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Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 114331 May 27, 1997

CESAR E. A. VIRATA, petitioner,

vs.

THE HONORABLE SANDIGANBAYAN and THE REPUBLIC OF THE PHILIPPINES, respondents.

TORRES, JR., J.:

In times past, when due process was more of a myth — empty accusations have had its day. In a more
enlightened age, a sage was heard to say — "Strike me if you must, but hear me first!" We have come a
long way, indeed, for in our time one who is required to answer for an alleged wrong must at least know
what is it all about.

This is the case before Us.

In this case, petitioner Cesar E. A. Virata (Virata, for brevity) is one of the defendants in Civil Case No.
0035, entitled Republic of the Philippines versus Benjamin (Kokoy) Romualdez, et. al.. The case, which
was filed by the Presidential Commission on Good Government in behalf of the Republic of the
Philippines (Republic, for brevity) against fifty three persons (53) 1 including Virata, involves the recovery
of ill-gotten wealth amassed by the defendants during the twenty year reign of former President
Ferdinand Marcos.

The complaint against the defendants was amended three times. The last amended complaint filed with
the Sandiganbayan, hereafter known as the expanded Second Amended Complaint, states, inter alia, the
following relevant allegations against petitioner Virata:

V. SPECIFIC AVERMENTS OF DEFENDANTS' ILLEGAL ACTS

xxx xxx xxx

14. Defendants Benjamin (Kokoy) Romualdez and Juliette Gomez Romualdez, acting by themselves
and/or in unlawful concert with Defendants Ferdinand E. Marcos and Imelda R. Marcos, and taking
undue advantage of their relationship, influence and connection with the latter Defendant spouses,
engaged in devises, schemes and strategems to unjustly enrich themselves at the expense of plaintiff
and the Filipino people, among others:

xxx xxx xxx

(b) gave MERALCO undue advantage (i) by effecting the increase of power rates with automatic
authority to tack into the consumers' electric bills the so-called purchase and currency adjustment, and.
(ii) with the active collaboration of Defendant Cesar E. A. Virata, by reducing the electric franchise tax
from 5% to 2% of gross receipts and the tariff duty on fuel oil imports by public utilities from 20% to
10%, resulting in substantial savings for MERALCO but without any significant benefit to the consumers
of electric power and loss of millions of pesos in much needed revenues to the government;

xxx xxx xxx

(g) secured, in a veiled attempt to justify MERALCO's anomalous acquisition of the electric
cooperatives, with the active collaborations of Defendants Cesar E. A. Virata, Juanito R. Remulla, Isidro
Rodriguez, Jose C. Hernandez, Pedro Dumol, Ricardo C. Galing, Francisco C. Gatmaitan, Mario D.
Camacho and the rest of the Defendants, the approval by Defendant Ferdinand E. Marcos and his cabinet
of the so-called "Three-Year Program for the Extension of MERALCO's Services to Areas Within the 60-
Kilometer Radius of Manila," which required government capital investment amounting to millions of
pesos;

xxx xxx xxx

(m) manipulated, with the support, assistance and collaboration of Philguarantee officials led by
Chairman Cesar E. A. Virata and the senior managers of FMMC/PNI Holdings Incorporated led by Jose S.
Sandejas, Jr., Jose M. Mantecon and Kurt S. Bachman, Jr., among others, the formation of Erecton
Holdings, Inc. without infusing additional capital solely for the purpose of making it assume the
obligation of Erectors Incorporated with Philguarantee in the amount of P527,387,440.71 with
insufficient Securities/collaterals just to enable Erectors Inc. to appear viable and to borrow more
capitals, so much so that its obligation with Philguarantee has reached a total of more than P2 Billion as
of June 30, 1987.

xxx xxx xxx

17. The following Defendants acted as dummies, nominees and/or agents by allowing themselves (i)
to be used as instruments in accumulating ill-gotten wealth through government concessions, orders
and/or policies prejudicial to plaintiff, or (ii) to be incorporators, directors or members of corporations
beneficially held and/or controlled by Defendants Ferdinand E. Marcos, Imelda R. Marcos, Benjamin
(Kokoy) T. Romualdez and Julliette Gomez Ramualdez in order (to) conceal and prevent recovery of
assets illegally obtained: . . . Cesar E. A. Virata . . . .
xxx xxx xxx

18. The acts of Defendants, singly or collectively, and/or in unlawful concern with one another,
constitute gross abuse of official position and authority, flagrant breach of public trust and fiduciary
obligations, acquisition of unexplained wealth, brazen abuse of right and power, unjust enrichment,
violation of the Constitution and laws of the Republic of the Philippines, to the grave and irreparable
damage of Plaintiff and the Filipino people. 2

Asserting that the foregoing allegations are vague and are not averred with sufficient definiteness as to
enable him to effectively prepare his responsive pleading, petitioner Virata filed a motion for a bill of
particulars on January 31, 1992.

In a Resolution promulgated on 4 August 1992, the Sandiganbayan partially granted the said motion by
requiring the Republic to submit a bill of particulars concerning the charges against petitioner Virata
stated only in paragraph 17 (acting as dummy, nominee and/or agent) and paragraph 18 (gross abuse of
authority and violation of laws and the Constitution) of the expanded Second Amended Complaint.
However, as to the other charges, namely: 1) Virata's alleged active collaboration in the reduction of
electric franchise tax and the tariff duty on fuel oil imports, as stated in paragraph 14 b (ii), 2) his active
collaboration in securing the approval by Ferdinand Marcos of the "Three Year Program for the Extension
of MERALCO's Services to Areas within the 60 Kilometer Radius of Manila," mentioned in paragraph 14 g,
and 3) his support, assistance and collaboration in the formation of Erectors Holdings Incorporated as
reflected in paragraph 14 m of the expanded Second Amended Complaint, the Sandiganbayan declared
that these accusations are clear and specific enough to allow Virata to submit an intelligent responsive
pleading, hence, the motion for a bill of particulars respecting the foregoing three charges was denied.

In view of the Sandiganbayan's order of August 4, 1992 requiring the Republic to amplify the charges in
paragraphs 17 and 18 of the expanded Second Amended Complaint, the Republic through the Office of
the Solicitor General submitted the bill of particulars dated October 22, 1992, hereafter called as the
Limited Bill of Particulars, which was signed by a certain Ramon A. Felipe IV, who was designated in the
bill of particulars as "private counsel", the relevant portion of which provides that:

xxx xxx xxx


1. Defendant Virata, while being one of the members of the Central Bank's Monetary Board,
approved Resolution No. 2320 dated December 14, 1973, allowing the Benpres Corporation, Meralco
Securities Corporation (MSC) and Manila Electric Company (MERALCO) to refinance/restructure their
outstanding loan obligations, a "sweetheart" or "behest" accommodation which enabled Meralco
Foundation, Inc. to acquire ownership and control of Manila Electric Company. Meralco Foundation, Inc.
was then controlled by the Marcos-Romualdez Group with Benjamin (Kokoy) Romualdez being the
beneficial owner and, thereby, expanding the said group's accumulation of ill-gotten wealth.

2. On July 11, 1973 defendant Virata representing the Republic of the Philippines as Finance
Minister, executed an Agreement with the Manila Electric Company (MERALCO) whereby the
government agreed to buy the parcels of land, improvements and facilities known as Gardner Station
Unit No. 1, Gardner Station Unit No. 2, Snyder Station Unit No. 1, Snyder Station Unit No. 2 and Malaya
Station Unit No. 1 for One Billion One Hundred Million Pesos (P1,100,000,000.00), a transaction which
was so disadvantageous to the government and most favorable to MERALCO which gained a total of
P206.2 million. As a result of this transaction, MERALCO is relieved of its heavy burden in servicing its
foreign loans which were assumed by the government. Furthermore, the agreement clearly showed the
"sweetheart" deal and favors being given by the government to MERALCO which was then owned/and or
controlled by Benjamin Romualdez representing the Marcos-Romualdez group, when it provided that the
"sale is subject to the reservation of rights, leases and easements in favor of Philippine Petroleum Corp.,
First Philippine Industrial Corp. (formerly MERALCO Securities Industrial Corp.) and Pilipinas Shell
Petroleum Corp. insofar as the same are presently in force and applicable." This enabled the Marcos-
Romualdez Group to further accumulate and expand the ill-gotten wealth and plunder the nation.

3. At the meeting of the Board of Directors of the Philippine Export and Foreign Loan Guarantee
Corp. held on September 16, 1983 defendant Virata acting as Chairman, together with the other
members of the board, approved the request of Erectors, Inc., a Benjamin Romualdez owned and/or
controlled corporation, for a guarantee to cover 100% of its proposed behest loan of US $33.5 Million
under the Central Bank Consolidated Foreign Borrowing Program with the Philippine National Bank,
Development Bank of the Philippines, Interbank, Philippine Commercial International Bank and
Associated Bank as conduit banks, to refinance Erectors, Inc.'s short term loans guaranteed by
Philguarantee, which at present forms part of the government's huge foreign debt. Such act of
defendant Virata was a flagrant breach of public trust as well as a violation of his duty to protect the
financial condition and economy of the country against, among others, abuses and corruption. 3

On 3 December 1992, a motion to strike out the Limited Bill of Particulars and to defer the filing of the
answer was filed by Virata on the grounds that the Limited Bill of Particulars avers for the first time new
actionable wrongs allegedly committed by him in various official capacities and that the allegations
therein do not indicate that Virata acted as dummy, nominee or agent but rather as a government
officer, acting as such in his own name. This motion was not acted upon by the Sandiganbayan.

Way back on September 1, 1992, Virata, who was dissatisfied with the Sandiganbayan Resolution of
August 4, 1992, filed a petition for certiorari (G.R. No. 106527) with this Court questioning the
Sandiganbayan's denial of his motion for a bill of particulars as regards the first three charges stated in
paragraph 14 b(ii), paragraph 14g and paragraph 14m of the expanded Second Amended Complaint. The
petition was granted by this Court in our decision promulgated on April 6, 1993. Accordingly, the
Sandiganbayan Resolution of August 4, 1992 to the extent that it denied the motion for a bill of
particulars with respect to the first three (3) charges was set aside and the Republic was required by this
Court to submit to Virata a bill of particulars containing the facts prayed for by the latter insofar as to
these first three (3) 'actionable wrongs' are concerned. 4

On August 20, 1993, the Office of the Solicitor General (OSG) filed a manifestation and motion dated
August 18, 1993 alleging, inter alia, that the OSG and PCGG agreed that the required bill of particulars
would be filed by the PCGG since the latter is the investigating body which has the complete records of
the case, hence, in a better position to supply the required pleading. The Sandiganbayan took note of
this manifestation in a Resolution dated August 26, 1993. On the basis of this arrangement, the PCGG
submitted the bill of particulars dated November 3, 1993, which was apparently signed by a certain
Reynaldo G. Ros, who was named in the bill of particulars as "deputized prosecutor" of the PCGG. This
bill of particulars, which incorporates by reference the Limited Bill of Particulars of October 22, 1992,
states, inter alia:

xxx xxx xxx

1. On the "Specific Averments of Defendant's Illegal Acts a (i)" [paragraph 14 b (ii) of the expanded
Second Amended Complaint]

Immediately after defendants Ferdinand E. Marcos and Benjamin "Kokoy" Romualdez took complete
control of Meralco and its subsidiaries, defendant Ferdinand E. Marcos issued Presidential Decree No.
551 on September 11, 1974 which effected the reduction of electric franchise tax being paid by Meralco
from 5% to 2% as well as lowered tariff duty of fuel oil imports from 20% to 10 % and allowed Meralco to
retain 3% reduction in franchise tax rates thereby allowing it to save as much as P258 million as of
December 31, 1992.
Defendant Cesar Virata then Minister of Finance, supported PD 551 and in fact issued the guidelines on
its implementation which were heavily relied upon by the Board of Energy in its questioned ruling dated
25 November 1982 by allowing Meralco to continue charging higher electric consumption rates despite
their savings from the aforesaid reduction of franchise tax without any significant benefit to the
consumers of electric power and resulting in the loss of millions of pesos in much needed revenues to
the government.

2. On the "Specific Averments of Defendant's Illegal Acts a (ii)" [par. 14g of the expended Second
Amended Complaint].

Defendant Cesar E.A. Virata, then Prime Minester [sic], caused the issuance of a confidential
memorandum dated October 12, 1982 to then President Ferdinand E. Marcos informing the latter of the
recommendation of the cabinet of the so called Three Year Program for the Extension of Meralco
Services of Areas within the 60 Kilometer Radius of Manila in order to justify Meralco's anomalous
acquisition of electric cooperatives and which later required the Monetary Board and Philguarantee then
headed by defendant Virata to recommend the restructuring of Meralco's foreign and local obligation
which led to the extending of loan accommodations by the Development Bank of the Philippines and
Philippine National Bank in favor of Meralco.

3. On the "Specific Averments of Defendant's Illegal Acts a (iii)" [par. 14m of the expanded Second
Amended Complaint].

Defendant Cesar Virata, as Chairman of Philguarantee and the Senior Managers of FMMC/PNI Holdings
Inc. led by Jose S. Sandejas, J. Jose N. Mantecon and Kurt S. Bachmann, Jr., supported and assisted the
formation of Erectors Holdings, Inc. for the purpose of making it assume the obligation of Erectors Inc.
with Philguarantee in the amount of P527,387,440.71 without sufficient securities/collateral and despite
this outstanding obligation, defendant Virata, as Chairman of Philguarantee, approved the Erectors Inc.
Applications for loan guarantees that reached more than P2 Billion as of June 30, 1987.

4. On the "Specific Averments of Defendant's Illegal Acts a (iv) [par. 17 of the expanded Second
Amended Complaint]
Plaintiff, hereby incorporates by reference plaintiff's Limited Bill of Particulars previously submitted to
this Honorable Court with the qualification that defendant Cesar Virata merely acted as agent. 5

Consequently, Virata filed on November 23, 1993 his comment on the bill of particulars with motion to
dismiss the expanded Second Amended Complaint. He alleges that both the bills of particulars dated
October 22, 1992 and November 3, 1993 are pro forma and should be stricken off the records. According
to him, the bill of particulars dated November 3, 1993 is merely a rehash of the assertions made in the
expanded Second Amended Complaint, hence, it is not the bill of particulars that is required by this
Court in the previous case of Virata vs. Sandiganbayan, et. al. (G.R. No. 106527). Furthermore, a reading
of the Limited Bill of Particulars dated October 22, 1992 shows that it alleges new imputations which are
immaterial to the charge of being a dummy, nominee or agent, and that Virata acted, not as a dummy,
nominee or agent of his co-defendants as what is charged in the complaint, but as a government officer
of the Republic. Virata also questions the authority of PCGG ad its deputized prosecutor to file the bill of
particulars in behalf of the Republic. He asserts that the legal representation of the Republic by the OSG
is mandated by law and that the Sandiganbayan, through its Resolution dated August 26, 1993, should
not have allowed the OSG to abdicate its duty as the counsel of record for the Republic.

The Republic filed its Opposition to Virata's Comment to Bill of Particulars on December 17, 1993.
Subsequently, Virata filed his Reply to Opposition on January 18, 1994.

After considering the relevant pleadings and motions submitted by the parties, the Sandiganbayan, in a
Resolution of February 16, 1994, admitted the bill of particulars submitted by the Republic and ordered
Virata to file his responsive pleading to the expanded Second Amended Complaint. The relevant portion
of the Resolution states as follows:

In the resolution of this incident, We find that the bill of particulars, filed by the plaintiff on November 3,
1993 in compliance with the Supreme Court's directive, appears to have substantially set out additional
averments and particulars which were not previously alleged in the Expanded Amended Complaint. We
likewise consider these additional averments and particulars to be sufficient enough to enable defendant
Virata to frame his responsive pleading or answer and that what he feels are still necessary in preparing
for trial should be obtained by various modes of discovery, such as interrogatories, depositions, etc. A bill
of particulars is sufficient if matters constituting the causes of action have already been specified with
sufficient particularity and which matters are within the moving party's knowledge. It cannot be utilized
to challenge the sufficiency of the claim asserted.
Simplicity of pleading is the idea of modern procedure, hence, evidentiary facts and details should not
be allowed to clutter a complaint as much as possible, consistent with the right of the moving party to
compel disclosure in instances where it is beyond cavil that He cannot adequately frame a responsive
pleading. In the instant case, the bill of particulars submitted by the plaintiff, in Our considered opinion,
is sufficient and adequate enough to fulfill its mission. 6

Dissatisfied, Virata filed this instant petition for certiorari under Rule 65 of the Rules of Court to
challenge the foregoing Resolution of the Sandiganbayan.

The issues to be resolved in the instant case are as follows:

1. WHETHER OR NOT THE SANDIGANBAYAN COMMITTED GRAVE ABUSE OF DISCRETION


AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ADMITTING THE BILL OF PARTICULARS
SUBMITTED BY THE REPUBLIC.

2. WHETHER OR NOT THE OFFICE OF THE SOLICITOR GENERAL AND THE PCGG ARE AUTHORIZED BY
LAW TO DEPUTIZE A COUNSEL TO FILE THE BILL OF PARTICULARS IN BEHALF OF THE REPUBLIC.

Petitioner maintains the view that the allegations in the bill of particulars of November 3, 1993 remain
vague, general and ambiguous, and the purported illegal acts imputed to Virata have not been averred
with sufficient definiteness so as to inform Virata of the factual and legal basis thereof.

Respecting the Limited Bill of Particulars dated October 22, 1992, which amplifies paragraphs 17 and 18
of the expanded Second Amended Complaint, Virata reiterates his basic arguments that the Limited Bill
of Particulars fails to provide the relevant and material averments sought to be clarified by him and that
it asserts for the first time new matters allegedly committed by him in different official capacities, to wit:
a) as a member of the Central Bank Monetary Board, he, with the other Monetary Board members,
approved Resolution No. 2320 dated December 14, 1973 regarding the restructuring of the loans of
Benpres Corporation, Meralco Securities Corporation, and the Manila Electric Company, b) as Finance
Minister, he executed an agreement with Manila Electric Company in connection with the sale of lands
and facilities of the Gardner Station Unit No. 1, Gardner Station Unit No. 2, Snyder Station Unit No. 1,
Snyder Station Unit No. 2, and Malaya Station Unit No. 1, and, c) as Chairman of the Board of Directors of
the Philippine Export and Foreign Loan Guarantee Corporation, approved the request of Erector,
Incorporated, for a guarantee to cover 100 % of its proposed behest loan of US $ 33.5 Million under the
Central Bank Consolidated Foreign Borrowing Program. He argues that the thrust of paragraphs 17 and
18 of the expanded Second Amended Complaint is the charge that Virata acted as "dummy, nominee
and/or agent," however, the foregoing allegations in the Limited Bill of Particulars do not indicate that he
acted as dummy, nominee or agent, but rather, as a government officer.

Invoking Section 3, Rule 17 of the Rules of Court, Virata argued that both the bills of particulars
submitted by the Republic did not follow the Rules of Court and the orders of the Sandiganbayan and
this Honorable Court, as such, the failure to comply with these legal orders is a ground for dismissal of
the action. Additionally, it is asserted that under Rule 12, Section 1(c) of the Rules of Court, if an order of
the court for a bill of particulars is not obeyed, it may order the striking out of the pleading to which the
motion was directed. Accordingly, Virata prayed for the striking out of the bills of particulars dated
October 22, 1992 and November 3, 1993 and the dismissal of the expanded Second Amended Complaint
in so far as he is concerned.

We find the instant petition meritorious.

The rule is that a complaint must contain the ultimate facts constituting plaintiff's cause of action. A
cause of action has the following elements, to wit: (1) a right in favor of the plaintiff by whatever means
and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to
respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of
the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for
which the latter may maintain an action for recovery of damages. 7 As long as the complaint contains
these three elements, a cause of action exists even though the allegations therein are vague, and
dismissal of the action is not the proper remedy when the pleading is ambiguous because the defendant
may ask for more particulars. As such, Section 1, Rule 12 of the Rules of Court, provides, inter alia, that a
party may move for more definite statement or for a bill of particulars of any matter which is not averred
with sufficient definiteness or particularity to enable him properly to prepare his responsive pleading or
to prepare for trial. Such motion shall point out the defects complained of and the details desired. Under
this Rule, the remedy available to a party who seeks clarification of any issue or matter vaguely or
obscurely pleaded by the other party, is to file a motion, either for a more definite statement or for a bill
of particulars. 8 An order directing the submission of such statement or bill, further, is proper where it
enables the party movant intelligently to prepare a responsive pleading, or adequately to prepare for
trial. 9

A bill of particulars is a complementary procedural document consisting of an amplification or more


particularized outline of a pleading, and being in the nature of a more specific allegation of the facts
recited in the pleading. 10 It is the office of the bill of particulars to inform the opposite party and the
court of the precise nature and character of the cause of action or defense which the pleader has
attempted to set forth and thereby to guide his adversary in his preparations for trial, and reasonably to
protect him against surprise at the

trial. 11 It gives information of the specific proposition for which the pleader contends, in respect to any
material and issuable fact in the case, and it becomes a part of the pleading which it supplements. 12 It
has been held that a bill of particulars must inform the opposite party of the nature of the pleader's
cause of action or defense, and it must furnish the required items of the claim with reasonable fullness
and precision. 13 Generally, it will be held sufficient if it fairly and substantially gives the opposite party
the information to which he is entitled, as required by the terms of the application and of the order
therefor. It should be definite and specific and not contain general allegations and conclusions. It should
be reasonably certain and as specific as the circumstances will allow. 14

Guided by the foregoing rules and principles, we are convinced that both the bill of particulars dated
November 3, 1993 and the Limited Bill of Particulars of October 22, 1992 are couched in such general
and uncertain terms as would make it difficult for petitioner to submit an intelligent responsive pleading
to the complaint and to adequately prepare for trial.

Let us examine the bill of particulars dated November 3, 1993:

1. The first paragraph of the foregoing bill of particulars provides that "(I)mmediately after
defendants Ferdinand E. Marcos and Benjamin 'Kokoy' Romualdez took control of Meralco and its
subsidiaries, defendant Ferdinand E. Marcos issued Presidential Decree No. 551 on September 11, 1974
which effected the reduction of electric franchise tax being paid by Meralco from 5% to 2% as well as
lowered tariff duty of fuel oil imports from 20% to 10% and allowed Meralco to retain the 3% reduction
in franchise tax rates thereby allowing it to save as much as P258 million as of December 31, 1992."
Further, it is stated that "(D)efendant Cesar Virata then Minister of Finance, supported PD 551 and in fact
issued the guidelines on its implementation which were heavily relied upon by the Board of Energy in its
questioned ruling dated 25 November 1982 by allowing Meralco to continue charging higher electric
consumption rates despite their savings from the aforesaid reduction of franchise tax without any
significant benefit to the consumers of electric power and resulting in the loss of millions of pesos in
much needed revenues to the government."

The abovequoted paragraph of the said bill of particulars is supposed to be the amplification of the
charge against Virata stated in paragraph 14(b) of the expanded Second Amended Complaint-which is his
alleged active collaboration in the reduction of electric franchise tax and tariff duty of fuel oil imports.
Yet, a careful perusal of the said paragraph shows that nothing is said about his alleged active
collaboration in reducing the taxes. Aside from the bare assertion that he "supported PD 551" and
"issued the guidelines on its implementation," the bill of particulars is disturbingly silent as to what are
the particular acts of Virata that establish his active collaboration in the reduction of taxes. The allegation
that he supported PD 551 and issued its implementing guidelines is an insufficient amplification of the
charge because the same is but a general statement bereft of any particulars. It may be queried-how did
Virata support PD 551? What were the specific acts indicating his support? What were these
implementing guidelines issued by him and when were they issued? In supporting PD 551 and in issuing
its implementing guidelines, what law or right, if there is any, is violated by Virata? It is worthy to note
that, until now, PD 551 has not been declared unconstitutional. In fact, this Court upheld its validity in
the case of Philippine Consumer Foundation, Inc. vs. Board of Energy and Meralco. 15

2. In the second paragraph of the said bill of particulars, it is alleged that "(D)efendant Cesar E.A.
Virata, then Prime Minester [sic], caused the issuance of a confidential memorandum dated October 12,
1982 to then President Ferdinand E. Marcos informing the latter of the recommendation of the cabinet
of the so called Three Year Program for the Extension of Meralco Services of Areas within the 60
Kilometer Radius of Manila in order to justify Meralco's anomalous acquisition of electric cooperatives
and which later required the Monetary Board and Philguarantee then headed by defendant Virata to
recommend the restructuring of Meralco's foreign and local obligation which led to the extending of loan
accommodation by the Development Bank of the Philippines and Philippine National Bank in favor of
Meralco."

The foregoing allegation purportedly amplifies the charge stated in paragraph 14 (g) of the expanded
Second Amended Complaint, that is-Virata's active collaboration in securing the approval by Ferdinand
Marcos and his cabinet of the Three Year Program for the Extension of Meralco's Services within the
Manila Area. However, just like the first paragraph of the said bill of particulars, this Court finds that the
second paragraph failed to set forth particularly or specifically the charge against Virata. It is an
incomplete or floating disclosure of material facts replete with generalizations and indefinite statements
which seemingly ends to nowhere. There are certain matters alleged that need to be clarified and filled
up with details so that Virata can intelligently and fairly contest them and raise them as cogent issues, to
wit: a) In causing the issuance of the said memorandum, what law, duty or right, if there is any, is
violated by Virata?; b) What was the recommendation of the cabinet regarding the Three Year Program?
The Republic should have at least furnish the substantial or important features of the recommendation;
c) What were these electric cooperatives? Were these cooperatives the same as those enumerated in
paragraph 14(e) of the expanded Second Amended Complaint? 16 Why was the acquisition of these
cooperatives anomalous?; and d) What were Virata's specific acts as the head of Philguarantee which led
to the restructuring of Meralco's obligation? What was his participation in recommending the
restructuring of Meralco's obligation? What were these foreign and local obligations? How much of the
obligation was recommended for restructuring? What were the loan accommodations given in favor of
Meralco? When were they given and how much were involved in the transaction?

3. Regarding the third paragraph of the said bill of particulars, We find the same as a mere recast or
restatement of the charge set forth in paragraph 14 (m) of the expanded Second Amended Complaint,
which is Virata's alleged support, assistance and collaboration in the formation of Erectors Holding,
Incorporated. The said paragraph of the bill of particulars states that "(D)efendant Cesar Virata, as
Chairman of Philguarantee and the Senior Managers of FMMC/PNI Holdings Inc. led by Jose S. Sandejas,
J. Jose N. Mantecon and Kurt S. Bachmann, Jr. supported and assisted the formation of Erectors Holdings,
Inc. for the purpose of making it assume the obligation of Erectors Inc. with Philguarantee in the amount
of P527,387,440.71 without sufficient securities/collateral and despite this outstanding obligation,
defendant Virata, as Chairman of Philguarantee, approved the Erectors Inc. Applications for loan
guarantees that reached more than P2 Billion as of June 30, 1987."

Clearly from the foregoing allegation, the Republic failed miserably to amplify the charge against Virata
because, instead of supplying the pertinent facts and specific matters that form the basis of the charge, it
only made repetitive allegations in the bill of particulars that Virata supported and assisted the formation
of the corporation concerned, which is the very same charge or allegation in paragraph 14 (m) of the
expanded Second Amended Complaint which requires specifications and unfailing certainty. As such, the
important question as to what particular acts of Virata that constitute support and assistance in the
formation of Erectors Holding, Incorporated is still left unanswered, a product of uncertainty.

We now take a closer look at the Limited Bill of Particulars dated October 22, 1992.

The said bill of particulars was filed by the Republic to amplify the charge of Virata's being a dummy,
nominee or agent stated in paragraphs 17 and 18 of the expanded Second Amended Complaint. In the
subsequent bill of particulars dated November 3, 1993 the said charge was qualified by the Republic in
the sense that Virata allegedly acted only as an agent. Let us consider each paragraph of the said bill of
particulars:

1. The first paragraph of the Limited Bill of Particulars states that "(D)efendant Virata, while being
one of the members of the Central Bank's Monetary Board, approved Resolution No. 2320 dated
December 14, 1973, allowing the Benpres Corporation, Meralco Securities Corp. (MSG) and Manila
Electric Company (MERALCO) to refinance/restructure their outstanding loan obligations, a 'sweetheart'
or 'behest' accommodation which enabled Meralco Foundation, Inc. to acquire ownership and control of
Manila Electric Company." It is stated further that "Meralco Foundation, Inc. was then controlled by the
Marcos-Romualdez Group with Benjamin (Kokoy) Romualdez being the beneficial owner and, thereby,
expanding the said group's accumulation of ill gotten wealth."

It is apparent from the foregoing allegations that the Republic did not furnish Virata the following
material matters which are indispensable for him to be placed in such a situation wherein he can
properly be informed of the charges against him: a) Did Virata, who was only one of the members of the
Board, act alone in approving the Resolution? Who really approved the Resolution, Virata or the
Monetary Board?; b) What were these outstanding loan obligations of the three corporations
concerned? Who were the creditors and debtors of these loan obligations? How much were involved in
the restructuring of the loan obligations? What made the transaction a 'sweetheart' or 'behest'
accommodation?; and c) How was the acquisition of MERALCO by Meralco Foundation, Inc. related to
the Resolution restructuring the loan obligations of the three corporations?

2 The second paragraph provides that "(O)n July 11, 1978 defendant Virata representing the
Republic of the Philippines as Finance Minister, executed an Agreement with the Manila Electric Co.
(MERALCO) whereby the government agreed to buy the parcels of land, improvements and facilities
known as Gardner Station Unit No. 1, Gardner Station Unit No. 2, Snyder Station Unit No. 1, Snyder
Station Unit No. 2 and Malaya Station Unit No. 1 for One Billion One Hundred Million Pesos
(P1,100,000,000.00), a transaction which was so disadvantageous to the government and most favorable
to MERALCO which gained a total of P206.2 million;" that "(A)s a result of this transaction, MERALCO was
relieved of its heavy burden in servicing its foreign loans which were assumed by the government;" that
". . ., the agreement clearly showed the 'sweetheart' deal and favors being given by the government to
MERALCO which was then owned and/or controlled by Benjamin Romualdez representing the Marcos-
Romualdez group, when it provided that the 'sale is subject to the reservation of rights, leases and
easements in favor of Philippine Petroleum Corp., First Philippine Industrial Corp. (formerly MERALCO
Securities Industrial Corp.) and Pilipinas Shell Petroleum Corp. insofar as the same are presently in force
and applicable'."

There are certain matters in the foregoing allegations which lack in substantial particularity. They are
broad and definitely vague which require specifications in order that Virata can properly define the
issues and formulate his defenses. The following are the specific matters which the Republic failed to
provide, to wit: a) What made the transaction 'disadvantageous' to the government? The allegation that
it was disadvantageous is a conclusion of law that lacks factual basis. How did MERALCO gain the P206.2
million? The Republic should have provided for more specifics how was the transaction favorable to
MERALCO?; b) What were these foreign obligations of MERALCO which were assumed by the
government? Who were the creditors in these obligations? When were these obligations contracted?
How much were involved in the assumption of foreign obligations by the government?; and c) By the
presence of the provision of the contract quoted by the Republic, what made the agreement a
'sweetheart' deal? The allegation that the agreement is a 'sweetheart deal' is a general statement that
needs further amplification.

3. The third paragraph states that "(A)t the meeting of the Board of Directors of the Philippine
Export and Foreign Loan Guarantee Corp. held on September 16, 1983 defendant Virata acting as
Chairman, together with the other members of the board, approved the request of Erectors Inc., a
Benjamin Romualdez owned and/or controlled corporation, for a guarantee to cover 100% of its
proposed behest loan of US$ 33.5 Million under the Central Bank Consolidated Foreign Borrowing
Program with the Philippine National Bank, Development Bank of the Philippines, Interbank, Philippine
Commercial International Bank and Associated Bank as conduit banks, to refinance Erectors, Inc.'s short
term loans guaranteed by Philguarantee, which at present forms part of the government's huge foreign
debt; that "(S)uch act of defendant Virata was a flagrant breach of public trust as well as a violation of his
duty to protect the financial condition and economy of the country against, among others, abuses and
corruption".

In like manner, the foregoing paragraph contains incomplete and indefinite statement of facts because it
fails to provide the following relevant matters: a) What was this $33.5 million proposed behest loan?
What were its terms? Who was supposed to be the grantor of this loan?; b) What were these short term
loans? Who were the parties to these transactions? When were these transacted? How was this $ 33.5
million behest loan related to the short term loans?

Furthermore, as correctly asserted by petitioner Virata, the Limited Bill of Particulars contains new
matters which are not covered by the charge that Virata acted as agent of his co-defendants in the
expanded Second Amended Complaint. Apparently, as may be examined from the three paragraphs of
the Limited Bill of Particulars, Virata, in so doing the acts; can not be considered as an agent of any of his
co-defendants, on the contrary, the factual circumstances stated in the said bill of particulars indicate
that Virata acted on behalf of the government, in his official capacity as a government officer. This
observation is established by the allegations that Virata acted as a member of the Central Bank
Monetary Board, as chairman of the Board of Directors of the Philippine Export and Foreign Loan
Guarantee Corporation, and, when he executed the Agreement with Meralco on July 7, 1978 concerning
the sale of certain properties, he acted as the Finance Minister of the government and as a
representative of the Republic in the contract. In performing the said acts, he, therefore, acted as an
agent of the government, not as an agent of his co-defendants, which is the charge against him in the
expanded Second Amended Complaint. Accordingly, the allegations in the Limited Bill of Particulars are
irrelevant and immaterial to the charge that Virata acted as an agent of his co-defendants.
As clearly established by the foregoing discussion, the two bills of particulars filed by the Republic failed
to properly amplify the charges leveled against Virata because, not only are they mere reiteration or
repetition of the allegations set forth in the expanded Second Amended Complaint, but, to the large
extent, they contain vague, immaterial and generalized assertions which are inadmissible under our
procedural rules.

It must be remembered that in our decision promulgated on April 6, 1993 (G.R. No. 106527), We
required the Republic to submit a bill of particulars concerning the first three charges against Virata
averred in paragraphs 14 b(ii), 14g, and 14m of the expanded Second Amended Complaint, on the other
hand, as regards the charges stated in paragraphs 17 and 18 of the said complaint, the Republic was
ordered to file the required bill of particulars by the Sandiganbayan through its Resolution dated August
4, 1992. The Republic purportedly complied with these orders by filing the questioned bill of particulars
dated November 3, 1993 and the Limited Bill of Particulars of October 22, 1992. However, as shown by
the above discussion, the two bills of particulars were not the bills of particulars which fully complied
with the Rules of Court and with the orders of the Sandiganbayan and this Court.

As such, in view of the Republic's failure to obey this Court's directive of April 6, 1993 (G.R. No. 106527)
and the Sandiganbayan's order of August 4, 1992 to file the proper bill of particulars which would
completely amplify the charges against Virata, this Court deems it just and proper to order the dismissal
of the expanded Second Amended Complaint, in so far as the charges against Virata are concerned. This
action is justified by Section 3, Rule 17 of the Rules of Court, which provides that:

Sec. 3. Failure to prosecute. — If plaintiff fails to appear at the time of the trial, or to prosecute his
action for an unreasonable length of time, or to comply with these rules or any order of the court, the
action may be dismissed upon motion of the defendant or upon the court's own motion. This dismissal
shall have the effect of an adjudication upon the merits, unless otherwise provided by court. (emphasis
ours)

Regarding the second issue of the instant case, Virata contends that the Presidential Commission on
Good Government is not authorized by law to deputize a counsel to prepare and file pleadings in behalf
of the Republic. Neither can the Office of the Solicitor General validly deputize an outside counsel to
completely take over the case for the Republic. According to petitioner, only the Office of the Solicitor
General is mandated by law to act counsel for the Republic. Thus, the bill of particulars filed for the
Republic by "private counsel" or "deputized prosecutor" of the PCGG is unauthorized.
This contention is devoid of merit.

We are of the opinion that the Limited Bill of Particulars dated October 22, 1992 signed by Ramon Felipe
IV and the Bill of Particulars dated November 3, 1993 signed by Reynaldo Ros are valid pleadings which
are binding upon the Republic because the two lawyer-signatories are legally deputized and authorized
by the Office of the Solicitor General and the Presidential Commission on Good Government to sign and
file the bills of particulars concerned.

Realizing that it can not adequately respond to this Court's order of April 6, 1993 (G.R. No. 106527)
requiring the Republic to submit the bill of particulars concerning the first three charges against Virata,
the Office of the Solicitor deemed it better to seek the help of the Presidential Commission on Good
Government by availing the services of the latter's lawyer who would directly file the required bill of
particulars in behalf of the Republic. This circumstance prompted the Office of the Solicitor General to
manifest before the Sandiganbayan on August 20, 1993 that it would be the PCGG which would file the
required bill of particulars and move that it be excused from doing so as the PCGG, being in-charge of
investigating the case, was in a better position than the OSG. Armed with this authority given by the
OSG, the PCGG, through one of its deputized prosecutors, Reynaldo Ros, filed the bill of particulars dated
November 3, 1993 to amplify the first three charges against Virata stated in paragraphs 14 b(ii), 14g, and
14m of the expanded Second Amended Complaint.

