Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No.

141968 February 12, 2001

as a condition sine qua non for the effectivity of the compromise. The court further ordered the bank: 1. to return immediately the subject car to the appellants in good working condition; Appellee may deposit the Manager's check - the proceeds of which have long been under the control of the issuing bank in favor of the appellee since its issuance, whereas the funds have long been paid by appellants to .secure said Manager's Check, over which appellants have no control; 2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary damages, and P25,000.00 as attorney's fees, and 3. to pay the cost of suit.

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE PHILIPPINES), petitioner, vs. SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents. KAPUNAN, J.: The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank (now Union Bank of the Philippines) to purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In consideration thereof, the Spouses executed promissory notes which were payable in monthly installments and chattel mortgage over the car to serve as security for the notes.1wphi1.nt The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995 a civil action docketed as Civil Case No. 658-95 for "Sum of Money with Prayer for a Writ of Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch 45. 2 On August 25, 1995, Dr. Francis Gueco was served summons and was fetched by the sheriff and representative of the bank for a meeting in the bank premises. Desi Tomas, the Bank's Assistant Vice President demanded payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After some negotiations and computation, the amount was lowered to P154,000.00, However, as a result of the non-payment of the reduced amount on that date, the car was detained inside the bank's compound. On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction of the outstanding loan to P150,000.00. On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00 but the car was not released because of his refusal to sign the Joint Motion to Dismiss. It is the contention of the Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal considering that they had not yet filed their Answer. Petitioner, however, insisted that the joint motion to dismiss is standard operating procedure in their bank to effect a compromise and to preclude future filing of claims, counterclaims or suits for damages. After several demand letters and meetings with bank representatives, the respondents Gueco spouses initiated a civil action for damages before the Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit. 3 On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan Trial Court was reversed. In its decision, the RTC held that there was a meeting of the minds between the parties as to the reduction of the amount of indebtedness and the release of the car but said agreement did not include the signing of the joint motion to dismiss

In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby AFFIRMED.4 The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed decision, the decretal portion of which reads: WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED and the Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No. Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against petitioner. SO ORDERED.5 The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts by the lower court and on the latter's finding of the existence of fraud which constitutes the basis for the award of damages. The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the Rules of Court, raising the following assigned errors: I THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A CONDITION FOR THE COMPROMISE AGREEMENT. II THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN FAVOR OF THE RESPONDENTS. III THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY

PROVISION FOR THE ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY THE RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIER'S CHECK THAT ALREADY BECAME STALE.6 As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the oral compromise or any subsequent novation is a question of fact that was resolved by the Regional Trial Court and the Court of Appeals in favor of respondents. It is well settled that the findings of fact of the lower court, especially when affirmed by the Court of Appeals, are binding upon this Court.7 While there are exceptions to this rule, 8 the present case does not fall under anyone of them, the petitioner's claim to the contrary, notwithstanding. Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral compromise entered into by the parties on August 28, 1995 included the stipulation that the parties would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial Court, while ruling in favor of the petitioner and thereby dismissing the complaint, did not make a factual finding that the compromise agreement included the condition of the signing of a joint motion to dismiss. The Court of Appeals made the factual findings in this wise: In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related that respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount of indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18, 5). Respondents, however, maintained that no such condition was ever discussed during their meeting of August 28, 1995 (Rollo, p. 32). The trial court, whose factual findings are entitled to respect since it has the 'opportunity to directly observe the witnesses and to determine by their demeanor on the stand the probative value of their testimonies' (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed to make a categorical finding on the issue. In dismissing the claim of damages of the respondents, it merely observed that respondents are not entitled to indemnity since it was their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the release of the car. The trial court opined, thus: 'As regards the third issue, plaintiffs' claim for damages is unavailing. First, the plaintiffs could have avoided the renting of another car and could have avoided this litigation had he signed the Joint Motion to Dismiss. While it is true that herein defendant can unilaterally dismiss the case for collection of sum of money with replevin, it is equally true that there is nothing wrong for the plaintiff to affix his signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against him is for his own good and benefit. In fact, the signing of the Joint Motion to Dismiss gives the plaintiff three (3) advantages. First, he will recover his car. Second, he will pay his obligation to the bank on its reduced amount of P150,000.00 instead of its original claim of P184,985.09. And third, the case against him will be dismissed. Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary damages as there is no showing that the defendant bank acted fraudulently or in bad faith.' (Rollo, p. 15) The Court has noted, however, that the trial court, in its findings of facts, clearly indicated that the agreement of the parties on August 28, 1995 was merely for the lowering of the price, hence -

'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered into an oral compromise agreement, whereby the original claim of the bank of P184,985.09 was reduced to P150,000.00 and that upon payment of which, plaintiff was informed that the subject motor vehicle would be released to him.' (Rollo, p. 12) The lower court, on the other hand, expressly made a finding that petitioner failed to include the aforesaid signing of the Joint Motion to Dismiss as part of the agreement. In dismissing petitioner's claim, the lower court declared, thus: 'If it is true, as the appellees allege, that the signing of the joint motion was a condition sine qua nonfor the reduction of the appellants' obligation, it is only reasonable and logical to assume that the joint motion should have been shown to Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco was not given a copy of the joint motion that day of August 28, 1995, for his family or legal counsel to see to be brought signed, together with the P150,000.00 in manager's check form to be submitted on the following day on August 29, 1995? (sic) [I]s a question whereby the answer up to now eludes this Court's comprehension. The appellees would like this Court to believe that Dr Gueco was informed by Mr. Rivera Rivera of the bank requirement of signing the joint motion on August 28, 1995 but he did not bother to show a copy thereof to his family or legal counsel that day August 28, 1995. This part of the theory of appellee is too complicated for any simple oral agreement. The idea of a Joint Motion to Dismiss being signed as a condition to the pushing through a deal surfaced only on August 29, 1995. 'This Court is not convinced by the appellees' posturing. Such claim rests on too slender a frame, being inconsistent with human experience. Considering the effect of the signing of the Joint Motion to Dismiss on the appellants' substantive right, it is more in accord with human experience to expect Dr. Gueco, upon being shown the Joint Motion to Dismiss, to refuse to pay the Manager's Check and for the bank to refuse to accept the manager's check. The only logical explanation for this inaction is that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of August 28, 1995, bolstering his claim that its signing was never put into consideration in reaching a compromise.' xxx. 9 We see no reason to reverse. Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the petitioner liable for damages, both .the Regional Trial Court and the Court of Appeals ruled that there was fraud on the part of the petitioner. The CA thus declared: The lower court's finding of fraud which became the basis of the award of damages was likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as amended is the 'deliberate and intentional evasion of the normal fulfillment of obligation' When petitioner refused to release the car despite respondent's tender of payment in the form of a manager's check, the former intentionally evaded its obligation and thereby became liable for moral and exemplary damages, as well as attorney's fees. 10 We disagree.

Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally and necessarily arise from such act or omission; the fraud referred to in Article 1170 of the Civil Code is the deliberate and intentional evasion of the normal fulfillment of obligation.11 We fail to see how the act of the petitioner bank in requiring the respondent to sign the joint motion to dismiss could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco that the signing of a joint motion to dismiss is a standard operating procedure of petitioner bank. However, this can not in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be dismissed with prejudice. The whole point of the parties entering into the compromise agreement was in order that Dr. Gueco would pay his outstanding account and in return petitioner would return the car and drop the case for money and replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a natural consequence of the compromise agreement and simply stated that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner's act of requiring Dr. Gueco to sign the joint motion to dismiss can not be said to be a deliberate attempt on the part of petitioner to renege on the compromise agreement of the parties. It should, likewise, be noted that in cases of breach of contract, moral damages may only be awarded when the breach was attended by fraud or bad faith.12 The law presumes good faith. Dr. Gueco failed to present an iota of evidence to overcome this presumption. In fact, the act of petitioner bank in lowering the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to settle the case. If respondent did suffer any damage, as a result of the withholding of his car by petitioner, he has only himself to blame. Necessarily, the claim for exemplary damages must fait. In no way, may the conduct of petitioner be characterized as "wanton, fraudulent, reckless, oppressive or malevolent." 13 We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of August 29, 1995, respondent Dr. Gueco delivered a manager's check representing the reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of respondent bank. However, since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to the effect that he was withholding the payment of the check.14 Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco instructed the bank to disregard the 'hold order" letter and demanded the immediate release of his car, 15 to which the former replied that the condition of signing the joint motion to dismiss must be satisfied and that they had kept the check which could be claimed by Dr. Gueco anytime. 16 While there is controversy as to whether the document evidencing the order to hold payment of the check was formally offered as evidence by petitioners,17 it appears from the pleadings that said check has not been encashed. The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders the petitioner: 1. to return immediately the subject car to the appellants in good working condition. Appellee may deposit the Manager's Check - the proceeds of which have long been under the control of the issuing bank in favor of the appellee since its issuance, whereas the funds have long been paid by appellants to secure said Manager's Check over which appellants have no control. 18 Respondents would make us hold that petitioner should return the car or its value and that the latter, because of its own negligence, should suffer the loss occasioned by the fact that the check had become stale.19 It is their position that delivery of the manager's check produced the effect of payment20 and, thus, petitioner was negligent in opting not to deposit or use said

check. Rudimentary sense of justice and fair play would not countenance respondents' position. A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an instrument not payable on demand must be presented for payment on the day it falls due. When the instrument is payable on demand, presentment must be made within a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable time after the last negotiation thereof. 21 A check must be presented for payment within a reasonable time after its issue,22 and in determining what is a "reasonable time," regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case.23 The test is whether the payee employed such diligence as a prudent man exercises in his own affairs.24 This is because the nature and theory behind the use of a check points to its immediate use and payability. In a case, a check payable on demand which was long overdue by about two and a half (2-1/2) years was considered a stale check.25 Failure of a payee to encash a check for more than ten (10) years undoubtedly resulted in the check becoming stale.26 Thus, even a delay of one (1) week27 or two (2) days,28 under the specific circumstances of the cited cases constituted unreasonable time as a matter of law. In the case at bar, however, the check involved is not an ordinary bill of exchange but a manager's check. A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance.29 It is really the bank's own check and may be treated as a promissory note with the bank as a maker.30The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer would be the maker and in which case the holder need not prove presentment for payment or present the bill to the drawee for acceptance.31 Even assuming that presentment is needed, failure to present for payment within a reasonable time will result to the discharge of the drawer only to the extent of the loss caused by the delay.32 Failure to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not alleged, much less shown that they or the bank which issued the manager's check has suffered damage or loss caused by the delay or nonpresentment. Definitely, the original obligation to pay certainly has not been erased. It has been held that, if the check had become stale, it becomes imperative that the circumstances that caused its non-presentment be determined.33 In the case at bar, there is no doubt that the petitioner bank held on the check and refused to encash the same because of the controversy surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this position taken by the Bank. 1wphi1.nt WHEREFORE, premises considered, the petition for review is given due course. The decision of the Court of Appeals affirming the decision of the Regional Trial Court is SET ASIDE. Respondents are further ordered to pay the original obligation amounting to P150,000.00 to the petitioner upon surrender or cancellation of the manager's check in the latter's possession, afterwhich, petitioner is to return the subject motor vehicle in good working condition.

SO ORDERED. Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ., concur.

Republic of the Philippines SUPREME COURT THIRD DIVISION G.R. No. 150255. April 22, 2005 SCHMITZ TRANSPORT & BROKERAGE CORPORATION, Petitioners, vs. TRANSPORT VENTURE, INC., INDUSTRIAL INSURANCE COMPANY, LTD., and BLACK SEA SHIPPING AND DODWELL now INCHCAPE SHIPPING SERVICES, Respondents. DECISION CARPIO-MORALES, J.: On petition for review is the June 27, 2001 Decision1 of the Court of Appeals, as well as its Resolution2 dated September 28, 2001 denying the motion for reconsideration, which affirmed that of Branch 21 of the Regional Trial Court (RTC) of Manila in Civil Case No. 92631323 holding petitioner Schmitz Transport Brokerage Corporation (Schmitz Transport), together with Black Sea Shipping Corporation (Black Sea), represented by its ship agent Inchcape Shipping Inc. (Inchcape), and Transport Venture (TVI), solidarily liable for the loss of 37 hot rolled steel sheets in coil that were washed overboard a barge. On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk, Russia on board M/V "Alexander Saveliev" (a vessel of Russian registry and owned by Black Sea) 545 hot rolled steel sheets in coil weighing 6,992,450 metric tons. The cargoes, which were to be discharged at the port of Manila in favor of the consignee, Little Giant Steel Pipe Corporation (Little Giant), 4 were insured against all risks with Industrial Insurance Company Ltd. (Industrial Insurance) under Marine Policy No. M-91-3747-TIS.5 The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports Authority (PPA) assigned it a place of berth at the outside breakwater at the Manila South Harbor. 6 Schmitz Transport, whose services the consignee engaged to secure the requisite clearances, to receive the cargoes from the shipside, and to deliver them to its (the consignees) warehouse at Cainta, Rizal,7 in turn engaged the services of TVI to send a barge and tugboat at shipside. On October 26, 1991, around 4:30 p.m., TVIs tugboat "Lailani" towed the barge "Erika V" to shipside.8 By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the barge alongside the vessel, left and returned to the port terminal.9 At 9:00 p.m., arrastre operator Ocean Terminal Services Inc. commenced to unload 37 of the 545 coils from the vessel unto the barge. By 12:30 a.m. of October 27, 1991 during which the weather condition had become inclement due to an approaching storm, the unloading unto the barge of the 37 coils was accomplished.10 No tugboat pulled the barge back to the pier, however.

