiff shall, without any monetary expense of his part,
assist in clearing the 20 quinones of its occupants;

24
 '13). That in order to effect a compromise between the parties, plaintiff not
only as well acted as emissary of both parties in conveying their respective proposals
and counter-proposals until plaintiff finally succeeded in convincing the DEUDORS to
settle with defendants amicably. Thus, on March 16, 1953, a Compromise Agreement
was entered into by and between the DEUDORS and the defendant companies; and on
April 11, 1953, this agreement was approved by this Honorable Court;
'14). That in order to comply with his other obligations under his agreement with
defendant companies, plaintiff had to confer with the occupants of the property,
exposing himself to physical harm, convincing said occupants to leave the premises
and to refrain from resorting to physical violence in resisting defendants' demands to
vacate;'
That plaintiff further assisted defendants' employees in the actual demolition
and transfer of all the houses within the perimeter of the 20 quinones until the end of
1955, when said area was totally cleared and the houses transferred to another area
designated by the defendants as 'Capt. Cruz Block' in Masambong, Quezon City.'
(Pars. 12, 13 and 14, Complaint; Emphasis Ours).
"From the foregoing, it is clear then that 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 executed contracts.
Performance of the contract takes it out of the operation of the statute. . .
The statute of 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 fact which is reduced to a minimum in executed contracts because the
intention of the parties becomes apparent by their execution and execution, in most
cases, concludes the right of 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 Ours).
"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 STATUTE. 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 a
minimum in executed contracts because (1) the intention of the parties is made

25
 apparent by the execution and (2) execution concludes, in most cases, the rights of
the parties.' (Emphasis Ours).
"Under paragraphs 13 and 14 of the complaint (supra) one can readily see that the plaintiff
has fulfilled ALL his obligations under the agreement between him and 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
Ours).
"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 plaintiffs part, the same takes this case out of the
context of said statute.
Plaintiff's Cause of
Action has NOT Prescribed:
"With all due respect to this Honorable Court, we also submit that the Court committed error
in holding that this action has prescribed:
"ORDER
xxx xxx xxx
'On the issue of the statute of limitations, the Court holds that the plaintiff's
action has prescribed. It is alleged in par. II of the complaint that, sometime in 1952,
the defendants approached the plaintiff to prevail upon the Deudors to enter into a
compromise agreement in Civil Case No. Q-135 and allied cases. Furthermore, pars.
13 and 14 of the complaint alleged that plaintiff acted as emissary of both parties in
conveying their respective proposals and counter-proposals until the final settlement
was effected on March 16, 1953 and approved by the Court on April 11, 1953. In the
present action, which was instituted on January 24, 1964, the plaintiff is seeking to
enforce the supposed agreement entered into between him and the defendants in
1952, which has already prescribed.' (at p. 3, Order).

"The present action has not prescribed, especially when we consider carefully the terms of
the agreement between plaintiff and the defendants. First, we must draw the attention of
this Honorable Court to the fact that this is an action to compel defendants to execute a
Deed of Conveyance over the 3,000 sq. ms. subject of their agreement. In paragraph 12 of
the complaint, the terms and conditions of the contract between the parties are spelled out.
Paragraph 12 (b) of the complaint states:
'(b) That as of date of signing the compromise agreement, plaintiff shall be the
owner of the 3,000 sq. ms. but the documents evidencing his title over this property

26
 shall be executed and delivered by defendants to plaintiff within ten (10) years from
and after date of signing of the compromise agreement.' (Emphasis Ours).
"The compromise agreement between defendants and the Deudors which was concluded
through the efforts of plaintiff, was signed on 16 March 1953. Therefore, the defendants had
ten (10) years from said date within which to execute the deed of conveyance in favor of
plaintiff over the 3,000 sq. ms. As long as the 10 years period has not expired, plaintiff had no
right to compel defendants to execute the document and the latter were under no obligation to
do so. Now, this 10-year period elapsed on March 16, 1963. THEN and ONLY THEN does
plaintiff's cause of action against defendants accrue. Therefore, the period of prescription began
to run against plaintiff only on March 17, 1963. Thus, under paragraph 15 of the complaint
(supra) plaintiff made demands upon defendants for the execution of the deed 'in or about
the middle of 1963.'
"Since the contract now sought to be enforced was not reduced to writing, plaintiff's cause of
action expires on March 16, 1969 or six years from March 16, 1963 WHEN THE CAUSE OF
ACTION ACCRUED (Art. 1145, Civil Code).
"In this posture, we again respectfully submit that this Honorable Court erred in holding that
plaintiff's action has prescribed.
"PRAYER
"WHEREFORE, it is respectfully prayed that this Honorable Court reconsider Its Order dated
August 13, 1964; and issue another order denying the motions to dismiss of defendants G.
Araneta, Inc. and J. M. Tuason Co. Inc. for lack of merit." (Pp. 70-85, Record on Appeal.).
Defendants filed an opposition on the main ground that "the arguments adduced by the plaintiff are
merely reiterations of his arguments contained in his Rejoinder to Reply and Opposition, which have
not only been refuted in herein defendant's Motion to Dismiss and Reply but already passed upon by
this Honorable Court."
On September 7, 1964, the trial court denied the motion for reconsiderations thus:
"After considering the plaintiff's Motion for Reconsideration of August 20, 1964 and it
appearing that the grounds relied upon in said motion are mere repetition of those already
resolved and discussed by this Court in the order of August 13, 1964, the instant motion is
hereby denied and the findings and conclusions arrived at by the Court in its order of August
13, 1964 are hereby reiterated and affirmed.
"SO ORDERED." (Page 90, Rec. on Appeal.).
Under date of September 24, 1964, plaintiff filed his record on appeal.
In his brief, appellant poses and discusses the following assignments of error:
"I. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND
THAT APPELLANT'S CLAIM OVER THE 3,000 SQ. MS. IS ALLEGEDLY UNENFORCEABLE
UNDER THE STATUTE OF FRAUDS;
"II. THAT THE COURT A QUO FURTHER COMMITTED ERROR IN DISMISSING
APPELLANT'S COMPLAINT ON THE GROUND THAT HIS CLAIM OVER THE 3,000 SQ. MS.
IS ALLEGEDLY BARRED BY THE STATUTE OF LIMITATIONS; and

27
 "III. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT FOR FAILURE TO
STATE A CAUSE OF ACTION IN SO FAR AS APPELLANT'S CLAIM FOR REIMBURSEMENT
OF EXPENSES AND FOR SERVICES RENDERED IN THE IMPROVEMENT OF THE FIFTY (50)
QUINONES, IS CONCERNED.
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.
Moreover, appellant's complaint clearly alleges that he has already fulfilled his part of the bargains to
induce the Deudors to amicably settle their differences with defendants as, in fact, on March 16,
28
1963, through his efforts, a compromise agreement between these parties was approved by the
court. In other words, the agreement in question has already been partially consummated, and is no
longer merely executory. And it is likewise a fundamental principle governing the application of the
Statute that the contract in dispute should be purely executory on the part of both parties thereto.
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."
We repeated this observation in J. M. Tuason & Co., Inc. vs. Teodosio Macalindong, 6 SCRA 938.
Thus, viewed from what would he the ultimate conclusion of appellant's case, We entertain grave
doubts as to whether or not he can successfully maintain his alleged cause of action against
defendants, considering that the compromise agreement that he invokes did not actually
materialize and defendants have not benefited therefrom, not to mention the undisputed fact
that, as pointed out by appellees, appellant's other attempt to secure the same 3,000 square
meters via the judicial enforcement of the compromise agreement in which they were supposed
to be reserved for him has already been repudiated by the courts. (pp. 5-7. Brief of Appellee
Gregorio Araneta, Inc.).
As regards appellant's third assignment of error, We hold that the allegations in his complaint do not
sufficiently constitute a cause of action against defendants-appellees. Appellant's 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."
From the very language of this provision, it is obvious that a presumed quasi-contract cannot emerge
as against one party when the subject matter 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 2142 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.) In the case at bar, since appellant has a clearer and more direct recourse against
the Deudors with whom he had entered into an agreement regarding the improvements and
29
expenditures made by him on the land of appellees. it cannot be said, in the sense contemplated in
Article 2142, that appellees have been enriched at the expense of appellant.

In the ultimate, therefore, Our holding above that appellant's first two assignments of error are well
taken cannot save the day for him. Aside from his having no cause of action against appellees, there
is one plain error of omission We have found in the order of the trial court which is as good a ground
as any other for Us to terminate this case favorably to appellees. In said order which We have quoted
in full earlier in this opinion, the trial court ruled that "the grounds relied upon in said motion are
mere repetitions of those already resolved and discussed by this Court in the order of August 13,
1964", an observation which We fully share. Virtually, therefore. appellants' motion for
reconsideration was ruled to be pro-forma. Indeed, a cursory reading of the record on appeal reveals
that appellant's motion for reconsideration above-quoted contained exactly the same arguments
and manner of discussion as his February 6, 1964 "Opposition to Motion to Dismiss" of defendant
Gregorio Araneta, Inc. ((pp. 17-25, Rec. on Appeal) as well as his February 17, 1964 "Opposition to
Motion to Dismiss of Defendant J. M. Tuason & Co." (pp. 33-45, Rec. on Appeal) and his February 29,
1964 "Rejoinder to Reply of Defendant J. M. Tuason & Co.", (pp. 52-64, Rec. on Appeal) We cannot
see anything in said motion for reconsideration that is substantially different from the above
oppositions and rejoinder he had previously submitted and which the trial court had already
considered when it rendered its main order of dismissal. Consequently, appellant's motion for
reconsideration did not suspend his period for appeal. (Estrada vs. Sto. Domingo, 28 SCRA 890, 905-
6.) And as this point was covered by appellees' "Opposition to Motion for Reconsideration" (pp. 86-
89), hence, within the frame of the issues below, it is within the ambit of Our authority as the
Supreme Court to consider the same here even if it is not discussed in the briefs of the parties.
(Insular Life Assurance Co., Ltd. Employees Association-NATU vs. Insular Life Assurance co., Ltd.
[Resolution en banc of March 10, 1977 in G. R. No. L-25291).
Now, the impugned main order was issued on August 13, 1964, while the appeal was made on
September 24, 1964 or 42 days later. Clearly, this is beyond the 30-day reglementary period for
appeal. Hence, the subject order of dismissal was already final and executory when appellant filed his
appeal.
WHEREFORE, the appeal of Faustino Cruz in this case is dismissed. No costs.
||| (Cruz v. J. M. Tuason & Co., Inc., G.R. No. L-23749, [April 29, 1977], 167 PHIL 261-278)

30
 EN BANC

[G.R. No. 9188. December 4, 1914.]

GUTIERREZ HERMANOS, plaintiff-appellee, vs. ENGRACIO ORENSE, defendant-

appellant.

William A. Kincaid, Thos. L. Harligan, and Ceferino M Villareal, for appellant.

Rafael de la Sierra, for appellee.

SYLLABUS

1. PRINCIPAL AND AGENT; RATIFICATION OF AGENT'S ACTS; RETRACTION. — When a

person who sold a parcel of real estate for P1,500 appears later not to be its owner and when the
real owner thereof, upon being questioned in a criminal case instituted against the vendor, states
that he consented to such sale, so that the vendor was acquitted of the charge against him, it is
neither lawful nor permissible for said owner later to retract and deny his former sworn statement
that he had consented to said sale by a third person who was a relative of his (Civil Code, arts.
1709, 1710, 1727.)
2. ID.; ID.; EFFECT IN ACTION FOR ESTAFA. — The sworn statement of the owner of the
real estate in the action for estafa secured the acquittal of the accused by destroying the fraud
which at first appeared to have been perpetrated to the owner's prejudice and became a
confirmation and ratification of the sale; therefore, the owner must fulfill the obligations
contracted by his agent, who made the sale as though he had had prior authorization and express
instructions in writing. (Conlu vs. Araneta and Guanko, 15 Phil. Rep., 387.)
3. ID; ID.; RATIFICATION AS EXPRESS AGENCY. — Even though the owner of the real
estate had not previously authorized the sale and his consent was given subsequent to the act,
yet when the fact is established that he approved the action of his relative in selling it as his agent,
this subsequent ratification by the owner in giving his approval and consent to the sale produced
the effect of an express agency and so purified the contract of the flaws it contained at the time it
was executed. (Civil Code, arts. 1259, 1313.)
4. ID.; ID.; ACTION FOR NULLITY. — The action for nullity that could have at first been
instituted was legally extinguished at the moment when said contract of sale was validly ratified
and confirmed. (Civil Code, art. 1309.)