The action of the OSG in seeking the assistance of the PCGG is not without legal basis. The
Administrative Code of 1987, which virtually reproduces the powers and functions of the OSG
enumerated in P.D. No. 478 (The Law Defining the Powers and Functions of the Office of the Solicitor
General), provides, inter alia, that:

Sec. 35. Powers and Functions, . . . .

It (the OSG) shall have the following specific powers and functions:

xxx xxx xxx

(8) Deputize legal officers of government departments, bureaus, agencies and offices to assist the
Solicitor General and appear or represent the Government in cases involving their respective offices,
brought before the courts and exercise supervision and control over such legal officers with respect to
such cases.

(9) Call on any department, bureau, office, agency, or instrumentality of the Government for such
service assistance and cooperation as may be necessary in fulfilling its functions and responsibilities and
for this purpose enlist the services of any government official or employee in the pursuit of his task. . . . .
17

Contrary to Virata's contention, the Solicitor General did not abdicate his function and turn over the
handling of the instant case to the PCGG. Nowhere in the manifestation and motion filed by the OSG on
August 20, 1993 is there an iota or indication that the OSG is withdrawing from the case and that the
PCGG is taking over its prosecution. What the OSG did was merely to call the PCGG for assistance and
authorize it to respond to the motion for a bill of particulars filed by Virata. The OSG was impelled to act
this way because of the existence of the special circumstance that the PCGG, which has the complete
records of the case and being in charge of its investigation, was more knowledgeable and better
informed of the facts of the case than the OSG.

The authority, therefore, of Attorney Reynaldo Ros to sign and submit in behalf of the Republic the bill of
particulars dated November 3, 1993 is beyond dispute because 1) he was duly deputized by the PCGG in
pursuance to its power to prosecute cases of ill-gotten wealth under Executive Order No. 14 of May 14,
1986, 2) the OSG empowered the PCGG to file the bill of particulars as evidenced by the OSG's
manifestation and motion filed on August 20, 1993, and 3) there was no abdication of OSG's duty by
giving the PCGG the authority to file the bill of particulars.

On the other hand, the deputation of Ramon Felipe IV by the Solicitor General to sign and file the
Limited Bill of Particulars is based on Section 3 of Presidential Decree No. 478, which provides that:

Sec. 3. The Solicitor General may, when necessary and after consultation with the Government entity
concerned, employ, retain, and compensate on a contractual basis, in the name of the Government, such
attorneys and experts or technical personnel as he may deem necessary, to assist him in the discharge of
his duties. The compensation and expenses may be charged to the agency or office in whose behalf the
services have to be rendered. (emphasis ours)
The Solicitor General is mandated by law to act as the counsel of the Government and its agencies in any
litigation and matter requiring the services of a lawyer. In providing the legal representation for the
Government, he is provided with vast array of powers, which includes the power to retain and
compensate lawyers on contractual basis, necessary to fulfill his sworn duty with the end view of
upholding the interest of the Government. Thus, the Solicitor General acted within the legal bounds of
its authority when it deputized Attorney Felipe IV to file in behalf of the Republic the bill of particulars
concerning the charges stated in paragraph 17 and 18 of the expanded Second Amended Complaint.

At any rate, whether or not the lawyer-signatories are duly deputized would not be decisive in the
resolution of this case considering that the two bills of particulars filed by the Republic are mere scraps
of paper which miserably failed to amplify the charges against Virata. For the Republic's failure to comply
with the court's order to file the required bill of particulars that would completely and fully inform Virata
of the charges against him, the dismissal of the action against him is proper based on Section 3, Rule 17
of the Revised Rules of Court and the relevant jurisprudence thereon. 18 Simple justice demands that as
stated earlier, petitioner must know what the complaint is all about. The law requires no less.

Although this Court is aware of the Government's laudable efforts to recover ill-gotten wealth allegedly
taken by the defendants, this Court, however, cannot shrink from its duty of upholding the supremacy of
the law under the aegis of justice and fairness. This Court in dismissing the action against the petitioner
has rightfully adhered in the unyielding tenet — principia, non homines — the rule of law, not of men.

ACCORDINGLY, the instant petition is hereby GRANTED and the expanded Second Amended Complaint,
in so far as petitioner Virata is concerned, is hereby ordered DISMISSED.

SO ORDERED.

Puno and Mendoza, JJ., concur.

Regalado, J., concurs in the result.

Romero, J., took no part.


Footnotes

1 The complaint which originally impleaded forty five defendants was amended to include eight
other co-defendants.

2 Rollo, pp. 57-78, Second Amended Complaint pp. 18-40.

3 Rollo, pp. 96-98.

4 Virata vs. Sandiganbayan, G.R. No. 106527, April 6, 1993. See 221 SCRA 52.

5 Rollo, pp. 125-126. Bill of Particulars dated November 3, 1993, pp. 1-2.

6 Rollo. pp. 38-39. Resolution promulgated on February 16, 1994, pp. 7-8.

7 Dulay vs. Court of Appeals, G.R. No. 108017, April 3, 1995; 243 SCRA 220.

8 Bantillo vs. IAC, No. 75311, October 18, 1988; 166 SCRA 508.

9 Ibid.

10 71 CJS 376, p. 799.

11 Tan vs. Sandiganbayan, G.R. No. 84195, December 11, 1989.

12 61 Am Jur 2d 296, pp. 287-288.


13 71 CJS 398, p. 830.

14 Ibid., p. 831.

15 G.R. 63018, October 22, 1985 (Resolution).

16 Rizal Electric Cooperative; Talim Electric Cooperative; the electric firms in Laguna and Quezon;
First Cavite Electric Cooperative, Inc.; the three electric cooperatives in Bulacan; Communications and
Electricity Development Authority in Cavite; and the San Mateo Electric Light and Power Company.

17 Book IV, Title III, Chapter 12 of Executive Order No. 292.

18 Santos vs. Liwag, 101 SCRA 327, No. L-24238, November 28, 1980, Aranico-Rabino vs. Aquino,
No. L-46641, October 28, 1977, 10 SCRA 253.

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THIRD DIVISION

G.R. No. 129227. May 30, 2000

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioners, vs. THE HON. COURT OF APPEALS, and
CALVIN & ELSA ARCILLA, respondents.

DECISION

GONZAGA_REYES, J.:

Before us is a Petition for Review on Certiorari of the Decision of the Court of Appeals1 in CA-G.R. CV No.
45891 entitled CALVIN S. ARCILLA and ELSA B. ARCILLA vs. BANCO FILIPINO SAVINGS and MORTGAGE
BANK, ET. AL. which affirmed the decision of the Regional Trial Court (RTC), Branch 33, Manila ordering
BANCO FILIPINO to pay CALVIN and ELSA ARCILLA the amount of P126,139.00 with interest thereon at
12% per annum from the filing of the complaint.

The undisputed facts as found by the Court of Appeals are as follows:

"Elsa Arcilla and her husband, Calvin Arcilla, the Appellees in the present recourse, secured, on three (3)
occasions, loans from the Banco Filipino Savings and Mortgage Bank, the Appellant in the present
recourse, in the total amount of P107,946.00 as evidenced by "Promissory Note" executed by the
Appellees in favor of the Appellant. To secure the payment of said loans, the Appellees executed "Real
Estate Mortgages" in favor of the Appellants over their parcels of land located in BF-Parañaque, covered
by Transfer Certificate of Title Nos. 444645, 450406, 450407 and 455410 of the Registry of Deeds of
Parañaque (Annexes "B" to "B-2", Amended Complaint). Under said deeds, the Appellant may increase
the rate of interest, on said loans, within the limits allowed by law, as Appellant’s Board of Directors may
prescribe for its borrowers. At that time, under the Usury Law, Act 2655, as amended, the maximum rate
of interest for loans secured by real estate mortgages was 12% per annum. On January 10, 1975, the
Appellees and the Appellant executed a "Deed of Consolidation and Amendment of Real Estate
Mortgage" whereby the aforementioned loans of the Appellees and the "Real Estate Mortgage"
executed by them as security for the payment of said loans were consolidated (pages 33-35, Record).
Likewise, under said deed, the loan of the Appellees from the Appellant was increased to P188,000.00.
The Appellees executed a "Promissory Note", dated January 15, 1975, whereby they bound and obliged
themselves, jointly and severally, to pay the Appellant the aforesaid amount of P188,000.00 with interest
at the rate of 12% per annum, in nineteen (19) years from date thereof, in stated installments of
P2,096.93 a month (page 32, Records).

On January 2, 1976, the Central Bank of the Philippines issued Central Bank Circular No. 494, quoted
infra, as follows:

‘x x x

‘3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans
with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift
banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen
percent (19%) per annum.

‘x x x

‘7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be
governed by the Usury Law, as amended.’ (idem, supra)

In the meantime, the Skyline Builders, Inc., through its President, Appellee Calvin Arcilla, secured loans
from the Bank of the Philippine Islands in the total amount of P450,000.00. To insure payment of the
aforesaid loan, the FGU Insurance Corporation, issued PG Bond No. 1003 for the amount of P225,000.00
(pages 434-436, Records) in favor of the Bank of the Philippine Islands. Skyline Buildings, Inc., and the
Appellees executed an "Agreement of Counter-Guaranty with Mortgage" in favor of the FGU Insurance
Corporation covering the aforesaid parcels of land to assure payment of any amount that the insurance
company may pay on account of said loans (pages 429-436, Records). The mortgage was annotated as
Entry No. 58009 at the dorsal portion of Appellees’ titles.

After October 30, 1978, the Appellant prepared and issued a "Statement of Account" to the Appellees on
their loan account to the effect that, as of October 30, 1978, the balance of their loan account, inclusive
of interests, computed at 17% per annum, amounted to 284,490.75 (page 555, Records). It turned out
that the Appellant unilaterally increased the rate of interest on the loan account of the Appellees from
12% per annum, as covenanted in the "Real Estate Mortgage" and "Deed of Consolidated and Amended
Real Estate Mortgage" to 17% per annum on the authority of the aforequoted Central Bank Circular.

The Appellees failed to pay their monthly amortizations to Appellant. The latter forthwith filed, on April
3, 1979, a petition, with the Provincial Sheriff, for the extrajudicial foreclosure of Appellees’ "Real Esate
Mortgage" in favor of the Appellant for the amount of P342,798.00 inclusive of the 17% per annum
which purportedly was the totality of Appellees’ account with the Appellant on their loans. The
Appellant was the purchaser of the property at public auction for the aforesaid amount of P324,798.00.
On May 25, 1979, the Sheriff executed a "Certificate of Sale" over the aforesaid properties in favor of the
Appellant for the aforesaid amount (pages 37-38, Records).

The Appellant filed a "Petition for a Writ of Possession" with the Regional Trial Court entitled "Banco
Filipino Savings and Mortgage Bank vs. Elsa Arcilla, et al., LRC Case No. P-7757-P". On February 28, 1980,
the Court rendered a Decision granting the Petition of the Appellant. The Appellees appealed to the
Court of Appeals but the latter Court, on June 29, 1985, promulgated a Decision affirming the Decision of
the Regional Trial Court (pages 190-198, Records).

In the meantime, the FGU Insurance Corporation, Inc., redeemed the aforesaid properties from the
Appellant by paying to the latter the amount of P389,289.41 inclusive of interest computed at 17% per
annum. The Appellant and FGU Insurance Corp., Inc., executed, on May 27, 1980, a "Deed of
Redemption" (pages 126-129, Records).

On September 2, 1985, the Appellees filed a complaint in the Court a quo for the "Annulment of the
Loan Contracts, Foreclose Sale with Prohibition and Injunction, Etc." entitled "Calvin Arcilla, et al. vs.
Banco Filipino Savings and Mortgage Bank, et al." (pages 1-38, Records).
The Appellees averred, in their complaint, inter alia, that the loan contracts and mortgages between the
Appellees and the Appellant were null and void because: (a) the interests, charges, etc., were deducted
in advance from the face value of the "Promissory Notes" executed by the Appellees; and (b) the rate of
interests charged by the Appellant were usurious. The Appellees prayed that judgment be rendered in
their favor as follows:

"x x x

WHEREFORE, it is respectfully prayed –

a) Pending hearing on the prayer for the issuance of the Writ of Preliminary Injunction, a restraining
order be immediately issued against the defendants or anyone acting in their behalf from enforcing the
writ of possession issued against the plaintiffs;

b) After notice and hearing, a writ of preliminary injunction be issued against the defendants,
particularly defendants FGU Insurance Corporation and the City Sheriff of Pasay City, MM, or any of his
deputies or anyone acting in their behalf from enforcing the writ of possession;

c) After trial –

1) To make the injunction permanent;

2) Declare the loan contracts null and void;

3) Declare the extrajudicial foreclosure null and void;

4) Ordering the defendants to pay the plaintiffs the sums of P100,000.00 as moral damages; P50,000.00
as attorney fees; and, costs of suit.
PLAINTIFFS further pray for such other reliefs and remedies just and equitable in the premises." (pages
88-89, Records)

In its Answer to the Complaint, the Appellant averred that the interests charged by it on Appellees’ loan
accounts and that the said loan contracts and mortgages were lawful. The Appellant further averred that
the Appellees’ action had already prescribed.

In the interim, the Supreme Court promulgated its Decision in the precedent - setting case of "Banco
Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, et al., 152 SCRA 346" where it declared that
Central Bank Circular No. 494 was not the "law" envisaged in the mortgage deeds of borrowers of the
Bank; that the escalation clause incorporated in said deeds giving authority to the Appellant to increase
the rate of interests without the corresponding deescalation clause should not be given effect because of
its one-sidedness in favor of the Appellant; that the aforesaid Central Bank Circular did not apply to loans
secured by real estate mortgages, and that, therefore, the Appellant cannot rely said Circular as
authority for it to unilaterally increase the rate of interests on loans secured by Real Estate Mortgages.

In the meantime, the FGU Insurance Corp., Inc., filed a "Motion for Substitution" with the Regional Trial
Court, in LRC Case No. Pq-7757-P praying that it be substituted as the Petitioner in said case (pages 354-
356, Records). The Appellees were served with a copy of said motion and filed their Opposition thereto.
However, on November 10, 1987, the Regional Trial Court rendered a Decision granting the motion of
FGU Insurance Company (page 369, Records)

On December 3, 1987, the Appellees filed a Motion, with the Court a quo, for leave to file an "Amended
Complaint" to implead FGU Insurance Corporation as party defendant (pages 83-129, Records). The
Court granted said motion and admitted Appellees’ Amended Complaint.

After the requisite pre-trial, the Court a quo issued a Pre-Trial Order which defined, inter alia, Appellees’
action against the Appellant, and the latter’s defenses, to wit:

"x x x

On the part of the defendants Banco Filipino Savings to simplify the case, it seeks to declare as null and
void plaintiff’s loan contract with Banco Filipino obtained in May 1974, on the ground that the interest
agreed in the contract was usurious. Plaintiffs also seek to declare as null and void the foreclosure of
their mortgage by Banco Filipino on the ground that the loan with the said mortgagee foreclosure maybe
validly done.

DEFENSES

1. Prescription

2. Laches

3. Estoppel" (page 496, Records)

In the meantime, the Appellees and FGU Insurance Corporation entered into and forged a "Compromise
Agreement." The Court a quo promulgated a Decision, dated April 3, 1991, based on said "Compromise
Agreement." Under the "Compromise Agreement", the Appellees bound and obliged themselves, jointly
and severally, to pay to FGU Insurance Corporation the amount of P1,964,117.00 in three (3) equal
installments and that:

"x x x

6. Upon faithful compliance by plaintiffs Calvin S. Arcilla and Elsa B. Arcilla with their Agreement,
defendant FGU Insurance Corporation shall renounce in their favor all its rights, interests and claims to
the four (4) parcels of land mentioned in paragraph No. 4 of this Compromise Agreement, together with
all the improvements thereon, and plaintiffs Calvin S. Arcilla and Elsa B. Arcilla shall be subrogated to all
such rights, interests and claims. In addition, defendant FGU Insurance Corporation shall execute in favor
of plaintiffs Calvin S. Arcilla and Elsa B. Arcilla a deed of cancellation of the real estate mortgage
constituted in its favor on the above-mentioned four (4) parcels of land, together with all the
improvements thereon. All documentary stamps and expenses for registration of the said deed of
cancellation of mortgage shall be for the account of plaintiffs Calvin S. Arcilla and Elsa B. Arcilla.
7. Subject to the provisions of paragraph No. 4 of this Compromise Agreement, the execution of this
Compromise Agreement shall be without prejudice to the prosecution of the claims of plaintiffs Calvin S.
Arcilla and Elsa B. Arcilla. (pages 543-544, Records)

Thereafter, the Appellees and the Appellant agreed, upon the prodding of the Court a quo, that the only
issue to be resolved by the Court a quo was, whether or not the Appellees were entitled to the refund,
under the Decision of the Supreme Court in "Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel
Navarro, et al.," supra. On November 8, 1991, the Appellees filed a "Motion for Summary Judgment"
appending thereto, inter alia, the Affidavit of Appellee Calvin S. Arcilla and the appendages thereof
(pages 550-555, Records). Appellant filed its Opposition but did not append any affidavit to said
Opposition. On March 26, 1993, the Court a quo promulgated a Decision, the decretal portion of which
reads as follows:

‘WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against
defendant Banco Filipino ordering defendant Banco Filipino to pay spouses Calvin S. Arcilla and Elsa B.
Arcilla the sum of P126,139.00 with interest thereon at 12% per annum reckoned from the filing of the
complaint.

SO ORDERED.’ (pages 584-585, Records)"2

Petitioner appealed to the Court of Appeals, which affirmed the decision of the RTC the dispositive
portion of which reads:

"IN THE LIGHT OF ALL THE FOREGOING, the assailed Decision is AFFIRMED. Appellant’s appeal is
DISMISSED. With costs against the Appellant.

SO ORDERED."3

Their Motion for Reconsideration4 was denied hence this petition where the petitioner assigns the
following errors:
"I. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT THE CAUSE OF ACTION OF THE
PRIVATE RESPONDENTS ACCRUED ON OCTOBER 30, 1978, AND THEREFORE THE FILING OF THEIR
COMPLAINT FOR ANNULMENT OF THEIR LOAN CONTRACTS WITH THE PETITIONER IN 1985 WAS NOT
YET BARRED BY PRESCRIPTION.

II. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT THE MATERIAL ALLEGATIONS OF
THE PRIVATE RESPONDENTS COMPLAINT WERE SUFFICIENT TO WARRANT THE RELIEFS GRANTED TO
THEM BY THE LOWER COURT, PATICULARLY THE REFUND OF P126,139.00 REPRESENTING ALLEGED
EXCESS INTEREST PAID ON THEIR LOAN.

III. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE PRIVATE RESPONDENTS WERE
ENTITLED TO THE SAID REFUND OF P126,139.00 CLAIMED BY THEM."5

The petitioner maintains that the complaint filed by herein private respondents was an action for
Annulment of Loan Contracts, foreclosure sale with prohibition and injunction. It is contended that these
causes of action accrued on the date of the execution of the promissory note and deed of mortgage on
January 15, 1975 and not October 30, 1978 as found by the Court of Appeals. Thus, private respondents
cause of action has already prescribed inasmuch as the case was filed on September 2, 1985 or more
than ten years thereafter. Petitioner further contends that private respondents cannot rely on the ruling
in the case of Banco Filipino Savings & Mortgage Bank vs. Navarro6 considering that they were not
parties to said case. Petitioner also maintains that the order of the lower court, which was affirmed by
the Court of Appeals ordering the petitioner to refund the excess interest paid by private respondents in
the amount of P126,318.00 was without any legal basis since private respondents never raised the issue
of interest nor prayed for any relief with respect thereto. Moreover, the private respondents never paid
said amount to the petitioner. While the amount was included in the bid price of the bank when it
bought the mortgaged properties during the public auction, said bid price did not prejudice the private
respondents because when the private respondents repurchased the properties, the amount they paid
was different and independent of the redemption price of the bank. Besides, the agreement between
the private respondents and FGU Insurance Corporation was one of sale and not redemption. Thus, any
amount paid by the private respondents to FGU was voluntarily entered into by them and was not a
consequence of the foreclosure of the mortgage properties.

Conversely, private respondents allege that their action has not prescribed considering that prescription
begins to run from the day the action may be brought; the date their right of action accrued. It is their
contention that the period of prescription of their action should commence to run from October 30,
1978 when the petitioner unilaterally increased the rate of interest on private respondents’ loan to 17%
per annum. Thus, when private respondents filed their action against the petitioner on September 2,
1985 or almost eight years thereafter, their action had not yet prescribed. Moreover, private respondents
aver that they are entitled to the refund inasmuch as the escalation clause incorporated in the loan
contracts do not have a corresponding de-escalation clause and is therefore illegal.

The appeal is unmeritorious.

There are only two issues, which must be resolved in the present appeal. First, has the action of the
private respondents prescribed; and second, are the respondents entitled to the refund of the alleged
interest overpayments.

Petitioner’s claim that the action of the private respondents has prescribed is bereft of merit. Under
Article 1150 of the Civil Code, the time for prescription of all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may be brought. Thus, the period
of prescription of any cause of action is reckoned only from the date the cause of action accrued.7 And a
cause of action arises when that which should have been done is not done, or that which should not
have been done is done.8 The period should not be made to retroact to the date of the execution of the
contract on January 15, 1975 as claimed by the petitioner for at that time, there would be no way for the
respondents to know of the violation of their rights.9 The Court of Appeals therefore correctly found
that respondents’ cause of action accrued on October 30, 1978, the date they received the statement of
account showing the increased rate of interest, for it was only from that moment that they discovered
the petitioner’s unilateral increase thereof. We quote with approval the pertinent portions of the Court
of Appeals decision as follows:

"It is the legal possibility of bringing the action that determines the starting point for the computation of
the period of prescription (Constancia C. Telentino vs. Court of Appeals, et al., 162 SCRA 66). In fine, the
ten-year prescriptive period is to be reckoned from the accrual of Appellees’ right of action, not
necessarily on the very date of the execution of the contracts subject of the action (Naga Telepone Co.
Inc. vs. Court of Appeals, et al., 230 SCRA 351). A party’s right of action accrues only when the
confluence of the following elements is established:

"xxx: a) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created;
b) an obligation on the part of defendant to respect such right; and c) an act or omission on the part of
such defendant violative of the right of the plaintiff (Cole vs. Vda. de Gregorio, 116 SCRA 670 [1982];
Mathay vs. Consolidated Bank & Trust Co., 58 SCRA 559 [1974]; Vda. de Enriquez vs. Dela Cruz, 54 SCRA 1
[1973]. It is only when the last element occurs or takes place that it can be said in law that a cause of
action has arisen (Cole vs. Vda. De Gregorio, supra)" (Maria U. Español vs. Chairman, etc., et al.,, 137
SCRA 314, page 318)

More, the aggrieved must have either actual or presumptive knowledge of the violation, by the guilty
party of his rights either by an act or omission. The question that now comes to the fore is when the
Appellees became precisely aware of the unilateral increase, by the Appellant, of the rate of interest on
their loan account to 17% per annum. As can be ascertained from the records, the Appellees discovered
or should have discovered, for the first time, the unilateral increase by the Appellant of the rate of
interest to 17% per annum when they received the "Statement of Account" of the Appellant as of
October 30, 1978. Hence, it was only then that the prescriptive period for the Appellees to institute their
action in the Court a quo commenced. Since the Appellees filed their complaint in the Court a quo on
September 2, 1985, the same was seasonably filed within the ten-year prescriptive period."10

Anent the second issue as to whether the respondents are entitled to recover the alleged overpayments
of interest, we find that they are despite the absence of any prayer therefor. This Court has ruled that it
is the material allegations of fact in the complaint, not the legal conclusion made therein or the prayer
that determines the relief to which the plaintiff is entitled.11 It is the allegations of the pleading which
determine the nature of the action and the Court shall grant relief warranted by the allegations and the
proof even if no such relief is prayed for.12 Thus, even if the complaint seeks the declaration of nullity of
the contract, the Court of Appeals correctly ruled that the factual allegations contained therein
ultimately seek the return of the excess interests paid.

The amended complaint13 of herein private respondents specifically allege that the contracts of loan
entered into by them and the petitioner were contrary to and signed in violation of the Usury Law14 and
consequentially pray that said contracts be declared null and void. The amended complaint reads:

"6. The aforementioned loans granted by defendant Banco Filipino to the plaintiffs as stated on the face
of the promissory note and real estate mortgage (Annexes "B" to "D", inclusive) were not actually
received by the plaintiffs because interests, charges, etc. were deducted in advance from the face value
of the loans not in accordance with the contracts;

7. Even the loan contracts (Annexes "B" to "D", inclusive) required by defendant Banco Filipino to be
signed by the plaintiffs were contrary to and in violation of the then Usury Law, as amended;
8. Assuming arguendo that the loan contracts between plaintiffs and defendant Banco Filipino are valid,
the extra-judicial foreclosure of the properties of the plaintiffs on May 24, 1979 was null and void for
having been conducted in clear violation of the law (Act 3135), namely: a) lack of roper notice to the
plaintiffs; b) lack of proper publication and posting as required by law; c) the alleged sale was conducted
at the place other than that prescribed by law, among others;

9. On May 27, 1990, defendant Banco Filipino purportedly executed in favor of defendant FGU Insurance
Corporation a Deed of Redemption over the foreclosed properties of the plaintiffs, again, without notice
to the latter, as evidenced by the said Deed of Redemption, copy of which is hereto attached and marked
as Annex "F".

10. The Deed of Redemption (Annex "F") is clearly null and void for having been executed in violation of
Rule 39, Rules of Court, and other related provisions of the Rules of Court."15

The loan contracts with real estate mortgage entered into by and between the petitioner and
respondent stated that the petitioner may increase the interest on said loans, within the limits allowed
by law, as petitioner’s Board of Directors may prescribe for its borrowers. At the time the contracts were
entered into, said escalation clause was valid.16 It was only pursuant to P.D. No. 1684 which became
effective March 17, 1980 wherein to be valid, escalation clauses should provide: 1.) that there can be an
increase in interest if increased by law or by the Monetary Board; and 2.) in order for such stipulation to
be valid, it must include a provision for the reduction of the stipulated interest in the event that the
maximum rate of interest is reduced by law or by the Monetary Board.17

Given the validity of the escalation clause, could the petitioner increase the stipulated interest pursuant
to the Central Bank Circular 494 from 12% to 17%.

We rule that it may not.

The escalation clause in the loan contracts reads as follows:


"xxx g) The rate of interest charged on the obligation secured by this mortgage, as well as the interest on
the amount which may have been advanced by the Mortgagee in accordance with paragraph (b) and (d)
hereof, shall be subject, during the terms of this contract, to such an increase, within the limits allowed
by law, as the Board of Directors of the Mortgagee may prescribe for its debtors; xxx" (emphasis
supplied)18

In Banco Filipino Savings & Mortgage Bank vs. Navarro,19 which involved a similar escalation clause20 ,
we ruled that Central Bank Circular 494, although it has the force and effect of law, is not a law and is not
the law contemplated by the parties which authorizes the petitioner to unilaterally raise the interest rate
of the loan.21 Consequently, the reliance by the petitioner on Central Bank Circular 494 to unilaterally
raise the interest rates on the loan in question was without any legal basis.

Petitioner’s argument that the Banco Filipino case cannot be applied to the present case since the
respondents were not intervenors therein is flawed. Only the judgment in said case cannot bind the
respondents as they were not parties thereto, however, the doctrine enunciated therein is a judicial
decision and forms part of the legal system of the land.22 It forms a precedent, which must be adhered
to under the doctrine of stare decisis.23 Thus, even if the respondents were not parties to the above-
mentioned case, the doctrine enunciated therein may be applied to the present case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 45891 is AFFIRMED and the instant
petition is hereby DENIED.

No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, and Purisima, JJ., concur.

Panganiban, J., on leave.


1 Special Fourth Division composed of the ponente, J. Romeo J. Callejo; and the members J. Gloria C.
Paras (Chairman) and J. Conrado M. Vasquez, Jr. concurring.

2 Decision of the Court of Appeals, pp. 1-8.

3 Ibid., p. 19.

4 Rollo, p. 35.

5 Petition, pp. 10-11; Rollo, pp. 18-19.

6 152 SCRA 347 [1987].

7 Lim Tay vs. CA, 293 SCRA 634 at p. 655 [1998].

8 Arturo M. Tolentino, The Civil Code, Volume IV (1997), p. 44.

9 Ibid.

10 Decision p. 11-12; Rollo, pp. 47-48.

11 Metropolitan Waterworks and Sewerage System vs. Court of Appeals, 297 SCRA 287 at p. 302 [1998].

12 Solid Homes, Inc. vs. Court of Appeals, 271 SCRA 157 at p. 164 [1997].

13 Admitted on December 8, 1987; Record, p. 138.


14 The Usury Law was suspended only on December 10, 1982 pursuant to Central Bank Circular No. 905,
Series of 1982. See Liam Law vs. Olympic Sawmill Co., 129 SCRA 439.

15 Amended Complaint, pp. 2 to 3; Record, pp. 86 to 87.

16 Banco Filipino Savings & Mortgage Bank vs. Navarro, 152 SCRA 346 at p. 353 [1987].

17 Ibid., at p. 355.

18 Record at pp. 21, 25 and 29.

19 See note 6.

20 "I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this
contract without advance notice to me/us in the event a law increasing the lawful rates of interest that
may be charged on this particular kind of loan."

21 See note 16, Supra at pp. 354-355.

22 Article 8, Civil Code.

23 Arturo M. Tolentino, The Civil Code, Volume I (1997), p. 37.

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Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 176014 September 17, 2009

ALICE VITANGCOL and NORBERTO VITANGCOL, Petitioners,

vs.

NEW VISTA PROPERTIES, INC., MARIA ALIPIT, REGISTER OF DEEDS OF CALAMBA, LAGUNA, and the
HONORABLE COURT OF APPEALS Respondents.

DECISION
VELASCO, JR., J.:

The Case

In this Petition for Review under Rule 45 of the Rules of Court, petitioners Alice Vitangcol and Norberto
Vitangcol (collectively, Vitangcol) assail the August 14, 2006 Decision1 and December 19, 2006
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 84205 which reversed the December 21,
2004 Order3 of the Regional Trial Court (RTC), Branch 35, in Calamba City, Laguna, in Civil Case No. 3195-
2001-C for Quieting of Title entitled New Vista Properties, Inc. v. Alice E. Vitangcol, Norberto A. Vitangcol,
Maria L. Alipit and Register of Deeds of Calamba, Laguna.

The Facts

Subject of the instant controversy is Lot No. 1702 covered by Transfer Certificate of Title (TCT) No.
(25311) 2528 of the Calamba, Laguna Registry in the name of Maria A. Alipit and Clemente A. Alipit,
married to Milagros.

On June 18, 1989, Maria and Clemente A. Alipit, with the marital consent of the latter’s wife, executed a
Special Power of Attorney4 (SPA) constituting Milagros A. De Guzman as their attorney-in-fact to sell
their property described in the SPA as "located at Bo. Latian, Calamba, Laguna covered by TCT No.
(25311) 2538 with Lot No. 1735 consisting of 242,540 square meters more or less." Pursuant to her
authority under the SPA, De Guzman executed on August 9, 1989 a Deed of Absolute Sale5 conveying to
New Vista Properties, Inc. (New Vista) a parcel of land with an area of 242,540 square meters situated in
Calamba, Laguna. In the deed, however, the lot thus sold was described as:

a parcel of land (Lot No. 1702 of the Calamba Estate, GLRO Rec. No. 8418) situated in the Calamba,
Province of Laguna, x x x containing an area of [250,007 square meters], more or less. x x x That a portion
of the above-described parcel of land was traversed by the South Expressway such that its original area
of [250,007] SQUARE METERS was reduced to [242,540] SQUARE METERS, which is the subject of the
sale.6
Following the sale, New Vista immediately entered the subject lot, fenced it with cement posts and
barbed wires, and posted a security guard to deter trespassers.

We interpose at this point the observation that the property delivered to and occupied by New Vista was
denominated in the SPA as Lot No. 1735 covered by TCT No. (25311) 2538, while in the deed of absolute
sale in favor of New Vista the object of the purchase is described as Lot No. 1702 covered by TCT No.
(25311) 2528.

The controversy arose more than a decade later when respondent New Vista learned that the parcel of
land it paid for and occupied, i.e., Lot No. 1702, was being claimed by petitioners Vitangcol on the
strength of a Deed of Absolute Sale for Lot No. 1702 under TCT No. (25311) 2528 entered into on August
14, 2001 by and between Vitangcol and Maria Alipit. Consequent to the Vitangcol-Maria Alipit sale, TCT
No. (25311) 2528 was canceled and TCT No. T-482731 issued in its stead in favor of Vitangcol on August
15, 2001.

Alarmed by the foregoing turn of events, New Vista lost no time in protecting its rights by, first, filing a
notice of adverse claim over TCT No. T-482731, followed by commencing a suit for quieting of title before
the RTC. Its complaint7 was docketed as Civil Case No. 3195-2001-C before the RTC, Branch 92 in
Calamba City. Therein, New Vista alleged paying, after its purchase of the subject lot in 1989, the
requisite transfer and related taxes therefor, and thereafter the real estate taxes due on the land. New
Vista also averred that its efforts to have the Torrens title transferred to its name proved unsuccessful
owing to the on-going process of reclassification of the subject lot from agricultural to
commercial/industrial. New Vista prayed, among others, for the cancellation of Vitangcol’s TCT No. T-
482731 and that it be declared the absolute owner of the subject lot.

On December 11, 2001, Vitangcol moved to dismiss8 the complaint which New Vista duly opposed. An
exchange of pleadings then ensued.

On June 27, 2003, or before Maria Alipit and Vitangcol, as defendants a quo, could answer, New Vista
filed an amended complaint,9 appending thereto a copy of the 1989 deed of absolute sale De Guzman,
as agent authorized agent of the Alipits, executed in its favor. Thereafter, Vitangcol filed a motion to
dismiss, followed by a similar motion dated August 29, 2003 interposed by Maria Alipit which New Vista
countered with an opposition.
Unlike in its original complaint, New Vista’s amended complaint did not have, as attachment, the June
18, 1989 SPA. It, however, averred that Clemente and Maria Alipit had ratified and validated the sale of
Lot No. 1702 covered by TCT No. (25311) 2528 by their having delivered possession of said lot to New
Vista after receiving and retaining the purchase price therefor.

Ruling of the RTC

The Initial RTC Order

By Order of November 25, 2003, the trial court denied Vitangcol’s and Maria Alipit’s separate motions to
dismiss the amended complaint. As there held by the RTC, the amended complaint10 sufficiently stated
a cause of action as shown therein that after the purchase and compliance with its legal obligations
relative thereto, New Vista was immediately placed in possession of the subject lot, but which Maria
Alipit, by herself, later sold to Vitangcol to New Vista’s prejudice.

The December 21, 2004 RTC Order

From the above order, Vitangcol sought reconsideration,11 attaching to the motion a copy of the June
18, 1989 SPA which, in the hearing on June 7, 2004, was accepted as evidence pursuant to Sec. 8, Rule
10 of the Rules of Court.12 By Order dated July 14, 2004, the RTC granted reconsideration and dismissed
the amended complaint, disposing as follows:

In view of the foregoing, the court hereby set aside its Order dated November 25, 2003 and by virtue of
this order, hereby finds that the Amended Complaint states no cause of action and that the claim of the
plaintiff in the present action is unenforceable under the provisions of the statue [sic] of frauds, hence,
the Amended Complaint is hereby ordered DISMISSED, pursuant to Rule 16, Section 1, paragraph g and i.

SO ORDERED.13
In reversing itself, the RTC made much of the fact that New Vista did not attach the SPA to the amended
complaint. To the RTC, this omission is fatal to New Vista’s cause of action for quieting of title, citing in
this regard the pertinent rule when an action is based on a document.14

The RTC also stated the observation that New Vista’s act of not directly mentioning the SPA and the non-
attachment of a copy thereof in the amended complaint constituted an attempt "to hide the fact that
Milagros Alipit-de Guzman is only authorized to sell a parcel of land denominated as Lot No. 1735 of the
Calamba Estate, and not Lot No. 1702 of the Calamba Estate, which is the subject matter of the Deed of
Absolute Sale (Annex B of the Amended Complaint)."15 According to the RTC, what the agent (De
Guzman) sold to New Vista was Lot No. 1702 which she was not authorized to sell.

Aggrieved, New Vista interposed an appeal before the CA, its recourse docketed as CA-G.R. CV No.
84205.