At around 5:30 a.m. of October 27, 1991, due to strong waves, 11 the crew of the barge abandoned it and transferred to the vessel. The barge pitched and rolled with the waves and eventually capsized, washing the 37 coils into the sea. 12 At 7:00 a.m., a tugboat finally arrived to pull the already empty and damaged barge back to the pier.13 Earnest efforts on the part of both the consignee Little Giant and Industrial Insurance to recover the lost cargoes proved futile.14 Little Giant thus filed a formal claim against Industrial Insurance which paid it the amount of P5,246,113.11. Little Giant thereupon executed a subrogation receipt 15 in favor of Industrial Insurance. Industrial Insurance later filed a complaint against Schmitz Transport, TVI, and Black Sea through its representative Inchcape (the defendants) before the RTC of Manila, for the recovery of the amount it paid to Little Giant plus adjustment fees, attorneys fees, and litigation expenses.16 Industrial Insurance faulted the defendants for undertaking the unloading of the cargoes while typhoon signal No. 1 was raised in Metro Manila. 17 By Decision of November 24, 1997, Branch 21 of the RTC held all the defendants negligent for unloading the cargoes outside of the breakwater notwithstanding the storm signal. 18 The dispositive portion of the decision reads: WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, ordering the defendants to pay plaintiff jointly and severally the sum of P5,246,113.11 with interest from the date the complaint was filed until fully satisfied, as well as the sum of P5,000.00 representing the adjustment fee plus the sum of 20% of the amount recoverable from the defendants as attorneys fees plus the costs of suit. The counterclaims and cross claims of defendants are hereby DISMISSED for lack of [m]erit.19 To the trial courts decision, the defendants Schmitz Transport and TVI filed a joint motion for reconsideration assailing the finding that they are common carriers and the award of excessive attorneys fees of more thanP1,000,000. And they argued that they were not motivated by gross or evident bad faith and that the incident was caused by a fortuitous event. 20 By resolution of February 4, 1998, the trial court denied the motion for reconsideration.
21

All the defendants appealed to the Court of Appeals which, by decision of June 27, 2001, affirmed in toto the decision of the trial court, 22 it finding that all the defendants were common carriers Black Sea and TVI for engaging in the transport of goods and cargoes over the seas as a regular business and not as an isolated transaction, 23 and Schmitz Transport for entering into a contract with Little Giant to transport the cargoes from ship to port for a fee. 24 In holding all the defendants solidarily liable, the appellate court ruled that "each one was essential such that without each others contributory negligence the incident would not have happened and so much so that the person principally liable cannot be distinguished with sufficient accuracy."25

In discrediting the defense of fortuitous event, the appellate court held that "although defendants obviously had nothing to do with the force of nature, they however had control of where to anchor the vessel, where discharge will take place and even when the discharging will commence."26 The defendants respective motions for reconsideration having been denied by Resolution 27 of September 28, 2001, Schmitz Transport (hereinafter referred to as petitioner) filed the present petition against TVI, Industrial Insurance and Black Sea. Petitioner asserts that in chartering the barge and tugboat of TVI, it was acting for its principal, consignee Little Giant, hence, the transportation contract was by and between Little Giant and TVI.28 By Resolution of January 23, 2002, herein respondents Industrial Insurance, Black Sea, and TVI were required to file their respective Comments. 29 By its Comment, Black Sea argued that the cargoes were received by the consignee through petitioner in good order, hence, it cannot be faulted, it having had no control and supervision thereover.30 For its part, TVI maintained that it acted as a passive party as it merely received the cargoes and transferred them unto the barge upon the instruction of petitioner. 31 In issue then are: (1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act of negligence on the part of petitioner Black Sea and TVI, and (2) If there was negligence, whether liability for the loss may attach to Black Sea, petitioner and TVI. When a fortuitous event occurs, Article 1174 of the Civil Code absolves any party from any and all liability arising therefrom: ART. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though foreseen, were inevitable. In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply with his obligation, must be independent of human will; (2) it must be impossible to foresee the event which constitute the caso fortuito, or if it can be foreseen it must be impossible to avoid; (3) the occurrence must be such as to render it impossible for the debtor to fulfill his obligation in any manner; and (4) the obligor must be free from any participation in the aggravation of the injury resulting to the creditor.32 [T]he principle embodied in the act of God doctrine strictly requires that the act must be occasioned solely by the violence of nature. Human intervention is to be excluded from creating or entering into the cause of the mischief. When the effect is found to be in part the

result of the participation of man, whether due to his active intervention or neglect or failure to act, the whole occurrence is then humanized and removed from the rules applicable to the acts of God.33 The appellate court, in affirming the finding of the trial court that human intervention in the form of contributory negligence by all the defendants resulted to the loss of the cargoes, 34 held that unloading outside the breakwater, instead of inside the breakwater, while a storm signal was up constitutes negligence.35 It thus concluded that the proximate cause of the loss was Black Seas negligence in deciding to unload the cargoes at an unsafe place and while a typhoon was approaching.36 From a review of the records of the case, there is no indication that there was greater risk in loading the cargoes outside the breakwater. As the defendants proffered, the weather on October 26, 1991 remained normal with moderate sea condition such that port operations continued and proceeded normally.37 The weather data report,38 furnished and verified by the Chief of the Climate Data Section of PAG-ASA and marked as a common exhibit of the parties, states that while typhoon signal No. 1 was hoisted over Metro Manila on October 23-31, 1991, the sea condition at the port of Manila at 5:00 p.m. - 11:00 p.m. of October 26, 1991 was moderate. It cannot, therefore, be said that the defendants were negligent in not unloading the cargoes upon the barge on October 26, 1991 inside the breakwater. That no tugboat towed back the barge to the pier after the cargoes were completely loaded by 12:30 in the morning39 is, however, a material fact which the appellate court failed to properly consider and appreciate40 the proximate cause of the loss of the cargoes. Had the barge been towed back promptly to the pier, the deteriorating sea conditions notwithstanding, the loss could have been avoided. But the barge was left floating in open sea until big waves set in at 5:30 a.m., causing it to sink along with the cargoes.41 The loss thus falls outside the "act of God doctrine." The proximate cause of the loss having been determined, who among the parties is/are responsible therefor? Contrary to petitioners insistence, this Court, as did the appellate court, finds that petitioner is a common carrier. For it undertook to transport the cargoes from the shipside of "M/V Alexander Saveliev" to the consignees warehouse at Cainta, Rizal. As the appellate court put it, "as long as a person or corporation holds [itself] to the public for the purpose of transporting goods as [a] business, [it] is already considered a common carrier regardless if [it] owns the vehicle to be used or has to hire one."42 That petitioner is a common carrier, the testimony of its own Vice-President and General Manager Noel Aro that part of the services it offers to its clients as a brokerage firm includes the transportation of cargoes reflects so. Atty. Jubay: Will you please tell us what [are you] functions x x x as Executive Vice-President and General Manager of said Company? Mr. Aro: Well, I oversee the entire operation of the brokerage and transport business of the company. I also handle the various division heads of the company for operation matters, and all other related functions that the President may assign to me from time to time, Sir.