DECISION

TORRES, J : p

31
 Appeal through bill of exceptions filed by counsel for the appellant from the judgment
rendered on April 14, 1913 by the Honorable P. M. Moir, judge, wherein he sentenced the
defendant to make immediate delivery of the property in question, through a public instrument,
by transferring and conveying to the plaintiff all his rights in the property described in the
complaint and to pay it the sum of P780, as damages, and the costs of the suit.
On March 5, 1913, counsel for Gutierrez Hermanos filed a complaint, afterwards amended,
in the Court of First Instance of Albay against Engracio Orense, in which he set forth that on and
before February 14, 1907, the defendant Orense had been the owner of a parcel of land, with the
buildings and improvements thereon, situated in the pueblo of Guinobatan, Albay, the location,
area and boundaries of which were specified in the complaint; that the said property has up to
date been recorded in the new property registry in the name of the said Orense, according to
certificate No. 5, with the boundaries therein given; that, on February 14. 1907, 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, for P1,500, the
aforementioned property, the vendor 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; that the said
instrument of sale of the property, executed by Jose Duran, was publicly and freely confirmed and
ratified by the defendant Orense in a verbal declaration made by him on March 14, 1912, in the
Court of First Instance of Albay, to the effect that the said instrument of sale was executed by
Duran with the knowledge and consent of the defendant, Orense; that, in order to perfect the
title to the said property, the plaintiff had to demand of the defendant that he execute in legal
form a deed of conveyance of the property, but that the defendant Orense refused to do so,
without any justifiable cause or reason, wherefore he should be compelled to execute the said
deed by an express order of the court, for 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; that, unless such deed of final conveyance were executed in behalf of the plaintiff
company, it would be injured by the fraud perpetrated by the vendor, Duran, in connivance with
the defendant; that the latter had been occupying the said property since February 14, 1911, and
refused to pay the rental thereof, notwithstanding the demand made upon him for its payment at
the rate of P30 per month, the just and reasonable value for the occupancy of the said property,
the possession of which the defendant likewise refused to deliver to the plaintiff company, in
spite of the continuous demands made upon him, the defendant, with bad faith and to the
prejudice of the firm of Gutierrez Hermanos, claiming to have rights of ownership and possession
in the said property Therefore it was prayed that judgment be rendered by holding that the land
and improvements in question belong legitimately and exclusively to the plaintiff, and ordering
the defendant to execute in the plaintiff's behalf the said instrument of transfer and conveyance
of the property and of all the right, interest, title and share which the defendant has therein; that
the defendant be sentenced to pay P30 per month for damages and rental of the property from
February 14, 1911, to the date of the restitution of the property to the plaintiff, and that, in case
32
these remedies were not granted to the plaintiff, the defendant be sentenced to pay to it the sum
of P3,000 as damages, together with interest thereon since the date of the institution of this suit,
and to pay the costs and other legal expenses.
The demurrer filed to the amended complaint was overruled, with exception on the part of
the defendant, whose counsel made a general denial of the allegations contained in the
complaint, excepting those that were admitted, and specifically denied paragraph 4 thereof to
the effect that on February 14, 1907, Jose Duran executed the deed of sale of the property in favor
of the plaintiff with the defendant's knowledge and consent.
As the first special defense, counsel for the defendant alleged that the facts set forth in the
complaint with respect to the execution of the deed did not constitute a cause of action, nor did
those alleged in the other form of action for the collection of P3,000, the value of the realty.
As the second special defense, he alleged that the defendant was the lawful owner of the
property claimed in the complaint, as his ownership was recorded in the property registry, and
that, since his title had been registered under the proceedings in rem prescribed by Act No. 496, it
was conclusive against the plaintiff and the pretended rights alleged to have been acquired by
Jose Duran prior to such registration could not now prevail; that the defendant had not executed
any written power of attorney nor given any verbal authority to Jose Duran in order that the latter
might, in his name and representation, sell the said property to the plaintiff company; that the
defendant's knowledge of the said sale was acquired long after the execution of the contract of
sale between Duran and Gutierrez Hermanos, and that prior thereto the defendant did not
intentionally and deliberately perform any act such as might have induced the plaintiff to believe
that Duran was empowered and authorized by the defendant and which would warrant him in
acting to his own detriment, under the influence of that belief. Counsel therefore prayed that the
defendant be absolved from the complaint and that the plaintiff be sentenced to pay the costs
and to hold his peace forever.
After the hearing of the case and an examination of the evidence introduced by both
parties, the court rendered the judgment aforementioned, to which counsel for the defendant
excepted and moved for a new trial. This motion was denied, an exception was taken by the
defendant and, upon presentation of the proper bill of exceptions, the same was approved,
certified and forwarded to the clerk of this court.
This suit involves the validity and efficacy of the sale under right of redemption of a parcel
of land and a masonry house with a 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; and
that, prior to the execution of the deed of sale, the defendant performed no act such as might
33
have induced the plaintiff to believe that Jose Duran was empowered and authorized by the
defendant to effect the said sale.

The plaintiff firm, therefore, charged Jose Duran, in the Court of First Instance of the said
province, 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. However, at the trial of the case Engracio Orense, called as a witness,
being interrogated by the fiscal as to whether he had consented to Duran's selling the said
property under right of redemption to the firm of Gutierrez Hermanos, replied that he had. In
view of this statement by the defendant, the court acquitted Jose Duran of the charge of estafa.
As a result of the acquittal of Jose Duran, based on the explicit testimony of his uncle,
Engracio 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 complaint 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 which Orense had in the property sold, and to pay to the same the rental of the
property due from February 14, 1911.
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's 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 having 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.

34
 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 Engracio 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 is 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.
||| (Hermanos v. Orense, G.R. No. 9188, [December 4, 1914], 28 PHIL 571-579)

35
 THIRD DIVISION

[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.

Roque A. Tamayo for petitioner.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angelesfor private respondent.

SYLLABUS

1.CIVIL PROCEDURE; REVIEW ON CERTIORARI UNDER RULE 45 OF THE REVISED RULE OF

COURT; CONFINED TO ERRORS OF LAW. — Only questions of law may be raised in a petition for
certiorari under Rule 45 of the Revised Rules of Court, the findings of fact of the Court of Appeals
being conclusive.
2.STATUTORY CONSTRUCTION; SPECIFIC PROVISION OF LAW PREVAILS OVER COMMON LAW
PRINCIPLE. — Between a common law principle and a statutory provision, the latter must prevail in
this jurisdiction.
3.OBLIGATIONS AND CONTRACTS; ARTICLE 2154 OF THE CIVIL CODE; REQUISITES TO ITS
APPLICATION. — For Article 2154 of the Civil Code 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.
4.ID.; ID.; APPLICABLE IN THE CASE AT BAR. — Since Article 2154 of the Civil Code which embodies
the doctrine of solutio indebiti applies in the case at bar, the court must reject the common law
principle that if one of two persons must suffer by the wrongful act of a third persons, the loss must
be borne by one whose negligence was the proximate cause of the loss.
5.ID.; ACTIONS BASED UPON A QUASI-CONTRACT; PRESCRIPTIVE PERIOD THEREOF. — An
action for recovery of a sum of money erroneously received by one who has no right to demand it
prescribes in six years.

DECISION

CORTES, J :p

36
Assailed in this petition for review on certiorari is the judgment of the Court of Appeals, which,
applying the doctrine of solutio indebiti, reversed the decision of the Regional Trial Court, Branch CV,
Quezon City by deciding in favor of private respondent.
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. (hereinafter referred to as FACETS) of the United States.
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. Sometime in
August 1980, FACETS instructed the First National State Bank of New Jersey, Newark, New Jersey,
U.S.A. (hereinafter referred to as FNSB) to transfer $10,000.00 to petitioner via Philippine National
Bank, Sta. Cruz Branch, Manila (hereinafter referred to as PNB). llcd

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.
Private respondent asked petitioner for the return of the second remittance of $10,000.00 but the
latter refused to pay. On May 12, 1982 a complaint was filed with the Regional Trial Court, Branch
CV, Quezon City which was decided in favor of petitioner as defendant. The trial court ruled that Art.
2154 of the New Civil Code is not applicable to the case because the second remittance was made not
by mistake but by negligence and petitioner was not unjustly enriched by virtue thereof [Record, p.
234]. On appeal, the Court of Appeals held that Art. 2154 is applicable and reversed the RTC decision.
The dispositive portion of the Court of Appeals' decision reads as follows:

37
 WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and another one
entered in favor of plaintiff-appellant and against defendant-appellee Domelita (sic)
M. Andres, doing business under the name and style "Irene's Wearing Apparel" to reimburse
and/or return to plaintiff-appellant the amount of $10,000.00, its equivalent in Philippine
currency, with interests at the legal rate from the filing of the complaint on May 12, 1982
until the whole amount is fully paid, plus twenty percent (20%) of the amount due as
attorney's fees; and to pay the costs.
With costs against defendant-appellee.
SO ORDERED. [Rollo, pp. 29-30.]
Thereafter, this 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.
This provision is taken from Art. 1895 of the Spanish Civil Code which provided that:
Art. 1895.If a thing is received when there was no right to claim it and which, through an
error, has been unduly delivered, an obligation to restore 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 solutio 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)]. cdrep

It is undisputed that private respondent delivered the second $10,000.00 remittance. However,
petitioner contends that the doctrine of solutio indebiti does not apply because its requisites are
absent.
38
First, it is argued that petitioner had the right to demand and therefore to retain the second
$10,000.00 remittance. It is alleged that even after the two $10,000.00 remittances are credited to
petitioner's receivables from FACETS, the latter allegedly still had a balance of $49,324.00. Hence, it
is argued that the last $10,000.00 remittance being in payment of a pre-existing debt, petitioner was
not thereby unjustly enriched.
The contention is without merit.
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.
In connection with this the Court of Appeals made the following finding of facts: LLphil

The fact that Facets sent only one remittance of $10,000.00 is not disputed. In the written
interrogatories sent to the First National State Bank of New Jersey through the Consulate
General of the Philippines in New York, Adelaide C. Schachel, the investigation and
reconciliation clerk in the said bank testified that a request to remit a payment for Facet
Funwear Inc. was made in August, 1980. The total amount which the First National State
Bank of New Jersey actually requested the plaintiff-appellant Manufacturers Hanover & Trust
Corporation to remit to Irene's Wearing Apparel was US $10,000.00. Only one remittance
was requested by First National State Bank of New Jersey as per instruction of Facets
Funwear (Exhibit "J", pp. 4-5).