Ruling of the CA

On August 14, 2006, the appellate court rendered the assailed Decision reversing the December 21, 2004
RTC Order, reinstating New Vista’s amended complaint for quieting of title, and directing Vitangcol and
Maria Alipit to file their respective answers thereto. The decretal portion of the CA’s decision reads:

WHEREFORE, premises considered, the 21 December 2004 Order of the court a quo is hereby REVERSED
and SET ASIDE, and the Amended Complaint is hereby REINSTATED. The defendants-appellees are hereby
directed to file their respective answers/responsive pleadings within the time prescribed under the Rules
of Court.

SO ORDERED.16

The CA faulted the RTC for dismissing the amended complaint, observing that it was absurd for the RTC
to require a copy of the SPA which was not even mentioned in the amended complaint. Pushing this
observation further, the CA held that the amended complaint, filed as it were before responsive
pleadings could be filed by the defendants below, superseded the original complaint. As thus
superseded, the original complaint and all documents appended thereto, such as the SPA, may no longer
be taken cognizance of in determining whether the amended complaint sufficiently states a cause of
action. It, thus, concluded that the RTC erred in looking beyond the four corners of the amended
complaint in resolving the motion to dismiss on the ground of its failing to state a cause of action.

And citing jurisprudence,17 the CA ruled that even if the SPA were considered, still the discrepancy
thereof relative to the deed of absolute sale—in terms of lot and title numbers—is evidentiary in nature
and is simply a matter of defense, and not a ground to dismiss the amended complaint.

Finally, the CA held that the real question in the case boiled down as to whose title is genuine or
spurious, which is obviously a triable issue of fact which can only be threshed out in a trial on the merits.

Through the equally assailed December 19, 2006 Resolution, the CA denied Vitangcol’s motion for
reconsideration.

Hence, the instant petition.

The Issue

Petitioners Vitangcol raise as ground for review the sole assignment of error in that:

THE DECISION AND THE RESOLUTION OF THE TWELFTH DIVISION OF THE COURT OF APPEALS UNDER
CHALLENGE ARE CONTRARY TO LAW18

The Court’s Ruling

The petition is bereft of merit.

The sole issue tendered for consideration is whether the Amended Complaint, with the June 18, 1989
SPA—submitted by petitioners Vitangcol—duly considered, sufficiently states a cause of action. It is
Vitangcol’s posture that it does not sufficiently state a cause of action. New Vista is of course of a
different view.

Amended Complaint Sufficiently States a Cause of Action

The Rules of Court defines "cause of action" as the act or omission by which a party violates a right of
another. It contains three elements: (1) a right existing in favor of the plaintiff; (2) a correlative duty on
the part of the defendant to respect that right; and (3) a breach of the defendant’s duty.19 It is, thus,
only upon the occurrence of the last element that a cause of action arises, giving the plaintiff a right to
file an action in court for recovery of damages or other relief.20

Lack of cause of action is, however, not a ground for a dismissal of the complaint through a motion to
dismiss under Rule 16 of the Rules of Court, for the determination of a lack of cause of action can only
be made during and/or after trial. What is dismissible via that mode is failure of the complaint to state a
cause of action. Sec. 1(g) of Rule 16 of the Rules of Court provides that a motion may be made on the
ground "that the pleading asserting the claim states no cause of action."

The rule is that in a motion to dismiss, a defendant hypothetically admits the truth of the material
allegations of the ultimate facts contained in the plaintiff’s complaint.21 When a motion to dismiss is
grounded on the failure to state a cause of action, a ruling thereon should, as rule, be based only on the
facts alleged in the complaint.22 However, this principle of hypothetical admission admits of exceptions.
Among others, there is no hypothetical admission of conclusions or interpretations of law which are
false; legally impossible facts; facts inadmissible in evidence; facts which appear by record or document
included in the pleadings to be unfounded;23 allegations which the court will take judicial notice are not
true;24 and where the motion to dismiss was heard with submission of evidence which discloses facts
sufficient to defeat the claim.25

New Vista’s threshold contention that De Guzman’s SPA to sell should not be considered for not having
been incorporated as part of its amended complaint is incorrect since Vitangcol duly submitted that
piece of document in court in the course of the June 7, 2004 hearing on the motion to dismiss. Thus, the
trial court acted within its discretion in considering said SPA relative to the motion to dismiss the
amended complaint.
The trial court, however, erred in ruling that, taking said SPA into account, the amended complaint stated
no cause of action. Indeed, upon a consideration of the amended complaint, its annexes, with the June
18, 1989 SPA thus submitted, the Court is inclined, in the main, to agree with the appellate court that the
amended complaint sufficiently states a cause of action.

Hypothetical Admission Supports Statement of Cause of Action

Thus, the next query is: Assuming hypothetically the veracity of the material allegations in the amended
complaint, but taking into consideration the SPA, would New Vista still have a cause of action against
Vitangcol and Maria Alipit sufficient to support its claim for relief consisting primarily of quieting of title?

The poser should hypothetically be answered in the affirmative.

In a motion to dismiss for failure to state a cause of action, the focus is on the sufficiency, not the
veracity, of the material allegations.26 The test of sufficiency of facts alleged in the complaint
constituting a cause of action lies on whether or not the court, admitting the facts alleged, could render
a valid verdict in accordance with the prayer of the complaint.27 And to sustain a motion to dismiss for
lack of cause of action, it must be shown that the claim for relief in the complaint does not exist, rather
than that a claim has been defectively stated, or is ambiguous, indefinite, or uncertain.28

Ratification Would Cure Defect in the SPA

There can be quibbling about the lot covered by the deed of absolute sale De Guzman executed in New
Vista’s favor being different from that referred to in her enabling power of attorney to sell in terms of lot
number and lot title number. The flaw stemmed from the faulty preparation of the SPA. Notwithstanding
the variance in lot descriptions, as indicated above, the amended complaint contained, as it were, a clear
statement of New Vista’s cause of action. New Vista, in fact, alleged that the intended sale of Lot No.
1702 effected by De Guzman had been ratified by her principals, lot owners Clemente and Maria Alipit.
Consider the ensuing clear stipulations in the August 9, 1989 Deed of Absolute Sale:

That on March 27, 1989, the SELLERS [the Alipits] entered into a Contract to Sell with the BUYER [New
Vista], after they had previously received on February 11, 1989 an earnest money of TEN THOUSAND
PESOS (P10,000.00), wherein they (Sellers) agreed to sell to the BUYER the above-described parcel of
land (in the reduced area of 242,540 square meters) for P60.00 per square meter or for a total price
consideration of FOURTEEN MILLION FIVE HUNDRED FIFTY TWO THOUSAND FOUR HUNDRED PESOS
(P14,552,400.00) under the other terms and conditions stipulated therein;

That on April 4, 1989, the BUYER had advanced the amount of SEVEN MILLION FIVE HUNDRED EIGHTEEN
THOUSAND SIX HUNDRED PESOS (7,518,600.00) and paid the Philippine Veterans Bank [PVB] in the same
amount by way of redemption of the above-described property from its mortgage, all in accordance with
the stipulation in the Contract to Sell dated March 27, 1989, making the advances made by the BUYER to
the SELLERS namely: P10,000.00 Earnest Money; P500,000.00 Advances; and P7,518,600.00 Redemption
Money; in the total amount of EIGHT MILLION TWENTY EIGHT THOUSAND SIX HUNDRED PESOS
(P8,028,600.00) which per agreement has formed part of the payment of the purchase price of
P14,550,000.00 thereby leaving a balance of SIX MILLION FIVE HUNDRED TWENTY THREE THOUSAND
EIGHT HUNDRED PESOS (P6,523,800.00);

That in line with the Resolution dated June 1, 1989 of the Honorable Supreme Court in GR. No. L-______
the Honorable [RTC], National Capital Judicial Region, Branch 39, Manila, issued an Order on June 30,
1989 in Civil Case No. 85-32311 entitled, "IN RE: IN THE MATTER OF THE PETITION FOR LIQUIDATION OF
THE PHILIPPINE VETERANS BANK, CENTRAL BANK OF THE PHILIPPINES, Petitioner", the dispositive
portion of which reads as follows:

"WHEREFORE, the petitioner Central Bank of the Philippines, the Acting Liquidator of the Philippine
Veterans Bank is hereby ordered to release to the movants-claimants, Spouses Clemente and Milagros
Alipit and Maria Alipit the latter’s Certificate of Title, TCT No. (T-25311) 2528 within three (3) days from
receipt hereof.

SO ORDERED."

thus, paving the way for the execution of the foregoing Final Deed of Sale.

NOW, THEREFORE, in view of the foregoing facts and circumstances, and for and in consideration of the
sum of [P14,552,400.00] of which had been previously paid by the BUYER to the SELLERS in the manner
stated above, and the remaining sum of x x x (P6,523,800.00), likewise Philippine Currency, to the
SELLERS now in hand paid and receipt whereof is hereby acknowledged and expressed to their entire
satisfaction from the BUYER THEREBY completing payment of the entire price consideration of this sale,
the SELLERS do hereby sell, transfer and convey, in the manner absolute and irrevocable, unto the
BUYER, its successors, administrators and assigns, the above-described parcel of land in its reduced area
of 242,540 square meters, more or less, free from all liens and encumbrances.29

As may clearly be noted, the transfer of the lot covered by TCT No. (25311) 2528 or, in fine Lot No. 1702
of the Calamba Estate, in favor of New Vista, came not as the result of simple, single transaction
involving a piece of land with a clean title where the vendor, for a sum certain received, delivers
ownership of the property upon contract signing. As things stand, the execution of the deed of absolute
sale completed a negotiated contractual package, the culmination of a series of side but closely
interrelated transactions involving several payments and remittances of what turned out to be the total
purchase price for the lot envisaged to be purchased and sold, to wit: PhP 10,000 earnest money
payment on February 11, 1989; an advance of half a million (no date provided); settlement of a
mortgage loan with Philippine Veterans Bank (PVB) of over PhP 7.5 million on April 4, 1989; and the final
payment of the balance of the total purchase price amounting to over PhP 6.5 million on August 9, 1989
—the date of the execution of the Deed of Absolute Sale. For proper perspective, it may be mentioned
that the Alipits and New Vista executed the Contract to Sell on March 27, 1989 after the payment of the
earnest money and before the settlement of the mortgage loan with the PVB; and the SPA executed by
Clemente and Maria Alipit on June 18, 1989 or more than a month before the execution of the Deed of
Absolute Sale.

Taking the foregoing events set forth in the 1989 deed of absolute sale, as hypothetically admitted, it is
fairly evident that the property the Alipits intended to sell and in fact sold was the lot covered by TCT No.
(25311) 2528, which, doubtless, is Lot No. 1702. As aptly argued by New Vista, the purchase of the
parcel of land in question was mainly dictated by its actual location and its metes and bounds and not by
mere lot number assigned to it in the certificate of title. This is not to say that the TCT covering the
property is of little importance. But what can be gleaned is that New Vista paid and acquired Lot No.
1702 which it redeemed, for the Alipits, by paying their mortgage obligations with the PVB. It could not
have bought and the Alipits could not have sold another property.

No Showing of Existence of Lot Subject of the SPA

As to how the SPA mentioned a lot, i.e., Lot No. 1735 covered by TCT No. (25311) 2538, different from
what is stated, i.e., Lot No. 1702, in the 1989 deed of absolute sale in question, is not sufficiently
explained by the parties. But what can be gathered from the records is that what were denominated as
Lot No. 1735 and Lot No. 1702 have the same area and location: 242,540 square meters in Calamba.
Moreover, if indeed the SPA authorized De Guzman to sell Lot No. 1735 covered by TCT No. (25311) 2538
and not the subject Lot No. 1702, the question begging for an answer is how come Maria Alipit never
presented a copy of TCT No. (25311) 2538 covering Lot No. 1735 with an area of 242,540 square meters
to prove her being a co-owner thereof? We note that Maria Alipit’s motion to dismiss merely adopted
the grounds raised in the parallel motion filed by Vitangcol.

Moreover, the sequence of coinciding events, starting from the payment by New Vista of the earnest
money, to the execution of the final deed of sale and the delivery of the subject lot to New Vista would
readily show the following: that Clemente and Maria Alipit executed the SPA for de Guzman to sell and
to formalize, in a deed of absolute sale, the sale of the subject lot following the fulfillment of the terms
and conditions envisaged in the Contract to Sell earlier entered into, and not some lot they co-owned, if
there be any. Maria Alipit’s utter failure to show in her motion to dismiss that she co-owns with her
brother Clemente a similarly-sized 242,540-square-meter lot, denominated as Lot No. 1735 of the
Calamba Estate and covered by TCT No. (25311) 2538, strongly suggests that no such separate property
exists and that there is contextually only one property—Lot No. 1702. This reality would veritably make
the lot and TCT designation and description entries in the SPA as a case of typographical errors.

Ratification: Delivery and Not Questioning Deed of Absolute Sale

Nonetheless, even if the SPA, vis-à-vis the deed of absolute in question, described a different lot and
indicated a dissimilar TCT number, still, the hypothetically admitted allegation of New Vista that lot
owners Clemente and Maria Alipit ratified the sale would cure the defect on New Vista’s claim for relief
under its amended complaint. Stated a bit differently, the ratificatory acts of the Alipits would work to
strengthen New Vista’s cause of action impaired by what may be taken as typographical errors in the
SPA. As deduced from the stipulations in the deed of absolute, lot owners Clemente and Maria Alipit
doubtless benefited from the transaction. And most importantly, they turned possession of Lot No. 1702
over to New Vista in 1989. Since then, New Vista enjoyed undisturbed right of ownership over the
property until the Vitangcol entered the picture.

The delivery of the subject Lot No. 1702 to New Vista clearly evinces the intent to sell said lot and is
ample proof of receipt of full payment therefor as indicated in the deed of absolute sale. For a span of
more than 10 years after the execution of the contract of sale, neither Clemente nor Maria Alipit came
forward to assail the conveyance they authorized De Guzman to effect, if they considered the same as
suffering from some vitiating defect. What is more, if their intention were indeed to authorize De
Guzman to sell a property other than Lot No. 1702, is it not but logical to surrender that "other"
property to New Vista? And if New Vista employed illegal means to gain possession of subject property, a
relatively valuable piece of real estate, why did Clemente and Maria Alipit, and their successors in
interest, not institute any proceedings to oust or eject New Vista therefrom?1avvphi1

Clemente and Maria Alipit’s long inaction adverted to argues against the notion that what they sold to
New Vista was a property other than Lot No. 1702 of the Calamba Estate.

Two Versions of TCT Covering Subject Lot Show Fraud

Lest it be overlooked, the purported sale of Lot 1702 to Vitangcol was made by Maria Alipit alone,
ostensibly utilizing another certificate of title bearing number "TCT No. (25311) 2528" with Maria Alipit
appearing on its face as the sole owner. New Vista holds the original duplicate owner’s copy of TCT No.
(25311) 2528 in the names of Clemente and Maria Alipit. Evidently, two versions of same TCT bearing the
same number and covering the subject property exist. This aberration doubtless is a triable factual issue.
To be sure, one title is authentic and the other spurious.

It is worth to mention at this juncture that the deed of absolute sale in favor of New Vista recited the
following event: that the RTC, Branch 39 in Manila issued on June 30, 1989 in Civil Case No. 85-32311 (in
re: liquidation PVB) an Order to release TCT No. (T-25311) 2528 in the names of Clemente Alipit, married
to Milagros Alipit, and Maria Alipit. If this recital is true and there is no reason why it is not, then TCT No.
(T-25311) 2528 in the name of Maria Alipit alone must, perforce, be a fake instrument. Accordingly, the
subsequent sale of Lot No. 1702 to Vitangcol on August 14, 2001 by Maria Alipit with a bogus TCT would
be ineffective and certainly fraudulent. Not lost on the Court, as badge of fraud, is, as New Vista points
out, the issuance of a new TCT on August 15, 2001 or a day after the subject lot was purportedly sold to
Vitangcol.

As found by the RTC in its initial November 25, 2003 order, virtually all the material allegations in the
amended complaint are triable issues of facts, a reality indicating that it sufficiently states a cause or
causes of action. If the allegations in the complaint furnish sufficient basis on which it can be maintained,
it should not be dismissed regardless of the defense that may be presented by the defendants.30

On July 15, 2009, the parties filed a Joint Motion to Dismiss informing the Court that they have amicably
settled their differences and have filed a Joint Motion for Judgment Based on Compromise Agreement
before the RTC, Branch 35 in Calamba City, Laguna, in Civil Case No. 3195-2001-C. A judgment on said
compromise would have preempted the resolution of the instant petition.
WHEREFORE, this petition is hereby DENIED for lack of merit. The records of the case are immediately
remanded to the RTC, Branch 35 in Calamba City, Laguna for appropriate action on the Compromise
Agreement submitted by the parties.

Let the entry of judgment be made. No costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

MINITA V. CHICO-NAZARIO

Associate Justice ANTONIO EDUARDO B. NACHURA

Associate Justice

DIOSDADO M. PERALTA

Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Chief Justice

Footnotes

1 Rollo, pp. 29-56. Penned by Associate Justice Arturo G. Tayag and concurred in by Associate Justices
Elvi John S. Asuncion and Jose C. Mendoza.

2 Id. at 58-59.

3 Id. at 65-68. Penned by Judge Romeo C. De Leon.

4 Id. at 60-61.
5 Id. at 62-64.

6 Id. at 62.

7 Id. at 264-285, dated November 27, 2001.

8 Id. at 301-310, dated December 10, 2001 captioned "Motion to Dismiss and Comment and Motion to
Deposit to the Honorable Court the alleged Owner’s Copy of TCT No. (T-25311) T-2528 registered in the
names of Clemente Alipit married to Milagros David and Maria L. Alipit (marked as Annex A of the
Complaint) and for short, will be hereinafter referred to as ‘Falsified Title’ and Motion to Order Plaintiff’s
Guards, Representatives, to terminate trespassing the northern western portion of Lot 1702 and to
Remove Therefrom the two billboards announcing that Plaintiff is the owner of Lot 1702, that were
posted therein on November 12, 2001 and Pending the Resolution of this Issue and the Motion to
Dismiss, to allow Vitangcol to place billboards and assign guards at the southern western portion of Lot
1702 to prevent Plaintiff from placing Squatters on Lot 1702."

9 Id. at 286-300, Amended Complaint dated June 25, 2003.

10 The Amended Complaint dated June 25, 2003 pertinently alleges:

2.1. Clemente L. Alipit and defendant Maria L. Alipit are siblings who are previous owners of a parcel of
land located in Calamba, Laguna with a previous area of approximately two hundred fifty thousand
seven square meters (250,007 sq.m.) and previously covered by Transfer Certificate of Title No. T-(25311)
2528 in the names of Clemente L. Alipit married to Milagros David and Maria L. Alipit issued by the
Registry of Dees of Laguna, x x x herein referred to as the "Subject Property". x x x

xxxx

2.2.3 On 04 April 1989, and pursuant to the Contract To Sell dated 27 March 1989, plaintiff paid
Philippine Veterans Bank the redemption value of the Subject Property in the amount of Seven Million
Five Hundred Eighteen Thousand Six Hundred Pesos (P7,518,600). Thereafter, the annotation on the title
of the Subject Property regarding the mortgage was cancelled and the mortgage released.

2.2.4. On 09 August 1989, plaintiff paid Clemente L. Alipit and defendant Maria L. Alipit the balance of
the purchase price of the Subject Property in the amount of Six Million Five Hundred Twenty Three
Thousand Eight Hundred Pesos (6,523,800.00). Upon payment of the balance, Clemente L. Alipit and
defendant Maria L. Alipit, acting through their duly authorized agent and attorney-in-fact Milagros D.
Alipit, executed a Deed of Absolute Sale dated 09 August 1989 over the Subject Property and gave the
original owner’s duplicate of Transfer Certificate of Title No. T-(25311) 2528.

2.2.4.1. Clemente L. Alipit and defendant Maria Alipit revalidated, confirmed and ratified the sale of the
Subject Property to plaintiff by accepting and/or retaining the sums paid by plaintiff, giving the owner’s
duplicate of TCT No. T-(25311) 2528 to plaintiff, and turning over possession of the subject property to
plaintiff who has present control and possession of the property.

2.3. Immediately after the execution of the Deed of Absolute Sale dated 09 August 1989, plaintiff took
possession of the Subject Property and posted security guards and constructed barbed wire fences with
cemented poles. Plaintiff continues to remain in possession to date. Clemente Alipit and Maria Alipt
never questioned plaintiff’s possession.

2.4. x x x Plaitiff then sought to transfer TCT No. T-(25311) 2528 in its name twice; first, on 06 February
1990, and again on 21 May 1990. Plaintiff failed on both attempts to register TCT No. T-(25311) 2528 in
its name since the Subject Property was still in the process of being converted from agricultural to
industrial/commercial. However, plaintiff was able to have the Deed of Absolute Sale annotated on the
Primary Entry Book of the Registry of Deeds in 1990.

2.5. Sometime middle of October 2001, plaintiff was conducting a title search of a prospective parcel of
land, which it intended to purchase in Calamba, Laguna. Plaintiff’s representative was informed by a staff
of the Registry of Deeds of Calamba, Laguna that the Subject Property had already been purchased by
defendant Alice E. Vitangcol. Furthermore, plaintiff was also informed, much to its surprise, that a new
transfer certificate of title in the name of defendant Alice E. Vitangcol had already been issued on 15
August 2001.

xxxx
2.5.2. Plaintiff noticed that Transfer Certificate of Title No. T-482731 was issued on 15 August 2001 by
the Registry of Deeds of Calamba, Laguna.

2.5.3. Attempting to find out how Transfer Certificate of Title No. T-482731 came to be issued, plaintiff
was able to secure a copy of an alleged Deed of Absolute Sale dated 14 August 2001. x x x x

2.5.7. Third, the Deed of Absolute Sale dated 14 August 2001 was only between defendant Alice E.
Vitangcol and defendant Maria L. Alipit. The Subject Property was previously co-owned by Clemente L.
Alipit and defendant Maria L. Alipit and not Maria L. Alipit alone. Plaintiff has obtained from the Land
Registration Commission a certified true copy of the Transfer Certificate of Title No. T-(25311) 2528
registered in the names of Clemente L. Alipit and Maria L. Alipit, a copy of which is hereto attached as
Annex "E".

2.5.8. A certified true copy of Transfer Certificate of Title No. T-(25311) 2528 dated 8 September 1999 (a
copy of which is attached as Annex "F") was also certified by Atty. Casiano Arcilla, the then Register of
Deeds of Calamba, Laguna. As shown by the said certified true copy, the subject property covered by TCT
No. T-(25311) 2528 was registered in the names of both Clemente L. Alipit and Maria L. Alipit.

2.5.9. At the time of the execution of the Deed of Absolute Sale dated 14 August 2001, defendant Maria
L. Alipit was already about ninety (90) years old and bed-ridden. Her signature appearing on the Deed of
Absolute Sale dated 14 August 2001 appears to be totally different and is superimposed by a thumb
mark.

11 Rollo, pp. 324-328, dated December 26, 2003.

12 Sec. 8. Effect of amended pleadings. – An amended pleading supersedes the pleading it amends.
However, admissions in superseded pleadings may be received in evidence against the pleader; claims
and defenses alleged therein not incorporated in the amended pleadings shall be deemed waived.

13 Rollo, p. 68.
14 Rules of Court, Rule 8, Sec. 7.

15 Rollo, p. 66.

16 Id. at 55.

17 World Wide Ins. & Surety Co., Inc. v. Manuel, 98 Phil. 47 (1955).

18 Rollo, p. 10.

19 Balanay v. Paderanga, G.R. No. 136963, August 28, 2006, 499 SCRA 670, 675; AC Enterprises, Inc. v.
Frabelle Properties Corporation, G.R. No. 166744, 506 SCRA 625, 665-666 (citations omitted).

20 Fluor Daniel, Inc.-Philippines v. E.B. Villarosa & Partners Co., Ltd., G.R. No. 159648, July 27, 2007, 528
SCRA 321, 327.

21 Davao Light & Power Co., Inc. v. Judge, Regional Trial Court, Davao City, Br. 8, G.R. No. 147058, March
10, 2006, 484 SCRA 272, 284.

22 Perkin Elmer Singapore Pte Ltd. v. Dakila Trading Corporation, G.R. No. 172242, August 14, 2007, 530
SCRA 170, 196.

23 See Tan v. Director of Forestry, No. L-24548, October 27, 1983, 125 SCRA 302.

24 See Marcopper Corporation v. Garcia, G.R. No. L-55935, July 30, 1986, 143 SCRA 178; U. Bañez Electric
Light Company v. Abra Electric Cooperative, Inc., No. L-59480, December 8, 1982, 119 SCRA 90; Mathay
v. Consolidated Bank and Trust Company, No. L-23136, August 26, 1974, 58 SCRA 560; Dalandan v. Julio,
No. L-19101, February 29, 1964, 10 SCRA 400.

25 Tan, supra note 23.

26 Malicdem v. Flores, G.R. No. 151001, September 8, 2006, 501 SCRA 248, 259.

27 Universal Aquarius, Inc. v. Q.C. Human Resources Management Corp., G.R. No. 155990, September
12, 2007, 533 SCRA 38; Fluor Daniel, Inc.-Philippines, supra note 20; Malicdem, id. at 260.

28 Pioneer Concrete Philippines, Inc. v. Todaro, G.R. No. 154830, June 8, 2007, 524 SCRA 153, 162
(citations omitted).

29 Rollo, pp. 62-64.

30 Jan-Dec Construction Corporation v. Court of Appeals, G.R. No. 146818, February 6, 2006, 481 SCRA
556, 567 (citation omitted).

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Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 201248 March 11, 2015

LETICIA NAGUIT AQUINO, MELVIN NAGUIT, ROMMEL NAGUIT, ELMA NAGUIT TAYAG, YSSEL L. NAGUIT,
ROSALINA NAGUIT AUMENTADO, RIZEL NAGUIT CUNANAN, CARIDAD NAGUIT PARAJAS, MILLIE NAGUIT
FLORENDO, MARNEL NAGUIT, EDUARDO NAGUIT, JOSE NAGUIT, ZOILO NAGUIT, AND AMELIA NAGUIT
DIZON, represented by YSSEL L. NAGUIT, Petitioners,

vs.

CESAR B. QUIAZON, AMANDA QUIAZON, JOSE B. QUIAZON AND REYNALDO B. QUIAZON, represented by
JAIME B. QUIAZON, Respondents.

DECISION

MENDOZA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
March 13, 2012 Decision1 of the Court of Appeals (CA), in CA-G.R. CV No. 92887, which affirmed the
Orders2 of the Regional Trial Court (RTC), Angeles City, Branch 59, in SP Civil Case No. 05-076, dismissing
the complaint for quieting of title filed by the petitioners.

The Facts

On December 16, 2005, a complaint3 for Annulment and Quieting of Title was filed before the RTC-
Branch59 by the petitioners, namely, Leticia Naguit Aquino, Melvin Naguit, Rommel Naguit, Elma Naguit
Tayag, Yssel L. Naguit, Rosalina Naguit Aumentado, Rizel Naguit Cunanan, Caridad Naguit Parajas, Millie
Naguit Florendo, Marnel Naguit, Eduardo Naguit, Jose Naguit, Zoilo Naguit, and AmeliaNaguit Dizon,
represented by Yssel L. Naguit (petitioners). They alleged that they were the heirs of the late Epifanio
Makam and Severina Bautista, who acquired a house and lot situated in Magalang, Pampanga, consisting
of 557 square meters, by virtue of a Deed of Sale, dated April 20, 1894; that since then, they and their
predecessors-in-interest had been in open, continuous, adverse, and notorious possession for more than
a hundred years, constructing houses and paying real estate taxes on the property;that sometime in June
2005, they received various demand letters from the respondents, namely, Cesar B. Quiazon, Amanda
Quiazon, Jose B. Quiazon, and Reynaldo B. Quiazon, represented by Jaime B. Quiazon (respondents),
claiming ownership over the subject property and demanding that they vacate the same; that upon
inquiry with the Register of Deeds of San Fernando, Pampanga, they confirmed that the property had
been titled in the name of respondents under Transfer Certificate of Title (TCT) No. 213777-R; that the
said title was invalid, ineffective, voidable or unenforceable; and that they were the true owners of the
property.

Hence, they prayed that the title be cancelled and a new title be issued in their favor.

In their Answer,4 respondents asserted that they were the absolute owners of the subject land as per
TCT No. 213777-R; that they had inherited the same from their predecessor-in-interest, Fausta Baluyut,
one of the registered owners under Original Certificate of Title (OCT) No. RO-1138 (11376), as per the
Project of Partition and Deed of Agreement, dated January 2, 1974; and that petitioners had been
occupying the property by mere tolerance. They denied the allegations in the complaint and proffered
affirmative defenses with counterclaims.

They argued that: First, the petitioners "have no valid, legal and sufficient cause of action"5 against
them, because their deed of sale was spurious and could not prevail over Land Registration Decree No.
122511 issued on June 28, 1919 in Land Registration Case No. 5, LRC Records No. 128, by the Court of
First Instance of Pampanga, in favor of their predecessor-in-interest. The predecessors-in-interest of
petitioners were among the oppositors in the land registration proceeding but, nevertheless, after the
trial, the subject lot was awarded, decreed and titled in favor of respondents’ predecessor-in-interest, as
per OCT No. RO-1138 (11376) of the Registry of Deeds of Pampanga. Second, the action was barred by
prescription and that petitioners were guilty of laches in asserting their interest over the subject lot,
considering that Land Registration Decree No. 122511 was issued on June 28, 1919 and OCT No. RO-
1138 (11376) was issued on May 12, 1922. Hence, it was much too late for petitioners to institute the
action after more than 80 years. They also raised the settled rule that a title registered under the Torrens
system could not be defeated by adverse, open and notorious possession, or by prescription. Third, the
action was also barred by res judicata and violated the prohibition against forum shopping, considering
that petitioners had earlier filed a similar case for quieting of title against respondents, docketed as Civil
Case No. 5487, which the RTC-Br. 56 dismissed. Petitioners filed their Comment to Defendant’s
Affirmative Defenses.6 Anent the alleged lack of cause of action due to the spurious deed of sale,
petitioners argued that this contention was a matter of evidence which might only be resolved in a full-
blown trial. They insisted that the deed of sale was genuine and authentic and was issued and certified
by the Deputy Clerk of Court of the RTC. They added that the settled rule was that to determine the
sufficiency of the cause of action, only the facts alleged in the complaint should be considered, and that
the allegations in their complaint sufficiently stated a cause of action.

As regards the allegation of prescription, the petitioners countered that an action to quiet title did not
prescribe if the plaintiffs were in possession of the property in question. They argued that they were
neither guilty of laches nor were they in possession of the property by mere tolerance, their possession
being in the concept of owner for more than a hundred years.

Lastly, regarding the argument on res judicata, petitioners explained that they were not the same
plaintiffs in Civil Case No. 5487 and that the case was dismissed without prejudice.

The RTC set a preliminary hearing on the affirmative defenses.

Respondents presented Atty. Charlemagne Tiqui Calilung, RTC Clerk of Court of San Fernando,
Pampanga, who presented the record of Cadastral Case No. 5, dated June 28, 1919, as well as Decree No.
122511. They also presented Luis Samuel Ragodon, the Registration Examiner of the Registry of Deeds of
San Fernando, Pampanga, who presented the original copy of OCT No. 11376, reconstituted as RO-1138,
and testified that the title was derived from Decree No. 122511. He further testified that the original title
had been cancelled pursuant to a project of partition, which was registered on December 17, 1984, and
in lieu thereof, TCT Nos. 213775, 213776, 213777, 213778, 213779, 213780, and 213781 were issued. He
presented the original copy of TCT No. 213777-R issued in the names of respondents.

Henry Y. Bituin, the court interpreter who translated the June 28, 1919 decision of the Court of First
Instance of Pampanga in Land Registration Case No. 5 from Spanish to English, also testified.

Petitioners manifested that they were opting to submit the incident for resolution without presenting
evidence, relying on their position that only the facts alleged in the complaint should be considered.

In their formal offer of evidence,7 respondents offered the following documents: (1) the June 28, 1919
Decision and its English translation; (2) Transmittal Letter, dated May 6, 1922; (3) Decree No. 122511; (4)
OCT No. RO-1138; (5) TCT No. 213777-R; (6) the petition, dated July 29, 1988, and its annexes in Civil
Case No. 5487;(7) the September 7, 1990 Order dismissing Civil Case No. 5487, without prejudice; and
(8) the July 29, 1916 Decision in Expediente No. 132, G.L.R.O. Record No. 11958 and its English
translation.

In their comment/opposition8 to the formal offer of evidence, petitioners argued (1) that the claims of
Epifanio Makam and Severina Bautista, their predecessors-in-interest, were not adjudicated in the June
28, 1919 decision and, thus, res judicata was inapplicable; (2) that Civil Case No. 5487 was dismissed
without prejudice and that they were not the plaintiffs therein; (3) that the allegedly spurious nature of
the deed of sale and the supposed in defeasibility of respondents’ title were matters of evidence to be
resolved in a full-blown trial and the trial court was only confined to the allegations in the complaint; (4)
that their action was not barred by prescription because an action toquiet title did not prescribe if the
plaintiffs were in possession of the subject property and that they had been in possession in the concept
of owner for more than 100 years; and (5) that respondents were guilty of laches having taken more
than 80 years to attempt to enforce their claimed title to the property.

Ruling of the RTC

On July 14, 2008, the RTC-Br. 59 issued the Order dismissing petitioners’ complaint. It found that based
on the decision, dated June 28, 1919, in Cadastral Case No. 5, the Baluyut siblings, respondents’
predecessors-in-interest, were declared the absolute owners of the subject property, over the claim of
Jose Makam, the predecessor-in-interest of petitioners, who was one of the oppositors in the said case.
From this decision, OCT No. RO-1138 (11376) was derived, which later became the subject of a project of
partition and deed of agreement among the Baluyut siblings, dated January 2, 1972, which, in turn, was
annotated on the OCT as Entry No. 8132. TCT No. 213777-R, covering the subject lot, was later derived
from the partition. The RTC-Br. 59 also noted that it was stated in the said decision that in 1907, a
warehouse was constructed on the subject lot by virtue of an agreement between the Chairman of
Magalang and Enrique Baluyut, with no objection from the Makams. It was further noted that the deed
of sale being asserted by petitioners was not mentioned in the 1919 decision despite the claim of their
predecessors-in-interest.

The RTC-Br. 59, thus, ruled that the deed of sale had become invalid by virtue of the June 28, 1919
decision. It held that although the deed of sale dated, April 20, 1894, was never challenged, it was
nevertheless unenforceable by virtue of the June 28, 1919 decision. It found that petitioners had lost
whatever right they had on the property from the moment the said decision was rendered and an OCT
was issued. Finding that petitioners were not holders of any legal title over the property and were bereft
of any equitable claim thereon, the RTC-Branch 59 stated that the first requisite of an action to quiet title
was miserably wanting. It also found the second requisite to be wanting because respondents had
proved that the TCT registered in their names was valid.

Anent petitioners’ argument that only the complaint may be considered in determining the sufficiency of
the cause of action, the RTC Br. 59 ruled that under Section 2 in relation to Section 6, Rule 16 of the
Rules of Court, a preliminary hearing on the affirmative defense in the answer might be had at the
discretion of the court, during which the parties could present their arguments and their evidence.

On December 22, 2008, the RTC-Br. 59 denied petitioners’ motion for reconsideration. It stated that the
court may consider evidence presented in hearings related to the case, which was an exception to the
general rule that only the complaint should be taken into consideration. It stated that petitioners were
without legal or equitable title to the subject property, thus, lacking the legal personality to file an action
for quieting of title and, therefore, "the complaint was properly dismissed for failing to state a cause of
action."9

Ruling of the CA

In the assailed Decision, dated March 13, 2012, the CA dismissed petitioners’ appeal. It explained that
under Section 6, Rule 16 of the Rules of Court, a court is allowed to conduct a preliminary hearing, motu
proprio, on the defendant’s affirmative defenses, including the ground of "lack of cause of action or
failure to state a cause of action."10 It gave the reason that because the rule spoke in general terms, its
manifest intention was to apply it to all grounds for a motion to dismiss under the rules which were
pleaded as affirmative defenses in the responsive pleading. Thus, it held that the trial court might
consider other evidence aside from the averments in the complaint in determining the sufficiency of the
cause of action. The CA explained:

But as shown in the foregoing rule, the holding of a preliminary hearing on any of the grounds for a
motion to dismiss which is pleaded as an affirmative defense is within the full discretion of the trial
court. The rule speaks of affirmative defenses that are grounds for a motion to dismiss. Indubitably, lack
of cause of action or failure to state a cause of action, being one of the grounds for a motion to dismiss,
is included thereby.