Q: Now, in connection [with] your duties and functions as you mentioned, will you please tell the Honorable Court if you came to know the company by the name Little Giant Steel Pipe Corporation? A: Yes, Sir. Actually, we are the brokerage firm of that Company. Q: And since when have you been the brokerage firm of that company, if you can recall? A: Since 1990, Sir. Q: Now, you said that you are the brokerage firm of this Company. What work or duty did you perform in behalf of this company? A: We handled the releases (sic) of their cargo[es] from the Bureau of Customs. We [are] also in-charged of the delivery of the goods to their warehouses. We also handled the clearances of their shipment at the Bureau of Customs, Sir. xxx Q: Now, what precisely [was] your agreement with this Little Giant Steel Pipe Corporation with regards to this shipment? What work did you do with this shipment? A: We handled the unloading of the cargo[es] from vessel to lighter and then the delivery of [the] cargo[es] from lighter to BASECO then to the truck and to the warehouse, Sir. Q: Now, in connection with this work which you are doing, Mr. Witness, you are supposed to perform, what equipment do (sic) you require or did you use in order to effect this unloading, transfer and delivery to the warehouse? A: Actually, we used the barges for the ship side operations, this unloading [from] vessel to lighter, and on this we hired or we sub-contracted with [T]ransport Ventures, Inc. which [was] in-charged (sic) of the barges. Also, in BASECO compound we are leasing cranes to have the cargo unloaded from the barge to trucks, [and] then we used trucks to deliver [the cargoes] to the consignees warehouse, Sir. Q: And whose trucks do you use from BASECO compound to the consignees warehouse? A: We utilized of (sic) our own trucks and we have some other contracted trucks, Sir. xxx ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it you have to contract for the barges of Transport Ventures Incorporated in this particular operation? A: Firstly, we dont own any barges. That is why we hired the services of another firm whom we know [al]ready for quite sometime, which is Transport Ventures, Inc. (Emphasis supplied) 43

It is settled that under a given set of facts, a customs broker may be regarded as a common carrier. Thus, this Court, in A.F. Sanchez Brokerage, Inc. v. The Honorable Court of Appeals,44 held: The appellate court did not err in finding petitioner, a customs broker, to be also a common carrier, as defined under Article 1732 of the Civil Code, to wit, Art. 1732. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. xxx Article 1732 does not distinguish between one whose principal business activity is the carrying of goods and one who does such carrying only as an ancillary activity. The contention, therefore, of petitioner that it is not a common carrier but a customs broker whose principal function is to prepare the correct customs declaration and proper shipping documents as required by law is bereft of merit. It suffices that petitioner undertakes to deliver the goods for pecuniary consideration.45 And in Calvo v. UCPB General Insurance Co. Inc.,46 this Court held that as the transportation of goods is an integral part of a customs broker, the customs broker is also a common carrier. For to declare otherwise "would be to deprive those with whom [it] contracts the protection which the law affords them notwithstanding the fact that the obligation to carry goods for [its] customers, is part and parcel of petitioners business."47 As for petitioners argument that being the agent of Little Giant, any negligence it committed was deemed the negligence of its principal, it does not persuade. True, petitioner was the broker-agent of Little Giant in securing the release of the cargoes. In effecting the transportation of the cargoes from the shipside and into Little Giants warehouse, however, petitioner was discharging its own personal obligation under a contact of carriage. Petitioner, which did not have any barge or tugboat, engaged the services of TVI as handler48 to provide the barge and the tugboat. In their Service Contract, 49 while Little Giant was named as the consignee, petitioner did not disclose that it was acting on commission and was chartering the vessel for Little Giant. 50 Little Giant did not thus automatically become a party to the Service Contract and was not, therefore, bound by the terms and conditions therein. Not being a party to the service contract, Little Giant cannot directly sue TVI based thereon but it can maintain a cause of action for negligence.51 In the case of TVI, while it acted as a private carrier for which it was under no duty to observe extraordinary diligence, it was still required to observe ordinary diligence to ensure the proper and careful handling, care and discharge of the carried goods. Thus, Articles 1170 and 1173 of the Civil Code provide:

ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2202, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. Was the reasonable care and caution which an ordinarily prudent person would have used in the same situation exercised by TVI?52 This Court holds not. TVIs failure to promptly provide a tugboat did not only increase the risk that migh t have been reasonably anticipated during the shipside operation, but was the proximate cause of the loss. A man of ordinary prudence would not leave a heavily loaded barge floating for a considerable number of hours, at such a precarious time, and in the open sea, knowing that the barge does not have any power of its own and is totally defenseless from the ravages of the sea. That it was nighttime and, therefore, the members of the crew of a tugboat would be charging overtime pay did not excuse TVI from calling for one such tugboat. As for petitioner, for it to be relieved of liability, it should, following Article 1739 53 of the Civil Code, prove that it exercised due diligence to prevent or minimize the loss, before, during and after the occurrence of the storm in order that it may be exempted from liability for the loss of the goods. While petitioner sent checkers54 and a supervisor55 on board the vessel to counter-check the operations of TVI, itfailed to take all available and reasonable precautions to avoid the loss. After noting that TVI failed to arrange for the prompt towage of the barge despite the deteriorating sea conditions, it should have summoned the same or another tugboat to extend help, but it did not. This Court holds then that petitioner and TVI are solidarily liable 56 for the loss of the cargoes. The following pronouncement of the Supreme Court is instructive: The foundation of LRTAs liability is the contract of carriage and its obligation to indemnify the victim arises from the breach of that contract by reason of its failure to exercise the high diligence required of the common carrier. In the discharge of its commitment to ensure the safety of passengers, a carrier may choose to hire its own employees or avail itself of the services of an outsider or an independent firm to undertake the task. In either case, the common carrier is not relieved of its responsibilities under the contract of carriage. Should Prudent be made likewise liable? If at all, that liability could only be for tort under the provisions of Article 2176 and related provisions, in conjunction with Article 2180 of the Civil Code. x x x [O]ne might ask further, how then must the liability of the common carrier, on one hand, and an independent contractor, on the other hand, be described? It would be solidary. A contractual obligation can be breached by tort and when the same act or omission causes the injury, one resulting in culpa contractual and the other in culpa aquiliana, Article 2194 of the