That there was a mistake in the second remittance of US$10,000.00 is borne out by the fact
that both remittances have the same reference invoice number which is 263 80. (Exhibits "A-
1-Deposition of Mr. Stanley Panasow" and "A-2-Deposition of Mr. Stanley Panasow").
Plaintiff-appellant made the second remittance on the wrong assumption that defendant-
appellee did not receive the first remittance of US$10,000.00. [Rollo, pp. 26-27.]
It is evident that the claim of petitioner is anchored on the appreciation of the attendant facts which
petitioner would have this Court review. The Court holds that the finding by the Court of Appeals
that the second $10,000.00 remittance was made by mistake, being based on substantial evidence, is
final and conclusive. The rule regarding questions of fact being raised with this Court in a petition for
certiorari under Rule 45 of the Revised Rules of Court has been stated in Remalante v. Tibe, G.R. No.
59514, February 25, 1988, 158 SCRA 138, thus: Cdpr

The rule in this jurisdiction is that only questions of law may be raised in a petition for
certiorari under Rule 45 of the Revised Rules of Court. "The jurisdiction of the Supreme Court
in cases brought to it from the Court of Appeals is limited to reviewing and revising the errors
39
 of law imputed to it, its findings of fact being conclusive" [Chan v. Court of Appeals, G.R. No.
L-27488, June 30, 1970, 33 SCRA 737, reiterating a long line of decisions]. This Court has
emphatically declared that "it is not the function of the Supreme Court to analyze or weigh
such evidence all over again, its jurisdiction being limited to reviewing errors of law that
might have been committed by the lower court" [Tiongco v. De la Merced, G.R. No. L-24426,
July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No. L-62482, April 28, 1983, 121
SCRA 865; Baniqued v. Court of Appeals, G.R. No. L-47531, February 20, 1984, 127 SCRA
596]. "Barring, therefore, a showing that the findings complained of are totally devoid of
support in the record, or that they are so glaringly erroneous as to constitute serious abuse of
discretion, such findings must stand, for this Court is not expected or required to examine or
contrast the oral and documentary evidence submitted by the parties" [Santa Ana, Jr. v.
Hernandez, G.R. No. L-16394, December 17, 1966, 18 SCRA 973]. [at pp. 144-145.]
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.
The rule is that principles of equity cannot be applied if there is a provision of law specifically
applicable to a case [Phil. Rabbit Bus Lines, Inc. v. Arciaga, G.R. No. L-29701, March 16, 1987, 148
SCRA 433; Zabat, Jr. v. Court of Appeals, G.R. No. L-36958, July 10, 1986, 142 SCRA 587; Rural Bank
of Parañaque, Inc. v. Remolado, G.R. No. 62051, March 18, 1985, 135 SCRA 409; Cruz v. Pahati, 98
Phil. 788 (1956)]. Hence, the Court in the case of De Garcia v. Court of Appeals, G.R. No. L-20264,
January 30, 1971, 37 SCRA 129, citing Aznar v. Yapdiangco, G.R. No. L-18536, March 31, 1965, 13 SCRA
486, held:
. . . The common law principle that where one of two innocent persons must suffer by a fraud
perpetrated by another, the law imposes the loss upon the party who, by his misplaced
confidence, has enabled the fraud to be committed, cannot be applied in a case which is
covered by an express provision of the new Civil Code, specifically Article 559. Between a
common law principle and a statutory provision, the latter must prevail in this jurisdiction. [at
p. 135.]
Having shown that Art. 2154 of the Civil Code, which embodies the doctrine of solutio indebiti, applies
in the case at bar, the Court must reject the common law principle invoked by petitioner. cdll

Finally, in her attempt to defeat private respondent's claim, petitioner makes much of the fact that
from the time the second $10,000.00 remittance was made, five hundred and ten days had elapsed
before private respondent demanded the return thereof. Needless to say, private respondent
instituted the complaint for recovery of the second $10,000.00 remittance well within the six years
prescriptive period for actions based upon a quasi-contract [Art. 1145 of the New Civil Code].
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
(Andres v. Manufacturers Hanover & Trust Corp., G.R. No. 82670, [September 15, 1989], 258 PHIL 425-
|||

431)

40
 EN BANC

[G.R. No. L-17447. April 30, 1963.]

GONZALO PUYAT & SONS, INC., plaintiff-appellee, vs. CITY OF MANILA AND
MARCELINO SARMIENTO, as City Treasurer of Manila, defendants-appellants.

Feria, Manglapus & Associates for plaintiff-appellee.

Asst. City Fiscal Manuel T . Reyes for defendants-appellants.

SYLLABUS

1. TAXATION; RETAIL DEALERS TAXES; RECOVERY OF TAXES PAID BY MISTAKES; PROTEST NOT
NECESSARY. — Where taxes which are not legally due are paid thru error or mistake, they may under
the principle of solutio indebiti, be recovered, even if no protest was made upon their payment,
particularly where such payment was due to a mistake in the construction of a doubtful or difficult
question of law (Article 2155, New Civil Code).
2. ID.; ID.; ID.; ID.; SECTION 76 OF CHARTER OF MANILA NOT APPLICABLE IN CASE AT BAR. —
Section 76 of the Charter of -Manila which provides that "No court shall entertain any suit assailing
the validity of tax under this article until the taxpayer shall have paid , under protest the taxes
assessed against him, . . .," relates to the assessment, collection and recovery of real estate
taxes only, and not to the recovery of retail dealers taxes.
3. ID.; ID.; ID.; PRESCRIPTION INTERRUPTED BY WRITTEN EXTRA-JUDICIAL DEMAND. — Even
applying the provisions of Act No. 190 to payments by appellee of the retail dealers taxes made
before the effectivity of the New Civil Code, because "prescription already running before the
effectivity of this Code shall be governed by laws previously in force . . ." (Art. 1116, NCC), still
payments made before August 30, 1950, are no longer recoverable in view of the second paragraph
of said article, which provides that "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". The action has therefor prescribed only with respect
to the payments made before October 30, 1950, when a written demand was made, considering that
the prescription of action is interrupted when there is a written extra-judicial demand (Art. 1155,
NCC).

DECISION

PAREDES, J : p

This an appeal from the judgment of the CFI of Manila, the dispositive portion of which reads:

41
 ". . . Of the payments made by the plaintiff, only that made on October 25, 1950, in the
amount of P1,250.00 has prescribed. Payments made in 1951 and thereafter are still
recoverable since the extra- judicial demand made on October 30, 1956 was well within the
six year prescriptive period of the New Civil Code.
In view of the foregoing considerations, judgment is hereby rendered in favor of the plaintiff,
ordering the defendants to refund the amount of P29,824.00, without interest. No costs.
Defendants' counterclaim is hereby dismissed for not having been substantiated."
On August 11, 1958, the plaintiff Gonzalo Puyat & Sons, Inc., filed an action for refund of Retail
Dealers Taxes 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 —
"1. That the plaintiff is a corporation duly organized and existing according to the laws of the
Philippines, with offices at Manila; while defendant City of Manila is a Municipal Corporation
duly organized in accordance with the laws of the Philippines, and defendant Marcelino
Sarmiento is the duly qualified incumbent City Treasurer of Manila;
2. That the plaintiff is engaged in the business of manufacturing and selling all kinds of
furniture at its factory at 190 Rodriguez-Arias, San Miguel, Manila, and has a display room
located at 604-606 Rizal Avenue, Manila, wherein it displays the various kinds of furniture
manufactured by it and sells some goods imported by it, such as billiard balls, bowling balls
and other accessories;
3. That acting pursuant to the provisions of Sec. 1, group II, of Ordinance No. 3364, defendant
City Treasurer of Manila assessed 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 therefor, on the dates and in the amount enumerated herein below:
Period Date paid O.R. No. Amount
Assessed

and paid

First Quarter 1950 Jan. 25, 1950 436271V P1,255.00

Second Quarter 1950 Apr. 25, 1950 215895X P1,250.00
Third Quarter 1950 Jul. 25, 1950 243321X P1,250.00
Fourth Quarter 1950 Oct. 25, 1950 271165X P1,250.00

(Follows, the assessment for different quarters in 1951, 1952, 1953, 1954 and 1955, fixing the same
amounts quarterly) . . .

First Quarter 1956 Jan. 25, 1956 823047X P1,250.00

Second Quarter 1956 Apr. 25, 1956 855949X P1,250.00
Third Quarter 1956 July 25, 1956 880789X P1,250.00
————

42
 TOTAL P33,785.00

4. That 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,
which took effect on September 24, 1956, on the sale of the various kinds of furniture
manufactured by it pursuant to the provisions of Sec. 18 (n) of Republic Act No. 409 (Revised
Charter of Manila), as restated in Section 1 of Ordinance No. 3816.
5. That, however, plaintiff, is liable for the payment of taxes prescribed in Section 1, Group II
of Ordinance No. 3364, as amended by Sec. 1, Group II of Ordinance No. 3816, which took
effect on September 24, 1956, on the sales of imported billiard balls, bowling balls and other
accessories at its display room. The taxes paid by the plaintiff on the sales of said articles are
as follows:
xxx xxx xxx
6. That on October 30, 1956, the plaintiff filed with defendant City Treasurer of Manila, a
formal request for refund of the retail dealer's taxes unduly paid by it as aforestated in
paragraph 3, hereof.
7. That on July 24, 1958, the defendant City Treasurer of Manila definitely denied said request
for refund.
8. Hence on August 21, 1958, plaintiff filed the present complaint.
9. Based on the above stipulation of facts, the legal issues to be resolved by his Honorable
Court are: (1) the period of prescription applicable in matters of refund of municipal taxes
erroneously paid by a taxpayer and (2) refund of taxes not paid under protest . . ."
which was the basis of the judgment heretofore recited.
Said judgment was directly appealed to this Court on two dominant issues, to wit: (1) Whether or not
the amounts paid by plaintiff-appellee, as retail dealer's taxes under Ordinance 1925, as amended by
Ordinance No. 3364 of the City of Manila, without protest, are refundable; and (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.
Under the first issue, defendants-appellants contend that the taxes in question were voluntarily paid
by appellee company and since, in this jurisdiction, in order that a legal basis arise for claim of refund
of taxes erroneously assessed, payment thereof must be made under protest, and this being a
condition sine qua non, and no protest having been made, — verbally or in writing, thereby indicating
that the payment was voluntary, the action must fail. Cited in support of the above contention, are
the cases of Zaragoza vs. Alfonso, 46 Phil., 160-161, and Gavino vs. Municipality of Calapan, 71, Phil.,
438.
In refutation of the above stand of appellants, appellee avers that the payments could not have been
voluntary. At most, they were paid "mistakenly and in good faith" and "without protest in the
erroneous belief that it was liable thereof." Voluntariness is incompatible with protest and mistake. It
submits that this is a simple case of "solutio indebiti".

43
Appellants do not dispute the fact that appellee-company is exempted from the payment of the tax
in question. This is manifest from the reply of appellant City Treasurer, stating that sales of
manufactured products at the factory site are not taxable either under the Wholesalers' Ordinance or
under the Retailers' Ordinance. With this admission, it would seem clear that the taxes collected from
appellee were paid, thru an error or mistake, which places said act of payment within the pale of
the New Civil Code provisions on solutio indebiti. The appellant City of Manila, at the very start,
notwithstanding the Ordinance imposing the Retailer's Tax, had no right to demand payment
thereof.
"If something is received when there is no right to demand it, and it was duly delivered
through mistake, the obligation to return it arises" (Art. 2154, NCC).
Appellee categorically stated the payment was not voluntarily made, (a fact found also by the lower
court), but on the erroneous 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 indebiti in the New Civil
Code, apply to the admitted facts of the case.
With all, appellant quoted Manresa as saying: ". . . De la misma opinion son el Sr. Sanchez Roman y el
Sr. Galcon, et cual afirma que si la paga se hizo por error de derecho, ni existe el cuasi-contrato ni
esta obligado a la restitucion el que cobro, aunque no se debiera lo que se pago" (Manresa, Tomo 12,
paginas 611-612). This opinion, however, has already lost its persuasiveness, in view of the provisions
of the Civil Code,recognizing "error de derecho" as a basis for the quasi-contract of solutio indebiti.
"Payment by reason of a mistake in the construction or application of a doubtful or difficult
question of law may come within the scope of the preceding article" (Art. 2155).

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 vs. 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. Both law and sound morality so dictate. Especially should
this be the rule as to illegal taxation. The taxpayer has no voice in the imposition of the
burden. He has the right to presume that the taxing power has been lawfully exercised. He
should not be required to know more than those in authority over him, nor should he suffer
loss by complying with what he bona fide believes to be his duty as a good citizen. Upon the
contrary, he should be promoted to its ready performance by refunding to him any legal
exaction paid by him in ignorance of its illegality; and, certainly, in such a case, if be subject
to a penalty for nonpayment, his compliance under belief of its legality, and without awaiting
a resort to judicial proceedings, should not be regarded in law as so far voluntary as to affect
his right of recovery."