Since the rule allows the trial court to conduct a preliminary hearing on this kind of an affirmative
defense, it follows then that evidence could be submitted and received during the proceedings which the
court may consider in forming its decision. It would be plain absurdity if the evidence already presented
therein would not be allowed to be considered in resolving whether the case should be dismissed or not.
To rule otherwise would render nugatory the provision of Section 6, Rule 16 and would make the holding
of a preliminary hearing a plain exercise in futility. No well-meaning judge would hold a preliminary
hearing and receive evidence only to disregard later the evidence gathered in the course thereof. If the
intention of the rule is for the trial court to confine itself to the allegations in the complaint in
determining the sufficiency of the cause of action, as the plaintiffs-appellants would want to impress
upon this Court, then it should have been so expressly stated by barring the court from conducting a
preliminary hearing based on the said ground. The fact, however, that the said rule speaks in general
terms, it is its manifest intention to apply it in all grounds for a motion to dismiss under the rules which
are pleaded as an affirmative defense in the responsive pleading. Thus, we find that that trial court did
not err in considering the evidence already presented and in not confining itself to the allegations in the
plaintiffs-appeallants’ complaint.11

The CA gave credence to the evidence presented by respondents and noted that, except for petitioners’
bare allegation that respondents’ title was invalid, there was nothing more to support the same. It
further noted that the deed of sale was written in a local dialect without the translation and with no
ascertainable reference to the area of the property being conveyed. The CA, therefore, found that
petitioners did not have the title required to avail of the remedy of quieting of title, while respondents
had sufficiently proven the validity of their Torrens title. Hence, the subject petition.

ISSUE
Whether the CA erred in affirming the dismissal of

petitioners’ complaint on the ground of lack of cause of

action or failure to state a cause of action.

Petitioners argue that the CA gravely erred in considering external factors beyond the allegations in the
petition. They aver that it is a settled rule that to determine the sufficiency of a cause of action, only
facts alleged in the complaint shall be considered, and it is error for the court to take cognizance of
external facts or hold a preliminary hearing to determine their existence. Respondents, on the other
hand, echo the ruling of the CA that it was within the disrection of the trial court to conduct a
preliminary hearing on the affirmative defense of lack of cause of action or failure to state a cause of
action, where both parties were given the chance to submit arguments and evidence for or against the
dismissal of the complaint. Furthermore, they argue that the Court has previously upheld cases where
the court took into account external factors in the dismissal of the complaint on the ground of lack of
cause of action. They assert that since petitioners were given reasonable opportunity to present
evidence to prove their cause of action, they are now estopped from invoking the rule that only
allegations in the complaint should be considered.12

Petitioners reiterate that they have been in possession of the property in the concept of owner for more
than 119 years, where they built their houses, reared their families, and paid realty taxes thereon. They
point out that their possession was never disputed by respondents, and that respondents had only
attempted to enforce their supposed rights over the property in 2005, or 86 years after the purported
decree awarding the property to them. Petitioners argue that respondents had abandoned their right to
the subject property which, thus, rendered invalid whatever title they might have had. They argue that it
has been held that a registered owner’s right to recover possession and title to property may be
converted into a stale demand by virtue of laches. They also claim that the allegations contained in their
complaint sufficiently state a cause of action, and that it was an error for the trial court to declare it
unenforceable considering that the deed of sale should be considered hypothetically admitted when
determining whether the complaint sufficiently states a cause of action.13

Ruling of the Court

Preliminary matters
The Court notes that respondents raised the affirmative defense in their Answer that petitioners "have
no valid, legal and sufficient cause of action," raising factual matters,14 which is effectively the ground of
"lack of cause of action." Respondents’ arguments made no assertion that the complaint failed to state a
cause of action. The ground of "lack of cause of action" has been frequently confused with the ground of
"failure to state a cause of action," and this is the situation prevailing in the present case. The terms
were, in fact, used interchangeably by both the respondents and the lower courts.

The distinction between the grounds of "failure to state a cause of action" and "lack of cause of action"
was aptly discussed in Dabuco vs. Court of Appeals, to wit:

As a preliminary matter, we wish to stress the distinction between the two grounds for dismissal of an
action: failure to state a cause of action, on the one hand, and lack of cause of action, on the other hand.
The former refers to the insufficiency of allegation in the pleading, the latter to the insufficiency of
factual basis for the action. Failure to state a cause may be raised in a Motion to Dismiss under Rule 16,
while lack of cause may be raised any time. Dismissal for failure to state a cause can be made at the
earliest stages of an action. Dismissal for lack of cause is usually made after questions of fact have been
resolved on the basis of stipulations, admissions or evidence presented.15

Although the two grounds were used interchangeably, it can be gleaned from the decisions of both the
trial court and the CA that respondents’ defense of "lack of cause of action" was actually treated as a
"failure to state a cause of action," which is a ground for a motion to dismiss under Rule 16. This is
apparent from their reliance on Section 6 of Rule 16, which pertains to grounds of a motion to dismiss
raised as affirmative defenses; as well as the doctrines cited in resolving the case. The CA even referred
to both as one and the same ground for a motion to dismiss when it stated that: "Indubitably, lack of
cause of action or failure to state a cause of action, being one of the grounds for a motion to dismiss, is
included thereby."16

Also confused, respondents, on their part, asserted that "it is within the discretion of the Court a quo to
conduct a preliminary hearing on the affirmative defense of lack of cause of action or failure to state a
cause of action,"17 the very basis of their argument being hinged on the application of Section 6. They
also insisted on the applicability of the exceptions to the general rule that only averments in the
complaint must be considered, which pertains to the ground of "failure to state a cause of action."
The trial court held a preliminary hearing resolving the ground of "lack of cause of action" pursuant to
Section 6 of Rule 16, which allows the court to hold a preliminary hearing on grounds for dismissal
provided in the same rule that have been raised as an affirmative defense in the answer.18 The ground
of "lack of cause of action," as already explained, however, is not one of the grounds for a motion to
dismiss under Rule 16, and hence, not proper for resolution during a preliminary hearing held pursuant
to Section 6. On this point alone, the trial court clearly erred in receiving evidence on the ground of "lack
of cause of action" during the preliminary hearing. The factual matters raised by respondents in their
affirmative defense arguing the non-existence of a cause of action, should have been duly resolved
during a trial on the merits of the case.

In any case, even if the Court were to treat respondents’ argument as a "failure to state a cause of
action," their defense would still fail. Court limited to averments in the complaint

Rule 16 of the Rules of Court enumerates the grounds for a motion to dismiss. The pertinent ground is
found under Section 1(g), which reads as follows:

xxxx

(g) That the pleading asserting the claim states no cause of action; xxxx (Emphasis supplied) The test for
determining the existence of a cause of action was amply discussed in Insular Investment and Trust
Corporation v. Capital One Equities Corporation,19 citing Perpetual Savings Bank v. Fajardo,20 to wit:

The familiar test for determining whether a complaint did or did not state a cause of action against the
defendants is whether or not, admitting hypothetically the truth of the allegations of fact made in the
complaint, a judge may validly grant the relief demanded in the complaint. In Rava Development
Corporation v. Court of Appeals, the Court elaborated on this established standard in the following
manner:

"The rule is that a defendant moving to dismiss a complaint on the ground of lack of cause of action is
regarded as having hypothetically admitted all the averments thereof. The test of the sufficiency of the
facts found in a petition as constituting a cause of action is whether or not, admitting the facts alleged,
the court can render a valid judgment upon the same in accordance with the prayer thereof
(Consolidated Bank and Trust Corp. v. Court of Appeals, 197 SCRA 663 [1991]).
In determining the existence of a cause of action, only the statements in the complaint may properly be
considered. It is error for the court to take cognizance of external facts or hold preliminary hearings to
determine their existence. If the allegation in a complaint furnish sufficient basis by which the complaint
may be maintained, the same should not be dismissed regardless of the defenses that may be assessed
by the defendants (supra).21

Thus, in determining the existence of a cause of action, only the allegations in the complaint may
properly be considered. For the court to do otherwise would be a procedural error and a denial of the
plaintiff’s right to due process.22

In the case at bench, petitioners’ cause of action relates to an action to quiet title under Article 476 of
the Civil Code, which provides:

Article 476. Whenever there is a cloud on title to real property or any interest therein, by reason of any
instrument, record, claim, encumbrance or proceeding which is apparently valid or effective but is in
truth and in fact invalid, ineffective, voidable, or unenforceable, and may be prejudicial to said title, an
action may be brought to remove such cloud or to quiet title.

An action may also be brought to prevent a cloud from being cast upon title to real property or any
interest therein.

A "cloud on title" is an outstanding instrument, record, claim, encumbrance or proceeding which is


actually invalid or inoperative, but which may nevertheless impair or affect injuriously the title to
property. The matter complained of must have a prima facie appearance of validity or legal efficacy. The
cloud on title is a semblance of title which appears in some legal form but which is in fact unfounded.
The invalidity or in operativeness of the instrument is not apparent on the face of such instrument, and it
has to be proved by extrinsic evidence.23

In order that an action for quieting of title may prosper, two requisites must concur: (1) the plaintiff or
complainant has a legal or equitable title or interest in the real property subject of the action; and (2) the
deed, claim, encumbrance, or proceeding claimed to be casting cloud on his title must be shown to be in
fact invalid or inoperative despite its prima facie appearance of validity or legal efficacy.24
Turning then to petitioners’ complaint, the relevant allegations as to the cause of action for quieting of
title read as follows:

3. Plaintiffs are the heirs of the late Epifanio Makam and Severina Bautista who acquired a house and lot
on 20 April 1894 situated in Magalang, Pampanga, consisting of Five Hundred Seventy Seven (577)
square meters more or less, by virtue of a Deed of Sale, hereby quoted for ready reference:

xxx

4. From 1894 and up to the present, plaintiffs and through their predecessors-in-interest have been in
open, continuous, adverse and notorious possession for more than a hundred years of the piece of
property mentioned above, constructed their houses thereon and dutifully and faithfully paid the real
estate taxes on the said property;

5. That sometime in June 2005, plaintiffs received various demand letters from defendants demanding
plaintiffs to vacate the premises, claiming ownership of the subject property;

6. That when plaintiffs inquired from the Office of the Register of Deeds of San Fernando, Pampanga,
they were able to confirm that their property had been titled in the name of herein defendants under
TCT No. 213777-R;

7. That the said title is in fact invalid, ineffective, voidable or unenforceable, the existence of which is
pre-judicial to the ownership and possession of plaintiffs who are the true owners and actual possessors
of the above described real property;

8. That equity demands that the said title be surrendered by defendants and cancelled as it is a cloud
upon the legal or equitable title to or interest of plaintiffs over the subject property.25

It is readily apparent from the complaint that petitioners alleged that (1) they had an interest over the
subject property by virtue of a Deed of Sale, dated April 20, 1894; and that (2) the title of respondents
under TCT No. 213777-R was invalid, ineffective, voidable or unenforceable. Hypothetically admitting
these allegations as true, as is required in determining whether a complaint fails to state a cause of
action, petitioners may be granted their claim. Clearly, the complaint sufficiently stated a cause of action.
In resolving whether or not the complaint stated a cause of action, the trial court should have limited
itself to examining the sufficiency of the allegations in the complaint. It was proscribed from inquiring
into the truth of the allegations in the complaint or the authenticity of any of the documents referred or
attached to the complaint, as these were deemed hypothetically admitted by the respondents.26

Evangelista v. Santiago elucidates:

The affirmative defense that the Complaint stated no cause of action, similar to a motion to dismiss
based on the same ground, requires a hypothetical admission of the facts alleged in the Complaint. In
the case of Garcon v. Redemptorist Fathers, this Court laid down the rules as far as this ground for
dismissal of an action or affirmative defense is concerned:

It is already well-settled that in a motion to dismiss a complaint based on lack of cause of action, the
question submitted to the court for determination is the sufficiency of the allegations of fact made in the
complaint to constitute a cause of action, and not on whether these allegations of fact are true, for said
motion must hypothetically admit the truth of the facts alleged in the complaint; that the test of the
sufficiency of the facts alleged in the complaint is whether or not, admitting the facts alleged, the court
could render a valid judgment upon the same in accordance with the prayer of said complaint.1âwphi1
Stated otherwise, the insufficiency of the cause of action must appear in the face of the complaint in
order to sustain a dismissal on this ground, for in the determination of whether or not a complaint states
a cause of action, only the facts alleged therein and no other matter may be considered, and the court
may not inquire into the truth of the allegations, and find them to be false before a hearing is had on the
merits of the case; and it is improper to inject in the allegations of the complaint facts not alleged or
proved, and use these as basis for said motion.27 (Emphasis and underscoring supplied)

Exceptions and Section 6 of Rule 16 not applicable

The Court does not discount, however, that there are exceptions to the general rule that allegations are
hypothetically admitted as true and inquiry is confined to the face of the complaint. First, there is no
hypothetical admission of (a) the veracity of allegations if their falsity is subject to judicial notice; (b)
allegations that are legally impossible; (c) facts inadmissible in evidence; and (d) facts which appear, by
record or document included in the pleadings, to be unfounded.28 Second, inquiry is not confined to the
complaint if culled (a) from annexes and other pleadings submitted by the parties;29 (b) from
documentary evidence admitted by stipulation which disclose facts sufficient to defeat the claim; or (c)
from evidence admitted in the course of hearings related to the case.30

Pointing to the exception that inquiry was not confined to the complaint if evidence had been presented
in the course of hearings related to the case, the CA ruled that it was within the trial court’s discretion to
receive and consider other evidence aside from the allegations in the complaint in resolving a party’s
affirmative defense. It held that this discretion was recognized under Section 6 of Rule 16 of the Rules of
Court, which allowed the court to conduct a preliminary hearing, motu proprio, on the defendant’s
affirmative defense if no corresponding motion to dismiss was filed. This section reads in part:

Section 6. Pleading grounds as affirmative defenses. – If no motion to dismiss has been filed, any of the
grounds for dismissal provided for in this Rule may be pleaded as an affirmative defense in the answer
and, in the discretion of the court, a preliminary hearing may be had thereon as if a motion to dismiss
had been filed.

In their answer, respondents raised the affirmative defenses of "lack of cause of action, prescription, and
res judicata,"31 stated in the following manner:

xxxx

6. Plaintiffs have no valid, legal and sufficient cause of action against the defendants. The alleged "deed
of sale" (Annex "B" – Amended Complaint) is spurious and the same cannot prevail over the Land
Registration Decree No. 122511 issued on June 28, 1919 in Land Registration Case No. 5, LRC Record No.
128, by the Court of First Instance of Pampanga, in favor of defendants’ predecessor-in-interest. In fact,
plaintiffs’ predecessors-in-interest were among the oppositors in that land registration proceeding but
after trial the lot in question was awarded, decreed and titled in favor and in the names of defendants’
predecessors-in-interest, as per Original Certificate of Title No. RO-1138 (11376) of the Registry of Deeds
of Pampanga;

7. The instant action, which is actually an action of reconveyance, is already barred by prescription.
Moreover, plaintiffs are guilty of laches in asserting their alleged title or interest over the subject lot. Said
Land Registration Decree No. 122511 was issued on June 28, 1919 and OCT No. RO 1138 (11376) was
issued on May 12, 1922. Clearly, it is much too late for the plaintiffs, after more than eighty (80) long
years to institute this action against the defendants;

xxxx

9. The present action is also barred by res judicata and violates the prohibition against forum shopping.
There was already a prior similar case for quieting of title filed by plaintiffs’ predecessor-in-interest
against defendant Jaime Quiazon and his co-owners, before Branch 56 of this Honorable Court, docketed
as Civil Case No. 5487, which was dismissed;32 x x x x (Emphases supplied)

A review of the first ground under paragraph 6 of the answer reveals that respondents alleged that
"[p]laintiffs have no valid, legal and sufficient cause of action against the defendants." It is at this point
that it must again be emphasized that it is not "lack or absence of cause of action" that is a ground for
dismissal of the complaint under Rule 16, but rather, that "the complaint states no cause of action."33
The issue submitted to the court was, therefore, the determination of the sufficiency of the allegations in
the complaint to constitute a cause of action and not whether those allegations of fact were true, as
there was a hypothetical admission of facts alleged in the complaint.34 An affirmative defense, raising
the ground that there is no cause of action as against the defendants poses a question of fact that should
be resolved after the conduct of the trial on the merits.35 A reading of respondents’ arguments in
support of this ground readily reveals that the arguments relate not to the failure to state a cause of
action, but to the existence of the cause of action, which goes into the very crux of the controversy and
is a matter of evidence for resolution after a full-blown hearing.

The trial court may indeed elect to hold a preliminary hearing on affirmative defenses as raised in the
answer under Section 6 of Rules 16 of the Rules of Court. It has been held, however, that such a hearing
is not necessary when the affirmative defense is failure to state a cause of action,36 and that it is, in fact,
error for the court to hold a preliminary hearing to determine the existence of external facts outside the
complaint.37 The reception and the consideration of evidence on the ground that the complaint fails to
state a cause of action, has been held to be improper and impermissible.38 Thus, in a preliminary
hearing on a motion to dismiss or on the affirmative defenses raised in an answer, the parties are
allowed to present evidence except when the motion is based on the ground of insufficiency of the
statement of the cause of action which must be determined on the basis only of the facts alleged in the
complaint and no other.39 Section 6, therefore, does not apply to the ground that the complaint fails to
state a cause of action. The trial court, thus, erred in receiving and considering evidence in connection
with this ground.
The lower courts also relied on the exception that external evidence may be considered when received
"in the course of hearings related to the case," which is rooted in the case of Tan v. Director of Forestry
(Tan).40 In said case, a hearing was conducted on the prayer for preliminary injunction where evidence
was submitted by the parties. In the meantime, a motion to dismiss was filed by the defendant, citing as
one of the grounds that the petition did not state a cause of action. The trial court resolved the prayer
for the issuance of a writ of preliminary injunction simultaneously with the motion to dismiss. It
dismissed the petition for failure to state a cause of action on the basis of the evidence presented during
the hearing for preliminary injuction. On appeal, this Court ruled that the trial court was correct in
considering the evidence already presented and in not confining itself to the allegations in the petition.

Tan, however, is not on all fours with the present case. First, the trial court therein considered evidence
presented during a preliminary hearing on an injunction and not during a hearing on a motion to
dismiss. As discussed, a preliminary hearing on a motion to dismiss is proscribed when the ground is
failure to state a cause of action. The exception of "hearings related to the case," therefore, pertains to
hearings other than the hearing on a motion to dismiss on the ground of failure to state a cause of
action. To reiterate, the ground that the complaint fails to state a cause of action should be tested only
on the allegations of facts contained in the complaint, and no other. If the allegations show a cause of
action, or furnish sufficient basis by which the complaint can be maintained, the complaint should not be
dismissed regardless of the defenses averred by the defendants.41 The trial court may not inquire into
the truth of the allegations, and find them to be false before a hearing is conducted on the merits of the
case.42 If the court finds the allegations to be sufficient but doubts their veracity, the veracity of the
assertions could be asserted during the trial on the merits.43

Second, Tan noted that the plaintiff had readily availed of his opportunity to introduce evidence during
the hearing and, as a result, was estopped from arguing that the court is limited to the allegations in the
complaint.44 This is in contrast to the present case, where petitioners steadfastly argued from the
beginning that the trial court was limited to the allegations in the complaint. Petitioners maintained their
stance during the preliminary hearing on the affirmative defenses, opting not to file rebuttal evidence
and opposing respondents’ formal offer of evidence on the same ground. Having been consistent in their
position from the start, petitioners cannot be estopped from arguing that the trial court was precluded
from considering external evidence in resolving the motion to dismiss.

Third, it was noted in Tan that the documentary evidence given credence by the trial court had
effectively been admitted by stipulation during the hearing,45 and another had been an annex to the
complaint,46 both of which are exceptions to the general rule that external facts cannot be considered.
Neither of the said exceptions is availing in the present case. The Court notes that only the OCT of
respondents was attached as an annex to their answer. The June 28, 1919 Decision in the Cadastral case,
which was given considerable weight by the trial court, was not attached and was only presented during
the preliminary hearing.

Fourth, Tanruled that the rigid application of the rules could not be countenanced considering the
overriding public interest involved, namely, the welfare of the inhabitants of the province whose lives
and properties would be directly and immediately imperilled by forest denudation.47 There appears to
be no overriding public interest in the present case to justify a similar relaxation of the rules.

It is of note that although the trial court might not have erred in holding a preliminary hearing on the
affirmative defenses of prescription and res judicata, it is readily apparent from the decisions of the
lower courts that no disquisition whatsoever was made on these grounds. It cannot be denied that
evidence in support of the ground of "lack of cause of action" was received and given great weight by
the trial court. In fact, all the evidence given credence by the trial court were only in support of the
ground of "lack of cause of action." This all the more highlights that the trial court erred in receiving
evidence to determine whether the complaint failed to state a cause of action.

Although neither the RTC or the CA ruled on the affirmative defenses of prescription and res judicata, it
appears that this case could not have been dismissed on these grounds. First, an action to quiet title is
imprescriptible if the plaintiffs are in possession of the property,48 which is the situation prevailing in the
present case. Second, there appears to be no res judicata nor a violation of the prohibition against forum
shopping considering that Civil Case No. 5487 had been dismissed, without prejudice, years before
petitioners initiated their complaint for quieting of title.

In sum, the trial court erred in dismissing the complaint on the ground of failure to state a cause of
action. Evidence should have been received not during a preliminary hearing under Section 6 of Rule 16,
but should have been presented during the course of the trial. The case should, thus, be remanded to
the RTC-Br. 59 for trial on the merits.

WHEREFORE, the petition is GRANTED. The March 13, 2012 Decision of the Court of Appeals, in CA-G.R.
CV No. 92887 is REVERSED and SET ASIDE. The case is ordered REMANDED to the Regional Trial Court for
trial on the merits of the case.

SO ORDERED.
JOSE CATRAL MENDOZA

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO

Associate Justice

Chairperson

ARTURO D. BRION

Associate Justice MARIANO C. DEL CASTILLO

Associate Justice

MARVIC M.V.F. LEONEN

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO

Associate Justice

Chairperson, Second Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify
that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

1 Rollo, pp. 21-32; penned by Associate Justice Amelita G. Tolentino, with Associate Justice Ramon R.
Garcia and Associate Justice Samuel H. Gaerlan, concurring.

2 Id. at 64-70 and 74-75.

3 Id. at 36-39.

4 Id. at 48-52.

5 Id. at 49.

6 Id. at 59-63.

7 Records, pp. 173-175.

8 Id. at 279-283.
9 Rollo, p. 75.

10 Id. at 28.

11 Id. at 28-29.

12 Id. at 155-161.

13 Id. at 199-203.

14 Id. at 49.

15 379 Phil. 939, 944-945 (2000).

16 Rollo, p. 28.

17 Id. at 90.

18 Section 6. Pleading grounds as affirmative defenses. – If no motion to dismiss has been filed, any of
the grounds for dismissal provided for in this Rule may be pleaded as an affirmative defense in the
answer and, in the discretion of the court, a preliminary hearing may be had thereon as if a motion to
dismiss had been filed.

xxx

19 G.R. No. 183308, April 25, 2012, 671 SCRA 112.


20 G.R. No. 79760, June 28, 1993, 223 SCRA 720.

21 Insular Investment and Trust Corporation v. Capital One Equities Corporation, supra note 19, at 142.

22 Indiana Aerospace University v. Commissioner of Higher Education, 408 Phil. 483, 502 (2001).

23 Evangelista v. Santiago, 497 Phil. 269, 290 (2005).

24 Phil-Ville Development and Housing Corporation v. Bonifacio, G.R. No. 167391, June 8, 2011, 651
SCRA 327, 341.

25 Rollo, pp. 37-39.

26 Evangelista v. Santiago, supra note 23, at 286.

27 Id. at 285-286.

28 Dabuco v. Court of Appeals, 379 Phil. 939, 950-951 (2000).

29 Philippine Army v. Pamittan, G.R. No. 187326, June 15, 2011, 652 SCRA 306, 312.

30 Dabuco v. Court of Appeals, supra note 28; Tan v. Director of Forestry, 210 Phil. 244 (1983).

31 Rollo, p. 27.

32 Id. at 49-50.
33 San Lorenzo Village Association v. CA, 351 Phil. 353, 365 (1998).

34 Far East Bank v. Court of Appeals, 395 Phil. 701, 709 (2000).

35 Heirs of Paez v. Torres, 381 Phil. 393, 402 (2000).

36 Municipality of Binan v. Court of Appeals, G.R. No. 94733, February 17, 1993, 219 SCRA 69, 76;
Misamis Occidental II Cooperative, Inc. v. David, 505 Phil. 181, 188-189 (2005).

37 D.C. Crystal, Inc. v. Laya, 252 Phil. 759, 768-769 (1989); Del Bros Hotel Corporation v. Court of Appeals,
G.R. No. 87678, June 16, 1992 210 SCRA 33, 42-43; Rava Development Corporation v. Court of Appeals,
G.R. No, 96825, July 3, 1992, 211 SCRA 144, 153.

38 Merrill Lynch Futures, Inc. v. Court of Appeals, G.R. No. 97816, July 24, 1992, 211 SCRA 824, 835.

39 Oscar M. Herrera, Remedial Law, (Quezon City, Philippines: Rex Book Store, Inc., 2007), Volume I, p.
1042; citing 1 Moran, p. 620, 1995 ed., citing Asejo v. Lenoso, 78 Phil. 467 (1947).

40 Tan v. Director of Forestry, supra note 30.

41 Hongkong & Shanghai Banking Corp., Ltd. v. Catalan, 483 Phil. 525, 538 (2004).

42 Evangelista v. Santiago, supra note 23.

43 Hongkong & Shanghai Banking Corp., Ltd. v. Catalan, supra note 41.
44 Tan v. Director of Forestry, supra note 30, at 255.

45 Id. at 257.

46 Id. at 260-261.

47 Id. at 257-258.

48 Almarza v. Arguelles, 240 Phil. 681, 685 (1987).

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Republic of the Philippines


SUPREME COURT

THIRD DIVISION

G.R. No. 159831 October 14, 2005

PILIPINAS SHELL PETROLEUM CORPORATION, Petitioner,

vs.

JOHN BORDMAN LTD. OF ILOILO, INC., Respondent.

DECISION

eeply imbedded in our jurisprudence is the doctrine that the factual findings of the Court of Appeals (CA)
affirming those of the trial court are, subject to some exceptions, binding upon this Court. Otherwise
stated, only questions of law, not of facts, may be raised before this Court in petitions for review under
Rule 45 of the Rules of Court. Nonetheless, in the interest of substantial justice, the Court delved into
both the factual and the legal issues raised in the present case and found no reason to overturn the CA’s
main Decision. Furthermore, under the peculiar factual circumstances of the instant appeal, this Court
holds that the period for reckoning the prescription of the present cause of action began only when
respondent discovered with certainty the short deliveries made by petitioner.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the August 20, 2002
Decision2 and August 29, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 46974. The
challenged Decision disposed as follows:

"WHEREFORE, premises considered, the assailed decision dated August 30, 1991 of the RTC, Branch 26,
Manila in Civil Case No. 13419 is hereby AFFIRMED with the MODIFICATION that the award of exemplary
damages and attorney’s fees be both reduced to ₱100,000.00.
"The order dated December 9, 1991 is likewise AFFIRMED."4

The assailed Resolution denied reconsideration.

The Facts

Petitioner Pilipinas Shell Petroleum Corporation ("Pilipinas Shell") is a corporation engaged in the
business of refining and processing petroleum products.5 The invoicing of the products was made by
Pilipinas Shell, but delivery was effected through Arabay, Inc., its sole distributor at the time material to
the present case.6 From 1955 to 1975, Respondent John Bordman Ltd. of Iloilo, Inc. ("John Bordman")
purchased bunker oil in drums from Arabay.7 When Arabay ceased its operations in 1975, Pilipinas Shell
took over and directly marketed its products to John Bordman.8

On August 20, 1980, John Bordman filed against Pilipinas Shell a civil case for specific performance. The
former demanded the latter’s short deliveries of fuel oil since 1955; as well as the payment of exemplary
damages, attorney’s fees and costs of suit.9 John Bordman alleged that Pilipinas Shell and Arabay had
billed it at 210 liters per drum, while other oil companies operating in Bacolod had

billed their customers at 200 liters per drum. On July 24, 1974, when representatives from John Bordman
and Arabay conducted a volumetric test to determine the quantity of fuel oil actually delivered, the
drum used could only fill up to 190 liters, instead of 210 liters, or a short delivery rate of 9.5%.10 After
this volumetric test, Arabay reduced its billing rate to 200 (instead of 210) liters per drum, except for 4
deliveries between August 1 and September 9, 1974, when the billing was at 190 liters per drum.11

On January 23, 1975, another volumetric test allegedly showed that the drum could contain only 187.5
liters.12 On February 1, 1975, John Bordman requested from Pilipinas Shell that 640,000 liters of fuel oil,
representing the latter’s alleged deficient deliveries, be credited to the former’s account.13 The volume
demanded was adjusted to 780,000 liters, upon a realization that the billing rate of 210 liters per drum
had been effective since 1966.

On October 24, 1977 and November 9, 1977, representatives from John Bordman, the auditor of the
Iloilo City Commission on Audit, pump boat carriers, and truck drivers conducted actual measurements
of fuel loaded on tanker trucks as transferred to dented drums at mouth full. They found that the drums
could contain 180 liters only.14 In its Complaint, John Bordman prayed for the appointment of
commissioners to ascertain the volume of short deliveries.15

On October 21, 1980, Pilipinas Shell and Arabay filed their Answer with Counterclaim.16 They specifically
denied that fuel oil deliveries had been less than those billed.17 Moreover, the drums used in the
volumetric tests were allegedly not representative of the ones used in the actual deliveries.18

By way of affirmative defense, Pilipinas Shell and Arabay countered that John Bordman had no cause of
action against them.19 If any existed, it had been waived or extinguished; or otherwise barred by
prescription, laches, and estoppel.20

During the pretrial, the parties agreed to limit the issues to the following: (1) whether the action had
prescribed, and (2) whether there had been short deliveries in the quantities of fuel oil.21 John
Bordman’s Motion for Trial by Commissioner was granted by the RTC,22 and the court-appointed
commissioner submitted her Report on April 20, 1988.23

On April 3, 1989, Pilipinas Shell and Arabay filed a Motion for Resolution of their affirmative defense of
prescription.24 Because prescription had not been established with certainty, the RTC ordered them on
November 6, 1989, to present evidence in support of their defense.25

On August 30, 1991, the RTC issued a Decision in favor of respondent.26 Pilipinas Shell and Arabay were
required to deliver to John Bordman 916,487.62 liters of bunker fuel oil, to pay actual damages of
₱1,000,000; exemplary damages of ₱500,000; attorney’s fees of ₱500,000; and the costs of suit.27 The
basis of the trial court’s decision was predicated on the following pronouncement:

"Since [respondent] had fully paid their contract price at 210 liters per drum, then the [petitioner] should
deliver to the [respondent] the undelivered volume of fuel oil from 1955 to 1974, which is 20 liters per
drum; and 10 liters per drum from 1974 to 1977. Per the invoice receipts submitted, the total volume of
fuel oil which [petitioner] have failed to deliver to [respondent] is 916,487.62 liters."28

Pilipinas Shell appealed to the CA, alleging that John Bordman had failed to prove the short deliveries;
and that the suit had been barred by estoppel, laches, and prescription.29
Ruling of the Court of Appeals

Upholding the trial court, the CA overruled petitioner’s objections to the evidence of respondent in
relation to the testimonies of the latter’s witnesses and the results of the volumetric tests.30 The CA
noted that deliveries from 1955 to 1977 had been admitted by petitioner; and the fact of deficiency,
established by respondent.31

The appellate court also debunked petitioner’s claims of estoppel and laches. It held that the stipulation
in the product invoices stating that respondent had received the products in good order was not
controlling.32 On the issue of prescription, the CA ruled that the action had been filed within the period
required by law.33

Hence, this Petition.34

The Issues

Petitioner states the issues in this wise:

"I.

Respondent’s allegation that the Petition must be summarily dismissed for containing a false, defective
and unauthorized verification and certification against forum shopping is patently unmeritorious, as the
requisites for a valid verification and certification against forum shopping have been complied with.

"II.
The Decisions of the court a quo and of the Honorable Court of Appeals were clearly issued with grave
abuse of discretion, based as they are on an unmistakable misappreciation of facts clearly appearing in
the records of the case.

A.

The Honorable Court of Appeals erred giving full faith and credence to the testimony of respondent’s
sole witness, who was neither an ‘expert witness’ nor one with personal knowledge of the material facts.

B.

The Honorable Court of Appeals erred in ruling that the testimony of respondent’s sole witness was not
controverted and that the results of his volumetric tests were not disproved by petitioner as the records
of the court a quo indubitably show that petitioner disputed the testimony of said witness in every
material respect.

C.

The court a quo and the Honorable Court of Appeals erred when it failed to hold that the results of the
volumetric tests conducted by respondent’s sole witness are not worthy of full faith and credence,
considering that drums subjected to said tests in 1974 and 1975 were not the same with, or otherwise
similar to those used by petitioner in the deliveries made to respondent since 1955.

D.

The Honorable Court of Appeals erred in holding that petitioner’s unilateral reduction of billing rates
constitutes an implied admission of the fact of short deliveries. The reduction was made for no other
purpose than as a business accommodation of a valued client.

"III.
The court a quo, as well as the Honorable Court of Appeals, gravely erred in not ruling that respondent’s
claims of alleged short deliveries for the period 1955 to 1976 were already barred by prescription.

"IV.

The Honorable Court of Appeals and the court a quo erred in not ruling that respondent’s claims are
barred by estoppel and laches considering that respondent failed to assert its claim for about twenty-five
(25) years.

"V.

The Honorable Court of Appeals erred in awarding to respondent compensatory damages, exemplary
damages, attorney’s fees and cost of suit, when petitioner has not otherwise acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner."35

The Court’s Ruling

In the main, the Petition has no merit, except in regard to the CA’s grant of exemplary damages.

First Issue:

Validity of Verification and Certification

Preliminarily, the Court shall tackle respondent’s allegation that petitioner’s verification and certification
against forum shopping had not complied with, and were in fact made in contravention of, Section 4 of
Rule 45 of the Rules of Court.36 Respondent alleges that Romeo B. Garcia, vice-president of Pilipinas
Shell, had no authority to execute them.37
The records, however, show that petitioner’s president conferred upon its vice-president the power to
institute actions. As certified by the assistant board secretary, the delegation was authorized by
petitioner’s board of directors.38 The power to institute actions necessarily included the power to
execute the verification and certification against forum shopping, as required in a petition for review
before this Court.

In any event, the policy of liberal interpretation of procedural rules compels us to give due course to the
Petition.39 There appears to be no intention to circumvent the need for proper verification and
certification, which are intended to assure the truthfulness and correctness of the allegations in the
Petition and to discourage forum shopping.40

Second Issue:

Appreciation of Facts

As a general rule, questions of fact may not be raised in a petition for review.41 The factual findings of
the trial court, especially when affirmed by the appellate court, are binding and conclusive on the
Supreme Court.42 Nevertheless, this rule has certain exceptions,43 which petitioner asserts are present
in this case.44 The Court reviewed the evidence presented and revisited the applicable pertinent rules.
Being intertwined, the issues raised by petitioner relating to the evidence will be discussed together.

Objection to Respondent’s Witness

Petitioner claims that the trial court erred in giving credence to the testimony of respondent’s witness,
Engineer Jose A. Macarubbo. The testimony had allegedly consisted of his personal opinion. Under the
Rules of Evidence, the opinion of a witness is not admissible, unless it is given by an expert.45
Macarubbo was allegedly not an expert witness; neither did he have personal knowledge of material
facts.46

We clarify. Macarubbo testified that sometime in May 1974, respondent had contacted him to review
the reception of fuel at its lime plant. He discovered that Arabay had been billing respondent at 210
liters per drum, while other oil companies billed their customers at 200 liters per drum.47 On July 24,
1974, he and Jerome Juarez, branch manager of Pilipinas Shell, conducted a volumetric test to determine
the amount of fuel that was actually being delivered to respondent.48 On January 25, 1975, the test was
again conducted in the presence of Macarubbo, Juarez and Manuel Ravina (Arabay’s sales supervisor).49

From the foregoing facts, it is evident that Macarubbo did not testify as an expert witness. The CA
correctly noted that he had testified based on his personal knowledge and involvement in discovering
the short deliveries.50 His testimony as an ordinary witness was aptly allowed by the appellate court
under the following rule on admissibility:

"Sec. 36. Testimony generally confined to personal knowledge; hearsay excluded. – A witness can testify
only to those facts which he knows of his personal knowledge; that is, which are derived from his own
perception, except as otherwise provided in these rules."51

Challenge to Volumetric Tests

Petitioner disputes the CA’s finding that it had failed to disprove the results of the volumetric tests
conducted by respondent. The former claims that it was able to controvert the latter’s evidence.52

During the July 24, 1974 volumetric test, representatives of both petitioner and respondent allegedly
agreed to conduct two tests using drums independently chosen by each.53 Respondent allegedly chose
the worst-dented drum that could fill only up to 190 liters. The second drum, which was chosen by
petitioner, was not tested in the presence of Macarubbo because of heavy rain.54 It supposedly filled up
to 210 liters, however.55

The issue, therefore, relates not to the submission of evidence, but to its weight and credibility. While
petitioner may have submitted evidence, it failed to disprove the short deliveries. The lower courts
obviously gave credence to the volumetric tests witnessed by both parties as opposed to those done
solely by petitioner.