Civil Code can well apply. In fine, a liability for tort may arise even under a contract, where tort is that which breaches the contract. Stated differently, when an act which constitutes a breach of contract would have itself constituted the source of a quasi-delictual liability had no contract existed between the parties, the contract can be said to have been breached by tort, thereby allowing the rules on tort to apply.57 As for Black Sea, its duty as a common carrier extended only from the time the goods were surrendered or unconditionally placed in its possession and received for transportation until they were delivered actually or constructively to consignee Little Giant. 58 Parties to a contract of carriage may, however, agree upon a definition of delivery that extends the services rendered by the carrier. In the case at bar, Bill of Lading No. 2 covering the shipment provides that delivery be made "to the port of discharge or so near thereto as she may safely get, always afloat."59 The delivery of the goods to the consignee was not from "pier to pier" but from the shipside of "M/V Alexander Saveliev" and into barges, for which reason the consignee contracted the services of petitioner. Since Black Sea had constructively delivered the cargoes to Little Giant, through petitioner, it had discharged its duty. 60 In fine, no liability may thus attach to Black Sea. Respecting the award of attorneys fees in an amount over P1,000,000.00 to Industrial Insurance, for lack of factual and legal basis, this Court sets it aside. While Industrial Insurance was compelled to litigate its rights, such fact by itself does not justify the award of attorneys fees under Article 2208 of the Civil Code. For no sufficient showing of bad faith would be reflected in a partys persistence in a case other than an erroneous conviction of the righteousness of his cause.61 To award attorneys fees to a party just because the judgment is rendered in its favor would be tantamount to imposing a premium on ones right to litigate or seek judicial redress of legitimate grievances. 62 On the award of adjustment fees: The adjustment fees and expense of divers were incurred by Industrial Insurance in its voluntary but unsuccessful efforts to locate and retrieve the lost cargo. They do not constitute actual damages. 63 As for the court a quos award of interest on the amount claimed, the same calls for modification following the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 64 that when the demand cannot be reasonably established at the time the demand is made, the interest shall begin to run not from the time the claim is made judicially or extrajudicially but from the date the judgment of the court is made (at which the time the quantification of damages may be deemed to have been reasonably ascertained). 65 WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz Transport & Brokerage Corporation, and Transport Venture Incorporation jointly and severally liable for the amount of P5,246,113.11 with the MODIFICATION that interest at SIX PERCENT per annum of the amount due should be computed from the promulgation on November 24, 1997 of the decision of the trial court. Costs against petitioner. SO ORDERED. Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.

Republic of the Philippines SUPREME COURT THIRD DIVISION G.R. No. 132864 October 24, 2005 PHILIPPINE FREE PRESS, INC., Petitioner, vs. COURT OF APPEALS (12th Division) and LIWAYWAY PUBLISHING, INC., Respondents. DECISION GARCIA, J.: In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Philippine Free Press, Inc. seeks the reversal of the Decision1 dated February 25, 1998 of the Court of Appeals (CA) in CA-GR CV No. 52660, affirming, with modification, an earlier decision of the Regional Trial Court at Makati, Branch 146, in an action for annulment of deeds of sale thereat instituted by petitioner against the Presidential Commission for Good Government (PCGG) and the herein private respondent, Liwayway Publishing, Inc. As found by the appellate court in the decision under review, the facts are: xxx [Petitioner] . . . is a domestic corporation engaged in the publication of Philippine Free Press Magazine, one of the . . . widely circulated political magazines in the Philippines. Due to its wide circulation, the publication of the Free Press magazine enabled [petitioner] to attain considerable prestige prior to the declaration of Martial Law as well as to achieve a high profit margin. . . . Sometime in . . . 1963, [petitioner] purchased a parcel of land situated at No. 2249, Pasong Tamo Street, Makati which had an area of 5,000 square meters as evidenced by . . . (TCT) No. 109767 issued by the Register of Deeds of Makati (Exh. Z). Upon taking possession of the subject land, [petitioner] constructed an office building thereon to house its various machineries, equipment, office furniture and fixture. [Petitioner] thereafter made the subject building its main office . . . . During the 1965 presidential elections, [petitioner] supported the late President Diosdado Macapagal against then Senate President Ferdinand Marcos. Upon the election of the late President Ferdinand Marcos in 1965 and prior to the imposition of Martial law on September 21, 1972, [petitioner] printed numerous articles highly critical of the Marcos administration, exposing the corruption and abuses of the regime. The [petitioner] likewise ran a series of articles exposing the plan of the Marcoses to impose a dictatorship in the guise of Martial Law .... In the evening of September 20, 1972, soldiers surrounded the Free Press Building, forced out its employees at gunpoint and padlocked the said establishment. The soldier in charge of the military contingent then informed Teodoro Locsin, Jr., the son of Teodoro Locsin, Sr., the

President of [petitioner], that Martial Law had been declared and that they were instructed by the late President Marcos to take over the building and to close the printing press. xxx. On September 21, 1972 . . ., Teodoro Locsin, Sr. was arrested [and] . . . . was brought to Camp Crame and was subsequently transferred to the maximum security bloc at Fort Bonifacio. Sometime in December, 1972, Locsin, Sr. was informed . . . that no charges were to be filed against him and that he was to be provisionally released subject to the following conditions, to wit: (1) he remained (sic) under city arrest; xxx (5) he was not to publish the Philippine Free Press nor was he to do, say or write anything critical of the Marcos administration . . . . Consequently, the publication of the Philippine Free Press ceased. The subject building remained padlocked and under heavy military guard (TSB, 27 May 1993, pp. 51-52; stipulated). The cessation of the publication of the ... magazine led to the financial ruin of [petitioner] . . . . [Petitioners] situation was further aggravated when its employees demanded the payment of separation pay as a result of the cessation of its operations. [Petitioners] minority stockholders, furthermore, made demands that Locsin, Sr. buy out their shares. xxx. On separate occasions in 1973, Locsin, Sr. was approached by the late Atty. Crispin Baizas with offers from then President Marcos for the acquisition of the [petitioner]. However, Locsin, Sr. refused the offer stating that [petitioner] was not for sale (TSN, 2 May 1988, pp. 8-9, 40; 27 May 1993, pp. 66-67). A few months later, the late Secretary Guillermo De Vega approached Locsin, Sr. reiterating Marcoss offer to purchase the name and the assets of the [petitioner].xxx Sometime during the middle of 1973, Locsin, Sr. was contacted by Brig. Gen. Hans Menzi, the former aide-de-camp of then President Marcos concerning the sale of the [petitioner]. Locsin, Sr. requested that the meeting be held inside the [petitioner] Building and this was arranged by Menzi (TSN, 27 May 1993, pp. 69-70). During the said meeting, Menzi once more reiterated Marcoss offer to purchase both the name and the assets of [petitioner] adding that " Marcos cannot be denied" (TSN, 27 May 1993, p. 71). Locsin, Sr. refused but Menzi insisted that he had no choice but to sell. Locsin, Sr. then made a counteroffer that he will sell the land, the building and all the machineries and equipment therein but he will be allowed to keep the name of the [petitioner]. Menzi promised to clear the matter with then President Marcos (TSN, 27 May 1993, p. 72). Menzi thereafter contacted Locsin, Sr. and informed him that President Marcos was amenable to his counteroffer and is offering the purchase price of Five Million Seven Hundred Fifty Thousand (P5, 750,000.00) Pesos for the land, the building, the machineries, the office furnishing and the fixtures of the [petitioner] on a "take-it-or-leave-it" basis (TSN, 2 May 1988, pp.42-43; 27 May 1993, p. 88). On August 22, 1973, Menzi tendered to Locsin, Sr. a check for One Million (P1, 000,000.00) Pesos downpayment for the sale, . . . Locsin, Sr. accepted the check, subject to the condition that he will refund the same in case the sale will not push through. (Exh. 7). On August 23, 1973, the Board of Directors of [petitioner] held a meeting and reluctantly passed a resolution authorizing Locsin, Sr. to sell the assets of the [petitioner] to Menzi minus the name "Philippine Free Press (Exhs. A-1 and 1; TSN, 27 May 1993, pp. 73-76). On October 23, 1973, the parties [petitioner, as vendor and private respondent, represented by B/Gen. Menzi, as vendee] met . . . and executed two (2) notarized Deeds of Sale covering