44
"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 seem 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).
Admittedly, plaintiff-appellee paid the tax without protest. Equally admitted is the fact that Section
76 of the Charter of Manila provides that "No court shall entertain any suit asserting the validity of
tax assessed under this article until the taxpayer shall have paid, under protest the taxes assessed
against him, . . .". It should be noted, however, that the article referred to in said section is Article XII,
entitled Department of Assessment, and the sections thereunder manifestly show that said article
and its sections relate to assessment, collection and recovery of real estate taxes only. Said Section
76, therefor, is not applicable to the case at bar, which relates to the recovery of retail dealer taxes.
In the opinion of the Secretary of Justice (Op. 90, Series of 1957), in a question similar to the case at
bar, it was held that the requirement of protest refers only to the payment of taxes which are directly
imposed by the charter itself, that is, real estate taxes, which view was sustained by judicial and
administrative precedents, one of which is the case of Medina, et al. vs. City of Baguio, G.R. No. L-
4269, Aug. 29, 1952. In other words, protest is not necessary for the recovery of retail dealer's taxes,
like the present, because they are not directly imposed by the charter. In the Medina case, the
Charter of Baguio (Chap. 61, Revised Adm. Code), provides that "no court shall entertain any suit
assailing the validity of a tax assessed under this charter until the tax-payer shall have paid, under
protest, the taxes assessed against him (Sec. 2574 (b), Rev. Adm. Code), a proviso similar to Section
76 of the Manila Charter. The refund of specific taxes paid under a void ordinance was ordered,
although it did not appear that payment thereof was made under protest.
In a recent case, We said: The appellants argue that the sum the refund of which is sought by the
appellee, was not paid under protest and hence is not refundable. Again, the trial court correctly held
that being unauthorized, it is not a tax assessed under the Charter of the appellant City of Davao and
for that reason, no protest is necessary for a claim or demand for its refund" (Citing the Medina
Case, supra: East Asiatic Co. Ltd. vs. City of Davao, G.R. No. L-16253, Aug. 21, 1962). Lastly, being a
case of solutio indebiti, protest is not required as a condition sine qua non for its application.
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 vs. Tan Jongko, 98 Phil., 51 O.G. 6221) 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 provisions of Act No. 190 should apply to those
payments made before the effectivity of the New Civil Code, because "prescription already running
before the effectivity of this Code shall be governed by laws previously in force . . . " (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
45
though by the former laws a longer period might be required". Anent the payments made after
August 30, 1950, it is obvious 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 . . . when
there is a written extrajudicial demand . . ." (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.
||| (Gonzalo Puyat & Sons, Inc. v. City of Manila, G.R. No. L-17447, [April 30, 1963], 117 PHIL 985-993)

46
 FIRST DIVISION

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

CBK POWER COMPANY LIMITED, petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, respondent.

DECISION

SERENO, C.J : p

This is a Petition for Review on Certiorari 1 under Rule 45 of the 1997 Rules of Civil Procedure filed by
CBK Power Company Limited (petitioner). The Petition assails the Decision 2 dated 27 June 2011 and
Resolution 3 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
Decision 4 dated 3 March 2010 and Resolution 5 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 electricity
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 CAHTIS

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 Section
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

47
 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
2005 Close of the quarter File Claim for
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. cCTaSH

After an evaluation of petitioner's 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 P27,170,123.36.
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 petitioner's 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. Petitioner's Motion for
Reconsideration was likewise denied for lack of merit.
Hence, this Petition. ScEaAD

ISSUE
48
Petitioner's 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 COURT'S 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.
xxx xxx xxx
(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.
Petitioner's sales to NPC are
effectively zero-rated
As aptly ruled by the CTA Special Second Division, petitioner's 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:

49
 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 ponentein 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 Court's 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 Revenue 14 (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. 15ISAaTH

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

50
Pursuant to Section 112 (A), petitioner's 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:
Close of the Last day to File
Period Covered Taxable Administrative Date of Filing
Quarter Claim

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 CIR's 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
51
 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. . . .
.
xxx xxx xxx
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. IDTcHa

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers
can rely on 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:
Period Covered Administrative Expiration of Last day to file Judicial
Claim Filed 120-days Judicial Claim Claim Filed

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

2nd quarter 2005 15-Sep-05 13-Jan-06 13-Feb-06 18-Apr-07

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, Philex's 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,
52
 during, or after the Atlas case, Philex's 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 Aichidoctrines,
Philex's 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 Philex's claim during the 120-day period is, by express provision of law,
"deemed a denial" of Philex's claim. Philex had 30 days from the expiration of the 120-day
period to file its judicial claim with the CTA. Philex's 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.DEHaTC

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. 20Simply 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 petitioner's 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

53
 (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. DTIACH

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.
(CBK Power Co. Ltd. v. Commissioner of Internal Revenue, G.R. Nos. 198729-30, [January 15, 2014],
|||

724 PHIL 686-701)

54
 EN BANC

[G.R. No. 12191. October 14, 1918.]

JOSE CANGCO, plaintiff-appellant, vs. MANILA RAILROAD CO., defendant-appellee.

Ramon Sotelo, for appellant.

Kincaid & Hartigan, for appellee.

SYLLABUS

1. MASTER AND SERVANT; CONTRACT; NEGLIGENCE. — Failure to perform a contract

cannot be excused upon the ground that the breach was due to the negligence of a servant of the
obligor, and that the latter exercised due diligence in the selection and control of the servant.
2. CONTRACTS; NEGLIGENCE:; CULPA AQUILIANA; CULPA CONTRACTUAL. — The
distinction between negligence as the source of an obligation (culpa aquiliana) and negligence in
the performance of a contract (culpa contractual ) pointed out.
3. CARRIERS; PASSENGERS; NEGLIGENCE; ALIGHTING FROM MOVING TRAIN. — It is
not negligence per se for a traveler to alight from a slowly moving train.

DECISION

FISHER, J :
p

At the time of the occurrence which gave rise to this litigation the plaintiff, Jose Cangco,
was in the employment of the 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 was returning home by rail from his daily labors; and as the train drew up to the
station in San Mateo 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 Zuniga, also an
employee of the railroad company, got off the same car, alighting safely at the point where the

55
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 shipment to the market. They were contained in
numerous tow sacks which had been piled on the platform in a row one upon another. The
testimony shows that this row of sacks was so placed that there was a space of only about two
feet between the sacks of melons and the edge of the 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 in 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 from 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 follow s that the
defendant company is liable for the damage thereby occasioned unless recovery is barred by the

56
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 the 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 Cc. (7 Phil. Rep., 359). In commenting upon article 1093
(vol. 8, p. 30) 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 articles 1101, 1103 and 1104 of
the same code." (Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. Rep., 359 at p. 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 respondent 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, whether 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.
57
 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 persons 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 yields 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
Rican Civil 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 the selection of the servant or
employee, or in supervision over him after the selection, or both; and (2) 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 is 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
58
to the breach of a contract, 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 its 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, gives 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 — to
limit such liability to cases in which the person upon 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
persons whose acts or omissions 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 one's own acts, or 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 source 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

59
 broken, it is not necessary for him to prove the 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
persons 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 a
watchmaker who contracts 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 of omission or commission
on the part of their servants, 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
the 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 decision 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.

60
 In the case of Baer Senior & Co.'s Successors vs. Compañia 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 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 such 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 a 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 Rachrach 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 complained 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 the servants; and that in the particular case the presumption of negligence had not
been overcome.
It is evident, therefore, that in its decision in the 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 aquilina or culpa contractual. As Manresa points out (vol. 8, pp. 29 and 69)
whether negligence occurs as an incident in the course of the performance of a contractual
undertaking or is itself the source of an extra-contractual 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
ease. Therefore, it follows that it is not to be inferred, because the court held in the Yamada ease
that the defendant was liable for the damages negligently caused by its servant to a person to
whom it was bound by contract, and made reference to the fact that the defendant was negligent
61
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 obligation, 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 a breach of the contract
would have constituted 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, whereas if the accident was
caused by 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 n its absolute form.
We are of the opinion that this proposition is too broadly stated and is at variance with the
experience of every-day life. In this particular instance, tat 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 persons 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:

62
 "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, if we prefer to adopt the mode of exposition used by this court in Picart vs. Snith (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.
As the case now before us presents itself, the only fact from which a conclusion can be
drawn to the effect that the 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 conceded that it had a right to pile these sacks in
the path of alighting passengers, the placing of them in that position gave rise to the duty to light
the premises 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

63
 custom to get on and off 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 the 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 Avanceña, JJ., concur.

Separate Opinions
MALCOLM, J., dissenting:

With one sentence in the majority decision, we are of full accord, namely, "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." With the general rule relative to a
passenger's contributory negligence, we are likewise in full accord, namely, "An attempt to alight
from a moving train is negligence per se." Adding these two points together, we have the logical
result — the Manila Railroad Co. should be absolved from the complaint, and judgment affirmed.
Johnson, J., concurs.
||| (Cangco v. Manila Railroad Co., G.R. No. 12191, [October 14, 1918], 38 PHIL 768-785)

64
 SECOND DIVISION

[G.R. No. 178610. November 17, 2010.]

HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF RETIREMENT PLAN

(now HSBC Retirement Trust Fund, Inc.), petitioner, vs. SPOUSES BIENVENIDO
AND EDITHA BROQUEZA, respondents.

DECISION

CARPIO, J :p

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 4dated 5
September 2000. The RTC's 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. ECAaTS

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
HSBC's 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.

65
 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. cHaCAS

The Metropolitan Trial Court's Ruling

On 28 December 1999, the MeTC promulgated its Decision 7 in favor of HSBCL-SRP. The
MeTC ruled that the nature of HSBCL-SRP's demands for payment is civil and has no connection
to the ongoing labor dispute. Gerong and Editha Broqueza's 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 MeTC's 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 attorney's fees;
3. Cost of suit. cCaDSA

SO ORDERED. 8
Gerong and the spouses Broqueza filed a joint appeal of the MeTC's decision before the
RTC. Gerong's case was docketed Civil Case No. 00-786, while the spouses Broqueza's case was
docketed as Civil Case No. 00-787. TAcSCH

The Regional Trial Court's Ruling

The RTC initially denied the joint appeal because of the belated filing of Gerong and the
spouses Broqueza's 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 MeTC's decision in toto. 9
The RTC ruled that Gerong and Editha Broqueza's 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 Broqueza's continued default in

66
 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. ESTAIH

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-SRP's 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 court's 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. ASTDCH

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. 14SCEDaT

The Court's 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. cHAIES

67
 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 attorney's fees in addition to expenses and costs of suit.
IaESCH

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.
. . . . (Emphasis supplied.) IaEHSD

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 Broqueza's obligation to pay HSBCL-SRP is a pure obligation. The
fact that HSBCL-SRP was content with the prior monthly check-off from Editha Broqueza's 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 Broqueza's 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 Broqueza's 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 enforced
through 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. cDCaTH

68
SO ORDERED.
(Hongkong and Shanghai Banking Corp., Ltd. Staff Retirement Plan v. Spouses Broqueza, G.R. No.
|||

178610, [November 17, 2010], 649 PHIL 511-519)

69
 ECOND DIVISION

[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.

DECISION

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 petition 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

70
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, 1961, 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 m s teorico y grafico del acto, o sea la perfeccion de este, se
fija, para determinar el concepto de la obligacion pura, en el distintivo de esta, y que es consecuencia
de aqul: 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 two legal questions raised 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.
||| (Pay v. Vda. de Palanca, G.R. No. L-29900, [June 28, 1974], 156 PHIL 619-623)

71
 EN BANC

[G.R. No. 16570. March 9, 1922.]

SMITH, BELL & CO., LTD., plaintiff-appellant, vs. VICENTE SOTELO

MATTI, defendant-appellant.

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

Ramon Sotelo for defendant-appellant.

SYLLABUS

1. CONTRACTS; PURCHASE AND SALE OF MERCHANDISE; UNCERTAINTY OF TIME OF

FULFILLMENT OF OBLIGATION. — As no definite date was fixed for the delivery of the goods,
which the plaintiff undertook to deliver, the term which the parties attempted to establish being
so uncertain that one cannot tell whether, as a matter of fact, the aforesaid goods could, or could
not, be imported into Manila, the obligation must be regarded as conditional and not one with a
term.
2. ID.; ID.; WHEN FULFILLMENT OF CONDITION NOT DEPENDENT ON THE WILL OF
OBLIGOR. — Where 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 with, if he does all that is in his power, and it then becomes incumbent
upon the other contracting party to comply with the terms of the contract.
3. ID.; ID.; WHEN TIME NOT ESSENTIAL. — Where no date is fixed in the contract for the
delivery of the thing sold, time is considered unessential, and delivery must be made within a
reasonable time to be determined by the courts in accordance with the circumstances of the case.
4. PRINCIPAL AND AGENT; THIRD PERSONS. — When an agent acts in his own name, the
principal has no right of action against the persons with whom the agent has contracted, or such
persons against the principal. In such case, the agent is directly liable to the person with whom he
has contracted, as if the transaction were his own. (Art. 1717, Civil Code.)