Petitioner also challenges the reliability of the volumetric tests on the grounds of failure to simulate the
position of the drums during filling56 and the fact that those tested were not representative of the ones
used from 1955 to 1974.57 These contentions fail to overturn the short deliveries established by
respondent.
The evidence of petitioner challenging the volumetric tests was wanting. It did not present any as
regards the correct position of the drums during loading. Notably, its representative had witnessed the
two tests showing the short deliveries.58 He therefore had the opportunity to correct the position of the
drums, if indeed they had been incorrectly positioned. Further, there was no proof that those used in
previous years were all good drums with no defects. Neither was there evidence that its deliveries from
1955 had been properly measured.

From the foregoing observations, it is apparent that the evidence presented by both parties
preponderates in favor of respondent. The Court agrees with the following observations of the CA:

"[Petitioner] posits that its fuel deliveries were properly measured and/or calibrated. To the mind of this
Court, regardless of what method or manner the deliveries were made, whether pre-packed drums, by
the dip stick method or through ex-jetty, the fact remains that [petitioner] failed to overcome the burden
of proving that indeed the drums used during the deliveries contain 210 liters. The [petitioner], to
support its claim, adduced no evidence. Moreover, it failed to disprove the results of the volumetric
tests."59

Having sustained the finding of short deliveries, the Court finds it no longer necessary to address the
contention of petitioner that its subsequent reduction of billings constituted merely a business
accommodation.60

Third Issue:

Prescription

Action Based on Contract

Petitioner avers that respondent’s action -- a claim for damages as a result of over-billing -- has already
prescribed. Respondent’s claim supposedly constitutes a quasi-delict, which prescribes in four years.61
We do not agree. It is elementary that a quasi-delict, as a source of an obligation, occurs only when there
is no preexisting contractual relation between the parties.62 The action of respondent

for specific performance was founded on short deliveries, which had arisen from its Contract of Sale with
petitioner, and from which resulted the former’s obligation in the present case. Any action to enforce a
breach of that Contract prescribes in ten years.63

Prescriptive Period Counted from

the Accrual of the Cause of Action

Petitioner avers that the action of respondent, even if based on a Contract, has nevertheless already
prescribed, because more than ten years had lapsed since 1955 to August 20, 1970 -- the period of short
deliveries that the latter seeks to recover.64 Respondent’s request for fuel adjustments on October 24,
1974, February 1, 1975, April 3, 1975, and September 22, 1975, were not formal demands that would
interrupt the prescriptive period, says petitioner.

The Court shall first address the contention that formal demands were not alleged in the Complaint. This
argument was not raised in the courts a quo; thus, it cannot be brought before this tribunal.65 Well
settled is the rule that issues not argued in the lower courts cannot be raised for the first time on
appeal.66 At any rate, it appears from the records that respondent’s letters to petitioner dated October
24, 1974 and February 1, 1975 were formal and written extrajudicial demands that interrupted the
prescriptive period.67 Nevertheless, the interruption has no bearing on the prescriptive period, as will
be shown presently.

Cause of Action Defined

Actions based upon a written contract should be brought within ten years from the time the right of
action accrues.68 This accrual refers to the cause of action, which is defined as the act or the omission
by which a party violates the right of another.69

Jurisprudence is replete with the elements of a cause of action: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created; (2) an obligation on the part of the
named defendant to respect or not to violate the right; and (3) an act or omission on the part of the
defendant violative of the right of the plaintiff or constituting a breach of an obligation to the latter.70 It
is only when the last element occurs that a cause of action arises.71

Applying the foregoing elements, it can readily be determined that a cause of action in a contract arises
upon its breach or violation.72 Therefore, the period of prescription commences, not from the date of
the execution of the contract, but from the occurrence of the breach.

The cause of action resulting from a breach of contract is dependent on the facts of each particular case.
The following cases involving prescription illustrate this statement.

Nabus v. Court of Appeals73 dealt with an action to rescind a Contract of Sale. The cause of action arose
at the time when the last installment was not paid. Since the case was filed ten years after that date, the
action was deemed to have prescribed.74

In Elido v. Court of Appeals,75 the overdraft Agreement stipulated that the obligation was payable on
demand. Thus, the breach started only when that judicial demand was made. This rule was applied
recently to China Banking Corporation v. Court of Appeals,76 which held that the prescriptive period
commenced on the date of the demand, not on the maturity of the certificate of indebtedness. In that
case, the certificate had stipulated that payment should be made upon presentation.

Banco Filipino Savings & Mortgage Bank v. Court of Appeals77 involved a Contract of Loan with real
estate mortgages, whereby the creditor could unilaterally increase the interest rate. When the debtor
failed to pay the loan, the creditor foreclosed on the mortgage. The Court ruled that the cause of action
for the annulment of the foreclosure sale should be counted from the date the debtor discovered the
increased interest rate.78

In Cole v. Gregorio,79 the agreement to buy and sell was conditioned upon the conduct of a preliminary
survey of the land to verify whether it contained the area stated in the Tax Declaration. Both the
agreement and the survey were made in 1963. The Court ruled that the right of action for specific
performance arose only in 1966, when the plaintiff discovered the completion of the survey.80
Serrano v. Court of Appeals81dealt with money claims arising from a Contract of Employment, which
would prescribe in three years from the time the cause of action accrued.82 The Court noted that the
cause of action had arisen when the employer made a definite denial of the employee’s claim. It was
deemed that the issues had not yet been joined prior to the definite denial of the claim, because the
employee could have still been reinstated.83

Naga Telephone Co. v. Court of Appeals84 involved the reformation of a Contract. Among others, the
grounds for the action filed by the plaintiff included allegations that the contract was too one-sided in
favor of the defendant, and that certain events had made the arrangement inequitable.85 The Court
ruled that the cause of action for a reformation would arise only when the contract appeared
disadvantageous.86

Cause of Action in

the Present Case

The Court of Appeals noted that, in the case before us, respondent had been negotiating with petitioner
since 1974. Accordingly, the CA ruled that the cause of action had arisen only in 1979, after a
manifestation of petitioner’s denial of the claims.87

The nature of the product in the present factual milieu is a major factor in determining when the cause
of action has accrued. The delivery of fuel oil requires the buyer’s dependence upon the seller

for the correctness of the volume. When fuel is delivered in drums, a buyer readily assumes that the
agreed volume can be, and actually is, contained in those drums.

Buyer dependence is common in many ordinary sale transactions, as when gasoline is loaded in the gas
tanks of motor vehicles, and when beverage is purchased in bottles and ice cream in bulk containers. In
these cases, the buyers rely, to a considerable degree, on the sellers’ representation that the agreed
volumes are being delivered. They are no longer expected to make a meticulous measurement of each
and every delivery.
To the mind of this Court, the cause of action in the present case arose on July 24, 1974, when
respondent discovered the short deliveries with certainty. Prior to the discovery, the latter had no
indication that it was not getting what it was paying for. There was yet no issue to speak of; thus, it could
not have brought an action against petitioner. It was only after the discovery of the short deliveries that
respondent got into a position to bring an action for specific performance. Evidently then, that action
was brought within the prescriptive period when it was filed on August 20, 1980.

Fourth Issue:

Estoppel

Petitioner alleges, in addition to prescription, that respondent is estopped from claiming short
deliveries.88 It is argued that, since the initial deliveries had been made way back in 1955, the latter
belatedly asserted its right only in 1980, or after twenty-five years. Moreover, respondent should
allegedly be bound by the Certification in the delivery Receipts and Invoices that state as follows:

"RECEIVED ABOVE PRODUCT(S) IN GOOD CONDITION. I HAVE INSPECTED THE COMPARTMENTS OF THE
BULK LORRY, WHEN FULL AND EMPTY, AND FOUND THEM IN ORDER."89

Estoppel by Laches

Estoppel by laches is the failure or neglect for an unreasonable length of time to do that which, by the
exercise of due diligence, could or should have been done earlier.90 Otherwise stated, negligence or
omission to assert a right within a reasonable time warrants a presumption that the party has
abandoned or declined the right.91 This principle is based on grounds of public policy, which discourages
stale claims for the peace of society.92

Respondent cannot be held guilty of delay in asserting its right during the time it did not yet know of the
short deliveries. The facts in the present case show that after the discovery of the short deliveries, it
immediately sought to recover the undelivered fuel from petitioner.93 Laches refers, inter alia, to the
length of time in asserting a claim. The Court, therefore, agrees with the lower courts that respondent’s
claim was not lost by laches.
Alleged Certification Not a Bar

It is not disputed that the alleged Certification stating that respondent received the fuel oil in good
condition is in the nature of a contract of adhesion.94 The statement was in fine print at the lower right
of petitioner’s invoices.95 It was made in the form and language prepared by petitioner. The latter’s
customers, including respondent, were required to sign the statement upon every delivery. The primary
purpose of an invoice, however, is merely to evidence delivery and receipt of the goods stated in it.

While the Court has sustained the validity of similar stipulations in other contracts, it has also recognized
that reliance on them cannot be favored when the facts and circumstances warrant the contrary.96
Noting the nature of the product in the present factual milieu, as discussed earlier in the claim of
prescription, the dependence of the buyer upon the seller makes the stipulation inapplicable.

Indeed, it would be too cumbersome and impractical for respondent to measure the fuel oil in each and
every drum delivered. Nonetheless, upon delivery by petitioner, the former was obliged to sign the
Certification in the invoice. In signing it, respondent could not have waived the right to a legitimate claim
for hidden defects. Thus, it is not estopped from recovering short deliveries.

Doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party
that prepared them. This principle especially holds true with regard to waivers, which are not presumed,
but which must be clearly and convincingly shown.97

Fourth Issue:

Exemplary Damages and Attorney’s Fees

In the last error assigned, petitioner challenges the Order for specific performance and the awards of
exemplary damages and attorney’s fees in favor of respondent.98 The directive for the delivery of
916,487.62 liters of bunker oil will no longer be taken up because, as discussed earlier, this fact is borne
out by the evidence.
The CA sustained the award of exemplary damages because of petitioner’s wanton refusal to deliver the
shortages of fuel oil after the demand was made.99 Similarly, attorney’s fees were imposed, because
respondent had been compelled to litigate to protect its interests.100 Both awards, however, were each
reduced from ₱500,000 to ₱100,000.101

Exemplary Damages Not Proper

Exemplary damages are imposed as a corrective measure102 when the guilty party has acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner.103 These damages are awarded in
accordance with the sound discretion of the court.104

Petitioner argues that its refusal to deliver the shortages of fuel was premised on good faith.105 Indeed,
records reveal that it had reviewed respondent’s requests for the delivery of shortages before declining
them.106 It likewise readily granted respondent’s requests to conduct volumetric tests. It simply had the
mistaken belief that it was not liable for any shortages. Unfortunately, the evidence showed the contrary.

Absent any showing of bad faith on the part of petitioner, exemplary damages cannot be imposed upon
it.

Attorney’s Fees Allowed

Petitioner claims that the award of attorney’s fees was tied up with the award for exemplary
damages.107 Since those damages were not recoverable, then the attorney’s fees allegedly had no legal
basis.

While attorney’s fees are recoverable when exemplary damages are awarded, the former may also be
granted when the court deems it just and equitable.108 The grant of attorney’s fees depends on the
circumstances of each case and lies within the discretion of the court. They may be awarded when a
party is compelled to litigate or to incur expenses to protect its interest by reason of an unjustified act by
the other.109
The Court agrees that the award of ₱100,000 as attorney’s fees is very reasonable;110 in fact, it is almost
symbolic, as it will not totally recompense respondent for the actual fees spent to prosecute its cause.
The case has dragged on unnecessarily despite petitioner’s failure to present countervailing evidence
during the trial. Moreover, respondent was compelled to litigate, notwithstanding its attempt at an
amicable settlement from the time it discovered the shortages in 1974 until the actual filing of the case
in 1980.111

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution are AFFIRMED with
the slight MODIFICATION that the award of exemplary damages is deleted. Costs against petitioner.

SO ORDERED.

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman, Third Division

WECONCUR:

ANGELINA SANDOVAL-GUTIERREZ

RENATO C. CORONA

Associate Justice

Associate Justice
CONCHITA CARPIO MORALES

CANCIO C. GARCIA

Associate Justice

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairman’s Attestation, it is
hereby certified that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice

Footnotes

1 Rollo, pp. 83-122.

2 Id., pp. 130-149. Tenth Division. Penned by Justice Remedios A. Salazar-Fernando, with the
concurrence of Justices Romeo J. Callejo Sr. (Division chair and now a member of this Court) and Danilo
B. Pine (member).

3 Id., p. 151.

4 CA Decision, p. 19; rollo, p. 148.

5 Petitioner’s Memorandum, p. 7; rollo, p. 501.

6 RTC Decision dated August 30, 1991, p. 5; CA rollo, p. 86.

7 Ibid; Petitioner’s Memorandum, p. 7; rollo, p. 501.


8 Ibid.; Petitioner’s Exhibit "4" (records, p. 1179).

9 Complaint, p. 7; records, p. 9.

10 Id., pp. 2-3 & 4-5.

11 Id., pp. 3 & 5.

12 Ibid.

13 Id., pp. 4 & 6.

14 Id., pp. 6 & 8.

15 Id., pp. 7 & 9.

16 Assailed Decision, p. 8; rollo, p. 137.

17 Answer with Counterclaim, p. 4; records, p. 13.

18 Ibid.

19 Id., pp. 10-11 & 19-20.

20 Id., pp. 11-12 & 20-21.


21 RTC Order dated August 5, 1982; records, p. 72.

22 There were three commissioners: Mr. Victoriano T. Macarubo (representing John Bordman), Atty. Luis
A. Vera Cruz Jr. (representing Pilipinas Shell and Arabay), and Rebecca R. Mariano (as appointed by the
trial court).

23 Report by Commissioner Rebecca R. Mariano; records, pp. 283-284.

24 Assailed Decision, p. 8; rollo, p. 137.

25 RTC Order dated November 6, 1989, pp. 2-3; records, pp. 1043-1044.

26 RTC Decision; CA rollo, pp. 82-91.

27 Id., pp. 9-10; CA rollo, pp. 90-91.

28 RTC Decision, pp. 8-9; CA rollo, pp. 89-90.

29 Appellant’s Brief, pp. 9-10; CA rollo, pp. 53-54.

30 Assailed Decision, pp. 12-13; rollo, pp. 140-141.

31 Ibid.

32 Id., pp. 14 & 142.


33 Id., pp. 17 & 145.

34 The case was deemed submitted for decision on November 18, 2004, upon this Court’s receipt of
petitioner’s Memorandum, signed by Attys. Ana Teresa Arnaldo-Oracion and Ria Corazon A. Golez.
Respondent’s Memorandum, signed by Atty. Miguel Antonio H. Galvez, was received by this Court on
November 3, 2004.

35 Petitioner’s Memorandum, pp. 12-13; rollo, pp. 506-507. Original in uppercase.

36 The rule requires a certification against forum shopping and verification that the allegations in the
Petition are true and correct based on personal knowledge and authentic records.

37 Respondent’s Memorandum, pp. 1-2; rollo, pp. 425-426.

38 Certification of Efren L. Legaspi; rollo, p. 127.

39 §6 of Rule 1 of the Rules of Court.

40 See BA Savings Bank v. Sia, 336 SCRA 484, July 27, 2000.

41 §1 of Rule 45 of the Rules of Court.

42 Sps. Lagandaon v. Court of Appeals, 352 Phil. 928, May 21, 1998; Yu Bun Guan v. Ong, 419 Phil. 845,
October 18, 2001; Cuenco v. Cuenco vda. de Manguerra, 440 SCRA 252, October 13, 2004.

43 CIR v. Embroidery and Garments Industries (Phil.), Inc., 364 Phil. 541, 546, March 22, 1999; Medina v.
Asistio, 191 SCRA 218, 223, November 8, 1990.
44 Petitioner claims that (1) the factual findings are grounded entirely on speculations, surmises or
conjectures; (2) the lower court’s inference from its factual findings were manifestly mistaken, absurd or
impossible; (3) there was grave abuse of discretion in the appreciation of facts; (4) there was a
misappreciation of facts, as those averred by petitioner were not disputed by the respondent; and (5)
the factual findings of the Court of Appeals, which were premised on absence of evidence, are
contradicted by the evidence on record. (Petitioner’s Memorandum, pp. 2-3; rollo, pp. 496-497)

45 §48 of Rule 130 of the Rules of Court.

46 Petitioner’s Memorandum, p. 18; rollo, p. 512.

The Court, however, observes that in its Memorandum, petitioner failed to explain how Macarubbo
lacked any personal knowledge on the material facts.

47 RTC Decision, p. 1; CA rollo, p. 82.

48 Id., pp. 2 & 83. See also Answer, p. 2; records, p. 11; TSN dated September 13, 1983, pp. 11-16; TSN
dated May 29, 1990, p. 17.

49 Ibid. See also Answer, p. 2; records, p. 11; TSN dated September 13, 1983, p. 21; TSN dated May 29,
1990, p. 19; Answer, p. 2; records, p. 11.

50 Assailed Decision, p. 11; rollo, p. 140.

51 Rule 130 of the Rules of Court.

52 Petitioner’s Memorandum, p. 23; rollo, p. 517.


53 Petitioner’s Memorandum, pp. 23-24; rollo, pp. 517-518.

54 Petitioner’s Memorandum, p. 24; rollo, p. 518.

55 Id., p. 25; rollo, p. 519.

56 Petitioner claims that a drum will contain more fuel oil when loaded in an inclined position than when
it is filled up in an upright position, because of less ullage or allowance for gas expansion. (Petitioner’s
Memorandum, p. 26; rollo, p. 520)

57 Petitioner’s Memorandum, p. 29; rollo, p. 523.

58 TSN dated May 29, 1990, pp. 17 & 20.

59 Assailed Decision, p. 13; rollo, p. 141.

60 The CA found that the accuracy of the volumetric tests had been bolstered by Shell’s voluntary
reduction of its billing rate. (Assailed Decision, p. 11; rollo, p. 140).

Petitioner voluntarily reduced its billing rate effective July 24, 1974, the date on which the first
volumetric test was conducted. (Answer, p. 2; records, p. 11; TSN dated May 29, 1990, p. 19.

61 Petitioner’s Memorandum, p. 34; rollo, p. 528 (citing Art. 1146 of the Civil Code).

62 Art. 2126 of the Civil Code.

63 Art. 1144 of the Civil Code.


64 Petitioner’s Memorandum. pp. 34-35; rollo, pp. 528-529.

65 See Petitioner’s Appellant Brief, pp. 30-32; CA rollo, pp. 74-76.

66 Elido v. Court of Appeals, 216 SCRA 637, 646, December 16, 1992; BA Finance Corporation v. Court of
Appeals, 201 SCRA 17, 164, August 28, 1991.

67 Petitioner’s Exhibits "D" and "E;" records, pp. 318-337.

The interruption of the prescriptive period by a written extrajudicial demand means that the period to
file would commence anew from the receipt of the demand. (Permanent Savings and Loan Bank v.
Velarde, 439 SCRA 1, 11, September 23, 2004)

68 Art. 1144 of the Civil Code.

69 §2 of Rule 2 of the Rules of Court.

70 China Banking Corporation v. Court of Appeals, GR No. 153267, June 23, 2005; Swagman Hotels &
Travel, Inc. v. Court of Appeals, GR No. 161135, April 8, 2005; Nabus v. Court of Appeals, 193 SCRA 732,
747, February 7, 1991; Cole v. Gregorio, 202 Phil. 226, 236, September 21, 1982.

71 Ibid.

72 Ibid.

73 193 SCRA 732, February 7, 1991.


74 Id., p. 747.

75 216 SCRA 637, 644, December 16, 1992.

76 Supra.

77 388 Phil. 27, May 30, 2000.

78 Id., p. 40.

79 Supra.

80 Id., p. 238.

81 415 Phil. 447, August 15, 2001.

82 Art. 291 of the Labor Code.

83 Supra, p. 458.

84 230 SCRA 351, February 24, 1994.

85 Id., p. 355.
86 Id., p. 369.

87 Assailed Decision, p. 17; rollo, p. 145.

88 Petitioner’s Memorandum, p. 37; rollo, p. 531.

89 Ibid.

90 Alfredo v. Borras, 404 SCRA 145, 167, June 17, 2003; Felizardo v. Fernandez, 363 SCRA 182, 191,
August 15, 2001; Tijam v. Sibonghanoy, 131 Phil. 556, 563, April 15, 1968.

91 Ibid.

92 Felizardo v. Fernandez, supra, Catholic Bishop of Balanga v. Court of Appeals, 332 Phil. 206, 219,
November 14, 1996.

93 Exhibits "C" and "D"; records, pp. 317-318.

94 A contract of adhesion is one wherein a party prepares the stipulations in the contract, while the
other party merely affixes the latter’s signature to it. (Gulf Resorts v. Phil. Charter Insurance Corp., GR
No. 156167, May 16, 2005)

95 Respondent’s Exhibits "O," "O-1" to "O-136," "P," "P-1" to "P-105," "Q," "Q-1" to "Q-147," "R," "R-1"
to "R-135," "S," and "S-1" to "S-86"; records, pp. 353-971.

96 Cebu Shipyard & Engineering Works v. William Lines, 366 Phil. 439, 457, May 5, 1999; Sweet Lines,
Inc. v. Teves, 83 SCRA 361, 369, May 19, 1978. See also Philippine National Bank v. Court of Appeals, 196
SCRA 536, 545, April 30, 1991.
97 See Ramirez v. Court of Appeals, 98 Phil. 225, 228, January 25, 1956; Arrieta v. National Rice and Corn
Corp., 119 Phil. 339, 347, January 31, 1964.

98 Petitioner’s Memorandum, pp. 43-44; rollo, pp. 537-538.

The Court observes that petitioner is no longer challenging the actual or compensatory damages in the
amount of ₱1,000,000 that was awarded by the trial court. (RTC Decision, p. 9; CA rollo, p. 90).

99 Assailed Decision, p. 18; rollo, p. 147.

100 Ibid.

101 Id., p. 19; rollo, p. 148.

102 Art. 2229 of the Civil Code.

103 Art. 2232 of the Civil Code.

104 Art. 2233 of the Civil Code.

105 Petitioner’s Memorandum, p. 43; rollo, p. 537.

106 Petitioner’s Exhibit "1," "3" and "4;" records, pp. 1171, 1177 and 1179.

107 Petitioner’s Memorandum, p. 44; rollo, p. 538.


108 Art. 2208 of the Civil Code.

109 Chavez v. Court of Appeals, 453 SCRA 843, 854, March 18, 2005; Tugade v. Court of Appeals, 407
SCRA 497, 515, July 31, 2003.

110 Art. 2208 of the Civil Code.

111 Petitioner’s Exhibits "C," "D," "E," "M," and "N"; records, pp. 317, 318, 327, and 348-352.

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Republic of the Philippines


SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,

vs.

THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II),
respondents.

Ernesto P. Pangalangan for petitioners.

Luis General, Jr. for private respondent.

NOCON, J.:

The case of Reyes v. Caltex (Philippines), Inc.1 enunciated the doctrine that where a person by his
contract charges himself with an obligation possible to be performed, he must perform it, unless its
performance is rendered impossible by the act of God, by the law, or by the other party, it being the rule
that in case the party desires to be excused from performance in the event of contingencies arising
thereto, it is his duty to provide the basis therefor in his contract.
With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267
which provides:

When the service has become so difficult as to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in part.

In the report of the Code Commission, the rationale behind this innovation was explained, thus:

The general rule is that impossibility of performance releases the obligor. However, it is submitted that
when the service has become so difficult as to be manifestly beyond the contemplation of the parties,
the court should be authorized to release the obligor in whole or in part. The intention of the parties
should govern and if it appears that the service turns out to be so difficult as to have been beyond their
contemplation, it would be doing violence to that intention to hold their contemplation, it would be
doing violence to that intention to hold the obligor still responsible.2

In other words, fair and square consideration underscores the legal precept therein.

Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article
1267 in favor of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the
former insists that the complaint should have been dismissed for failure to state a cause of action.

The antecedent facts, as narrated by respondent Court of Appeals are, as follows:

Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long
distance telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative,
Inc. (CASURECO II) is a private corporation established for the purpose of operating an electric power
service in the same city.

On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the
operation of its telephone service the electric light posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections for
the use by private respondent in the following places:

(a) 3 units — The Main Office of (private respondent);

(b) 2 Units — The Warehouse of (private respondent);

(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion Pequeña;

(d) 1 Unit — The Residence of (private respondent's) President;

(e) 1 Unit — The Residence of (private respondent's) Acting General Manager; &

(f) 2 Units — To be determined by the General Manager.3

Said contract also provided:

(a) That the term or period of this contract shall be as long as the party of the first part has need for
the electric light posts of the party of the second part it being understood that this contract shall
terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned
[sic] its operation as a public service and it becomes necessary to remove the electric lightpost; (sic)4

It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a
member of the Board of Directors of private respondent and at the same time the legal counsel of
petitioner.

After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989
with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of
the contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not in
conformity with the guidelines of the National Electrification Administration (NEA) which direct that the
reasonable compensation for the use of the posts is P10.00 per post, per month; that after eleven (11)
years of petitioners' use of the posts, the telephone cables strung by them thereon have become much
heavier with the increase in the volume of their subscribers, worsened by the fact that their linemen
bore holes through the posts at which points those posts were broken during typhoons; that a post now
costs as much as P2,630.00; so that justice and equity demand that the contract be reformed to abolish
the inequities thereon.

As second cause of action, private respondent alleged that starting with the year 1981, petitioners have
used 319 posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City,
without any contract with it; that at the rate of P10.00 per post, petitioners should pay private
respondent for the use thereof the total amount of P267,960.00 from 1981 up to the filing of its
complaint; and that petitioners had refused to pay private respondent said amount despite demands.

And as third cause of action, private respondent complained about the poor servicing by petitioners of
the ten (10) telephone units which had caused it great inconvenience and damages to the tune of not
less than P100,000.00

In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it
does not sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription,
the same having been filed more than ten (10) years after the execution of the contract; and (3) it is
barred by estoppel, since private respondent seeks to enforce the contract in the same action.
Petitioners further alleged that their utilization of private respondent's posts could not have caused their
deterioration because they have already been in use for eleven (11) years; and that the value of their
expenses for the ten (10) telephone lines long enjoyed by private respondent free of charge are far in
excess of the amounts claimed by the latter for the use of the posts, so that if there was any inequity, it
was suffered by them.

Regarding the second cause of action, petitioners claimed that private respondent had asked for
telephone lines in areas outside Naga City for which its posts were used by them; and that if petitioners
had refused to comply with private respondent's demands for payment for the use of the posts outside
Naga City, it was probably because what is due to them from private respondent is more than its claim
against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service
had been categorized by the National Telecommunication Corporation (NTC) as "very high" and of
"superior quality."

During the trial, private respondent presented the following witnesses:

(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it
was petitioner Maggay who prepared the contract; that the understanding between private respondent
and petitioners was that the latter would only use the posts in Naga City because at that time,
petitioners' capability was very limited and they had no expectation of expansion because of legal
squabbles within the company; that private respondent agreed to allow petitioners to use its posts in
Naga City because there were many subscribers therein who could not be served by them because of
lack of facilities; and that while the telephone lines strung to the posts were very light in 1977, said posts
have become heavily loaded in 1989.

(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department,
declared that the posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were
in the towns of Pili, Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners'
cables strung to the posts in 1989 are much bigger than those in November, 1977; that in 1987, almost
100 posts were destroyed by typhoon Sisang: around 20 posts were located between Naga City and the
town of Pili while the posts in barangay Concepcion, Naga City were broken at the middle which had
been bored by petitioner's linemen to enable them to string bigger telephone lines; that while the cost
per post in 1977 was only from P700.00 to P1,000.00, their costs in 1989 went up from P1,500.00 to
P2,000.00, depending on the size; that some lines that were strung to the posts did not follow the
minimum vertical clearance required by the National Building Code, so that there were cases in 1988
where, because of the low clearance of the cables, passing trucks would accidentally touch said cables
causing the posts to fall and resulting in brown-outs until the electric lines were repaired.

(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and
Manager of Region V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by
private telephone systems of electric cooperatives' posts, they should pay a minimum monthly rental of
P4.00 per post, and considering the escalation of prices since 1985, electric cooperatives have been
charging from P10.00 to P15.00 per post, which is what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent,
testified on the poor service rendered by petitioner's telephone lines, like the telephone in their
Complaints Section which was usually out of order such that they could not respond to the calls of their
customers. In case of disruption of their telephone lines, it would take two to three hours for petitioners
to reactivate them notwithstanding their calls on the emergency line.

(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors
asked him to study the contract sometime during the latter part of 1982 or in 1983, as it had appeared
very disadvantageous to private respondent. Notwithstanding his recommendation for the filing of a
court action to reform the contract, the former general managers of private respondent wanted to adopt
a soft approach with petitioners about the matter until the term of General Manager Henry Pascual who,
after failing to settle the matter amicably with petitioners, finally agreed for him to file the present action
for reformation of contract.

On the other hand, petitioner Maggay testified to the following effect:

(1) It is true that he was a member of the Board of Directors of private respondent and at the same
time the lawyer of petitioner when the contract was executed, but Atty. Gaudioso Tena, who was also a
member of the Board of Directors of private respondent, was the one who saw to it that the contract
was fair to both parties.

(2) With regard to the first cause of action:

(a) Private respondent has the right under the contract to use ten (10) telephone units of
petitioners for as long as it wishes without paying anything therefor except for long distance calls
through PLDT out of which the latter get only 10% of the charges.

(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which
posts have remained erect up to the present;

(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need
only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are
according to standard and comparable to those of PLDT. The accidents mentioned by private respondent
involved trucks that were either overloaded or had loads that protruded upwards, causing them to hit
the cables.

(3) Concerning the second cause of action, the intention of the parties when they entered into the
contract was that the coverage thereof would include the whole area serviced by petitioners because at
that time, they already had subscribers outside Naga City. Private respondent, in fact, had asked for
telephone connections outside Naga City for its officers and employees residing there in addition to the
ten (10) telephone units mentioned in the contract. Petitioners have not been charging private
respondent for the installation, transfers and re-connections of said telephones so that naturally, they
use the posts for those telephone lines.

(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be
in accordance with engineering standards and practice and comparable to the best in the country.

On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards
private respondent's first cause of action, that while the contract appeared to be fair to both parties
when it was entered into by them during the first year of private respondent's operation and when its
Board of Directors did not yet have any experience in that business, it had become disadvantageous and
unfair to private respondent because of subsequent events and conditions, particularly the increase in
the volume of the subscribers of petitioners for more than ten (10) years without the corresponding
increase in the number of telephone connections to private respondent free of charge. The trial court
concluded that while in an action for reformation of contract, it cannot make another contract for the
parties, it can, however, for reasons of justice and equity, order that the contract be reformed to abolish
the inequities therein. Thus, said court ruled that the contract should be reformed by ordering
petitioners to pay private respondent compensation for the use of their posts in Naga City, while private
respondent should also be ordered to pay the monthly bills for the use of the telephones also in Naga
City. And taking into consideration the guidelines of the NEA on the rental of posts by telephone
companies and the increase in the costs of such posts, the trial court opined that a monthly rental of
P10.00 for each post of private respondent used by petitioners is reasonable, which rental it should pay
from the filing of the complaint in this case on January 2, 1989. And in like manner, private respondent
should pay petitioners from the same date its monthly bills for the use and transfers of its telephones in
Naga City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the contract does not mention
anything about the use by petitioners of private respondent's posts outside Naga City. Therefore, the
trial court held that for reason of equity, the contract should be reformed by including therein the
provision that for the use of private respondent's posts outside Naga City, petitioners should pay a
monthly rental of P10.00 per post, the payment to start on the date this case was filed, or on January 2,
1989, and private respondent should also pay petitioners the monthly dues on its telephone connections
located outside Naga City beginning January, 1989.

And with respect to private respondent's third cause of action, the trial court found the claim not
sufficiently proved.

Thus, the following decretal portion of the trial court's decision dated July 20, 1990:

WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of the
agreement (Exh. A); ordering the defendants to pay plaintiff's electric poles in Naga City and in the towns
of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where defendant NATELCO
uses plaintiff's electric poles, the sum of TEN (P10.00) PESOS per plaintiff's pole, per month beginning
January, 1989 and ordering also the plaintiff to pay defendant NATELCO the monthly dues of all its
telephones including those installed at the residence of its officers, namely; Engr. Joventino Cruz, Engr.
Antonio Borja, Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January,
1989. Plaintiff's claim for attorney's fees and expenses of litigation and defendants' counterclaim are
both hereby ordered dismissed. Without pronouncement as to costs.

Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the
decision dated May 28, 1992, respondent court affirmed the decision of the trial court,5 but based on
different grounds to wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract
was subject to a potestative condition which rendered said condition void. The motion for
reconsideration was denied in the resolution dated September 10, 1992.6 Hence, the present petition.

Petitioners assign the following pertinent errors committed by respondent court:

1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case commenced
from the time it became disadvantageous to private respondent; and

3) in ruling that the contract was subject to a potestative condition in favor of petitioners.

Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because
the contract does not involve the rendition of service or a personal prestation and it is not for future
service with future unusual change. Instead, the ruling in the case of Occeña, et al. v. Jabson, etc., et al.,7
which interpreted the article, should be followed in resolving this case. Besides, said article was never
raised by the parties in their pleadings and was never the subject of trial and evidence.

In applying Article 1267, respondent court rationalized:

We agree with appellant that in order that an action for reformation of contract would lie and may
prosper, there must be sufficient allegations as well as proof that the contract in question failed to
express the true intention of the parties due to error or mistake, accident, or fraud. Indeed, in
embodying the equitable remedy of reformation of instruments in the New Civil Code, the Code
Commission gave its reasons as follows:

Equity dictates the reformation of an instrument in order that the true intention of the contracting
parties may be expressed. The courts by the reformation do not attempt to make a new contract for the
parties, but to make the instrument express their real agreement. The rationale of the doctrine is that it
would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect
or disclose the real meeting of the minds of the parties. The rigor of the legalistic rule that a written
instrument should be the final and inflexible criterion and measure of the rights and obligations of the
contracting parties is thus tempered to forestall the effects of mistake, fraud, inequitable conduct, or
accident. (pp. 55-56, Report of Code Commission)

Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that where
through mistake or accident on the part of either or both of the parties or mistake or fraud on the part of
the clerk or typist who prepared the instrument, the true intention of the parties is not expressed
therein, then the instrument may be reformed at the instance of either party if there was mutual
mistake on their part, or by the injured party if only he was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a
mistake on its part or mutual mistake on the part of both parties when they entered into the agreement
Exh. "A", and that because of this mistake, said agreement failed to express their true intention. Rather,
plaintiff's evidence shows that said agreement was prepared by Atty. Luciano Maggay, then a member of
plaintiff's Board of Directors and its legal counsel at that time, who was also the legal counsel for
defendant-appellant, so that as legal counsel for both companies and presumably with the interests of
both companies in mind when he prepared the aforesaid agreement, Atty. Maggay must have considered
the same fair and equitable to both sides, and this was affirmed by the lower court when it found said
contract to have been fair to both parties at the time of its execution. In fact, there were no complaints
on the part of both sides at the time of and after the execution of said contract, and according to 73-year
old Justino de Jesus, Vice President and General manager of appellant at the time who signed the
agreement Exh. "A" in its behalf and who was one of the witnesses for the plaintiff (sic), both parties
complied with said contract "from the very beginning" (p. 5, tsn, April 17, 1989).

That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the plaintiff
with the expansion of the business of appellant and the increase in the volume of its subscribers in Naga
City and environs through the years, necessitating the stringing of more and bigger telephone cable
wires by appellant to plaintiff's electric posts without a corresponding increase in the ten (10) telephone
connections given by appellant to plaintiff free of charge in the agreement Exh. "A" as consideration for
its use of the latter's electric posts in Naga City, appear, however, undisputed from the totality of the
evidence on record and the lower court so found. And it was for this reason that in the later (sic) part of
1982 or 1983 (or five or six years after the subject agreement was entered into by the parties), plaintiff's
Board of Directors already asked Atty. Luis General who had become their legal counsel in 1982, to study
said agreement which they believed had become disadvantageous to their company and to make the
proper recommendation, which study Atty. General did, and thereafter, he already recommended to the
Board the filing of a court action to reform said contract, but no action was taken on Atty. General's
recommendation because the former general managers of plaintiff wanted to adopt a soft approach in
discussing the matter with appellant, until, during the term of General Manager Henry Pascual, the
latter, after failing to settle the problem with Atty. Luciano Maggay who had become the president and
general manager of appellant, already agreed for Atty. General's filing of the present action. The fact that
said contract has become inequitous or disadvantageous to plaintiff as the years went by did not,
however, give plaintiff a cause of action for reformation of said contract, for the reasons already pointed
out earlier. But this does not mean that plaintiff is completely without a remedy, for we believe that the
allegations of its complaint herein and the evidence it has presented sufficiently make out a cause of
action under Art. 1267 of the New Civil Code for its release from the agreement in question.

xxx xxx xxx


The understanding of the parties when they entered into the Agreement Exh. "A" on November 1, 1977
and the prevailing circumstances and conditions at the time, were described by Dioscoro Ragragio, the
President of plaintiff in 1977 and one of its two officials who signed said agreement in its behalf, as
follows:

Our understanding at that time is that we will allow NATELCO to utilize the posts of CASURECO II only in
the City of Naga because at that time the capability of NATELCO was very limited, as a matter of fact we
do [sic] not expect to be able to expand because of the legal squabbles going on in the NATELCO. So,
even at that time there were so many subscribers in Naga City that cannot be served by the NATELCO, so
as a mater of public service we allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3,
1989)

Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were very
light and that very few telephone lines were attached to the posts of CASURECO II in 1977, said posts
have become "heavily loaded" in 1989 (tsn, id.).