the land, building and the machineries of the [petitioner]. Menzi paid the balance of the purchase price in the amount of . . . (P4,750,000.00) Pesos (Exhs. A and (; B and 10;TSN, 27 May 1993, pp. 81-82; 3 June 1993, p. 89). Locsin, Sr. thereafter used the proceeds of the sale to pay the separation pay of [petitioners] employees, buy out the shares of the minority stockholders as well as to settle all its obligations. On February 26, 1987, [petitioner] filed a complaint for Annulment of Sale against [respondent] Liwayway and the PCGG before the Regional Trail Court of Makati, Branch 146 on the grounds of vitiated consent and gross inadequacy of purchase price. On motion of defendant PCGG, the complaint against it was dismissed on October 22, 1987. (Words in bracket and underscoring added) In a decision dated October 31, 1995,2 the trial court dismissed petitioners complaint and granted private respondents counterclaim, to wit: WHEREFORE, in view of all the foregoing premises, the herein complaint for annulment of sales is hereby dismissed for lack of merit. On [respondent] counterclaim, the court finds for [respondent] and against [petitioner] for the recovery of attorneys fees already paid for at P1,945,395.98, plus a further P316,405.00 remaining due and payable. SO ORDERED. (Words in bracket added) In time, petitioner appealed to the Court of Appeals (CA) whereat its appellate recourse was docketed as CA-G.R. C.V. No. 52660. As stated at the outset hereof, the appellate court, in a decision dated February 25, 1998, affirmed with modification the appealed decision of the trial court, the modification consisting of the deletion of the award of attorneys fees to private respondent, thus: WHEREFORE, with the sole modification that the award of attorneys fees in favor of [respondent] be deleted, the Decision appealed from is hereby AFFIRMED in all respects. SO ORDERED.

xxx IN CONCLUDING THAT THE UNDISPUTED FACTS AND CIRCUMSTANCES PRECEDING THE EXECUTION OF THE CONTRACTS OF SALE FOR THE PETITIONER'S PROPERTIES DID NOT ESTABLISH THE FORCE, INTIMIDATION, DURESS AND UNDUE INFLUENCE WHICH VITIATED PETITIONER'S CONSENT. A. xxx IN CONSIDERING AS HEARSAY THE TESTIMONIAL EVIDENCE WHICH CLEARLY ESTABLISHED THE THREATS MADE UPON PETITIONER AND THAT RESPONDENT LIWAYWAY WILL BE USED AS THE CORPORATE VEHICLE FOR THE FORCED ACQUISITION OF PETITIONER'S PROPERTIES. B. xxx IN CONCLUDING THAT THE ACTS OF THEN PRESIDENT MARCOS DURING MARTIAL LAW DID NOT CONSTITUTE THE FORCE, INTIMIDATION, DURESS AND UNDUE INFLUENCE WHICH VITIATED PETITIONER'S CONSENT. C. xxx IN RESOLVING THE INSTANT CASE ON THE BASIS OF MERE SURMISES AND SPECULATIONS INSTEAD OF THE UNDISPUTED EVIDENCE ON RECORD. III xxx IN CONCLUDING THAT THE GROSSLY INADEQUATE PURCHASE PRICE FOR PETITIONER'S PROPERTIES DOES NOT INDICATE THE VITIATION OF PETITIONER'S CONSENT TO THE CONTRACTS OF SALE. IV xxx IN CONCLUDING THAT PETITIONER'S USE OF THE PROCEEDS OF THE SALE FOR ITS SURVIVAL CONSTITUTE AN IMPLIED RATIFICATION [OF] THE CONTRACTS OF SALE. V xxx IN EXCLUDING PETITIONER'S EXHIBITS "X-6" TO "X-7" AND "Y-3" (PROFFER) WHICH ARE ADMISSIBLE EVIDENCE WHICH COMPETENTLY PROVE THAT THEN PRESIDENT MARCOS OWNED PRIVATE RESPONDENT LIWAYWAY, WHICH WAS USED AS THE CORPORATE VEHICLE FOR THE ACQUISITION OF PETITIONER'S PROPERTIES. The petition lacks merit.

Hence, petitioners present recourse, urging the setting aside of the decision under review which, to petitioner, decided questions of substance in a way not in accord with law and applicable jurisprudence considering that the appellate court gravely erred: I

Petitioner starts off with its quest for the allowance of the instant recourse on the submission that the martial law regime tolled the prescriptive period under Article 1391 of the Civil Code, which pertinently reads: Article 391. The action for annulment shall be brought within four years.

xxx IN ITS MISAPPLICATION OF THE DECISIONS OF THE HONORABLE COURT THAT RESULTED IN ITS ERRONEOUS CONCLUSION THAT PETITIONER'S CAUSE OF ACTION HAD ALREADY PRESCRIBED. II

This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.