DECISION

ROMUALDEZ, J : p

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 (21,000), the same to be shipped
from New York and delivered at Manila "within three or four months;" two expellers at the price

72
of twenty five thousand pesos (25,000) 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 (2,000) 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 coconut oil, the intervenor
suffered damages in the sums of one hundred sixteen thousand seven hundred eighty-three
pesos and ninety-one centavos (116,788.91) for the nondelivery of the tanks, and twenty-one
thousand two hundred and fifty pesos (21,250) 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 (50,000), 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.

73
 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 requirements 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."
"The following articles, herein below 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 cause 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
expressions, "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 States 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 obligation must be regarded as conditional.

74
 "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, 1866, and February 23, 1871.
In the former it is held:
"First. 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, 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
'Novisima Recopilacion,' 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 violate." (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 with if he does all that is in his power, and has the
right to demand performance of the contract by the other party, which is the doctrine laid
down also by the supreme court."
(The same publication [1871]. vol. 23, page 492.)
It is sufficiently proven in the record that the plaintiff has made all the efforts it could
possibly by expected to make under the circumstances, to bring the goods in question to Manila,

75
as soon as possible. And, as a matter of fact, through such efforts, it succeeded in importing them
and placing them at the disposal of the defendant, Mr. Sotelo, in April, 1919. Under the doctrine
just cited, which, as we have seen is of the same juridical origin as our Civil Code, it is obvious that
the plaintiff has complied with its obligation.
In connection with this obligation to deliver, occurring in a contract of sale like those in
question, the rule in North America is that when the time of delivery is not fixed in the contract,
time is regarded unessential.
"When the time of delivery is not fixed or is stated in general and indefinite terms,
time is not of the essence of the contract." (35 Cyc., 179. And see Montgomery vs.
Thompson, 152 Cal., 319; 92 Pac., 866; O'Brien vs. Higley, 162 Ind., 316; 70 N. E., 242;
Pratt vs. Lincoln [Me. 1888], 13 Atl., 689; White vs. McMillan, 114 N. c., 349; 19 S. E., 234;
Ballantyne vs. Watson, 30 U. C. C. P., 529.)
In such case, the delivery must be made within a reasonable time.
"The law implies, however, that if no time is fixed, delivery shall be made within a
reasonable time, in the absence of anything to show that an immediate delivery intended."
(35 Cyc., 179, 180.)
"When the contract provides for delivery as soon as possible' the seller is entitled to a
reasonable time, in view of all the circumstances, such as the necessities of manufacture, or
of putting the goods in condition for delivery. The term does not men immediately or that
the seller must stop all his other work and devote himself to that particular order. But the
seller must nevertheless act with all reasonable diligence or without unreasonable delay. It
has been held that a requirement that the shipment of goods should be the earliest possible'
must be construed as meaning that the goods should be sent as soon as the seller could
possibly send them, and that it signified rather more than that the goods should be sent
within a reasonable time.
"Delivery 'Shortly.' — In a contract for the sale of personal property to be delivered
'shortly,' it is the duty of the seller to tender delivery within a reasonable time and if he
tenders delivery after such time the buyer may reject.
xxx xxx xxx
"The question as to what is a reasonable time for the delivery of the goods by the
seller is to be determined by the circumstances attending the particular transaction, such as
the character of the goods, and the purpose for which they are intended, the ability of the
seller to produce the goods if they are to be manufactured, the facilities available for
transportation, and the distance the goods must be carried, and the usual course of business
in the particular trade." (35 Cyc., 181-184.)
Whether or not the delivery of the machinery in litigation was offered to the defendant
within a reasonable time, is a question to be determined by the court.
"Applications of rule. — A contract for delivery 'about Nov. 1' is complied with by
delivery on November 10 (White vs. McMillan, 114 N. C., 349; 19 S. E., 234. And see
O'Brien vs. Higley, 162 Ind., 316; 70 N. E., 242); and a contract to deliver 'about the last of
May or June' is complied with by delivery on the last days of June (New Bedford Copper
Co. vs. Southard, 95 Me., 209; 49 Atl., 1062, holding also that if the goods were to be used for
a ship to arrive 'about April' and the vessel was delayed, the seller might deliver within a

76
 reasonable time after her arrival, although such reasonable time extended beyond the last of
June); so under a contract to deliver goods sold 'about June, 1906,' delivery may be made
during the month of June, or in a reasonable time thereafter (Loomis vs. Norman Printers'
Supply Co., 81 Conn., 343; 71 Atl., 358)." (35 Cyc., 180, note 16.)
The record shows, as we have stated, that the plaintiff did all within its power to have the
machinery arrive at Manila as soon as possible, and immediately upon its arrival it notified the
purchaser of the fact and offered to deliver it to him. Taking these circumstances into account, we
hold that the said machinery was brought to Manila by the plaintiff within a reasonable time.
Therefore, the plaintiff has not been guilty of any delay in the fulfillment of its obligation,
and, consequently, it could not have incurred any of the liabilities mentioned by the intervenor in
its counterclaim or set-off.
Besides, it does not appear that the intervenor, the Manila Oil Refining and By-Products
Co., Inc., has in any way taken part in these contracts. These contracts were signed by the
defendant, Mr. Vicente Sotelo, in his individual capacity and own name. If he was then acting as
agent of the intervenor, the latter has no right of action against the herein plaintiff.
"When an agent acts in his own name, the principal shall have no right of action
against the persons with whom the agent has contracted, or such persons against the
principal.
"In such case, the agent is directly liable to the person with whom he has contracted,
as if the transaction were his own. Cases involving things belonging to the principal are
excepted.
"The provisions of this article shall be understood to be without prejudice to actions
between principal and agent." (Civil Code, art. 1717.)
"When the agent transacts business in his own name, it shall not be necessary for him
to state who is the principal and he shall be directly liable, as if the business were for his own
account, to the persons with whom he transacts the same, said persons not having any right
of action against the principal, nor the latter against the former, the liabilities of the principal
and of the agent to each other always being reserved." (Code of Com., art, 246.)
"If the agent transacts business in the name of the principal, he must state that fact;
and if the contract is in writing, he must state it therein or in the subscribing clause, giving
the name, surname, and domicile of said principal.
"In the case prescribed in the foregoing paragraph, the contract and the actions
arising therefrom shall be effective between the principal and the persons or person who
may have transacted business with the agent; but the latter shall be liable to the persons
with whom he transacted business during the time he does not prove the commission, if the
principal should deny it, without prejudice to the obligation and proper actions between the
principal and agent." (Code of Com., art. 247.)
The foregoing provisions lead us to the conclusion that the plaintiff is entitled to the relief
prayed for in its complaint, and that the intervenor has no right of action, the damages alleged to
have been sustained by it not being imputable t the plaintiff.
Wherefore, the judgment appealed 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 is question, and to pay the plaintiff the sum of ninety-six thousand pesos (96,000), with
77
 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.
||| (Smith, Bell & Co., Ltd. v. Matti, G.R. No. 16570, [March 9, 1922], 44 PHIL 874-885)

78
 EN BANC

[G.R. No. L-264. October 4, 1946.]

VICENTE SINGSON ENCARNACION, plaintiff-appellee, vs. JACINTA BALDOMAR,

ET AL., defendants-appellants.

Bausa & Ampil, for appellants.

Tolentino & Aguas, for appellee.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; LEASE; VALIDITY AND FULFILLMENT CANNOT BE

LEFT TO EXCLUSIVE WILL OF LESSEE. — The continuance and fulfillment of the contract of
lease cannot be made to depend solely and exclusively upon the free and uncontrolled choice of
the lessees between continuing paying the rentals or not, completely depriving the owner of all
say in the matter. For if this were 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 article 1256 of the Civil Code.

DECISION

HILADO, J :
p

Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila,
some six years ago leased said house to Jacinta 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 agreed 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

79
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 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.
In the Court of First Instance the gravamen of the defense interposed by defendants, as it
was expressed by 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 indefinitely and while they should faithfully fulfill their obligation 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 Lefrado Fernando during the trial had not been alleged in
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 buy 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 arrears 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 appellantes. So ordered.

80
||| (Encarnacion v. Baldomar, G.R. No. L-264, [October 4, 1946], 77 PHIL 470-473)

81
 FIRST DIVISION

[G.R. No. 967 . July 25, 1902.]

DARIO ELEIZEGUI ET AL., plaintiffs-appellees, vs. THE MANILA LAWN TENNIS

CLUB, defendant-appellant.

Pillsbury and Sutro, for appellant.

Manuel Torres Vergara, for appellees.

SYLLABUS

1.APPEALS; JURISDICTION OF SUPREME COURT. — The Supreme Court has appellate

jurisdiction in all cases of final judgments rendered by Courts of First Instance entered in the
exercise of its original or its appellate jurisdiction.

DECISION

COOPER, J : p

The appellee has moved the court to dismiss the appeal taken against the judgment
rendered by the Court of First Instance of Manila, upon the ground that the Supreme Court is
without jurisdiction in cases tried by the Court of First Instance in the exercise of its jurisdiction
over cases appealed from justice courts.
Article 74 of the Code of Civil Procedure of 1901 provides that either of the parties to an
action pending before a justice court may appeal against a judgment of a justice of the peace to a
Court of First Instance, the appeal to be tried at the next regular term of the said court. In
accordance with the provisions of article 75 the effect of an appeal so taken is to vacate the
judgment of the justice court, and the case, when duly entered in the Court of First Instance, is
tried de novo on the merits, in accordance with the regular procedure of that court, as though it
had not been tried before and had originally been brought therein. Article 143 of the Code of Civil
Procedure provides that upon the rendition of a final judgment by a Court of First Instance
disposing of the action either of the parties shall be entitled to perfect a bill of exceptions for a
review by the Supreme Court of all rulings, orders, and judgments made in the action to which the
party has duly excepted at the time of making such ruling, order, or judgment. No limitation
whatever has been fixed with respect to the right of the parties to appeal against a judgment of a
Court of First Instance, nor has any distinction been made as to whether the case was
commenced in the Court of First Instance or whether it was brought before it by appeal from a
justice court. We hold that article 143 confers jurisdiction upon the Supreme Court in all cases of

82
 final judgments rendered by the Court of First Instance, either in the exercise of its original
jurisdiction or its appellate jurisdiction.
The motion to dismiss is therefore overruled. So ordered.
||| (Eleizegui v. The Manila Lawn Tennis Club, G.R. No. 967, [July 25, 1902], 1 PHIL 303-304)

EN BANC

[G.R. No. 967 . May 19, 1903.]

DARIO AND GAUDENCIO ELEIZEGUI, plaintiffs-appellees, vs. THE MANILA LAWN

TENNIS CLUB, defendant-appellant.

Pillsbury & Sutro for appellant.

Manuel Torres Vergara for appellee.

SYLLABUS

1. REAL PROPERTY; LEASE; CONVENTIONAL AND LEGAL TERM. — Article 1581 of the
Civil Code, fixing legal terms for leases in which no conventional term is stipulated, has no
application to a lease whose termination is expressly left to the will of the lessee.
2. ID.; ID.; TERM AT WILL OF LESSEE. — The term of a lease whose termination is
expressly left to the will of the lessee must be fixed by the courts according to the character and
conditions of the mutual undertakings, in an action brought for that purpose, in accordance with
article 1128 of the Civil Code.
3. OBLIGATIONS; CONTRACTS; GENERAL PROVISIONS. — The general principles
established by the Civil Code with respect to obligations and contracts are applicable to contracts
of all kinds.
Per WILLARD, J ., concurring:
4. REAL PROPERTY; LEASE; CONVENTIONAL AND LEGAL TERM. — Article 1128 of the
Civil Code has no application to a lease whose termination is left to the will of the lessee; such
lease in favor of a natural person creates an estate which may amount to a life tenancy and in
favor of a judicial person may endure until the dissolution of the entity or until terminated by
breach of some condition of the contract.