In truth, as also correctly found by the lower court, despite the increase in the volume of appellant's
subscribers and the corresponding increase in the telephone cables and wires strung by it to plaintiff's
electric posts in Naga City for the more 10 years that the agreement Exh. "A" of the parties has been in
effect, there has been no corresponding increase in the ten (10) telephone units connected by appellant
free of charge to plaintiff's offices and other places chosen by plaintiff's general manager which was the
only consideration provided for in said agreement for appellant's use of plaintiffs electric posts. Not only
that, appellant even started using plaintiff's electric posts outside Naga City although this was not
provided for in the agreement Exh. "A" as it extended and expanded its telephone services to towns
outside said city. Hence, while very few of plaintiff's electric posts were being used by appellant in 1977
and they were all in the City of Naga, the number of plaintiff's electric posts that appellant was using in
1989 had jumped to 1,403,192 of which are outside Naga City (Exh. "B"). Add to this the destruction of
some of plaintiff's poles during typhoons like the strong typhoon Sisang in 1987 because of the heavy
telephone cables attached thereto, and the escalation of the costs of electric poles from 1977 to 1989,
and the conclusion is indeed ineluctable that the agreement Exh. "A" has already become too one-sided
in favor of appellant to the great disadvantage of plaintiff, in short, the continued enforcement of said
contract has manifestly gone far beyond the contemplation of plaintiff, so much so that it should now be
released therefrom under Art. 1267 of the New Civil Code to avoid appellant's unjust enrichment at its
(plaintiff's) expense. As stated by Tolentino in his commentaries on the Civil Code citing foreign civilist
Ruggiero, "equity demands a certain economic equilibrium between the prestation and the counter-
prestation, and does not permit the unlimited impoverishment of one party for the benefit of the other
by the excessive rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil Code of
the Philippines, 1986 ed.,

pp. 247-248).

We therefore, find nothing wrong with the ruling of the trial court, although based on a different and
wrong premise (i.e., reformation of contract), that from the date of the filing of this case, appellant must
pay for the use of plaintiff's electric posts in Naga City at the reasonable monthly rental of P10.00 per
post, while plaintiff should pay appellant for the telephones in the same City that it was formerly using
free of charge under the terms of the agreement Exh. "A" at the same rate being paid by the general
public. In affirming said ruling, we are not making a new contract for the parties herein, but we find it
necessary to do so in order not to disrupt the basic and essential services being rendered by both parties
herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff, said
arrangement to continue only until such time as said parties can re-negotiate another agreement over
the same

subject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed by the
parties, the aforesaid ruling of the lower court and affirmed by us shall cease to exist and shall be
substituted and superseded by their new agreement. . . ..8

Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale
behind this provision,9 the term "service" should be understood as referring to the "performance" of the
obligation. In the present case, the obligation of private respondent consists in allowing petitioners to
use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare reading
of this article reveals that it is not a requirement thereunder that the contract be for future service with
future unusual change. According to Senator Arturo M. Tolentino,10 Article 1267 states in our law the
doctrine of unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in
public international law; under this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the contract also ceases to exist. Considering
practical needs and the demands of equity and good faith, the disappearance of the basis of a contract
gives rise to a right to relief in favor of the party prejudiced.

In a nutshell, private respondent in the Occeña case filed a complaint against petitioner before the trial
court praying for modification of the terms and conditions of the contract that they entered into by fixing
the proper shares that should pertain to them out of the gross proceeds from the sales of subdivided
lots. We ordered the dismissal of the complaint therein for failure to state a sufficient cause of action.
We rationalized that the Court of Appeals misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract but that the court "render
judgment modifying the terms and conditions of the contract . . . by fixing the proper shares that should
pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subject
subdivision". The cited article (Article 1267) does not grant the courts (the) authority to remake, modify
or revise the contract or to fix the division of shares between the parties as contractually stipulated with
the force of law between the parties, so as to substitute its own terms for those covenanted by the
parties themselves. Respondent's complaint for modification of contract manifestly has no basis in law
and therefore states no cause of action. Under the particular allegations of respondent's complaint and
the circumstances therein averred, the courts cannot even in equity grant the relief sought.11

The ruling in the Occeña case is not applicable because we agree with respondent court that the
allegations in private respondent's complaint and the evidence it has presented sufficiently made out a
cause of action under Article 1267. We, therefore, release the parties from their correlative obligations
under the contract. However, our disposition of the present controversy does not end here. We have to
take into account the possible consequences of merely releasing the parties therefrom: petitioners will
remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their
service to the public; while private respondent, in consonance with the contract12 will return all the
telephone units to petitioners, causing prejudice to its business. We shall not allow such eventuality.
Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of
its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other
places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per
month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its
telephones at the same rate being paid by the public beginning January, 1989. The peculiar
circumstances of the present case, as distinguished further from the Occeña case, necessitates exercise
of our equity jurisdiction.13 By way of emphasis, we reiterate the rationalization of respondent court
that:

. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it
necessary to do so in order not to disrupt the basic and essential services being rendered by both parties
herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff . . . .14

Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never
the subject of trial and evidence has been passed upon by respondent court in its well reasoned
resolution, which we hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this
case, we have changed its theory and decided the same on an issue not invoked by plaintiff in the lower
court. For basically, the main and pivotal issue in this case is whether the continued enforcement of the
contract Exh. "A" between the parties has, through the years (since 1977), become too inequitous or
disadvantageous to the plaintiff and too one-sided in favor of defendant-appellant, so that a solution
must be found to relieve plaintiff from the continued operation of said agreement and to prevent
defendant-appellant from further unjustly enriching itself at plaintiff's expense. It is indeed unfortunate
that defendant had turned deaf ears to plaintiffs requests for renegotiation, constraining the latter to go
to court. But although plaintiff cannot, as we have held, correctly invoke reformation of contract as a
proper remedy (there having been no showing of a mistake or error in said contract on the part of any of
the parties so as to result in its failure to express their true intent), this does not mean that plaintiff is
absolutely without a remedy in order to relieve itself from a contract that has gone far beyond its
contemplation and has become so highly inequitous and disadvantageous to it through the years
because of the expansion of defendant-appellant's business and the increase in the volume of its
subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in the best
way and manner it can in the light of the proven facts and the law or laws applicable thereto.

It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellant
court may uphold the decision below upon some other point which was ignored or erroneously decided
by the trial court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de
Paz, 18 SCRA 467). Furthermore, the appellate court has the discretion to consider an unassigned error
that is closely related to an error properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal,
78 Phil. 196). It has also been held that the Supreme Court (and this Court as well) has the authority to
review matters, even if they are not assigned as errors in the appeal, if it is found that their consideration
is necessary in arriving at a just decision of the case (Saura Import & Export Co., Inc. v. Phil. International
Surety Co. and PNB, 8 SCRA 143). For it is the material allegations of fact in the complaint, not the legal
conclusion made therein or the prayer, that determines the relief to which the plaintiff is entitled, and
the plaintiff is entitled to as much relief as the facts warrant although that relief is not specifically prayed
for in the complaint (Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v.
Barrios, 77 Phil. 120). To quote an old but very illuminating decision of our Supreme Court through the
pen of American jurist Adam C. Carson:

"Under our system of pleading it is the duty of the courts to grant the relief to which the parties are
shown to be entitled by the allegations in their pleadings and the facts proven at the trial, and the mere
fact that they themselves misconstrue the legal effect of the facts thus alleged and proven will not
prevent the court from placing the just construction thereon and adjudicating the issues accordingly."
(Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme Court also
held:

We rule that the respondent court did not commit any error in taking cognizance of the aforesaid issues,
although not raised before the trial court. The presence of strong consideration of substantial justice has
led this Court to relax the well-entrenched rule that, except questions on jurisdiction, no question will be
entertained on appeal unless it has been raised in the court below and it is within the issues made by the
parties in their pleadings (Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .

We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of
the New Civil Code to this case. Defendant-appellant stresses that the applicability of said provision is a
question of fact, and that it should have been given the opportunity to present evidence on said
question. But defendant-appellant cannot honestly and truthfully claim that it (did) not (have) the
opportunity to present evidence on the issue of whether the continued operation of the contract Exh.
"A" has now become too one-sided in its favor and too inequitous, unfair, and disadvantageous to
plaintiff. As held in our decision, the abundant and copious evidence presented by both parties in this
case and summarized in said decision established the following essential and vital facts which led us to
apply Art. 1267 of the New Civil Code to this case:

xxx xxx xxx 15

On the issue of prescription of private respondent's action for reformation of contract, petitioners allege
that respondent court's ruling that the right of action "arose only after said contract had already become
disadvantageous and unfair to it due to subsequent events and conditions, which must be sometime
during the latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of contracts, what is
reformed is not the contract itself, but the instrument embodying the contract. It follows that whether
the contract is disadvantageous or not is irrelevant to reformation and therefore, cannot be an element
in the determination of the period for prescription of the action to reform.

Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be
brought within ten (10) years from the time the right of action accrues. Clearly, the ten (10) year period
is to be reckoned from the time the right of action accrues which is not necessarily the date of execution
of the contract. As correctly ruled by respondent court, private respondent's right of action arose
"sometime during the latter part of 1982 or in 1983 when according to Atty. Luis General, Jr. . . ., he was
asked by (private respondent's) Board of Directors to study said contract as it already appeared
disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private respondent's) cause of action
to ask for reformation of said contract should thus be considered to have arisen only in 1982 or 1983,
and from 1982 to January 2, 1989 when the complaint in this case was filed, ten (10) years had not yet
elapsed." 17

Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations
of either party because petitioner's permission for free use of telephones is not made to depend purely
on their will, neither is private respondent's permission for free use of its posts dependent purely on its
will.

Apart from applying Article 1267, respondent court cited another legal remedy available to private
respondent under the allegations of its complaint and the preponderant evidence presented by it:

. . . we believe that the provision in said agreement —

(a) That the term or period of this contract shall be as long as the party of the first part [herein
appellant] has need for the electric light posts of the party of the second part [herein plaintiff] it being
understood that this contract shall terminate when for any reason whatsoever, the party of the second
part is forced to stop, abandoned [sic] its operation as a public service and it becomes necessary to
remove the electric light post [sic]"; (Emphasis supplied)

is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of the
aforesaid agreement to the latter's sole and exclusive will as long as plaintiff is in operation. A similar
provision in a contract of lease wherein the parties agreed that the lessee could stay on the leased
premises "for as long as the defendant needed the premises and can meet and pay said increases" was
recently held by the Supreme Court in Lim v. C.A., 191 SCRA 150, citing the much earlier case of
Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a purely potestative condition because it
leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee."
Further held the High Court in the Lim case:

The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively
upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or
not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a
contract of lease of no equality exists between the lessor and the lessee since the life of the contract is
dictated solely by the lessee.

The above can also be said of the agreement Exh. "A" between the parties in this case. There is no
mutuality and equality between them under the afore-quoted provision thereof since the life and
continuity of said agreement is made to depend as long as appellant needs plaintiff's electric posts. And
this is precisely why, since 1977 when said agreement was executed and up to 1989 when this case was
finally filed by plaintiff, it could do nothing to be released from or terminate said agreement
notwithstanding that its continued effectivity has become very disadvantageous and inequitous to it due
to the expansion and increase of appellant's telephone services within Naga City and even outside the
same, without a corresponding increase in the ten (10) telephone units being used by plaintiff free of
charge, as well as the bad and inefficient service of said telephones to the prejudice and inconvenience
of plaintiff and its customers. . . . 18

Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the
fulfillment of which depends upon the sole will of the debtor, in which case, the conditional obligation is
void. 19 Based on this definition, respondent court's finding that the provision in the contract, to wit:

(a) That the term or period of this contract shall be as long as the party of the first part (petitioner)
has need for the electric light posts of the party of the second part (private respondent) . . ..

is a potestative condition, is correct. However, it must have overlooked the other conditions in the same
provision, to wit:

. . . it being understood that this contract shall terminate when for any reason whatsoever, the party of
the second part (private respondent) is forced to stop, abandoned (sic) its operation as a public service
and it becomes necessary to remove the electric light post (sic);

which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In
sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and
partly on chance, hazard or the will of a third person, which do not invalidate the aforementioned
provision. 21 Nevertheless, in view of our discussions under the first and second issues raised by
petitioners, there is no reason to set aside the questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992
and its resolution dated September 10, 1992 are AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

#Footnotes

1 84 Phil. 654.

2 Report of the Code Commission, p. 133; cited in Rollo, p. 57.

3 Records, p. 6.

4 Ibid, pp. 6-7.

5 Rollo, p. 62.

6 Rollo, p. 71.

7 G.R. No. L-44349, October 29, 1976, 73 SCRA 637.


8 Rollo, pp. 54-59.

9 Supra.

10 Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 Edition p. 347.

11 At p. 641.

12 Records, p. 7.

13 Agne, et al. v. Director of Lands, et al., G.R. No. L-40399, February 9, 1990, 181 SCRA 793.

14 Rollo, p.59.

15 Rollo, pp. 66-69.

16 Rollo, pp. 53-54.

17 Rollo, pp. 53-54.

18 Rollo, pp. 59-61.

19 Article 1182 of the New Civil Code.

20 Civil Code of the Philippines Annotated by Edgardo L. Paras, 1985 Edition,


p. 171.

21 Ibid.

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Republic of the Philippines

SUPREME COURT

THIRD DIVISION

G.R. No. 159831 October 14, 2005


PILIPINAS SHELL PETROLEUM CORPORATION, Petitioner,

vs.

JOHN BORDMAN LTD. OF ILOILO, INC., Respondent.

DECISION

eeply imbedded in our jurisprudence is the doctrine that the factual findings of the Court of Appeals (CA)
affirming those of the trial court are, subject to some exceptions, binding upon this Court. Otherwise
stated, only questions of law, not of facts, may be raised before this Court in petitions for review under
Rule 45 of the Rules of Court. Nonetheless, in the interest of substantial justice, the Court delved into
both the factual and the legal issues raised in the present case and found no reason to overturn the CA’s
main Decision. Furthermore, under the peculiar factual circumstances of the instant appeal, this Court
holds that the period for reckoning the prescription of the present cause of action began only when
respondent discovered with certainty the short deliveries made by petitioner.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the August 20, 2002
Decision2 and August 29, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 46974. The
challenged Decision disposed as follows:

"WHEREFORE, premises considered, the assailed decision dated August 30, 1991 of the RTC, Branch 26,
Manila in Civil Case No. 13419 is hereby AFFIRMED with the MODIFICATION that the award of exemplary
damages and attorney’s fees be both reduced to ₱100,000.00.

"The order dated December 9, 1991 is likewise AFFIRMED."4

The assailed Resolution denied reconsideration.

The Facts
Petitioner Pilipinas Shell Petroleum Corporation ("Pilipinas Shell") is a corporation engaged in the
business of refining and processing petroleum products.5 The invoicing of the products was made by
Pilipinas Shell, but delivery was effected through Arabay, Inc., its sole distributor at the time material to
the present case.6 From 1955 to 1975, Respondent John Bordman Ltd. of Iloilo, Inc. ("John Bordman")
purchased bunker oil in drums from Arabay.7 When Arabay ceased its operations in 1975, Pilipinas Shell
took over and directly marketed its products to John Bordman.8

On August 20, 1980, John Bordman filed against Pilipinas Shell a civil case for specific performance. The
former demanded the latter’s short deliveries of fuel oil since 1955; as well as the payment of exemplary
damages, attorney’s fees and costs of suit.9 John Bordman alleged that Pilipinas Shell and Arabay had
billed it at 210 liters per drum, while other oil companies operating in Bacolod had

billed their customers at 200 liters per drum. On July 24, 1974, when representatives from John Bordman
and Arabay conducted a volumetric test to determine the quantity of fuel oil actually delivered, the
drum used could only fill up to 190 liters, instead of 210 liters, or a short delivery rate of 9.5%.10 After
this volumetric test, Arabay reduced its billing rate to 200 (instead of 210) liters per drum, except for 4
deliveries between August 1 and September 9, 1974, when the billing was at 190 liters per drum.11

On January 23, 1975, another volumetric test allegedly showed that the drum could contain only 187.5
liters.12 On February 1, 1975, John Bordman requested from Pilipinas Shell that 640,000 liters of fuel oil,
representing the latter’s alleged deficient deliveries, be credited to the former’s account.13 The volume
demanded was adjusted to 780,000 liters, upon a realization that the billing rate of 210 liters per drum
had been effective since 1966.

On October 24, 1977 and November 9, 1977, representatives from John Bordman, the auditor of the
Iloilo City Commission on Audit, pump boat carriers, and truck drivers conducted actual measurements
of fuel loaded on tanker trucks as transferred to dented drums at mouth full. They found that the drums
could contain 180 liters only.14 In its Complaint, John Bordman prayed for the appointment of
commissioners to ascertain the volume of short deliveries.15

On October 21, 1980, Pilipinas Shell and Arabay filed their Answer with Counterclaim.16 They specifically
denied that fuel oil deliveries had been less than those billed.17 Moreover, the drums used in the
volumetric tests were allegedly not representative of the ones used in the actual deliveries.18
By way of affirmative defense, Pilipinas Shell and Arabay countered that John Bordman had no cause of
action against them.19 If any existed, it had been waived or extinguished; or otherwise barred by
prescription, laches, and estoppel.20

During the pretrial, the parties agreed to limit the issues to the following: (1) whether the action had
prescribed, and (2) whether there had been short deliveries in the quantities of fuel oil.21 John
Bordman’s Motion for Trial by Commissioner was granted by the RTC,22 and the court-appointed
commissioner submitted her Report on April 20, 1988.23

On April 3, 1989, Pilipinas Shell and Arabay filed a Motion for Resolution of their affirmative defense of
prescription.24 Because prescription had not been established with certainty, the RTC ordered them on
November 6, 1989, to present evidence in support of their defense.25

On August 30, 1991, the RTC issued a Decision in favor of respondent.26 Pilipinas Shell and Arabay were
required to deliver to John Bordman 916,487.62 liters of bunker fuel oil, to pay actual damages of
₱1,000,000; exemplary damages of ₱500,000; attorney’s fees of ₱500,000; and the costs of suit.27 The
basis of the trial court’s decision was predicated on the following pronouncement:

"Since [respondent] had fully paid their contract price at 210 liters per drum, then the [petitioner] should
deliver to the [respondent] the undelivered volume of fuel oil from 1955 to 1974, which is 20 liters per
drum; and 10 liters per drum from 1974 to 1977. Per the invoice receipts submitted, the total volume of
fuel oil which [petitioner] have failed to deliver to [respondent] is 916,487.62 liters."28

Pilipinas Shell appealed to the CA, alleging that John Bordman had failed to prove the short deliveries;
and that the suit had been barred by estoppel, laches, and prescription.29

Ruling of the Court of Appeals

Upholding the trial court, the CA overruled petitioner’s objections to the evidence of respondent in
relation to the testimonies of the latter’s witnesses and the results of the volumetric tests.30 The CA
noted that deliveries from 1955 to 1977 had been admitted by petitioner; and the fact of deficiency,
established by respondent.31
The appellate court also debunked petitioner’s claims of estoppel and laches. It held that the stipulation
in the product invoices stating that respondent had received the products in good order was not
controlling.32 On the issue of prescription, the CA ruled that the action had been filed within the period
required by law.33

Hence, this Petition.34

The Issues

Petitioner states the issues in this wise:

"I.

Respondent’s allegation that the Petition must be summarily dismissed for containing a false, defective
and unauthorized verification and certification against forum shopping is patently unmeritorious, as the
requisites for a valid verification and certification against forum shopping have been complied with.

"II.

The Decisions of the court a quo and of the Honorable Court of Appeals were clearly issued with grave
abuse of discretion, based as they are on an unmistakable misappreciation of facts clearly appearing in
the records of the case.

A.

The Honorable Court of Appeals erred giving full faith and credence to the testimony of respondent’s
sole witness, who was neither an ‘expert witness’ nor one with personal knowledge of the material facts.
B.

The Honorable Court of Appeals erred in ruling that the testimony of respondent’s sole witness was not
controverted and that the results of his volumetric tests were not disproved by petitioner as the records
of the court a quo indubitably show that petitioner disputed the testimony of said witness in every
material respect.

C.

The court a quo and the Honorable Court of Appeals erred when it failed to hold that the results of the
volumetric tests conducted by respondent’s sole witness are not worthy of full faith and credence,
considering that drums subjected to said tests in 1974 and 1975 were not the same with, or otherwise
similar to those used by petitioner in the deliveries made to respondent since 1955.

D.

The Honorable Court of Appeals erred in holding that petitioner’s unilateral reduction of billing rates
constitutes an implied admission of the fact of short deliveries. The reduction was made for no other
purpose than as a business accommodation of a valued client.

"III.

The court a quo, as well as the Honorable Court of Appeals, gravely erred in not ruling that respondent’s
claims of alleged short deliveries for the period 1955 to 1976 were already barred by prescription.

"IV.

The Honorable Court of Appeals and the court a quo erred in not ruling that respondent’s claims are
barred by estoppel and laches considering that respondent failed to assert its claim for about twenty-five
(25) years.
"V.

The Honorable Court of Appeals erred in awarding to respondent compensatory damages, exemplary
damages, attorney’s fees and cost of suit, when petitioner has not otherwise acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner."35

The Court’s Ruling

In the main, the Petition has no merit, except in regard to the CA’s grant of exemplary damages.

First Issue:

Validity of Verification and Certification

Preliminarily, the Court shall tackle respondent’s allegation that petitioner’s verification and certification
against forum shopping had not complied with, and were in fact made in contravention of, Section 4 of
Rule 45 of the Rules of Court.36 Respondent alleges that Romeo B. Garcia, vice-president of Pilipinas
Shell, had no authority to execute them.37

The records, however, show that petitioner’s president conferred upon its vice-president the power to
institute actions. As certified by the assistant board secretary, the delegation was authorized by
petitioner’s board of directors.38 The power to institute actions necessarily included the power to
execute the verification and certification against forum shopping, as required in a petition for review
before this Court.

In any event, the policy of liberal interpretation of procedural rules compels us to give due course to the
Petition.39 There appears to be no intention to circumvent the need for proper verification and
certification, which are intended to assure the truthfulness and correctness of the allegations in the
Petition and to discourage forum shopping.40
Second Issue:

Appreciation of Facts

As a general rule, questions of fact may not be raised in a petition for review.41 The factual findings of
the trial court, especially when affirmed by the appellate court, are binding and conclusive on the
Supreme Court.42 Nevertheless, this rule has certain exceptions,43 which petitioner asserts are present
in this case.44 The Court reviewed the evidence presented and revisited the applicable pertinent rules.
Being intertwined, the issues raised by petitioner relating to the evidence will be discussed together.

Objection to Respondent’s Witness

Petitioner claims that the trial court erred in giving credence to the testimony of respondent’s witness,
Engineer Jose A. Macarubbo. The testimony had allegedly consisted of his personal opinion. Under the
Rules of Evidence, the opinion of a witness is not admissible, unless it is given by an expert.45
Macarubbo was allegedly not an expert witness; neither did he have personal knowledge of material
facts.46

We clarify. Macarubbo testified that sometime in May 1974, respondent had contacted him to review
the reception of fuel at its lime plant. He discovered that Arabay had been billing respondent at 210
liters per drum, while other oil companies billed their customers at 200 liters per drum.47 On July 24,
1974, he and Jerome Juarez, branch manager of Pilipinas Shell, conducted a volumetric test to determine
the amount of fuel that was actually being delivered to respondent.48 On January 25, 1975, the test was
again conducted in the presence of Macarubbo, Juarez and Manuel Ravina (Arabay’s sales supervisor).49

From the foregoing facts, it is evident that Macarubbo did not testify as an expert witness. The CA
correctly noted that he had testified based on his personal knowledge and involvement in discovering
the short deliveries.50 His testimony as an ordinary witness was aptly allowed by the appellate court
under the following rule on admissibility:
"Sec. 36. Testimony generally confined to personal knowledge; hearsay excluded. – A witness can testify
only to those facts which he knows of his personal knowledge; that is, which are derived from his own
perception, except as otherwise provided in these rules."51

Challenge to Volumetric Tests

Petitioner disputes the CA’s finding that it had failed to disprove the results of the volumetric tests
conducted by respondent. The former claims that it was able to controvert the latter’s evidence.52

During the July 24, 1974 volumetric test, representatives of both petitioner and respondent allegedly
agreed to conduct two tests using drums independently chosen by each.53 Respondent allegedly chose
the worst-dented drum that could fill only up to 190 liters. The second drum, which was chosen by
petitioner, was not tested in the presence of Macarubbo because of heavy rain.54 It supposedly filled up
to 210 liters, however.55

The issue, therefore, relates not to the submission of evidence, but to its weight and credibility. While
petitioner may have submitted evidence, it failed to disprove the short deliveries. The lower courts
obviously gave credence to the volumetric tests witnessed by both parties as opposed to those done
solely by petitioner.

Petitioner also challenges the reliability of the volumetric tests on the grounds of failure to simulate the
position of the drums during filling56 and the fact that those tested were not representative of the ones
used from 1955 to 1974.57 These contentions fail to overturn the short deliveries established by
respondent.

The evidence of petitioner challenging the volumetric tests was wanting. It did not present any as
regards the correct position of the drums during loading. Notably, its representative had witnessed the
two tests showing the short deliveries.58 He therefore had the opportunity to correct the position of the
drums, if indeed they had been incorrectly positioned. Further, there was no proof that those used in
previous years were all good drums with no defects. Neither was there evidence that its deliveries from
1955 had been properly measured.
From the foregoing observations, it is apparent that the evidence presented by both parties
preponderates in favor of respondent. The Court agrees with the following observations of the CA:

"[Petitioner] posits that its fuel deliveries were properly measured and/or calibrated. To the mind of this
Court, regardless of what method or manner the deliveries were made, whether pre-packed drums, by
the dip stick method or through ex-jetty, the fact remains that [petitioner] failed to overcome the burden
of proving that indeed the drums used during the deliveries contain 210 liters. The [petitioner], to
support its claim, adduced no evidence. Moreover, it failed to disprove the results of the volumetric
tests."59

Having sustained the finding of short deliveries, the Court finds it no longer necessary to address the
contention of petitioner that its subsequent reduction of billings constituted merely a business
accommodation.60

Third Issue:

Prescription

Action Based on Contract

Petitioner avers that respondent’s action -- a claim for damages as a result of over-billing -- has already
prescribed. Respondent’s claim supposedly constitutes a quasi-delict, which prescribes in four years.61

We do not agree. It is elementary that a quasi-delict, as a source of an obligation, occurs only when there
is no preexisting contractual relation between the parties.62 The action of respondent

for specific performance was founded on short deliveries, which had arisen from its Contract of Sale with
petitioner, and from which resulted the former’s obligation in the present case. Any action to enforce a
breach of that Contract prescribes in ten years.63

Prescriptive Period Counted from


the Accrual of the Cause of Action

Petitioner avers that the action of respondent, even if based on a Contract, has nevertheless already
prescribed, because more than ten years had lapsed since 1955 to August 20, 1970 -- the period of short
deliveries that the latter seeks to recover.64 Respondent’s request for fuel adjustments on October 24,
1974, February 1, 1975, April 3, 1975, and September 22, 1975, were not formal demands that would
interrupt the prescriptive period, says petitioner.

The Court shall first address the contention that formal demands were not alleged in the Complaint. This
argument was not raised in the courts a quo; thus, it cannot be brought before this tribunal.65 Well
settled is the rule that issues not argued in the lower courts cannot be raised for the first time on
appeal.66 At any rate, it appears from the records that respondent’s letters to petitioner dated October
24, 1974 and February 1, 1975 were formal and written extrajudicial demands that interrupted the
prescriptive period.67 Nevertheless, the interruption has no bearing on the prescriptive period, as will
be shown presently.

Cause of Action Defined

Actions based upon a written contract should be brought within ten years from the time the right of
action accrues.68 This accrual refers to the cause of action, which is defined as the act or the omission
by which a party violates the right of another.69

Jurisprudence is replete with the elements of a cause of action: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created; (2) an obligation on the part of the
named defendant to respect or not to violate the right; and (3) an act or omission on the part of the
defendant violative of the right of the plaintiff or constituting a breach of an obligation to the latter.70 It
is only when the last element occurs that a cause of action arises.71

Applying the foregoing elements, it can readily be determined that a cause of action in a contract arises
upon its breach or violation.72 Therefore, the period of prescription commences, not from the date of
the execution of the contract, but from the occurrence of the breach.
The cause of action resulting from a breach of contract is dependent on the facts of each particular case.
The following cases involving prescription illustrate this statement.

Nabus v. Court of Appeals73 dealt with an action to rescind a Contract of Sale. The cause of action arose
at the time when the last installment was not paid. Since the case was filed ten years after that date, the
action was deemed to have prescribed.74

In Elido v. Court of Appeals,75 the overdraft Agreement stipulated that the obligation was payable on
demand. Thus, the breach started only when that judicial demand was made. This rule was applied
recently to China Banking Corporation v. Court of Appeals,76 which held that the prescriptive period
commenced on the date of the demand, not on the maturity of the certificate of indebtedness. In that
case, the certificate had stipulated that payment should be made upon presentation.

Banco Filipino Savings & Mortgage Bank v. Court of Appeals77 involved a Contract of Loan with real
estate mortgages, whereby the creditor could unilaterally increase the interest rate. When the debtor
failed to pay the loan, the creditor foreclosed on the mortgage. The Court ruled that the cause of action
for the annulment of the foreclosure sale should be counted from the date the debtor discovered the
increased interest rate.78

In Cole v. Gregorio,79 the agreement to buy and sell was conditioned upon the conduct of a preliminary
survey of the land to verify whether it contained the area stated in the Tax Declaration. Both the
agreement and the survey were made in 1963. The Court ruled that the right of action for specific
performance arose only in 1966, when the plaintiff discovered the completion of the survey.80

Serrano v. Court of Appeals81dealt with money claims arising from a Contract of Employment, which
would prescribe in three years from the time the cause of action accrued.82 The Court noted that the
cause of action had arisen when the employer made a definite denial of the employee’s claim. It was
deemed that the issues had not yet been joined prior to the definite denial of the claim, because the
employee could have still been reinstated.83

Naga Telephone Co. v. Court of Appeals84 involved the reformation of a Contract. Among others, the
grounds for the action filed by the plaintiff included allegations that the contract was too one-sided in
favor of the defendant, and that certain events had made the arrangement inequitable.85 The Court
ruled that the cause of action for a reformation would arise only when the contract appeared
disadvantageous.86

Cause of Action in

the Present Case

The Court of Appeals noted that, in the case before us, respondent had been negotiating with petitioner
since 1974. Accordingly, the CA ruled that the cause of action had arisen only in 1979, after a
manifestation of petitioner’s denial of the claims.87

The nature of the product in the present factual milieu is a major factor in determining when the cause
of action has accrued. The delivery of fuel oil requires the buyer’s dependence upon the seller

for the correctness of the volume. When fuel is delivered in drums, a buyer readily assumes that the
agreed volume can be, and actually is, contained in those drums.

Buyer dependence is common in many ordinary sale transactions, as when gasoline is loaded in the gas
tanks of motor vehicles, and when beverage is purchased in bottles and ice cream in bulk containers. In
these cases, the buyers rely, to a considerable degree, on the sellers’ representation that the agreed
volumes are being delivered. They are no longer expected to make a meticulous measurement of each
and every delivery.

To the mind of this Court, the cause of action in the present case arose on July 24, 1974, when
respondent discovered the short deliveries with certainty. Prior to the discovery, the latter had no
indication that it was not getting what it was paying for. There was yet no issue to speak of; thus, it could
not have brought an action against petitioner. It was only after the discovery of the short deliveries that
respondent got into a position to bring an action for specific performance. Evidently then, that action
was brought within the prescriptive period when it was filed on August 20, 1980.

Fourth Issue:
Estoppel

Petitioner alleges, in addition to prescription, that respondent is estopped from claiming short
deliveries.88 It is argued that, since the initial deliveries had been made way back in 1955, the latter
belatedly asserted its right only in 1980, or after twenty-five years. Moreover, respondent should
allegedly be bound by the Certification in the delivery Receipts and Invoices that state as follows:

"RECEIVED ABOVE PRODUCT(S) IN GOOD CONDITION. I HAVE INSPECTED THE COMPARTMENTS OF THE
BULK LORRY, WHEN FULL AND EMPTY, AND FOUND THEM IN ORDER."89

Estoppel by Laches

Estoppel by laches is the failure or neglect for an unreasonable length of time to do that which, by the
exercise of due diligence, could or should have been done earlier.90 Otherwise stated, negligence or
omission to assert a right within a reasonable time warrants a presumption that the party has
abandoned or declined the right.91 This principle is based on grounds of public policy, which discourages
stale claims for the peace of society.92

Respondent cannot be held guilty of delay in asserting its right during the time it did not yet know of the
short deliveries. The facts in the present case show that after the discovery of the short deliveries, it
immediately sought to recover the undelivered fuel from petitioner.93 Laches refers, inter alia, to the
length of time in asserting a claim. The Court, therefore, agrees with the lower courts that respondent’s
claim was not lost by laches.

Alleged Certification Not a Bar

It is not disputed that the alleged Certification stating that respondent received the fuel oil in good
condition is in the nature of a contract of adhesion.94 The statement was in fine print at the lower right
of petitioner’s invoices.95 It was made in the form and language prepared by petitioner. The latter’s
customers, including respondent, were required to sign the statement upon every delivery. The primary
purpose of an invoice, however, is merely to evidence delivery and receipt of the goods stated in it.
While the Court has sustained the validity of similar stipulations in other contracts, it has also recognized
that reliance on them cannot be favored when the facts and circumstances warrant the contrary.96
Noting the nature of the product in the present factual milieu, as discussed earlier in the claim of
prescription, the dependence of the buyer upon the seller makes the stipulation inapplicable.

Indeed, it would be too cumbersome and impractical for respondent to measure the fuel oil in each and
every drum delivered. Nonetheless, upon delivery by petitioner, the former was obliged to sign the
Certification in the invoice. In signing it, respondent could not have waived the right to a legitimate claim
for hidden defects. Thus, it is not estopped from recovering short deliveries.

Doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party
that prepared them. This principle especially holds true with regard to waivers, which are not presumed,
but which must be clearly and convincingly shown.97

Fourth Issue:

Exemplary Damages and Attorney’s Fees

In the last error assigned, petitioner challenges the Order for specific performance and the awards of
exemplary damages and attorney’s fees in favor of respondent.98 The directive for the delivery of
916,487.62 liters of bunker oil will no longer be taken up because, as discussed earlier, this fact is borne
out by the evidence.

The CA sustained the award of exemplary damages because of petitioner’s wanton refusal to deliver the
shortages of fuel oil after the demand was made.99 Similarly, attorney’s fees were imposed, because
respondent had been compelled to litigate to protect its interests.100 Both awards, however, were each
reduced from ₱500,000 to ₱100,000.101

Exemplary Damages Not Proper


Exemplary damages are imposed as a corrective measure102 when the guilty party has acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner.103 These damages are awarded in
accordance with the sound discretion of the court.104

Petitioner argues that its refusal to deliver the shortages of fuel was premised on good faith.105 Indeed,
records reveal that it had reviewed respondent’s requests for the delivery of shortages before declining
them.106 It likewise readily granted respondent’s requests to conduct volumetric tests. It simply had the
mistaken belief that it was not liable for any shortages. Unfortunately, the evidence showed the contrary.

Absent any showing of bad faith on the part of petitioner, exemplary damages cannot be imposed upon
it.

Attorney’s Fees Allowed

Petitioner claims that the award of attorney’s fees was tied up with the award for exemplary
damages.107 Since those damages were not recoverable, then the attorney’s fees allegedly had no legal
basis.