xxx xxx xxx It may be recalled that the separate deeds of sale3 sought to be annulled under petitioners basic complaint were both executed on October 23, 1973. Per the appellate court, citing Development Bank of the Philippines [DBP] vs. Pundogar4, the 4-year prescriptive period for the annulment of the aforesaid deeds ended " in late 1977", doubtless suggesting that petitioners right to seek such annulment accrued four (4) years earlier, a starting timepoint corresponding, more or less, to the date of the conveying deed, i.e., October 23, 1973. Petitioner contends, however, that the 4-year prescriptive period could not have commenced to run on October 23, 1973, martial law being then in full swing. Plodding on, petitioner avers that the continuing threats on the life of Mr. Teodoro Locsin, Sr. and his family and other menacing effects of martial law which should be considered as force majeure - ceased only after the February 25, 1986 People Power uprising. Petitioner instituted its complaint for annulment of contracts on February 26, 1987. The question that now comes to the fore is: Did the 4-year prescriptive period start to run in late October 1973, as postulated in the decision subject of review, or on February 25, 1986, as petitioner argues, on the theory that martial law has the effects of a force majeure5, which, in turn, works to suspend the running of the prescriptive period for the main case filed with the trial court. Petitioner presently faults the Court of Appeals for its misapplication of the doctrinal rule laid down in DBP vs. Pundogar6 where this Court, citing and quoting excerpts from the ruling in Tan vs. Court of Appeals 7, as reiterated in National Development Company vs. Court of Appeals, 8 wrote We can not accept the petitioners contention that the period during which authoritarian rule was in force had interrupted prescription and that the same began to run only on February 25, 1986, when the Aquino government took power. It is true that under Article 1154 [of the Civil Code] xxx fortuitous events have the effect of tolling the period of prescription. However, we can not say, as a universal rule, that the period from September 21, 1972 through February 25, 1986 involves a force majeure. Plainly, we can not box in the "dictatorial" period within the term without distinction, and without, by necessity, suspending all liabilities, however demandable, incurred during that period, including perhaps those ordered by this Court to be paid. While this Court is cognizant of acts of the last regime, especially political acts, that might have indeed precluded the enforcement of liability against that regime and/or its minions, the Court is not inclined to make quite a sweeping pronouncement, . . . . It is our opinion that claims should be taken on a case-to-case basis. This selective rule is compelled, among others, by the fact that not all those imprisoned or detained by the past dictatorship were true political oppositionists, or, for that matter, innocent of any crime or wrongdoing. Indeed, not a few of them were manipulators and scoundrels. [Italization in the original; Underscoring and words in bracket added] According to petitioner, the appellate court misappreciated and thus misapplied the correct thrust of the Tan case, as reiterated in DBP which, per petitioners own formulation, is the following:9 The prevailing rule, therefore, is that on a case-to-case basis, the Martial Law regime may be treated as force majeure that suspends the running of the applicable prescriptive period provided that it is established that the party invoking the imposition of Martial Law as a force majeure are true oppositionists during the Martial Law regime and that said party was so circumstanced that is was impossible for said party to commence, continue or to even resist an action during the dictatorial regime. (Emphasis and underscoring in the original)

We are not persuaded. It strains credulity to believe that petitioner found it impossible to commence and succeed in an annulment suit during the entire stretch of the dictatorial regime. The Court can grant that Mr. Locsin, Sr. and petitioner were, in the context of DBP and Tan, "true oppositionists" during the period of material law. Petitioner, however, has failed to convincingly prove that Mr. Locsin, Sr., as its then President, and/or its governing board, were so circumstanced that it was well-nigh impossible for him/them to successfully institute an action during the martial law years. Petitioner cannot plausibly feign ignorance of the fact that shortly after his arrest in the evening of September 20, 1972, Mr. Locsin, Sr., together with several other journalists 10, dared to file suits against powerful figures of the dictatorial regime and veritably challenged the legality of the declaration of martial law. Docketed in this Court as GR No. L-35538, the case, after its consolidation with eight (8) other petitions against the martial law regime, is now memorialized in books of jurisprudence and cited in legal publications and case studies as Aquino vs. Enrile.11 Incidentally, Mr. Locsin Sr., as gathered from the ponencia of then Chief Justice Querube Makalintal in Aquino,was released from detention notwithstanding his refusal to withdraw from his petition in said case. Judging from the actuations of Mr. Locsin, Sr. during the onset of martial law regime and immediately thereafter, any suggestion that intimidation or duress forcibly stayed his hands during the dark days of martial law to seek judicial assistance must be rejected.12 Given the foregoing perspective, the Court is not prepared to disturb the ensuing ruling of the appellate court on the effects of martial law on petitioners right of action: In their testimonies before the trial court, both Locsin, Sr. and Locsin, Jr. claimed that they had not filed suit to recover the properties until 1987 as they could not expect justice to be done because according to them, Marcos controlled every part of the government, including the courts, (TSN, 2 May 1988, pp. 23-24; 27 May 1993, p. 121). While that situation may have obtained during the early years of the martial law administration, We could not agree with the proposition that it remained consistently unchanged until 1986, a span of fourteen (14) years. The unfolding of subsequent events would show that while dissent was momentarily stifled, it was not totally silenced. On the contrary, it steadily simmered and smoldered beneath the political surface and culminated in that groundswell of popular protest which swept the dictatorship from power.13 The judiciary too, as an institution, was no ivory tower so detached from the ever changing political climate. While it was not totally impervious to the influence of the dictatorships political power, it was not hamstrung as to render it inutile to perform its functions normally. To say that the Judiciary was not able to render justice to the persons who sought redress before it . . . during the Martial Law years is a sweeping and unwarranted generalization as well as an unfounded indictment. The Judiciary, . . . did not lack in gallant jurists and magistrates who refused to be cowed into silence by the Marcos administration. Be that as it may, the Locsins mistrust of the courts and of judicial processes is no excuse for their non-observance of the prescriptive period set down by law. Corollary to the presented issue of prescription of action for annulment of contract voidable on account of defect of consent14 is the question of whether or not duress, intimidation or undue influence vitiated the petitioners consent to the subject contracts of sale. Petitioner delves at length on the vitiation issue and, relative thereto, ascribes the following errors to the appellate court: first, in considering as hearsay the testimonial evidence that may prove the element of "threat" against petitioner or Mr. Locsin, Sr., and the dictatorial regime's use of private