DECISION

ARELLANO, C .J : p

83
 This suit concerns the lease of a piece of land for fixed consideration and to endure at the
will of the lessee By the contract of lease the lessee is expressly authorized to make
improvements upon the land, by erecting buildings of both permanent and temporary character,
by making fills, laying pipes, and making such other improvements as might be considered
desirable for the comfort and amusement of the members.

With respect to the term of the lease the present question has arisen. In its discussion three theories
have been presented: One which makes the duration depend upon the will of the lessor, who, upon
one month's notice given to the lessee, may terminate the lease so stipulated; another which, on the
contrary, makes it dependent upon the will of the lessee, as stipulated; and the third, in accordance
with which the right is reserved to the courts to fix the duration of the term.
The first theory is that which has prevailed in the judgment below, as appears from the language in
which the basis of the decision is expressed: "The court is of the opinion that the contract of lease
was terminated by the notice given by the plaintiffs on August 28 of last year . . ." And such is the
theory maintained by the plaintiffs, which expressly rests upon article 1581 of the Civil Code, the law
which was in force at the time the contract was entered into (January 25, 1890). The judge, in giving
to this notice the effect of terminating the lease, undoubtedly considers that it is governed by the
article relied upon by the plaintiffs, which is of the following tenor: "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." (P. 11, Bill of Exceptions.)
In accordance with such a theory, the plaintiffs might have terminated the lease the month following
the making of the contract — at any time after the First month, which, strictly speaking, would be the
only month with respect to which they were expressly bound, they not being bound for each
successive month except by a tacitrenewal (art. 1566) — an effect which they might prevent by giving
the required notice.
Although the relief asked for in the complaint, drawn in accordance with the new form of procedure
established by the prevailing Code, is the restitution of the land to the plaintiffs (a formula common
to various actions), nevertheless the action which is maintained can be no other than that
of desahucio, in accordance with the substantive law governing the contract. The lessor — says article
1569 of the Civil Code — 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. We have already
seen what this legal term is with respect to urban properties, in accordance with article 1581.
Hence, it follows that the judge has only to determine whether there is or is not a conventional term.
If there be a conventional term, he can not apply the legal term fixed in subsidium to cover a case in
which the parties have made no agreement whatsoever with respect to the duration of the lease. In
this case the law interprets the presumptive intention of the parties, they having said nothing in the
contract with respect to its duration. "Obligations arising from contracts have the force of
law between the contracting parties and must be complied with according to the tenor of the
contracts." (Art. 1091 of the Civil Code.)

84
The obligations which, with the force of law, the lessors assumed by the contract entered into, so far
as pertaining to the issues, are the following: "First. . . They lease the above-described land to Mr.
Williamson, who takes it on lease, . . . for all the time the members of the said club may desire to use it
. . . Third. . . . the owners of the land undertake to maintain the club as tenant as long as the latter
shall see fit, without altering in the slightest degree the conditions of this contract, even though the
estate be sold."
It is necessary, therefore, to answer the first question: Was there, or was there not, a conventional
term, a duration, agreed upon in the contract in question ? If there was an agreed duration, a
conventional term, then the legal term — the term fixed in article 1581 — has no application; the
contract is the supreme law of the contracting parties. Over and above the general law is the special
law, expressly imposed upon themselves by the contracting parties. Without these clauses 1 and 3,
the contract would contain no stipulation with respect to the duration of the lease, and then article
1581, in connection with article 1569, would necessarily be applicable. In view of these clauses,
however, it can not be said that there is no stipulation with respect to the duration of the lease, or
that, notwithstanding these clauses, article 1581, in connection with article 1569, can be applied. If
this were so, it would be necessary to hold that the lessors spoke in vain — that their words are to be
disregarded — a claim which can not be advanced by the plaintiffs nor upheld by any court without
citing the law which detracts all legal force from such words or despoils them of their literal sense.
It having been demonstrated that the legal term can not be applied, there being a conventional term,
this destroys the assumption that the contract of lease was wholly terminated by the notice given by
the plaintiffs, this notice being necessary only when it becomes necessary to have recourse to the
legal term. Nor had the plaintiffs, under the contract, any right to give such notice. It is evident that
they had no intention of stipulating that they reserved the right to give such notice. Clause 3 begins
as follows: "Mr. Williamson, or whoever may succeed him as secretary of said club, may terminate
this lease whenever desired without other formality than that of giving a month's notice. The owners
of the land undertake to maintain the club as tenant as long as the latter shall see fit." The right of
the one and the obligation of the others being thus placed in antithesis, there is something more,
much more, than the inclussio unius, exclussio alterius. It is evident that the lessors did not intend to
reserve to themselves the right to rescind that which they expressly conferred upon the lessee by
establishing it exclusively in favor of the latter.
It would be the greatest absurdity to conclude that in a contract by which the lessor has left the
termination of the lease to the will of the lessee, such a lease can or should be terminated at the will
of the lessor.
It would appear to follow, from the foregoing, that, if such is the force of the agreement, there can be
no other mode of terminating the lease than by the will of the lessee. as stipulated in this case. Such
is the conclusion maintained by the defendant in the demonstration of the first error of law in the
judgment, as alleged by him. He goes so far, under this theory, as to maintain the possibility of a
perpetual lease, either as such lease, if the name can be applied, or else as an innominate contract, or
under any other denomination, in accordance with. the agreement of the parties, which is, in fine,
the law of the contract, superior to all other law, provided that there be no agreement against any
prohibitive statute, morals, or public policy.

85
It is unnecessary here to enter into a discussion of a perpetual lease in accordance with the law and
doctrine prior to the Civil Code now in force, and which has been operative since 1889. Hence the
judgment of the supreme court of Spain of January 2, 1891, with respect to a lease made in 1887,
cited by the defendant, and a decision stated by him to have been rendered by the Audiencia of
Pamplona in 1885 (it appears to be rather a decision by the head office of land registration of July 1,
1885), and any other decision which might be cited based upon the constitutions of Cataluña,
according to which a lease of more than ten years is understood to create a life tenancy, or even a
perpetual tenancy, are entirely out of point in this case, in which the subject-matter is a lease entered
into under the provisions of the present Civil Code, in accordance with the principles of which alone
can this doctrine be examined.

It is not to be understood that we admit that the lease entered into was stipulated as a life tenancy,
and still less as a perpetual lease. The terms of the contract express nothing to this effect. They do,
however, imply 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. Furthermore, the lessee is an English
association.
Usufruct is a right of superior degree to that which arises from a lease. It is a real right and includes all
the jus utendi and jus fruendi. Nevertheless, the utmost period for which a usufruct can endure, if
constituted in favor of a natural person, is the lifetime of the usufructuary (art. 513, sec. 1); and if in
favor of a juridical person, it can not be created for more than thirty years. (Art. 515.) If the lease
might be perpetual, in what would it be distinguished from an emphyteusis? Why should the lessee
have a greater right than the usufructuary, as great as that of an emphyteuta, with respect to the
duration of the enjoyment of the property of another? Why did they not contract for a usufruct or an
emphyteusis? It was repeatedly stated in the document that it was a lease, and nothing but a lease,
which was agreed upon: "Being in the full enjoyment of the necessary legal capacity to enter into this
contract of lease . . . they have agreed upon the lease of said estate . . . They lease to Mr. Williamson,
who receives it as such . . . The rental is fixed at 25 pesos a month. . . . The owners bind themselves to
maintain the club as tenant. . . . Upon the foregoing conditions they make the present contract
of lease. . . ." (Pp. 9. 11, and 12, bill of exceptions.) If it is 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.)
On the other hand, it can not be concluded that the termination of the contract is to be left
completely at the will of the lessee, 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
86
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 — all 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
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. In the case of a loan of money or a commodatum of furniture, the payment or return to be
made when the borrower call conveniently do so" does not mean that he is to be allowed to enjoy the
money or to make use of the thing indefinitely or perpetually. The courts will fix in each case,
according to the circumstances, the time for the payment or return. This is the theory also
maintained by the defendant in his demonstration of the fifth assignment of error. "Under article
1128 of the Civil Code," thus his proposition concludes, "contracts whose term is left to the will of one
of the contracting parties must be fixed by the courts, . . . the condition as to the term of this lease
has a direct legislative sanction," and he cites article 1128. "In place of the ruthless method of
annihilating a solemn obligation, which the plaintiffs in this case have sought to pursue, the Code has
provided a legitimate and easily available remedy. . . . The Code has provided for the proper
disposition of those covenants, and a case can hardly arise more clearly demonstrating the
usefulness of that provision than the case at bar." (Pp. 52 and 53 of appellant's brief.)
The plaintiff s, with respect to this conclusion on the part of their opponents, only say that article
1128 "expressly refers to obligations in contracts in general, and that it is well known that a lease is
included among special contracts." But they do not observe that if contracts, simply because special
rules are provided for them, could be excepted from the provisions of the articles of the Code relative
to obligations and contracts in general, such general provisions would be wholly without application.
The system of the Code is that of establishing general rules applicable to all obligations and
contracts, and then special provisions peculiar to each species of contract. In no part of Title VI of
Book IV, which treats of the contract of lease, are there any special rules concerning pure or
conditional obligations which may be stipulated in a lease, because, with respect to these matters,
the provisions of section 1, chapter 3, Title I, on the subject of obligations, are wholly sufficient. With
equal reason should we refer to section 2, which deals with obligations with a term, in the same
chapter and title, if a question concerning the term arises out of a contract of lease, as in the present
case, and within this section we find article 1128, which decides the question.
The judgment was entered below 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. It follows,
therefore, that the judgment below is erroneous.

87
The judgment is reversed and the case will be remanded to the court below with directions to enter a
judgment of dismissal of the action in favor of the defendant, the Manila Lawn Tennis Club, without
special allowance as to the recovery of costs. So ordered.
Mapa and Ladd, JJ ., concur.
Torres, J ., disqualified.

Separate Opinions
WILLARD, J ., concurring:

I concur in the foregoing opinion so far as it holds that article 1581 has no application to the case and
that the action can not be maintained. But as to the application of article 1128 I do not concur. That
article is as follows:
"Should the obligation not fix a period, but it can be inferred from its nature and
circumstances that there was an intention to grant it to the debtor, the courts shall fix the
duration of the same.
"The court shall also fix the duration of the period when it may have been left to the
will of the debtor."
The court has applied the last paragraph of the article to the case of a lease. But, applying the first
paragraph to leases, we have a direct conflict between this article and article 1581. Let us suppose the
lease of a house for 50 pesos a month. Nothing is said about the number of months during which the
lessee shall occupy it. If article 1581 is applicable to this case, the law fixes the duration of the term
and the courts have no power to change it. If article 1128 is applied to it, the courts fix the duration of
the lease without reference to article 1581. It will, I think, be agreed by everyone that article 1581 is
the law applicable to the case, and that article 1128 has nothing to do with it.
It seems clear that both parts of the article must refer to the same kind of obligations. The first
paragraph relates to obligations in which the parties have named no period, the second to the same
kind of obligations in which the period is left to the will of the debtor. If the first paragraph is not
applicable to leases, the second is not.
The whole article was, I think, intended to apply generally to unilateral contracts — to those in which
the creditor had parted with something of value, leaving it to the debtor to say when it should be
returned. In such cases the debtor might never return it, and the creditor might thus be deprived of
his property and entirely defeated in his rights It was to prevent such a wrong that the article was
adopted But it has no application to this case The plaintiffs are not deprived of their rights They get
every month the value which they themselves put upon the use of the property The time for the
payment of this rent has not been left by the contract to the will of the debtor It is expressly provided
in the contract that it shall be paid ''within the first five days after the expiration of each month."
Article 1255 of the Civil Code is as follows:

88
 "The contracting parties may make the agreement and establish the clauses and conditions
which they may deem advisable, provided they are not in contravention of law, morals, or
public order."