While attorney’s fees are recoverable when exemplary damages are awarded, the former may also be
granted when the court deems it just and equitable.108 The grant of attorney’s fees depends on the
circumstances of each case and lies within the discretion of the court. They may be awarded when a
party is compelled to litigate or to incur expenses to protect its interest by reason of an unjustified act by
the other.109

The Court agrees that the award of ₱100,000 as attorney’s fees is very reasonable;110 in fact, it is almost
symbolic, as it will not totally recompense respondent for the actual fees spent to prosecute its cause.
The case has dragged on unnecessarily despite petitioner’s failure to present countervailing evidence
during the trial. Moreover, respondent was compelled to litigate, notwithstanding its attempt at an
amicable settlement from the time it discovered the shortages in 1974 until the actual filing of the case
in 1980.111

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution are AFFIRMED with
the slight MODIFICATION that the award of exemplary damages is deleted. Costs against petitioner.
SO ORDERED.

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman, Third Division

WECONCUR:

ANGELINA SANDOVAL-GUTIERREZ

RENATO C. CORONA

Associate Justice

Associate Justice

CONCHITA CARPIO MORALES

CANCIO C. GARCIA
Associate Justice

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairman’s Attestation, it is
hereby certified that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice
Footnotes

1 Rollo, pp. 83-122.

2 Id., pp. 130-149. Tenth Division. Penned by Justice Remedios A. Salazar-Fernando, with the
concurrence of Justices Romeo J. Callejo Sr. (Division chair and now a member of this Court) and Danilo
B. Pine (member).

3 Id., p. 151.

4 CA Decision, p. 19; rollo, p. 148.

5 Petitioner’s Memorandum, p. 7; rollo, p. 501.

6 RTC Decision dated August 30, 1991, p. 5; CA rollo, p. 86.

7 Ibid; Petitioner’s Memorandum, p. 7; rollo, p. 501.

8 Ibid.; Petitioner’s Exhibit "4" (records, p. 1179).

9 Complaint, p. 7; records, p. 9.

10 Id., pp. 2-3 & 4-5.

11 Id., pp. 3 & 5.


12 Ibid.

13 Id., pp. 4 & 6.

14 Id., pp. 6 & 8.

15 Id., pp. 7 & 9.

16 Assailed Decision, p. 8; rollo, p. 137.

17 Answer with Counterclaim, p. 4; records, p. 13.

18 Ibid.

19 Id., pp. 10-11 & 19-20.

20 Id., pp. 11-12 & 20-21.

21 RTC Order dated August 5, 1982; records, p. 72.

22 There were three commissioners: Mr. Victoriano T. Macarubo (representing John Bordman), Atty. Luis
A. Vera Cruz Jr. (representing Pilipinas Shell and Arabay), and Rebecca R. Mariano (as appointed by the
trial court).

23 Report by Commissioner Rebecca R. Mariano; records, pp. 283-284.


24 Assailed Decision, p. 8; rollo, p. 137.

25 RTC Order dated November 6, 1989, pp. 2-3; records, pp. 1043-1044.

26 RTC Decision; CA rollo, pp. 82-91.

27 Id., pp. 9-10; CA rollo, pp. 90-91.

28 RTC Decision, pp. 8-9; CA rollo, pp. 89-90.

29 Appellant’s Brief, pp. 9-10; CA rollo, pp. 53-54.

30 Assailed Decision, pp. 12-13; rollo, pp. 140-141.

31 Ibid.

32 Id., pp. 14 & 142.

33 Id., pp. 17 & 145.

34 The case was deemed submitted for decision on November 18, 2004, upon this Court’s receipt of
petitioner’s Memorandum, signed by Attys. Ana Teresa Arnaldo-Oracion and Ria Corazon A. Golez.
Respondent’s Memorandum, signed by Atty. Miguel Antonio H. Galvez, was received by this Court on
November 3, 2004.

35 Petitioner’s Memorandum, pp. 12-13; rollo, pp. 506-507. Original in uppercase.


36 The rule requires a certification against forum shopping and verification that the allegations in the
Petition are true and correct based on personal knowledge and authentic records.

37 Respondent’s Memorandum, pp. 1-2; rollo, pp. 425-426.

38 Certification of Efren L. Legaspi; rollo, p. 127.

39 §6 of Rule 1 of the Rules of Court.

40 See BA Savings Bank v. Sia, 336 SCRA 484, July 27, 2000.

41 §1 of Rule 45 of the Rules of Court.

42 Sps. Lagandaon v. Court of Appeals, 352 Phil. 928, May 21, 1998; Yu Bun Guan v. Ong, 419 Phil. 845,
October 18, 2001; Cuenco v. Cuenco vda. de Manguerra, 440 SCRA 252, October 13, 2004.

43 CIR v. Embroidery and Garments Industries (Phil.), Inc., 364 Phil. 541, 546, March 22, 1999; Medina v.
Asistio, 191 SCRA 218, 223, November 8, 1990.

44 Petitioner claims that (1) the factual findings are grounded entirely on speculations, surmises or
conjectures; (2) the lower court’s inference from its factual findings were manifestly mistaken, absurd or
impossible; (3) there was grave abuse of discretion in the appreciation of facts; (4) there was a
misappreciation of facts, as those averred by petitioner were not disputed by the respondent; and (5)
the factual findings of the Court of Appeals, which were premised on absence of evidence, are
contradicted by the evidence on record. (Petitioner’s Memorandum, pp. 2-3; rollo, pp. 496-497)

45 §48 of Rule 130 of the Rules of Court.


46 Petitioner’s Memorandum, p. 18; rollo, p. 512.

The Court, however, observes that in its Memorandum, petitioner failed to explain how Macarubbo
lacked any personal knowledge on the material facts.

47 RTC Decision, p. 1; CA rollo, p. 82.

48 Id., pp. 2 & 83. See also Answer, p. 2; records, p. 11; TSN dated September 13, 1983, pp. 11-16; TSN
dated May 29, 1990, p. 17.

49 Ibid. See also Answer, p. 2; records, p. 11; TSN dated September 13, 1983, p. 21; TSN dated May 29,
1990, p. 19; Answer, p. 2; records, p. 11.

50 Assailed Decision, p. 11; rollo, p. 140.

51 Rule 130 of the Rules of Court.

52 Petitioner’s Memorandum, p. 23; rollo, p. 517.

53 Petitioner’s Memorandum, pp. 23-24; rollo, pp. 517-518.

54 Petitioner’s Memorandum, p. 24; rollo, p. 518.

55 Id., p. 25; rollo, p. 519.


56 Petitioner claims that a drum will contain more fuel oil when loaded in an inclined position than when
it is filled up in an upright position, because of less ullage or allowance for gas expansion. (Petitioner’s
Memorandum, p. 26; rollo, p. 520)

57 Petitioner’s Memorandum, p. 29; rollo, p. 523.

58 TSN dated May 29, 1990, pp. 17 & 20.

59 Assailed Decision, p. 13; rollo, p. 141.

60 The CA found that the accuracy of the volumetric tests had been bolstered by Shell’s voluntary
reduction of its billing rate. (Assailed Decision, p. 11; rollo, p. 140).

Petitioner voluntarily reduced its billing rate effective July 24, 1974, the date on which the first
volumetric test was conducted. (Answer, p. 2; records, p. 11; TSN dated May 29, 1990, p. 19.

61 Petitioner’s Memorandum, p. 34; rollo, p. 528 (citing Art. 1146 of the Civil Code).

62 Art. 2126 of the Civil Code.

63 Art. 1144 of the Civil Code.

64 Petitioner’s Memorandum. pp. 34-35; rollo, pp. 528-529.

65 See Petitioner’s Appellant Brief, pp. 30-32; CA rollo, pp. 74-76.


66 Elido v. Court of Appeals, 216 SCRA 637, 646, December 16, 1992; BA Finance Corporation v. Court of
Appeals, 201 SCRA 17, 164, August 28, 1991.

67 Petitioner’s Exhibits "D" and "E;" records, pp. 318-337.

The interruption of the prescriptive period by a written extrajudicial demand means that the period to
file would commence anew from the receipt of the demand. (Permanent Savings and Loan Bank v.
Velarde, 439 SCRA 1, 11, September 23, 2004)

68 Art. 1144 of the Civil Code.

69 §2 of Rule 2 of the Rules of Court.

70 China Banking Corporation v. Court of Appeals, GR No. 153267, June 23, 2005; Swagman Hotels &
Travel, Inc. v. Court of Appeals, GR No. 161135, April 8, 2005; Nabus v. Court of Appeals, 193 SCRA 732,
747, February 7, 1991; Cole v. Gregorio, 202 Phil. 226, 236, September 21, 1982.

71 Ibid.

72 Ibid.

73 193 SCRA 732, February 7, 1991.

74 Id., p. 747.

75 216 SCRA 637, 644, December 16, 1992.


76 Supra.

77 388 Phil. 27, May 30, 2000.

78 Id., p. 40.

79 Supra.

80 Id., p. 238.

81 415 Phil. 447, August 15, 2001.

82 Art. 291 of the Labor Code.

83 Supra, p. 458.

84 230 SCRA 351, February 24, 1994.

85 Id., p. 355.

86 Id., p. 369.

87 Assailed Decision, p. 17; rollo, p. 145.

88 Petitioner’s Memorandum, p. 37; rollo, p. 531.


89 Ibid.

90 Alfredo v. Borras, 404 SCRA 145, 167, June 17, 2003; Felizardo v. Fernandez, 363 SCRA 182, 191,
August 15, 2001; Tijam v. Sibonghanoy, 131 Phil. 556, 563, April 15, 1968.

91 Ibid.

92 Felizardo v. Fernandez, supra, Catholic Bishop of Balanga v. Court of Appeals, 332 Phil. 206, 219,
November 14, 1996.

93 Exhibits "C" and "D"; records, pp. 317-318.

94 A contract of adhesion is one wherein a party prepares the stipulations in the contract, while the
other party merely affixes the latter’s signature to it. (Gulf Resorts v. Phil. Charter Insurance Corp., GR
No. 156167, May 16, 2005)

95 Respondent’s Exhibits "O," "O-1" to "O-136," "P," "P-1" to "P-105," "Q," "Q-1" to "Q-147," "R," "R-1"
to "R-135," "S," and "S-1" to "S-86"; records, pp. 353-971.

96 Cebu Shipyard & Engineering Works v. William Lines, 366 Phil. 439, 457, May 5, 1999; Sweet Lines,
Inc. v. Teves, 83 SCRA 361, 369, May 19, 1978. See also Philippine National Bank v. Court of Appeals, 196
SCRA 536, 545, April 30, 1991.

97 See Ramirez v. Court of Appeals, 98 Phil. 225, 228, January 25, 1956; Arrieta v. National Rice and Corn
Corp., 119 Phil. 339, 347, January 31, 1964.

98 Petitioner’s Memorandum, pp. 43-44; rollo, pp. 537-538.


The Court observes that petitioner is no longer challenging the actual or compensatory damages in the
amount of ₱1,000,000 that was awarded by the trial court. (RTC Decision, p. 9; CA rollo, p. 90).

99 Assailed Decision, p. 18; rollo, p. 147.

100 Ibid.

101 Id., p. 19; rollo, p. 148.

102 Art. 2229 of the Civil Code.

103 Art. 2232 of the Civil Code.

104 Art. 2233 of the Civil Code.

105 Petitioner’s Memorandum, p. 43; rollo, p. 537.

106 Petitioner’s Exhibit "1," "3" and "4;" records, pp. 1171, 1177 and 1179.

107 Petitioner’s Memorandum, p. 44; rollo, p. 538.

108 Art. 2208 of the Civil Code.

109 Chavez v. Court of Appeals, 453 SCRA 843, 854, March 18, 2005; Tugade v. Court of Appeals, 407
SCRA 497, 515, July 31, 2003.
110 Art. 2208 of the Civil Code.

111 Petitioner’s Exhibits "C," "D," "E," "M," and "N"; records, pp. 317, 318, 327, and 348-352.

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FIRST DIVISION

[G.R. No. 133775. January 20, 2000]

FIDEL DABUCO, FELICIANO EBINA, MELICIO BOLO, AURELIO CABAJAR, EUSTIQUIO CABATUAN, RAFAEL
OCAREZA, SAMUEL RECO, ALEJANDRO IBONALO TEMPLATURA, NEMESIO OBESO, ALEJANDRA CABILES,
JULIAN RESPONDE, CATALINO BORDAS, FELICISIMA BALILI, FELIX PAGATPAT, NOLI BALILI, BONIFACIO
BORDAS, VICENTE GONZAGA, EUGENIO HABONITA, ARSENIO BALDADO, DOMINADOR BORDAS, JUANA
CABILES, DINDO PAGATPAT, LUZVIMINDA LACERNA, ANTONIA TEE LADRAZO AND VICENTE CABILES,
petitioners, vs. COURT OF APPEALS AND GABI MULTI PURPOSE COOPERATIVE, REPRESENTED BY MARIA
QUISUMBING ALVAREZ AND COL. SOLOMON DALID, RET., respondents. ALEX

DECISION
KAPUNAN, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45, with a prayer for issuance of a
Restraining Order or Writ of Preliminary Injunction. The Petition assails the Decision[1], dated October 6,
1997 and the Order, dated April 30, 1998, both of the Court of Appeals. The issue raised in the petition
before the Court of Appeals was whether the dismissal of Civil Case No. CEB-16217 by the Regional Trial
Court of Cebu City, Branch 15, was proper. LEX

The case in the trial court, Civil Case No. CEB-16217, was an action for quieting of title, accion publiciana
and damages involving agricultural lands located in Gabi, Sudlon, Cebu City. Private respondent GABI
Multi Purpose Cooperative (GABI, for brevity) was the plaintiff in the case below, while petitioners were
the defendants.

As an incident to the instant petition, petitioners filed an Urgent Motion, dated June 10, 1998, for the
issuance of a Restraining Order or Writ of Preliminary Injunction, wherein they alleged that GABI had
commenced to enter the disputed lands. On July 17, 1998, an Opposition by GABI to petitioners' Urgent
Motion was received by the Court. Petitioners filed a Reply to the Opposition on July 28, 1998, and a
Rejoinder, dated August 28, 1998 was filed by GABI.

GABI filed a 2-page Comment,[2] wherein GABI dismissed petitioners' contentions as a mere rehash of
its arguments in the appellate court. The Solicitor General also filed a Comment[3] in behalf of the
respondent Court of Appeals. On February 18, 1999, the Court received petitioners' Reply to the
Comment of the Solicitor General. Sc jj

The antecedent facts are summarized in the assailed Decision of the Court of Appeals. We quote the
pertinent portions below:

The Lazarrabal [sic] family were the registered owners of the properties, subject matter of this case.

In 1991, on different occasions, the subject properties were sold to Ruben Baculi, Editha Belocura, Lira
Puno, Rafael Lapuz, Ladrioro Montealto, Joel Masecampo, Delsa N. Manay, Ilderim Castaares, Maria
Theresa Puno, [and] Jill Mendoza. On June 27, 1994, plaintiff [herein private respondent GABI Multi-
Purpose Cooperative], a registered non-stock, non-profit cooperative filed a civil complaint against
defendants [herein petitioners] who were found residing and/or tilling the subject properties. Plaintiff
alleged therein that it is the owner in fee simple of the subject properties; that defendants without any
authority, resided, tilled, sow [sic] in the subject properties; that defendants refused to vacate inspite
[sic] notice. Sj cj

Plaintiff prays for the issuance of preliminary mandatory injunction to require defendants to remove the
barricade constructed by them and for the issuance of a writ of injunction to restrain defendants from
preventing plaintiff in developing the subject properties.

On July 20, 1997, the trial court issued a Temporary Restraining Order, enjoining defendants to desist
from further stopping plaintiff's development of the properties. The trial court further required
defendants to show cause why no writ of preliminary or mandatory injunction be issued against them.

On July 27, 1997, after hearing, the trial court lifted and dissolved the temporary restraining order it
earlier issued upon failure of the plaintiff to prove its title over the subject properties. Supreme

On July 29, 1994, defendants filed their answer alleging that plaintiff has no personality to file this case
since plaintiff does not appear to be the buyer of the properties neither were the properties titled in its
name; that the subject properties are part of the forest reserve which cannot be privately acquired.

On August 3, 1994, defendants filed a Motion to Dismiss the complaint on the ground of lack of cause of
action, plaintiff has no personality to sue; and lack of jurisdiction.

Plaintiff moved for the striking out of defendants' motion to dismiss, alleging that at this stage
defendants could no longer file the said motion.

On August 18, 1994, the assailed order dismissing the complaint on the ground that plaintiff has no real
interest in the case, was rendered. Court
Plaintiff filed a motion for reconsideration of the said order, but the trial court denied the same. The
dispositive portion of the order dated January 9, 1995, of the trial court denying plaintiff's motion for
reconsideration reads:

WHEREFORE, finding the Motion for Reconsideration to be without merit, the same is hereby denied.
Notify counsel accordingly.

IT IS SO ORDERED.[4]

GABI appealed to the Court of Appeals. Thereafter, the respondent court issued its assailed decision, the
dispositive portion of which reads:

WHEREFORE, foregoing considered, the appealed order is hereby REVERSED and SET-ASIDE. A new one is
hereby issued ordering the trial court to reinstate the complaint and to proceed with deliberate speed
with the trial of the case.[5]

Petitioners' Motion for Reconsideration was denied by the appellate court in its assailed Order, dated
April 30, 1998. They then filed the instant petition praying that the dismissal of Civil Case No. CEB-16217
by the trial court be affirmed, and the decision by the appellate court reversing such dismissal be set
aside. J lexj

The success of this petition rests on the validity of the dismissal by the trial court. Petitioners assert that
there was sufficient reason to dismiss the action below on the ground that GABI had no cause of action
against petitioners. They also aver in the alternative that the Complaint by GABI was properly dismissed
on the ground that it failed to state a cause of action.

As a preliminary matter, we wish to stress the distinction between the two grounds for dismissal of an
action: failure to state a cause of action, on the one hand, and lack of cause of action, on the other hand.
The former refers to the insufficiency of allegation in the pleading, the latter to the insufficiency of
factual basis for the action. Failure to state a cause may be raised in a Motion to Dismiss under Rule 16,
[6] while lack of cause may be raised any time.[7] Dismissal for failure to state a cause can be made at
the earliest stages of an action. Dismissal for lack of cause is usually made after questions of fact have
been resolved on the basis of stipulations, admissions or evidence presented.[8]
We find no merit in petitioners' first contention that dismissal was proper on the ground of lack of cause
of action. We note that the issue of sufficiency of GABI's cause of action does not appear to have been
passed upon by the appellate court in its assailed decision. However, inasmuch as this issue was raised in
the trial court as an affirmative defense by petitioners and is now assigned in error, we resolve the same.
Juri smis

The pertinent portions of the trial court Order dismissing the action are reproduced below:

The court was confronted with plaintiffs Motion to Strike Out defendants' pleading entitled: Motion to
Dismiss, after the court allowed the same to be filed on the ground alleged in the affirmative defenses,
that the plaintiff has no real interest in the property in question. Inasmuch as the action in this case was
instituted by the Gabi Multi-Purpose Cooperative which is not the titled owner, nor the holder of the
title to the property in question, therefore, it has no legal capacity to sue in this case for lack of interest,
not being the real party in interest of the property involved in this litigation. Plaintiffs motion to strike
out defendants' motion to dismiss is therefore denied for lack of merit, on the ground that the court has
already resolved in the July 27, 1994 Order that if until today the plaintiff cannot produce and to show to
this court the title in the name of Gabi Multi-Purpose Cooperative, the court will proceed to dismiss this
case. Jjj uris

xxx

WHEREFORE, in view of all the foregoing arguments and considerations, this court hereby resolves to
dismiss this case as it is hereby disrnissed.[9]

It appears that the trial court dismissed the case on the ground that GABI was not the owner of the lands
or one entitled to the possession thereof, and thus had no cause of action. In dismissal for lack of cause
of action, the court in effect declared that plaintiff is not entitled to a favorable judgment inasmuch as
one or more elements of his cause of action do not exist in fact.

Because questions of fact are involved, courts hesitate to declare a plaintiff as lacking in cause of action.
Such declaration is postponed until the insufficiency of cause is apparent from a preponderance of
evidence. Usually, this is done only after the parties have been given the opportunity to present all
relevant evidence on such questions of fact. lex

We do not here rule on whether GABI has a cause of action against petitioners. What we are saying is
that the trial court's ruling, to the effect that GABI had no title to the lands and thus had no cause of
action, was premature. Indeed, hearings were conducted. And the view of the Court of Appeals was that
such hearings were sufficient. In its assailed decision, the appellate court stated the following:

Records show that plaintiff-appellant was afforded the preliminary hearing required by law before the
dismissal of the complaint based on the ground raised in the affirmative defenses.

xxx

Procedurally, therefore, the complaint was properly dismissed.[10]

The Court disagrees with the appellate court's ruling. The hearing of July 27, 1994 was on the propriety
of lifting the restraining order. At such preliminary hearing, the trial court required GABI to produce
Certificates of Title to the lands in its name. GABI admitted that it did not have such Certificates, only
Deeds of Sale from the registered owners. The order of the trial court dated July 27, 1994, reads in part:
Jksm

To begin with, the discussions started with the court asking whether the parties are present, and asked
the defendants whether they have evidence to show why the temporary restraining order should not be
continued, and not ripen into a preliminary injunction and they answered that the plaintiff, Gabi Multi
Purpose Cooperative has "no locus standi" with Col.Solomon Dalid, to appear and litigate in this case,
not being the actual registered owner of the property in question and therefore not the real party in
interest.

In view thereof, the court asked the plaintiffs counsel to show to the court titles to prove that they are
really the owners of the properties in question. And they could [not] show any, inasmuch as from the
records before this court, only Deeds of Sale from the original owners of the properties in favor of
individual persons appear. Chief
WHEREFORE, as this hearing was called for the purpose of determining whether the temporary
restraining order should ripen into a permanent injunction or in the alternative be lifted this afternoon,
for failure of the plaintiffs to show titles to the properties in their names, and they have miserably failed
the court hereby resolves to lift and dissolve the temporary restraining order it has issued. However, the
defendants are hereby allowed, upon their own request, to file a motion to dismiss questioning the legal
personality of Gabi Multi Purpose Cooperative within 15 days from today.[11]

Instead, GABI offered to present evidence to prove its title in the ordinary course of trial. The pertinent
portions of the Transcript of Stenographic Notes quoted by petitioners in their Manifestation and
Motion, dated September 29, 1998, are reproduced below: Esmsc

COURT:

What we are saying, because it has been raised by counsel for the defendants[,] is: what personality has
Gabi to sue in this case[.] They are saying that you have no locus standing[sic] in court. You need the
proper party in interest. You are not the owners according to the titles. And you are suing, claiming that
you are the owners and you have been in possession and that you have been molested by the
defendants because you are the owner. But where does it show these? Of course, you alleged that. But
where is the proof? We want the proof that you are really the owner. (TSN, 27 July 1994, at 9)

We are asking a question of how does Gabi become the owner of this property such that Gabi is now
trying to claim this property against the defendants. Such as [to] exclude the defendants from cultivating
or tilting [sic] this property. There is no question about it. We are not questioning your existence as a
corporation[,] as a corporate entity. We are asking the question, where lies the right of the ownership of
Gabi? How can you prove that you own the property, adverse or against these defendants? And you did
not show it to this court. I am afraid you have no cause of action. (TSN, id., at 9-10). Esmmis

ATTY. P. FLORES:

...in due time, we are going to present the document.


COURT:

But you have to present that now. Otherwise, I lift the injunction. I lift the temporary restraining order.
And I have said and do [sic] it.

ATTY. P. FLORES:

Your Honor, please, the incident this afternoon is for the defendants to show cause why the injunction
cannot be issued.

COURT:

When the court made a mistake in giving you this petition, the court cannot order another procedure. If
the court commit[s] an error, it is the inherent power of this court to see to it that no injustice is
committed. I am not bound by my own error. Only the dead and fools don't change their minds. (TSN, id.,
at 10) Es-mso

ATTY. FLORES

First of all, your Honor, it is not [sic] an error to say that the Gabi Cooperative is not the owner because
as a matter of fact, it is the owner. It is just bad enough that [they] were not able to bring with them the
documents.[12]

On August 18, 1994, another hearing was conducted wherein GABI was again required to show
Certificates of Title to the property in its name. On the basis of GABI's failure to show such Certificates at
this second preliminary hearing, the trial court concluded that GABI had no title and thereafter
dismissed the case.[13] Such action by the trial court was premature inasmuch as the issues of fact
pertaining to GABI's title had not yet been adequately ventilated at that preliminary stage. Ms-esm
Anent petitioners' thesis that dismissal of the complaint by the trial court was proper for failure to state
a cause of action, we, likewise, find no valid basis to sustain the same.

Dismissal of a Complaint for failure to state a cause of action is provided for by the Rules of Court.[14]

In dismissal for failure to state a cause, the inquiry is into the sufficiency, not the veracity, of the material
allegations.[15] The test is whether the material allegations, assuming these to be true, state ultimate
facts which constitute plaintiff's cause of action, such that plaintiff is entitled to a favorable judgment as
a matter of law.[16] The general rule is that inquiry is confined to the four corners of the complaint, and
no other.[17] E-xsm

This general rule was applied by the Court of Appeals. Said court stated:

It is a well-settled rule that in determining the sufficiency of the cause of action, ONLY the facts alleged in
the complaint and no others, should be considered. In determining the existence of a cause of action,
only the statements in the complaint may properly be considered. If the complaint furnish sufficient
basis by which the complaint may be maintained, the same should not be dismissed regardless of the
defenses that may be assessed [sic] by defendants-appellees.[18]

The appellate court, relying on the general rule, made the following conclusion:

A reading of the above-quoted complaint would readily show that plaintiff-appellant has sufficient cause
of action as against defendants-appellees. Ky-le

In the complaint, it is alleged that plaintiff-appellant is the owner of the subject properties, thus, entitled
to be respected in its possession and ownership. This is the first element.

Defendants-appellees are mere squatters of the subject properties who should vacate the premises upon
demand by plaintiff-appellant. This is the second element.
Defendants-appellees unjustly refused to vacate the subject premises, thus, depriving plaintiff-appellant
possession of the same. This is the third element. Ky-calr

In this case therefore, plaintiff-appellant has sufficient cause of action.[19]

There are well-recognized exceptions to the rule that the allegations are hypothetically admitted as true
and inquiry is confined to the face of the complaint. There is no hypothetical admission of the veracity of
allegations if their falsity is subject to judicial notice,[20] or if such allegations are legally impossible, or if
these refer to facts which are inadmissible in evidence, or if by the record or document included in the
pleading these allegations appear unfounded.[21] Also, inquiry is not confined to the complaint if there
is evidence which has been presented to the court by stipulation of the parties,[22] or in the course of
hearings related to the case.[23] Calr-ky

Petitioners invoke these exceptions to justify the dismissal by the RTC. They particularly rely on the ruling
of this Court in Tan vs. Director of Forestry.[24] As in this case, Tan involved the issue of whether the
dismissal for failure to state a cause of action was proper. A hearing was conducted on Tan's prayer for
preliminary injunction, wherein evidence was submitted by the parties and extensive discussion held.
The trial court then resolved the Motion to Dismiss and dismissed Tan's petition for failure to state a
cause of action. The trial court held that, on the basis of the evidence presented in the hearings, the
timber license relied upon by Tan was null and void. Such license being void, Tan's allegation that his
right had been violated was false. On appeal, this Court ruled that the trial court was correct in
considering the evidence already presented and in not confining itself to the allegations in Tan's petition.

The theory behind Tan is that the trial court must not rigidly apply the device of hypothetical admission
of allegations when, on the basis of evidence already presented, such allegations are found to be false.
Thus, findings of fact are not postponed until after trial, but are made at the preliminary stage because
there is sufficient evidence available.

We find, however, that Tan is not applicable in this case. Unlike in Tan where the parties were given
ample opportunity in the preliminary hearing to present evidence on their contentions, GABI did not
have sufficient chance to prove its allegation of ownership. Thus, the conclusion that GABI's allegation of
ownership is false and that its complaint stated no cause of action, appears to be without basis. Me-sm
Petitioners also invoke Drilon vs. Court of Appeals.[25] Yet, a close reading of Drilon reveals that
petitioners' contention is weakened rather than strengthened by said case. Drilon also involved the issue
of whether the dismissal for failure to state a cause of action was proper. However, the Court applied the
general rule that inquiry is confined to the face of the complaint and no other.[26]

In sum, as appears from the available records, the Court of Appeals was correct in ruling that the
dismissal by the trial court of GABI's complaint was incorrect. The case should, therefore, proceed to trial
where the parties may adduce evidence to support their claims and defenses.

IN VIEW OF THE FOREGOING, the Court resolved to DENY the Petition.

SO ORDERED. S-l-x

Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

[1] Rollo, p. 39.

[2] Id., at 78-80.

[3] Id., at 141-156.

[4] Id., at 41-42 (emphasis ours).

[5] Id., at 48.

[6] Rule 16 of the Rules of Court reads: Lexj uris


Section 1. Grounds.-Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:

xxx

(g) That the pleading asserting the claim states no cause of action;

xxx

[7] Quiaoit vs. Consolacion, 73 SCRA 208, 212 (1976), per Antonio, J.

[8] For further discussion on other distinctions and difference in procedure between these two grounds
for dismissal, refer to REGALADO, I REMEDIAL LAW CONPENDIUM 164 (6th rev. ed. 1997); MORAN, I
COMMENTS ON THE RULES OF COURT 608 (1995 ed. as revised by Dr. Fortunato Gupit, Jr.)

[9] Rollo, pp. 123-124.

[10] Id., at 42-43.

[11] Id., at 122.

[12] Id., at 116-117.

[13] Supra, note 8.

[14] Supra, note 6.


[15] Ventura vs. Bernabe, 38 SCRA 587, 598 (1971), per Barredo, J., citing Palma vs. Graciano, 99 Phil. 72
(1956).

[16] Suyom, et al. v. Collantes, et al., 69 SCRA 514, 520 (1976), per Esguerra, J.

[17] Acua vs. Batac Producers Cooperative, 20 SCRA 526, 531 (1967), per Makalintal, J., citing De Jesus, et
al. vs. Santos Belarmino, 50 O.G. 3004-3068; Verzosa vs. Rigonan, G.R. No. L-6459, April 23, 1954;
Dimayuga vs. Dimayuga, 51 O.G. 2397-2400.

[18] Rollo, p. 43

[19] Id., at 45.

[20] U. Baez Electric Light Co. vs. Abra Electric Cooperative, Inc., et al., 119 SCRA 90, 93 (1982), per Plana,
J.

[21] Regalado, I Remedial Law Compendium (5th rev. ed.) 151, citing Marcopper Mining Corp. vs. Garcia,
143 SCRA 178, 188 (1986), per Gutierrez, J., and Tan vs. Director of Forestry, 125 SCRA 302 (1983) per
Makasiar, J.

[22] Locals No. 1470, No. 1469, and No. 1512 of the International Longshoremen's Association vs.
Southern Pacific Co., 131 F. 2d 605.

[23] Tan vs. Director of Forestry, 125 SCRA 302 (1983) per Makasiar, J.

[24] 125 SCRA 302 (1983) per Makasiar, J.


[25] 270 SCRA 211 (1997), per Hermosisima, Jr., J.

[26] Id., at 225.

Today is Friday, September 07, 2018 home

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Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 91670 February 7, 1991

ALBERT NABUS, petitioner,

vs.

THE HONORABLE COURT OF APPEALS and MARIANO LIM, respondents.

Benjamin C. Reyes for petitioner.

Aventino B. Vlaveria & David Allaga for private respondent.


REGALADO, J.:

This petition for review by certiorari seeks the reversal of the decision1 of respondent Court of Appeals
in CA-G.R. CV No. 15846 which affirmed the order of the trial court dismissing herein petitioner's
complaint for rescission with damages on the ground of res judicata.

The records show that on June 22, 1970, herein petitioner Albert Nabus brought an action for
reconveyance of a parcel of land against herein private respondent Mariano Lim in the then Court of First
Instance of Baguio and Benguet, La Trinidad, Benguet, which was docketed as Civil Case No. 2159 (24),
alleging inter alia:

2. That on June 23, 1965, plaintiff sold to defendant one (1) parcel of land, situated in the Barrio of
Ambiong, Municipality of La Trinidad, Province of Benguet, . . . as evidenced by a deed of absolute
sale, . . . ;

3. That the said property is a portion of a bigger parcel of land, with an area of 15 hectares, 05 ares
and 17 centares, covered by and embraced in Original Certificate of Title No. P-136 (Free Patent No.
V48737) issued in the name of plaintiff, on July 5, 1956, . . . ;

4. That although the purchase price of the . . . property in the amount of P258,000.00 was
amortized . . ., title to the same was transferred to the defendant under TCT No. 2814, . . ., and was later
subdivided by said defendant into four (4) lots . . . ;

5. That as of the date thereof, defendant has still an unpaid balance of P75,000.00;

6. That on June 8, 1970 (or 4 years, 11 months and 15 days from June 23, 1965); plaintiff through
counsel offered to repurchase the above-described parcel of land, pursuant to Sec. 119 of the Public
Land Law (C.A. No. 141, as amended), as evidenced by a letter of the undersigned counsel to
defendant, . . .; and which was confirmed by the plaintiff in his letter to defendant, dated June 12, 1970, .
...

7. That notwithstanding the written offers . . . and subsequent verbal offers of plaintiff to
repurchase the above-described property according to law, the defendant refused and denied, and still
refuses and denies, the said offer;

8. That plaintiff is ready and willing to repurchase the said property and to pay defendant the sum
of P183,000.00, the difference between the stipulated purchase price of P258,000.00 and the unpaid
balance thereof in the amount of P75,000.00 referred to in paragraph 5 hereof.2

xxx xxx xxx

On December 11, 1971, after Nabus had rested his case, Lim moved to dismiss the complaint in Civil Case
No. 2159(24) on the grounds of lack of cause of action, there being no tender of the repurchase price of
the parcel of land in question, and of prescription. This was denied by the trial court. Thereafter, Lim
filed a motion for reconsideration of the order denying his motion to dismiss, to which on February 3,
1972 Nabus filed an opposition on the ground that tender of the repurchase price of the parcel of land in
question was allegedly not a requirement under the Public Land Act, unlike the provisions of the Civil
Code, the repurchase of the said lot being a substantive right coupled with public interest.

On February 5, 1980, the trial court, upon motion of Lim, ordered Nabus to deposit the repurchase pace
of the said lot in the amount of P183,000.00. On November 13,1980, Lim filed a motion to dismiss Civil
Case No. 2159(24) for failure of Nabus to deposit in court the required amount. On December 1, 1980,
Nabus, by counsel, filed a motion for extension of time within which to file an opposition to Lim's motion
to dismiss. On March 13, 1981, no opposition having been filed to the motion to dismiss because of the
death of Nabus' counsel, the trial court dismissed with prejudice Civil Case No. 2159(24) for his failure to
deposit the required amount, evincing lack of interest to repurchase the parcel of land in question.3

On May 14, 1981, Nabus filed, through a new counsel, a motion for reconsideration of the order
dismissing Civil Case No. 2159(24). On January 26, 1982, the trial court denied Nabus' motion for
reconsideration.4
No appeal was taken from said order of dismissal.

On March 15, 1982, Nabus filed Civil Case No. 4293 in the same Court of First Instance of Baguio and
Benguet for the annulment of the order of dismissal in Civil Case No. 2159(24), claiming that the failure
of Atty. Florendo, his former counsel, to file an opposition to Lim's motion to dismiss was due to his
serious illness; that the dismissal of his complaint therein, without Nabus being able to file an opposition
to Lim's motion to dismiss, deprived him of the opportunity to be heard amounting to denial of due
process; and that the denial of his motion for reconsideration constituted grave abuse of discretion
tantamount to lack of jurisdiction on the part of the trial court.

Civil Case No. 4293 was subsequently amended to allege grounds for rescission and damages as
additional causes of action. These second and third causes of action added in the amended compliant
aver that:

SECOND CAUSE OF ACTION

xxx xxx xxx

21. That as appearing in the Deed of Absolute Sale Annex "A" of Civil Case No. 2159, . . . defendant
was to pay the purchase price of P258,000.00 in installment; however, defendant failed to pay the total
amount of P258,000.00 having paid only the sum of P183,000.00 and leaving an unpaid balance of
P75,000.00 which defendant failed and refused to pay in spite of repeated demands;

22. That due to the foregoing, plaintiff is left with no other alternative but to seek for a rescission
(sic) of the contract of Sale aforesaid . . . ;

23. That plaintiff is ready and willing to return the sum of P183,000.00 he has received from
defendant minus of course such damages as the Court may adjudge against defendant;

24. That the said properties covered by said Deed of Absolute Sale have not been transferred to
third persons acting in good faith;
THIRD CAUSE OF ACTION

25. That due to the gross and evident bad faith of defendant in committing the foregoing acts and in
failing and refusing to comply with his obligations to the plaintiff, the latter has suffered damages to wit:
–– attorneys fee –– 15% of the total value of the lots subject matter of the aforesaid Deed of Absolute
Sale; expenses and losses incident to litigation –– P500,000.00; moral and other damages –– one
hundred thousand pesos (P100,000.00).5

On August 8, 1986, Lim filed a motion to dismiss the complaint in Civil Case No. 4293 on the ground that
it was barred by prior judgment or res judicata and that the action had already prescribed. On October 7,
1986, Nabus filed an opposition to the motion to dismiss. A reply to the opposition and a supplement to
his motion to dismiss was filed by Lim, to which Nabus filed a rejoinder. On July 22, 1987, the trial court
dismissed the complaint in Civil Case No. 4293 on both grounds invoked in the motion to dismiss.6

On appeal to respondent court, Nabus claimed that the trial court erred in holding that all the causes of
action in the case are barred by res judicata and that the action for rescission and damages has
prescribed. The annulment of the dismissal order issued in Civil Case No. 2159(24) was no longer
pursued or raised on appeal.