That the parties to this contract distinctly agreed that the defendant should have this property so
long as he was willing to pay 25 pesos a month for it, is undisputed.
I find nothing in the Code to show that when a natural person is the tenant such an agreement would
be contrary to law, morality, or public policy. In such a case the contract would terminate at the
death of the tenant. Such is the doctrine of the French Cour de Cassation. (Houet vs. Lamarge, July
20, 1840 )
The tenant is the only person who has been given the right to say how long the contract shall
continue That right is personal to him, and is not property in such a sense as to pass to his heirs.
In this case the question is made more difficult by the fact that the tenant is said to be a juridical
person, and it is said that the lease is therefore a perpetual one Just what kind of a partnership or
association the defendant is does not appear, and without knowing what kind of an entity it is we can
not say that this contract is a perpetual lease Even if the defendant has perpetual succession, the
lease would not necessarily last forever. A breach of any one of the obligations imposed upon the
lessee by article 1555 of the Civil Code would give the landlord the right to terminate it.
||| (Eleizegui v. Manila Lawn Tennis Club, G.R. No. 967, [May 19, 1903], 2 PHIL 309-318)

89
 EN BANC

[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 of Wong Heng,
deceased, defendant-appellant.

Nicanor S. Sison for plaintiff-appellant.

Ozaeta, Gibbs & Ozaeta for defendants-appellants.

SYLLABUS

1. LEASE CONTRACT; RESOLUTORY CONDITION; OPTION, VALIDITY OF. — Plaintiff-appellant

assails the validity of the lease agreement for want of mutuality. Paragraph 5 of the lease contract
states that the lessee may at any time withdraw from the agreement. It is claimed that this
stipulation offends article 1308 of the Civil Code. Held: Art. 1256 (now 1308) of the Civil Code in our
opinion creates no impediment to the insertion in a contract 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 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 (Taylor vs. Tang Pao, 43 Phil. 873).
In the case of Singson Encarnacion vs. Baldomar, 77 Phil. 470, 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, solong 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 lessee could effectively thwart his purpose if he 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 period but not the
annulment of the contract.
2. PURCHASE AND SALE; CUSTODIA LEGIS; SALE, VALIDITY OF. — 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 had or might have in the land 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

90
result of the pending administration, in no wise stands in the way of such administration." (Jakosalem
vs. Esfols, 73 Phil. 628).
3. CONTRACTS; CONSIDERATION; EFFECT OF. — The fact that no money was paid at the time of
the execution of the document does not rule out the possibility that the considerations were paid
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 of the other.
4. ID.; ALIENS; CONSTITUTIONAL PROHIBITION, CIRCUMVENTION OF. — Where a scheme to
circumvent the Constitutional prohibition against the transfer of lands to aliens is readily revealed as
the purpose for the contracts then the illicit purpose becomes the illegal cause rendering the
contracts void. Thus, 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, 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, just
fruendi and jus abutendi) but also of the right to dispose of it (jus disponendi) — rights the sum total of
which make up ownership. If this can be done, then the Constitutional ban against alien landholding
in the Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave peril.
5. ID.; ID.; ID.; ID.; REMEDY OF PARTIES. — It does not follow that because the parties are in pari
delicto they will be left where they are without relief. Article 1416 of the Civil Code provides as an
exception to the rule in 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."
6. CONSTITUTIONAL LAW; TRANSFER OR ASSIGNMENT OF PRIVATE AGRICULTURAL LAND;
REASON FOR PROVISION. — The constitutional provision that 'save in cases of hereditary
succession, no private agricultural land shall be transferred or assigned except individuals,
corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines
(Art. XIII, Sec. 5) is an expression of public policy to conserve lands for the Filipinos.
FERNANDO, J., concurring:
1. CONSTITUTIONAL LAW; LANDS OF THE PUBLIC DOMAIN; PROHIBITION AGAINST ALIEN
LANDHOLDING; RECOVERY OF PROPERTY IN SALES ENTERED INTO PRIOR TO
THE KRIVENKO DECISION NOT AVAILABLE IN VIEW OF THE PARE DELICTO DOCTRINE. — The
doctrine as announced in the case of Rellosa v. Gaw Chee Hun, 93 Phil. 827 is that while the sale by a
Filipino-vendor to an alien-vendee of a residential or a commercial lot is null and void as held in
the Krivenko case, still the Filipino-vendor has no right to recover under a civil law doctrine, the
parties being in pari delicto. The only remedy to prevent this continuing violation of the Constitution
which the decision impliedly sanctions by allowing the alien vendees to retain the lots in question is
either escheat or reversion. Thus: "By following either of these remedies, or by approving an
implementary law as above suggested, we can enforce the fundamental policy of our Constitution
regarding our natural resources without doing violence to the principle of pari delicto.
2. ID.; ID: ID.; ID.; APPLICATION OF THE PARI DELICTO RULE IN PREVIOUS CASES TOO EXTREME.
— Since the sales in question took place prior to the Krivenkodecision, at a time when the assumption
91
could be honestly entertained that there was no constitutional prohibition against the sale of
commercial or residential lots by Filipino-vendor to alien-vendee, in the absence of a definite
decision by the Supreme Court, it would not be doing violence to reason to free them from the
imputation of evading the Constitution. For evidently evasion implies at the very least knowledge of
what is being evaded. The new Civil Code expressly provides: "Mistakes upon a doubtful or difficult
question of law may be the basis of good faith." (Art. 526, par. 3). According to the Rellosa opinion,
both parties are equally guilty of evasion of the Constitution, based on the broader principle that
"both parties are presumed to know the law." This statement that the sales entered into prior to
the Krivenko decision were at that time already vitiated by a guilty knowledge of the parties may be
too extreme a view. It appears to ignore a postulate of a constitutional system, wherein the words of
the Constitution acquire meaning through Supreme Court adjudication.
3. ID.; ID.; ID.; ID.; ID.; RESTORATION BY ALIEN-VENDEE OF PROPERTY TO FILIPINO-VENDOR
MAY BE ALLOWED UPON RESTITUTION OF PURCHASE PRICE. — Alien-vendee is incapacitated or
disqualified to acquire and hold real estate. That incapacity and that disqualification should date
from the adoption of the Constitution on November 15, 1935. That in capacity and that
disqualification, however, was made known to Filipino-vendor and to alien-vendee only upon the
promulgation of the Krivenko decision on November 15, 1947 Alien-vendee therefore, cannot be
allowed to continue owning and exercising acts of ownership over said property, when it is clearly
included within the constitutional prohibition. Alien-vendee should thus be made to restore the
property with its fruits and rents to Filipino-vendor, its previous owner, if it could be shown that in
the utmost good faith, he transferred his title over the same to alien-vendee, upon restitution of the
purchase price of course.
4. ID.; ID.; ID.; ID.; ID.; ID.; REACQUISITION OF PROPERTY SOLD THE BETTER REMEDY IN
CONSONANCE WITH THE DICTATES OF JUSTICE AND EQUITY. — The Constitution frowns upon
the title remaining in the alien-vendees. Restoration of the property upon payment of price received
by Filipino vendor or its reasonable equivalent as fixed by the court is the answer. To give the
constitutional provision full force and effect, in consonance with the dictates of equity and justice,
the restoration to Filipino-vendor upon the payment of a price fixed by the court is the better
remedy. He thought he could transfer the property to an alien and did so. After the Krivenko case had
made clear that he had no right to sell nor an alien-vendee to purchase the property in question, the
obvious solution would be for him to reacquire the same. That way the Constitution would be given,
as it ought to be given, respect and deference.

DECISION

CASTRO, J :p

Justina Santos y Canon Faustino and her sister Lorenza 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

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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,
having 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 already existence was brightened now and then
by the visits of Wong's four children who had become the joy of her life. Wong's 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 look 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 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 at 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 practised by him, she now directed her
executor to secure the annulment of the contracts.

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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 prohibition 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 sum 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 had 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.

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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
vs. Uy Tiong Piao. 1 We said in the 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 vs. 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 vs. 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 period 5 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 Lorenza on September 22, 1957 by force of article 777 of the Civil Code. Hence,

95
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 the data given to him by Wong
and that she told him that "what ever 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 his witness said was:
"Q Did you explain carefully to your client, Doña 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 objections that it is really onerous and 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 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
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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 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 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 inference 12 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 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

97
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 execution of the documents, but his
negative testimony does not rule out the possibility that the consideration 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 Doña
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 though of the ninety-nine (99) years lease; we thought of the
adoption, believing that thru adoption Wong Heng might acquire Filipino citizenship; being
the adopted child of 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 land of
aliens. "The illicit purpose then becomes the illegal cause 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 said in Krivenko vs.
Register of Deeds: 20

"[A]liens are not completely excluded by the Constitution form 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
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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 this pace 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 vs. 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 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 vs. 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 amounts which she entrusted to him from to time, and another
pertaining to rentals from the Ongpin property and from the Rizal Avenue property, which he himself
was leasing.

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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); 10,000 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 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 P56,564.35 28 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 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 P9,310.49 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 court:
"[T]he documents bear the earmarks of genuineness; the trouble is that they were made only
be Francisco Wong and Antonia Matias, nick-name Toning, — which was the way she signed
the loose sheets, and there is no clear proof that Doña 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 Doña 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 s the evidence is none too clear about the amounts spent by Wong for
food, 29 masses 30 salaries of of her maid. 31 His claim for P9,210.49 must likewise be rejected as his
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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 P56,567.35, 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.

Separate Opinions
FERNANDO, J., concurring:

With the able and well-written opinion of Justice Castro, I am in full agreement. The exposition of the
facts leaves nothing to be desired and the statement of the law notable for its comprehensiveness
and clarity. This concurring opinion has been written solely to express what I consider to be the
unfortunate and deplorable consequences of applying the pari delicto concept, as was, to my mind,
indiscriminately done, to alien landholding declared illegal under the Krivenko doctrine in some past
decisions.
It is to remembered that in Krivenko v. The Register of Deeds of Manila, 1 this Court over strong
dissents held that residential and commercial lots may be considered agricultural within the meaning
of the constitutional provision prohibiting the transfer of any private agricultural land to individuals,
corporations or associations not qualified to acquire or hold lands of the public domain in the
Philippines save in cases of hereditary succession.
That provision of the Constitution took effect on November 15, 1935 when the Commonwealth
Government was established. The interpretation as set forth in the Krivenko decision was only
handed down on November 15, 1947. Prior to that date there were many who were of the opinion
that the phrase agricultural land should be construed strictly and not be made to
cover residential and commercial lots. Acting on that belief, several transactions were entered into
transferring such lots to alien vendees by Filipino vendors.

After the Krivenko decision, some Filipino vendors sought recovery of the lots in question on the
ground that the sales were null and void. No definite ruling was made by this Court until September
of 1953, when on the 29th of said month, Rellosa v. Gaw Chee Hun, 2 Bautista v. Uy Isabelo, 3 Talento
v. Makiki,4 Caoile v. Chiao Peng 5 were decided.
Of the four decisions in September 1953, the most extensive discussion of the question is found
in Rellosa v. Gaw Chee Hun, the opinion being penned by retired Justice Bautista Angelo with the
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concurrence only of one Justice, Justice Labrador, also retired. Former Chief Justice Paras as well as
the former Justices Tuason and Montemayor concurred in the result. The necessary sixth vote for a
decision was given by the then Justice Bengzon, who had a two- paragraph concurring opinion
disagreeing with the main opinion as to the force to be accorded to the two cases, 6 therein cited.
There were two dissenting opinions by former Justices Pablo and Alex Reyes.
The doctrine as announced in the Rellosa case is that while the sale by a Filipino-vendor to an alien-
vendee of a residential or a commercial lot is null and void as held in the Krivenko case, still the
Filipino-vendor has no right to recover under a civil law doctrine, the parties being in pari delicto. The
only remedy to prevent this continuing violation of the Constitution which the decision impliedly
sanctions by allowing the alien vendees to retain the lots in question is either escheat or reversion.
Thus "By following either of these remedies, or by approving an implementary law as above
suggested, we can enforce the fundamental policy of our Constitution regarding our natural
resources without doing violence to the principle of pari delicto." 7
Were the parties really in pari delicto? Had the sale by and between Filipino-vendor and alien-vendee
occurred after the decision in the Krivenko case, then the above view would be correct that both
Filipino-vendor and alien-vendee could not be considered as innocent parties within the
contemplation of the law. Both of them should be held equally guilty of evasion of the Constitution.
Since, however, the sales in question took place prior to the Krivenko decision, at a time when the
assumption could be honestly entertained that there was no constitutional prohibition against the
sale of commercial or residential lots by Filipino-vendor to alien- vendee, in the absence of a definite
decision by the Supreme Court, it would not be doing violence to reason to free them from the
imputation of evading the Constitution. For evidently evasion implies at the very least knowledge of
what is being evaded. The new Civil Code expressly provides: "Mistakes upon a doubtful or difficult
question of law may be the basis of good faith." 8
According to the Rellosa opinion, both parties are equally guilty of evasion of the Constitution, based
on the broader principle that "both parties are presumed to know the law." This statement that the
sales entered into prior to the Krivenko decision were at that time already vitiated by a guilty
knowledge of the parties may be too extreme a view. It appears to ignore a postulate of a
constitutional system, wherein the words of the Constitution acquire meaning through Supreme
Court adjudication.
Reference may be made by way of analogy to a decision adjudging a statute void. Under the
orthodox theory of constitutional law, the act having been found unconstitutional was not a law,
conferred no rights, imposed no duty, afforded no protection. 9 As pointed out by former Chief
Justice Hughes though in Chicot County Drainage District v. Baxter State Bank: 10 "It is quite clear,
however, that such broad statements as to the effect of a determination of unconstitutionality must
be taken with qualifications. The actual existence of a statute, prior to such a determination, is an
operative fact and may have consequences which cannot justly be ignored. The past cannot always
be erased by a new judicial declaration. The effect of subsequent ruling as to invalidity may have to
be considered in various aspects, — with respect to particular relations, individual and corporate, and
particular conduct, private and official. Questions of rights claimed to have become vested, of status,
of prior determinations deemed to have finality and acted upon accordingly, or public policy in the
light of the nature both of the statute and of its previous application, demand examination."
102
After the Krivenko decision, there is no doubt that continued possession by alien-vendee of property
acquired before its promulgation is violative of the Constitution. It is as if an act granting aliens the
right to acquire residential and commercial lots were annulled by the Supreme Court as contrary to
the provision of the Constitution prohibiting aliens from acquiring private agricultural land.
The question then as now, therefore, was and is how to divest the alien of such property rights on
terms equitable to both parties. That question should be justly resolved in accordance with the
mandates of the Constitution not by a wholesale condemnation of both parties for entering into a
contract at a time when there was no ban as yet arising from the Krivenko decision, which could not
have been anticipated. Unfortunately, under the Rellosa case, it was assumed that parties, being
in pari delicto, would be left in the situation in which they were, neither being in a position to seek
judicial redress.
Would it not have been more in consonance with the Constitution, if instead the decision compelled
the restitution of the property by the alien-vendee to the Filipino-vendor? The Krivenko decision held
in clear, explicit and unambigous language that: "We are deciding the instant case under section 5 of
Article XIII of the Constitution which is more comprehensive and more absolute in the sense that it
prohibits the transfer to aliens of any private agricultural land including residential land whatever its
origin might have been. . . This prohibition [Rep. Act No. 133] makes no distinction between private
lands that are strictly agricultural and private lands that are residential or commercial. The
prohibition embraces the sale of private lands of any kind in favor of aliens, which is again a clear
implementation and a legislative interpretation of the constitutional prohibition. . . 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." 11
Alien-vendee is therefore incapacitated or disqualified to acquire and hold real estate. That
incapacity and that disqualification should date from the adoption of the Constitution on November
15, 1935. That incapacity and that disqualification, however, was made known to Filipino-vendor and
to alien-vendee only upon the promulgation of the Krivenko decision on November 15, 1947. Alien-
vendee therefore, cannot be allowed to continue owning and exercising acts of ownership over said
property, when it is clearly included within the Constitutional prohibition. Alien-vendee should thus
be made to restore the property with its fruits and rents to Filipino- vendor its previous owner, if it
could be shown that in the utmost good faith, he transferred his title over the same to alien-vendee,
upon restitution of the purchase price of course.
The Constitution bars alien-vendees from owning the property in question. By dismissing those suits,
the lots remained in alien hands. Notwithstanding the solution of escheat or reversion offered, they
are still at the moment of writing, for the most part in alien hands. There have been after almost
twenty years no proceedings for escheat or reversion.
Yet it is clear that an alien-vendee cannot consistently with the constitutional provision, as
interpreted in the Krivenko decision, continue owning the exercising acts of ownership over the real
estate in question. It ought to follow then, if such a continuing violation of the fundamental law is to
be put an end to, that the Filipino- vendor, who in good faith entered into a contract with an
103
incapacitated person, transferring ownership of a piece of land after the Constitution went into full
force and effect, should, in the light of the ruling in the Krivenko case, be restored to the possession
and ownership thereof, where he has filed the appropriate case or proceeding. Any other
construction would defeat the ends and purposes not only of this particular provision in question but
the rest of the Constitution itself.
The Constitution frowns upon the title remaining in the alien- vendees. Restoration of the property
upon payment of price received by Filipino vendor or its reasonable equivalent as fixed by the court is
the answer. To give the constitutional provision full force and effect, in consonance with the dictates
of equity and justice the restoration to Filipino-vendor upon the payment of a price fixed by the court
is the better remedy. He thought he could transfer the property to an alien and did so. After
the Krivenko case had made clear that he had no right to sell nor an alien-vendee to purchase the
property in question, the obvious solution would be for him to reacquire the same. That way the
Constitution would be given, as it ought to be given, respect and deference.
It may be said that it is too late at this stage to hope for such a solution, the Rellosa opinion, although
originally concurred in by only one justice, being too firmly inbedded. The writer however sees a
welcome sign in the adoption by the Court in this case of the concurring opinion of the then Justice,
later Chief Justice, Bengzon. Had it been followed then, the problem would not be still with us now.
'Fortunately, it is never too late — not even in constitutional adjudication.
||| (Philippine Banking Corp. v. Lui She, G.R. No. L-17587, [September 12, 1967], 128 PHIL 53-78)

104
 FIRST DIVISION

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

LOURDES VALERIO LIM, petitioner, vs. PEOPLE OF THE PHILIPPINES, respondent.

The Solicitor General for public respondent.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS: PERIOD OF OBLIGATION; MAY NOT BE FIXED BY
COURT WHERE AGREEMENT IN CASE AT BAR CLEARLY FIXES A PERIOD. — 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.
2. ID.; ID.; AGENCY; SUBJECT AGREEMENT IS A CONTRACT OF AGENCY TO SELL NOT A
CONTRACT OF SALE. — 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.

DECISION

RELOVA, J : p

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 subsidiary
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:
105
 " . . . 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: LibLex

'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 P1.30 per kilo. The proceed
in the amount of Seven Hundred Ninety Nine Pesos and 50/100 (P799.50) 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' of 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 kuug 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).
Ludy'
"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
106
 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 foregoing 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: LLpr

" . . . 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.
||| (Lim v. People, G.R. No. L-34338, [November 21, 1984], 218 PHIL 303-307)

107
 EN BANC

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

GREGORIO ARANETA, INC., petitioner, vs. THE PHILIPPINE SUGAR ESTATES

DEVELOPMENT CO., LTD., respondent.

Araneta, & Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Paño for respondent.

SYLLABUS

1. ACTION TO COMPEL PERFORMANCE UNDER CONTRACT; COURT HAS NO AUTHORITY TO FIX

PERIOD WHERE CONTRACT ESTABLISHES "REASONABLE TIME". — If the contract provided a
"reasonable time", then there was a period fixed, 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 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 facts 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.
2. PLEADING AND PRACTICE; ABSENCE OF PRAYER IN COMPLAINT FOR COURT TO FIX PERIOD;
EFFECT. — The complaint not having sought that the Court should set a period the court could not
proceed to do so unless the complaint was 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.
3. ACTION TO COMPEL PERFORMANCE; POWER OF COURT TO FIX DATE ART. 1197,
CONSTRUED. — 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 last
paragraph of Article 1197 is clear that the period cannot be set arbitrarily. All 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-year
period given herein was derived at.

DECISION

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

108
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 of 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 others, in the contract of purchase and sale with mortgage,
that the buyer will —
"Build on the parcel of 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., Ltd., filed its complaint against J. M. Tuason & Co., Inc., and Gregorio
Araneta, Inc. in the above Court of First 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 be 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.
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:
109
 "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 to the 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
110
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 was first amended; for the original decision is clear that the complaint
proceeded on the theory that the period for performance had elapsed already, 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 last paragraph of Article 1197 is clear
that the period can not be set arbitrarily. The law expressly prescribes that —
"the courts shall determine such period as may under the circumstance have 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-year 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.

111
It follows that there is no justification in law for the setting of 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.
(Gregorio Araneta, Inc. v. Philippine Sugar Estates Development Co., Ltd., G.R. No. L-22558, [May 31,
|||

1967], 126 PHIL 678-685)

112
 THIRD DIVISION

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

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, petitioners, vs. DAN
T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, respondent.

DECISION

LEONEN, J : p

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 certiorari 1 assailing the Court of Appeals' decision 2 in CA-G.R. CV
No. 95709, which stemmed from a complaint 3 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. 4 From February 2007 to March 2007, he delivered scrap papers worth PhP7,220,968.31 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
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-
dated check dated April 18, 2007 7 in the amount of PhP1,487,766.68 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 aHESCT

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement 10 where 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:
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 Sy's account.
Schedule of deliveries are as follows:
cDCaTH

xxx xxx xxx

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 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 letter 12 to Arco Pulp and Paper demanding payment of the
amount of PhP7,220,968.31, but no payment was made to him. 13
Dan T. Lim filed a complaint 14 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
answer 15 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
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 Paper's
obligation to Dan T. Lim. 17
Dan T. Lim appealed 18 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
On January 11, 2013, the Court of Appeals 20 rendered a decision 21 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 PhP7,220,968.31 with interest at 12% per annum from the time of
demand; PhP50,000.00 moral damages; PhP50,000.00 exemplary damages; and PhP50,000.00
attorney's fees. 22
TIEHSA

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 attorney's
fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking. 24
Its motion for reconsideration 25 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 attorney's fees to respondent who
did not show proof that he was entitled to damages. 27
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 PhP7,220,968.31 with damages since the debt of petitioners remains unpaid. 28 He also

114
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
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
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 aDTSHc

The issues to be resolved by this court are as follows:

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 attorney's 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:
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:
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 PhP7,220,968.31 to petitioner
Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper's
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
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.
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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. Respondent's receipt of the check and his
subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper's 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
Paper's 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: STECDc

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) CcTIAH

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
Novation was extensively discussed by this court in Garcia v. Llamas: 37
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
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 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) expromision and
(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 person's
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. IHTASa

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. SaCDTA

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:
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) DcaCSE

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 respondent's 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:
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

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 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: HCISED

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 Paper's 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 Paper's obligation to respondent remains valid
and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of
PhP7,220,968.31.
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:
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) SaHTCE

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:
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:
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
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Here, the injury suffered by respondent is the loss of PhP7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper's
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. THaAEC

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be
awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(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:
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. SHacCD

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:
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
Articles 20 and 21 of the Civil Code are as follows:
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.

119
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:
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
CSaITD

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:
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
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 one's conduct and/or
contemporaneous statements. 47 (Emphasis supplied) TAIDHa

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 Paper's 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.
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Exemplary damages may also be awarded. Under the Civil Code,exemplary damages are due in the
following circumstances: DSEIcT

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:
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:
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
defendant — associated with such circumstances as willfulness, wantonness, malice,
gross negligence or recklessness, oppression, insult or fraud or gross fraud — that
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) HaEcAC

The requisites for the award of exemplary damages are as follows:

(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 TcSICH

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.

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Since the award of exemplary damages is proper, attorney's fees and cost of the suit may also be
recovered. Article 2208 of the Civil Code states:
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:
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.
xxx xxx xxx
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 corporation's 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.
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We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines: 55 CTaSEI

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: aEIADT

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 PhP1,487,766.68 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 Paper's 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 Paper's liability. She unjustifiably refused to honor petitioner
corporation's 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 Frames 58
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:
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:

123
 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.
AIcECS

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. 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. aATHIE

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 attorney's fees in the amount of
P50,000.00.
SO ORDERED.
||| (Arco Pulp and Paper Co., Inc. v. Lim, G.R. No. 206806, [June 25, 2014], 737 PHIL 133-159)

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