As earlier stated, respondent court sustained the said order of dismissal on the ground of res judicata,
the relevant portion of its decision reading as follows:

It is within the power of the trial court to dismiss the appellant's complaint in Civil Case No. 2159(24) for
failure to comply with its order to deposit the repurchase price of the parcel of land in question. And
such dismissal, rightly or wrongly, has the effect of an adjudication upon the merits, it not having been
provided otherwise (Section 3, Rule 17. Revised Rules of Court). Dismissal on a technicality is no different
in effect and consequences from a dismissal on the merits under the cited provision of the Rules
(General Offset Press, Inc. vs. Anatalio, 17 SCRA 688, 691). So too is the order of dismissal, with
prejudice, res judicata upon finality under Section 49, Rule 39, of the Revised Rules of Court, . . . .

Respondent court, however, found no necessity to rule on the matter of prescription.


Hence, the instant petition reiterating substantially the same issues raised on appeal with respondent
court, that is, whether or not (1) the complaint for rescission and damages is barred by the order of
dismissal of petitioner's action for reconveyance under the principle of res judicata; (2) petitioner's
action for rescission has prescribed; and (3) it is equitable to deny petitioner his day in court, considering
that admittedly private respondent has not paid the last three installments of the contract of sale
amounting to P75,000.00.

I. Res judicata is a rule of universal law pervading every well regulated system of jurisprudence,
and is put on two grounds, embodied in various maxims of the common law; the one, public policy and
necessity, which makes it the interest of the state that there should be an end to litigation — interest
reipublicae ut sit finis litium; the other, the hardship on the individual that he should be vexed twice for
the same cause — nemo debet bis vexari pro una et eadem causa.7 The doctrine applies and treats the
final determination of the action as speaking the infallible truth as to the rights of the parties as to the
entire subject of the controversy, and such controversy and every part of it must stand irrevocably closed
by such determination. The sum and substance of the whole doctrine is that a matter once judicially
decided is finally decided.8

The foundation principle upon which the doctrine of res judicata rests is that parties ought not to be
permitted to litigate the same issue more than once; that, when a right or fact has been judicially tried
and determined by a court of competent jurisdiction, or an opportunity for such trial has been given, the
judgment of the court, so long as it remains unreversed, should be conclusive upon the parties and those
in privity with them in law or estate.9

Section 49, Rule 39 of the Rules of Court which embodies the principle of res judicata pertinent to this
case provides:

xxx xxx xxx

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any
other matter that could have been raised in relation thereto, conclusive between the parties and their
successors in interest by title subsequent to the commencement of the action or special proceeding,
litigating for the same thing and under the same title and in the same capacity;
(c) In any other litigation between the same parties or their successors in interest, that only is
deemed to have been adjudged in a former judgment which appears upon its face to have been so
adjudged, or which was actually and necessarily included therein or necessary thereto.

The principle of res judicata actually embraces two different concepts: (1) bar by former judgment and
(2) conclusiveness of judgment. There is "bar by former judgment" when, between the first case where
the judgment was rendered, and the second case where such judgment is invoked, there is identity of
parties, subject matter and cause of action. When the three identities are present, the judgment on the
merits rendered in the first constitutes an absolute bar to the subsequent action. It is final as to the
claim or demand in controversy, including the parties and those in privity with them, not only as to every
matter which was offered and received to sustain or defeat the claim or demand, but as to any other
admissible matter which might have been offered for that purpose. But where between the first case
wherein judgment is rendered and the second case wherein such judgment is invoked, there is identity
of parties, but there is no identity of cause of action, the judgment is conclusive in the second case, only
as to those matters actually and directly controverted and determined, and not as to matters merely
involved therein. This is what is termed conclusiveness of the judgment.10

A. A case is said to be barred by a former judgment when the following requisites concur: (1) the
presence of a final former judgment; (2) the former judgment was rendered by a court having
jurisdiction over the subject matter and the parties; (3) the former judgment is a judgment on the
merits; and, (4) there is, between the first and the second actions, identity of parties, subject matter, and
causes of action.11 There is no dispute as to the existence of and compliance with the first two elements
of res judicata in the case at bar. In issue are the alleged absence of a judgment on the merits in the first
case and the identity of causes of action in both cases.

1. Elemental is the rule that in order that a judgment may operate as a bar to a subsequent suit on
the same cause of action it must have been based on the merits of the case. And a judgment is on the
merits when it determines the rights and liabilities of the parties based on the disclosed facts,
irrespective of formal, technical, or dilatory objections. It is not necessary, however, that there should
have been a trial. If the judgment is general, and not based on any technical defect or objection, and the
parties had a full legal opportunity to be heard on their respective claims and contentions, it is on the
merits although there was no actual hearing or arguments on the facts of the case.12 Such is one of the
situations contemplated in Section 3, Rule 17 of the Rules of Court, where a complaint is dismissed for
failure of the plaintiff to comply with a lawful order of the court which dismissal, as correctly argued by
private respondent, has the effect of an adjudication upon the merits.
In the present case, petitioner labors upon the erroneous conceptualization that the order of dismissal
issued in Civil Case No. 2159(24) was based merely on a preliminary matter, that is, failure to deposit the
repurchase price which allegedly is not the matter in controversy, hence it is not an adjudication on the
merits. While we do not discount the rule that a judgment dismissing a suit because of a purely technical
defect, irregularity, or informality is not strictly on the merits and is, therefore, no bar to subsequent
actions,13 this is however, not applicable to the present case. Under the circumstances obtaining herein,
we have to consequently reject petitioner's ratiocination.

Firstly, it will be remembered that the order dismissing petitioner's complaint in Civil Case No. 2159(24)
is specified to be with prejudice. Our law reports are replete with jurisprudence declaring that a
dismissal with prejudice is an adjudication on the merits which finally disposes of the controversy and,
unless reversed, constitutes a bar to a future action.14

Secondly, the aforesaid order of dismissal is not a dismissal on sheer technicality but actually goes into
the very substance of the relief sought therein by petitioner, that is, for the reconveyance of the subject
property which was denied in said case, and must thus be regarded as an adjudication on the merits. It is
the dismissal premised on such technical grounds as a mis-joinder, non-joinder, misnomer or defect of
parties; or that plaintiff has no sufficient title or authority to bring the suit, or want of legal capacity to
sue on his part; or formal defects in the pleadings; or a dismissal of the action for failure of the complaint
to state a cause of action which is not a bar to a new action on a good complaint wherein the defects
and omissions in the first complaint are corrected and supplied by the second complaint. Also, a failure
to allege a matter essential to the jurisdiction of the court is no bar to a second complaint wherein such
defect is cured or obviated by further and sufficient allegations.15

The aforesaid instances are deemed to have no bearing on the merits of the case and will thus not bar a
subsequent suit on the same cause of action. The order of dismissal issued in Civil Case No. 2159(24)
definitely does not fall within any of the above-mentioned exceptions and is considered in our
procedural rules as an adjudication on the merits.16 It would not be amiss to state that a "dismissal of an
action with prejudice" by court order is to be considered no less than a "judgment."17

It must be noted, however, that while the first order of dismissal is an adjudication on the merits, this
does not necessarily mean that it is a bar to the filing of petitioner's second complaint for rescission, for,
as hereinunder discussed, there is no identity of causes of action whereby the first action would
constitute res judicata to the second.
2. Petitioner next submits that there can be no identity of causes of action between the first and
second cases since the former involves the right of petitioner to redeem the subject property under
Section 119 of the Public Land Act within five years from the date of sale, whereas the latter arose from
the failure of private respondent to pay the balance of the purchase price thereby authorizing the
rescission of the contract of sale pursuant to Article 1191 of the Civil Code. More importantly, it is argued
that the same evidence does not support and establish the causes of action in both cases.

On the other hand, private respondent theorizes that there is identity of causes of action between the
previous and subsequent cases in that: (1) the allegations contained and the facts which form the bases
of the two complaints are essentially and substantially the same; (2) the pivotal issue raised in both
cases involves non-payment of the last three installments of the purchase price; (3) the crux of the
prayer of the two cases are exactly the same, that is, the reconveyance of the subject lot; (4) both
actions originated from the same deed of sale; and, (5) the documentary evidence presented, as well as
the testimony given by the petitioner, in Civil Case No. 2159(24) can also be used to sustain the
prosecution of Civil Case No. 4293.

We find for petitioner on this score.

In determining whether causes of action are identical so as to warrant application of the rule of res
judicata, the test most commonly stated is to ascertain whether the same evidence which is necessary to
sustain the second action would have been sufficient to authorize a recovery in the first, even if the
forms or nature of the two actions be different. If the same facts or evidence would sustain both, the
two actions are considered the same within the rule that the judgment in the former is a bar to the
subsequent action; otherwise it is not. It has been said that this method is the best and most accurate
test as to whether a former judgment is a bar in subsequent proceedings between the same parties, and
it has even been designated as infallible.18

It will be observed that Civil Case No. 2159(24) is based on petitioner's light to repurchase the subject
property under Section 119 of the Public Land Act, while Civil Case No. 4293 involves the rescission of
the contract of sale by reason of the failure of private respondent to pay in full the value of the property,
pursuant to Article 1191 of the Civil Code. The former, in order to prosper, requires proof that the land
was granted under a free patent, that the land was sold within five years from the grant thereof, and that
the action for reconveyance was filed within five years from the execution of the deed of sale. In the
second case, proof of the unpaid installments is the only evidence necessary to sustain the action for
rescission. It is thus apparent that a different set of evidence is necessary to sustain and establish the
variant causes of action in the two cases.
In addition, causes of action which are distinct and independent, although arising out of the same
contract, transaction, or state of facts, may be sued on separately, recovery on one being no bar to
subsequent actions on others.19 Also, the mere fact that the same relief is sought in the subsequent
action will not render the judgment in the prior action operative as res judicata,20

such as where the two actions are brought on different statutes,21 as in the case at bar.

Under the circumstances, therefore, the doctrine of res judicata will not apply. To repeat, for emphasis,
the cause of action asserted by petitioner in the former suit was anchored upon his right to repurchase
the subject lot. The cause of action sought to be enforced in the present action is predicated upon the
failure of private respondent to pay the last three installments of the purchase price. It is a cause of
action which is wholly independent of, and entirely separate and discrete from, the alleged cause of
action asserted by petitioner in the former suit. Since petitioner seeks relief in the instant case upon a
cause of action different from the one asserted by him in the former suit, the judgment in the former
suit is conclusive only as to such points or questions as were actually in issue or adjudicated therein. And
this brings us to the rule on conclusiveness of judgment.

B. Private respondent avers that granting arguendo that there is no identity of cause of action,
considering that the issue on the unpaid installments has been raised, considered, and passed upon in
Civil Case No. 2159(24), such issue can no longer be relitigated anew in Civil Case No. 4293, invoking
thereby the doctrine of conclusiveness of judgment.

The doctrine states that a fact or question which was in issue in a former suit, and was there judicially
passed on and determined by a court of competent jurisdiction, is conclusively settled by the judgment
therein, as far as concerns the parties to that action and persons in privity with them, and cannot be
again litigated in any future action between such parties or their privies, in the same court or any other
court of concurrent jurisdiction on either the same or a different cause of action, while the judgment
remains unreversed or unvacated by proper authority.22 The only identities thus required for the
operation of the judgment as an estoppel, in contrast to the judgment as a bar, are identity of parties
and identity of issues.23

It has been held that in order that a judgment in one action can be conclusive as to a particular matter in
another action between the same parties or their privies, it is essential that the issues be identical. If a
particular point or question is in issue in the second action, and the judgment will depend on the
determination of that particular point or question, a former judgment between the same parties will be
final and conclusive in the second if that same point or question was in issue and adjudicated in the first
suit; but the adjudication of an issue in the first case is not conclusive of an entirely different and distinct
issue arising in the second. In order that this rule may be applied, it must clearly and positively appear,
either from the record itself or by the aid of competent extrinsic evidence that the precise point or
question in issue in the second suit was involved and decided in the first. And in determining whether a
given question was an issue in the prior action, it is proper to look behind the judgment to ascertain
whether the evidence necessary to sustain a judgment in the second action would have authorized a
judgment for the same party in the first action.24

Applying these rules to, the case at bar, it becomes crystal clear that the doctrine of res judicata will still
not apply even under the rule on conclusiveness of judgment. To begin with, the fact that there was an
unpaid balance equivalent to three installments was never put in issue in Civil Case No. 2159(24). The
same was considered or assumed only for purposes of determining the amount of the redemption price
It was never directly admitted, controverted nor litigated therein, it being merely incidental or peripheral
to the main issue of whether petitioner could still exercise his right to repurchase the subject lot by
reason of the breach of the prohibition imposed by law. On the other hand, the issue of non-payment of
the installments is the primary and sole controversy presented in the subsequent case for rescission. It is
thus evident that the two cases involve two different issues. Hence, it would be safe to conclude that
neither a "bar by prior judgment" nor "conclusiveness of judgment" would operate upon or adversely
affect the second action for rescission.

C. Private respondent insists that petitioner should have included and alleged rescission of contract
as a second cause of action in Civil Case No. 2159(24) considering that at the time the first complaint was
filed, the breach of the contract of sale was already total, hence the ground for rescission was available
and in existence. This very argument, significantly, is in line with petitioner's own assertion that, being
based on different causes of action, the action for rescission under Article 1191 of the Civil Code is
distinct from the action for reconveyance under Section 119 of the Public Land Act. Accordingly, said
action for rescission could have been brought independently of the action for reconveyance since
Section 5, Rule 2 of the Rules of Court merely provides:

Sec. 5. Joinder of causes of action. –– Subject to rules regarding jurisdiction, venue and joinder of
parties, a party may in one pleading state, in the alternative or otherwise, as many causes of action as he
may have against an opposing party (a) if the said causes of action arise out of the same contract,
transaction or relation between the parties, or (b) if the causes of action are for demands for money, or
are of the same nature and character.
xxx xxx xxx

The rule is clearly permissive. It does not constitute an obligatory rule, as there is no positive provision of
law or any rule of jurisprudence which compels a party to join all his causes of action and bring them at
one and the same time.25

Under the present rules, the provision is still that the plaintiff may, and not that he must, unite several
causes of action although they may be included in one of the classes specified. This, therefore, leaves it
to the plaintiffs option whether the causes of action shall be joined in the same action, and no
unfavorable inference may be drawn from his failure or refusal to do so. He may always file another
action based on the remaining cause or causes of action within the prescriptive period therefor.

II. We, however, find and so hold that in the controversy now before us the action for rescission has
prescribed and should consequently be dismissed on said ground. There can be no dispute that actions
based on written contracts prescribe after ten years from the time the right of the action accrues.26 It is
elementary that the computation of the period of prescription of any cause of action, which is the same
as saying prescription of the action, should start from the date when the cause of action accrues or from
the day the right of the plaintiff is violated. This is as it should be.

A cause of action has three elements, namely: (1) a right in favor of the plaintiff by whatever means and
under whatever law it arises or is created: (2) an obligation on the part of the named defendant to
respect or not to violate such right; and, (3) an act or omission on the part of such defendant violative of
the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff. It is
only when the last element occurs or takes place that it can be said in law that a cause of action has
arisen. Translated in terms of a hypothetical situation regarding a written contract, no cause of action
arises until there is a breach or violation thereof by either party.27

Conversely, upon the occurrence of a breach, a cause of action exists and the concomitant right of action
may then be enforced.

In the present case, petitioner's position is that the last three installments which he claims were not paid
by private respondent, allegedly fell due on July 1, 1968, July 1, 1969, and July 1,1970, respectively.28
Indulging petitioner in his own submissions, therefore, the breach committed by private respondent
occurred, at the earliest, on July 1, 1968 or, at the latest, on July 1, 1970.

Now, even taking the non-payment of the last installment as the basis, an actionable breach of the
contract was already committed on said date, hence, as of that time there arose and existed a cause of
action for petitioner to file a case for rescission. This remedy could already have been availed of by
petitioner for, as earlier discussed, there has been no legal obstacle thereto. Since the ten-year period
had started to run on July 2, 1970, petitioner should have filed the action before July 2, 1980 when the
prescriptive period expired. Considering that the amended complaint in Civil Case No. 4293, invoking
petitioner's right to rescind the contract, was filed only on May 3, 1985, the action therefor has obviously
and ineluctably prescribed.

ACCORDINGLY, the instant petition for review on certiorari is hereby DENIED.

SO ORDERED.

Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.

Footnotes

1 Penned by Associate Justice Pedro A. Ramirez, with Associate Justices Vicente V. Mendoza and Cecilio
L. Pe, concurring; Annex A, Petition; Rollo, 56.

2 Original Record, 6-8.

3 Annex D, Complaint; Original Record, 30.

4 Annex F, Id.; Ibid., 36.


5 Original Record, 92-93.

6 Ibid., 178.

7 Yusingco et al. vs. Ong Hing Lian, etc., et al., 42 SCRA 589 (1971).

8 50 C.J.S. 11-13.

9 Philippine National Bank vs. Barreto, et al., 52 Phil. 818 (1929); Escudero, et al. vs. Flores, et al., 97 Phil.
240 (1955); Navarro vs. Director of Lands, 115 Phil. 824 (1962).

10 Viray, etc. vs. Marinas, etc., et al., 49 SCRA 44 (1973).

11 Martinez, et al. vs. Hon. Court of Appeals, et al., 139 SCRA 568 (1985).

12 50 C.J.S. 51-53.

13 Licup vs. Manila Railroad Co., et al., 112 Phil. 203 (1961).

14 Guanzon, et al. vs. Mapa, 7 SCRA 457 (1963): Insular Veneer Inc., et al. vs. Plan, et al., 73 SCRA 1
(1976).

15 50 C.J.S., 66-68.

16 Sec. 3, Rule 17, Rules of Court.


17 50 C.J.S. 65.

18 Vda. de Cruzo, et al. vs. Cariaga, Jr., et al., 174 SCRA 330 (1989).

19 50 C.J.S., 120.

20 Ibid., 100.

21 Ibid., 91.

22 Ibid., 141.

23 Ibid., 144-145.

24 Ibid., 198-202.

25 Baldovi vs. Sarte, 36 Phil. 550 (1917).

26 Article 1144, Civil Code.

27 Cole, et al. vs. Vda. de Gregoria et al., 116 SCRA 670 (1982).

28 Rollo, 49,301; Original Record, 11.


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FIRST DIVISION

G.R. No. 139420 August 15, 2001

ROBERTO R. SERRANO, petitioner,

vs.

COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION, MAERSK-FILIPINAS CREWING, INC. and
A.P. MOLLER, respondents.

PUNO,J.:
Were it not for petitioner's relentless efforts, his claim for portions of his salary as a seaman would now
be sunk into oblivion. The ebb and flow of his claim will now rest as he is finally awarded what has long
been due him.

This is a petition for review on certiorari to nullify the resolutions of the Court of Appeals dated June 18,
1999 and July 15, 1999 dismissing outrightly the petition for certiorari filed by petitioner for having been
filed out of time.

The following facts spurred the present controversy:

From 1974 to 1991, respondent Maersk-Filipinas Crewing, Inc., the local agent of respondent foreign
corporation A.P. Moller, deployed petitioner Serrano as a seaman to Liberian, British and Danish ships.1
As petitioner was on board a ship most of the time, respondent Maersk offered to send portions of
petitioner's salary to his family in the Philippines. The amounts would be sent by money order. Petitioner
agreed and from 1977 to 1978, he instructed respondent Maersk to send money orders to his family.
Respondent Maersk deducted the amounts of these money orders totaling HK$4,600.00 and £1,050.00
Sterling Pounds from petitioner's salary.2 Respondent Maersk, it is also alleged, deducted various
amounts from his salary for Danish Social Security System (SSS), welfare contributions, ship club, and SSS
Medicare.

It appears that petitioner's family failed to receive the money orders petitioner sent through respondent
Maersk.3 Upon learning this in 1978, petitioner demanded that respondent Maersk pay him the
amounts the latter deducted from his salary. Respondent Maersk assured him that they would look into
the matter, then assigned him again to board one of their vessels.

Whenever he returned to the Philippines, petitioner would go to the office of respondent Maersk to
follow up his money claims but he would be told to return after several weeks as respondent Maersk
needed time to verify its records and to bring up the matter with its principal employer, respondent A.P.
Moller. Meantime, respondent Maersk would hire him again to board another one of their vessels for
about a year.
Finally, in October 1993, petitioner wrote to respondent Maersk demanding immediate payment to him
of the total amount of the money orders deducted from his salary from 1977 to 1978.4 On November
11, 1993, respondent A.P. Moller replied to petitioner that they keep accounting documents only for a
certain number of years, thus data on his money claims from 1977 to 1978 were no longer available.
Likewise, it was claimed that it had no outstanding money orders. A.P. Moller declined petitioner's
demand for payment.5

In April 1994, petitioner filed a complaint for collection of the total amount of the unsent money orders
and illegal salary deductions against the respondent Maersk in the Philippine Overseas Employment
Agency (POEA). The case was transferred to the NLRC where Labor Arbiter Arthur Amansec ruled,viz:

"Anent the deductions from his salary of "Welfare/Ship Club" contributions, these deductions are
compulsory deductions pursuant to Department Order No. 898 dated December 27, 1990 of the Danish
Maritime Authority. Being government imposed deductions, the same cannot be said to be unlawful. In
fact, a non-deduction could have been unlawful and could have meant official sanctions against the
respondents.

Regarding the Danish SSS deductions of forty-four dollars ($44.00) for a period of three (3) months in
1991, it appearing that the same were for payments of complainants' medical insurance and expenses,
the same cannot be said to be illegal.

Regarding to (sic) complainant's claim for payment of and/or refund of seven (7) money orders for the
period covering 1977 to 1978, while the respondents claim payment of that claim, it failed to present
competent evidence of payment such that this Office is constrained to approve this claim as warranted.

xxx xxx xxx

WHEREFORE, judgment is hereby made ordering the respondent and/or TICO Insurance Co., Inc. to
refund to complainant his untransmitted money order payment of HK$4,600 and 1,050 Sterling Pounds.

Respondent TICO Insurance Co., Inc.('s) cross-claim against respondent, for being meritorious, is hereby
APPROVED.
Other claims for lack of merit, are ordered DISMISSED."6

Respondent Maersk appealed to the NLRC the Labor Arbiter's grant of the claim for the amount of
unsent money orders. The NLRC reversed and set side Labor Arbiter Amansec's decision and dismissed
the case on the ground of prescription,viz:

"The Appeal is impressed with merit. Primarily we find that the complainant's claim that the money
orders he sent to his brother Arturo Serrano in the years 1977 to 1978 were not received by the latter
and his claim against respondent to pay him the alleged amounts of HK$4,600 and 1,050 (Position Paper)
or US$2,050.00 (Affidavit-complaint) has indeed prescribed. Under Article 251 (sic) of the Labor Code as
amended and we quote:

'Article 291. Money claims. — All money claims arising from employer-employee relations accruing
during the effectivity of this Code shall be filed within three years from the time the cause of action
accrued, otherwise they shall be forever barred.'

In the instant case, complainant's cause of action accrued in 1977 and 1978 but he filed a complaint only
on April 20, 1994. Clearly, complainant has slept on his rights and allowed himself to be overtaken by
prescription."

On March 4, 1999, petitioner filed a motion for reconsideration of the NLRC decision. It was denied for
lack of merit.

Petitioner sought recourse in the Court of Appeals. The appellate court dismissed his petition for having
been filed out of time. Petitioner's motion for reconsideration of the appellate court's resolution having
been denied, he appealed to this Court with the lone assignment of error,viz:

"RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION ON MERE TECHNICALITIES


RATHER THAN ON THE MERITS OF THE CASE."
The Labor Arbiter's dismissal of petitioner's complaint for illegal salary deductions was not appealed and
has thus become final. In his petition before this Court, petitioner takes issue only on the dismissal of his
claim for the unsent money orders.

We shall first deal with the issue on the period for filing a petition for review from a decision of the NLRC
to the Court of Appeals.

Applying the law then applicable, the Court of Appeals correctly dismissed the petition for certiorari for
having been filed out of time,viz:

". . . Pursuant to Section 4 of the Rule, as amended effective September 1, 1998, such a petition should
be filed within sixty days, computed as follows:

'SECTION 4. Where and when petition to be filed. — The petition may be filed not later than sixty
(60) days from notice of judgment, order or resolution sought to be assailed in the Supreme Court or, if it
relates to the acts or omissions of a lower court or of a corporation, board, officer or person, in the
Regional Trial Court exercising jurisdiction over the territorial area as defined by the Supreme Court. It
may also be filed in the Court of Appeals whether or not the same is in aid of its appellate jurisdiction, or
in the Sandiganbayan if it is in aid of its jurisdiction. If it involves acts or omissions of a quasi-judicial
agency, and unless otherwise provided by law or these Rules, the petition shall be filed in and cognizable
only by the Court of Appeals.

'If petitioner had filed a motion for new trial or reconsideration in due time after notice of said
judgment, order or resolution, the period herein fixed shall be interrupted. If the motion is denied, the
aggrieved party may file the petition within the remaining period, but which shall not be less than five
(5) days in any event, reckoned from notice of such denial. No extension of time to file the petition shall
be granted except for the most compelling reason and in no case to exceed fifteen (15) days.'

In the instant petition, the petitioner himself states that onFebruary 26, 1999, he received a copy of the
impugned decision of the National Labor Relations Commission; and onMarch 4, 1999, he filed his
motion for reconsideration. Thus, he had already used up six (6) days of the reglementary 60-day period
so that he had only fifty-four (54) days from notice of the denial of his motion for reconsideration within
which to file his petition. OnApril 6, 1999, he received a copy of the Resolution of the NLRC denying his
motion for reconsideration. Accordingly, he had only untilMay 30, 1999, within which to file his petition.
But he filed it only onJune 7, 1999. Hence, it is late by eight (8) days."7 (emphasis supplied)

Be that as it may, Rule 65, Section 4, as amended, was further amended effective September 1, 2000 to
read as follows:

"SECTION 4. When and where petition filed. — The petition shall be filed not later than sixty (60)
days from notice of the judgment, order or resolution.In case a motion for reconsideration or new trial
was timely filed, whether such motion is required or not, the sixty (60) day period shall be counted from
notice of the denial of said motion.

The petition shall be filed in the Supreme Court or, if it relates to the acts or omissions of a lower court
or of a corporation, board, officer or person, in the Regional Trial Court exercising jurisdiction over the
territorial area as defined by the Supreme Court. It may also be filed in the Court of Appeals whether or
not the same is in aid of its appellate jurisdiction, or in the Sandiganbayan if it is in aid of its appellate
jurisdiction. If it involves the acts or omissions of a quasi-judicial agency, unless otherwise provided by
law or these rules, the petition shall be filed in and cognizable only by the Court of Appeals.

No extension of time to file the petition shall be granted except for compelling reason and in no case
exceeding fifteen (15) days." (emphasis supplied)

Although the above amendment took effect on September 1, 2000, this Court has applied it
retroactively. InSystems Factors Corporation and Modesto Dean v. NLRC, et al.,8 petitioner filed a
petition for certiorari in the Court of Appeals on January 24, 2000. The appellate court dismissed it on
February 15, 2000 for having been filed ten days beyond the prescriptive period. The counting of the
sixty-day reglementary period was reckoned from the date petitioner received the impugned decision,
interrupted by the filing of a motion for reconsideration, then resumed from the date of receipt of the
resolution denying the motion for reconsideration. The petitioner therein sought recourse in this Court.
While the case was pending in this Court, Section 4, Rule 65 of the Rules was amended effective
September 1, 2000. Applying the amendment to the case, we ruled that the petition in the Court of
Appeals was deemed timely filed,viz:

"We hold that the amendment under A.M. No. 00-2-03-SC wherein the sixty-day period to file a petition
for certiorari is reckoned from receipt of the resolution denying the motion for reconsideration should be
deemed applicable. Remedial statutes or statutes relating to remedies or modes of procedure, which do
not create new or take away vested rights, but only operate in furtherance of the remedy or
confirmation of rights already existing, do not come within the legal conception of a retroactive law, or
the general rule against retroactive operation of statutes (Castro vs. Sagales, 94 Phil. 208). Statutes
regulating (sic) to the procedure of the courts will be construed as applicable to actions pending and
undetermined at the time of their passage. Procedural laws are retroactive in that sense and to that
extent. The retroactive application of procedural laws is not violative of any right of a person who may
feel that he is adversely affected (Gregorio vs. Court of Appeals, 26 SCRA 229; Tinio vs. Mina, 26 SCRA
512). The reason is that as a general rule, no vested right may attach to nor arise from procedural laws.
(Billones vs. CIR, 14 SCRA 674)"9

In the case at bar, petitioner Serrano received the resolution of the NLRC denying his motion for
reconsideration onApril 6, 1999. Thenceforth, he had 60 days or untilJune 7, 1999 to file a petition for
certiorari with the Court of Appeals. But as June 7 fell on a Saturday, he had untilJune 9, the next
working day, to file his petition. Rule 22, Section 1 provides in relevant part,viz:

". . . If the last day of the period, as thus computed, falls on a Saturday, a Sunday or a legal holiday in the
place where the court sits, the time shall not run until the next working day."

Petitioner thus timely filed his petition with the Court of Appeals on June 9, 1999.

We now proceed to decide the case on the merits. The issue is whether or not the claim of the petitioner
has prescribed. The applicable law is Article 291 of the Labor Code,viz:

"ARTICLE 291. Money claims. All money claims arising from employer-employee relations accruing
during the effectivity of this Code shall be filed withinthree years from the time the cause of action
accrued, otherwise they shall be forever barred." (emphasis supplied)

The pivotal question is when petitioner's cause of action accrued for this will determine the reckoning
date of the three-year prescriptive period.

Petitioner contends that his cause of action accrued only in 1993 when respondent A.P. Moller wrote to
him that its accounting records showed it had no outstanding money orders and that his case was
considered outdated. Thus, the three (3) year prescriptive period should be counted from 1993 and not
1978 and since his complaint was filed in 1994, he claims that it has not prescribed.

We agree. Petitioner's cause of action accrued in November 1993 upon respondent Maersk's definite
denial of his money claims following this Court's ruling in the similar case ofBaliwag Transit, Inc. v.
Ople.10 In that case, a bus of the petitioner Baliwag Transit bus company driven by the respondent
driver figured in an accident with a train of the Philippine National Railways (PNR) on August 10, 1974.
This resulted to the death of eighteen (18) passengers and caused serious injury to fifty-six (56) other
passengers. The bus itself also sustained extensive damage. The bus company instituted a complaint
against the PNR. The latter was held liable for its negligence in the decision rendered on April 6, 1977.
The respondent driver was absolved of any contributory negligence. However, the driver was also
prosecuted for multiple homicide and multiple serious physical injuries, but the case was provisionally
dismissed in March 1980 for failure of the prosecution witness to appear at the scheduled hearing. Soon
after the PNR decision was rendered, the driver renewed his license and sought reinstatement with
Baliwag Transit. He was advised to wait until his criminal case was terminated. Herepeatedly requested
for reinstatement thereafter, but to no avail, even after termination of the criminal case against him.
Finally, on May 2, 1980, he demanded reinstatement in a letter signed by his counsel.On May 10, 1980,
petitioner Baliwag Transit replied that he could not be reinstated as his driver's license had already been
revoked and his driving was "extremely dangerous to the riding public." This prompted respondent
driver to file on July 29, 1980 a formal complaint with the Ministry of Labor and Employment for illegal
dismissal against Baliwag Transit praying for reinstatement with back wages and emergency cost of living
allowance. The complaint was dismissed by the regional director on the ground of prescription under
Art. 291 of the Labor Code. This was reversed by then Labor and Employment Minister Ople. On appeal
to this Court, we ruled that the action had not prescribed,viz:

". . . (T)he antecedent question that has to be settled is the date when the cause of action accrued and
from which the period shall commence to run. The parties disagree on this date. The contention of the
petitioner is that it should be August 10, 1974, when the collision occurred. The private respondent
insists it is May 10, 1980, when his demand for reinstatement was rejected by the petitioner.

It is settled jurisprudence thata cause of action has three elements, to wit, (1) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part
of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of
such defendant violative of the right of the plaintiff or constituting a breach of the obligation of the
defendant to the plaintiff .
The problem in the case at bar is with the third element as the first two are deemed established.

We hold that the private respondent's right of action could not have accrued from the mere fact of the
occurrence of the mishap on August 10, 1974, as he was not considered automatically dismissed on that
date. At best, he was deemed suspended from his work, and not even by positive act of the petitioner
but as a result of the suspension of his driver's license because of the accident. There was no apparent
disagreement then between (respondent driver) Hughes and his employer. As the private respondent
was the petitioner's principal witness in its complaint for damages against the Philippine National
Railways, we may assume that Baliwag Transit and Hughes were on the best of terms when the case was
being tried. Hence, there existed no justification at that time for the private respondent to demand
reinstatement and no opportunity warrant (sic) either for the petitioner to reject that demand.

We agree with private respondent thatMay 10, 1980, is the date when his cause of action accrued, for it
was then that the petitioner denied his demand for reinstatement and so committed that act or
omission "constituting a breach of the obligation of the defendant to the plaintiff." The earlier requests
by him having been warded off with indefinite promises, and the private respondent not yet having
decided to assert his right, his cause of action could not be said to have then already accrued. The issues
had not yet been joined, so to speak. This happened only when the private respondent finally demanded
reinstatement on May 2, 1980, and his demand was categorically rejected by the petitioner on May 10,
1980."11 (emphasis supplied)

The facts in the case at bar are similar to the Baliwag case. Petitioner repeatedly demanded payment
from respondent Maersk but similar to the actuations of Baliwag Transit in the above cited case,
respondent Maersk warded off these demands by saying that it would look into the matter until years
passed by. In October 1993, Serrano finally demanded in writing payment of the unsent money orders.
Then and only then was the claim categorically denied by respondent A.P. Moller in its letter dated
November 22, 1993. Following the Baliwag Transit ruling, petitioner's cause of action accrued only upon
respondent A.P. Moller's definite denial of his claim in November 1993. Having filed his action five (5)
months thereafter or in April 1994, we hold that it was filed within the three-year (3) prescriptive period
provided in Article 291 of the Labor Code.

WHEREFORE, the petition is GRANTED and the impugned resolutions of the Court of Appeals dated June
18, 1999 and July 15, 1999 are REVERSED and SET ASIDE. The decision of the Labor Arbiter ordering
respondent Maersk and/or A.P. Moller to pay petitioner his untransmitted money order payments in the
amount of HK$4,600.00 and £1,050,00 Sterling Pounds or their peso equivalent at the time of actual
payment is reinstated.12 No costs.
SO ORDERED.

Davide, Jr., C .J ., Kapunan, Pardo and Ynares-Santiago, JJ ., concur.

Footnotes

1 Rollo, p. 16; Original Records, pp. 220-221; Affidavit-Complaint, p. 1.

2 Rollo, p. P5, 10.

3 Id., p. 5.

4 Id., p. 11.

5 Id., p. 45.

6 Id., pp. 23-24.

7 Rollo, p. 41.

8 G.R. No. 143789, November 27, 2000.

9 Systems Factors Corporation and Modesto Dean v. NLRC, et al., G.R. No. 143789, November 27, 2000,
p. 5. See also Unity Fishing Development Corp. and/or Antonio Dee v. Court of Appeals, National Labor
Relations Commission and Dominador Laguin, G.R. No. 145415, February 2, 2001; Presidential
Commission on Good Government [PCGG], represented by Orlando L. Salvador v. Hon. Aniano Desierto,
et al., G.R. No. 140358, December 8, 2000.

10 171 SCRA 250 (1989).

11 Baliwag Transit, Inc. v. Ople, 171 SCRA 250 (1989), pp. 258-259, citing ACCFA v. Alpha Insurance and
Surety Co., Inc., 24 SCRA 151; Summit Guaranty and Insurance Co., Inc. v. De Guzman, 151 SCRA 389;
Tormon v. Cutanda, 9 SCRA 698.

12 Philippine Transmarine Carriers, Inc. v. NLRC, et al., G.R. No. 123891, February 28, 2001.

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