respondent as a corporate vehicle for forcibly acquiring petitioners properties; second, in concluding that the acts of then President Marcos during the martial law years did not have a consent-vitiating effect on petitioner; andthird, in resolving the case on the basis of mere surmises and speculations. The evidence referred to as hearsay pertains mainly to the testimonies of Messrs. Locsin, Sr. and Teodoro Locsin, Jr. (the Locsins, collectively), which, in gist, established the following facts: 1) the widely circulated Free Pressmagazine, which, prior to the declaration of Martial Law, took the strongest critical stand against the Marcos administration, was closed down on the eve of such declaration, which closure eventually drove petitioner to financial ruin; 2) upon Marcos orders, Mr. Locsin, Sr. was arrested and detained for over 2 months without charges and, together with his family, was threatened with execution; 3) Mr. Locsin, Sr. was provisionally released on the condition that he refrains from reopening Free Press and writing anything critical of the Marcos administration; and 4) Mr. Locsin, Sr. and his family remained fearful of reprisals from Marcos until the 1986 EDSA Revolution. Per the Locsins, it was amidst the foregoing circumstances that petitioners property in question was sold to private respondent, represented by Gen. Menzi, who, before the sale, allegedly applied the squeeze on Mr. Locsin, Sr. thru the medium of the " Marcos cannot be denied" and "[you] have no choice but to sell" line. The appellate court, in rejecting petitioners above posture of vitiation of consent, observed: It was under the above-enumerated circumstances that the late Hans Menzi, allegedly acting on behalf of the late President Marcos, made his offer to purchase the Free Press. It must be noted, however, that the testimonies of Locsin, Sr. and Locsin, Jr. reg arding Menzis alleged implied threat that "Marcos cannot be denied" and that [respondent] was to be the corporate vehicle for Marcoss takeover of the Free Press is hearsay as Menzi already passed away and is no longer in a position to defend himself; the same can be said of the offers to purchase made by Atty. Crispin Baizas and Secretary Guillermo de Vega who are also both dead. It is clear from the provisions of Section 36, Rule 130 of the 1989 Revised Rules on Evidence that any evidence, . . . is hearsay if its probative value is not based on the personal knowledge of the witness but on the knowledge of some other person not on the witness stand. Consequently, hearsay evidence, whether objected to or not, has no probative value unless the proponent can show that the evidence falls within the exceptions to the hearsay evidence rule (Citations omitted) The appellate courts disposition on the vitiation-of-consent angle and the ratio therefor commends itself for concurrence. Jurisprudence instructs that evidence of statement made or a testimony is hearsay if offered against a party who has no opportunity to cross-examine the witness. Hearsay evidence is excluded precisely because the party against whom it is presented is deprived of or is bereft of opportunity to cross-examine the persons to whom the statements or writings are attributed.15 And there can be no quibbling that because death has supervened, the late Gen Menzi, like the other purported Marcos subalterns, Messrs. Baizas and De Vega, cannot cross-examine the Locsins for the threatening statements allegedly made by them for the late President. Like the Court of Appeals, we are not unmindful of the exception to the hearsay rule provided in Section 38, Rule 130 of the Rules of Court, which reads:

SEC. 38. Declaration against interest. The declaration made by a person deceased or unable to testify, against the interest of the declarant, if the fact asserted in the declaration was at the time it was made so far contrary to the declarant's own interest, that a reasonable man in his position would not have made the declaration unless he believed it to be true, may be received in evidence against himself or his successors-in-interest and against third persons. However, in assessing the probative value of Gen. Menzis supposed declaration against interest, i.e., that he was acting for the late President Marcos when he purportedly coerced Mr. Locsin, Sr. to sell the Free Press property, we are loathed to give it the evidentiary weight petitioner endeavors to impress upon us. For, the Locsins can hardly be considered as disinterested witnesses. They are likely to gain the most from the annulment of the subject contracts. Moreover, allegations of duress or coercion should, like fraud, be viewed with utmost caution. They should not be laid lightly at the door of men whose lips had been sealed by death.16 Francisco explains why: [I]t has been said that "of all evidence, the narration of a witness of his conversation with a dead person is esteemed in justice the weakest." One reason for its unreliability is that the alleged declarant can not recall to the witness the circumstances under which his statement were made. The temptation and opportunity for fraud in such cases also operate against the testimony. Testimony to statements of a deceased person, at least where proof of them will prejudice his estate, is regarded as an unsafe foundation for judicial action except in so far as such evidence is borne out by what is natural and probable under the circumstances taken in connection with actual known facts. And a court should be very slow to act upon the statement of one of the parties to a supposed agreement after the death of the other party; such corroborative evidence should be adduced as to satisfy the court of the truth of the story which is to benefit materially the person telling it. 17 Excepting, petitioner insists that the testimonies of its witnesses the Locsins - are not hearsay because: In this regard, hearsay evidence has been defined as "the evidence not of what the witness knows himself but of what he has heard from others." xxx Thus, the mere fact that the other parties to the conversations testified to by the witness are already deceased does [not] render such testimony inadmissible for being hearsay. 18 xxx xxx xxx The testimonies of Teodoro Locsin, Sr. and Teodoro Locsin, Jr. that the late Atty. Baizas, Gen. Menzi and Secretary de Vega stated that they were representing Marcos, that "Marcos cannot be denied", and the fact that Gen. Menzi stated that private respondent Liwayway was to be the corporate vehicle for the then President Marcos' take-over of petitioner Free Press are not hearsay. Teodoro Locsin, Sr. and Teodoro Locsin, Jr. were in fact testifying to matters of their own personal knowledge because they were either parties to the said conversation or were present at the time the said statements were made. 19 Again, we disagree. Even if petitioner succeeds in halving its testimonial evidence, one-half purporting to quote the words of a live witness and the other half purporting to quote what the live witness heard from one already dead, the other pertaining to the dead shall nevertheless remain hearsay in character.

The all too familiar rule is that "a witness can testify only to those facts which he knows of his own knowledge". 20There can be no quibbling that petitioners witnesses cannot testify respecting what President Marcos said to Gen. Menzi about the acquisition of petitioners newspaper, if any there be, precisely because none of said witnesses ever had an opportunity to hear what the two talked about. Neither may petitioner circumvent the hearsay rule by invoking the exception under the declaration-against-interest rule. In context, the only declaration supposedly made by Gen. Menzi which can conceivably be labeled as adverse to his interest could be that he was acting in behalf of Marcos in offering to acquire the physical assets of petitioner. Far from making a statement contrary to his own interest, a declaration conveying the notion that the declarant possessed the authority to speak and to act for the President of the Republic can hardly be considered as a declaration against interest. Petitioner next assails the Court of Appeals on its conclusion that Martial Law is not per se a consent-vitiating phenomenon. Wrote the appellate court: 21 In other words, the act of the ruling power, in this case the martial law administration, was not an act of mere trespass but a trespass in law - not a perturbacion de mero hecho but a pertubacion de derecho - justified as it is by an act of government in legitimate self-defense (IFC Leasing & Acceptance Corporation v. Sarmiento Distributors Corporation, , citing Caltex (Phils.) v. Reyes, 84 Phil. 654 [1949]. Consequently, the act of the Philippine Government in declaring martial law can not be considered as an act of intimidation of a third person who did not take part in the contract (Article 1336, Civil Code). It is, therefore, incumbent on [petitioner] to present clear and convincing evidence showing that the late President Marcos, acting through the late Hans Menzi, abused his martial law powers by forcing plaintiff-appellant to sell its assets. In view of the largely hearsay nature of appellants evidence on this point, appellants cause must fall. According to petitioner, the reasoning of the appellate court is "flawed" because: 22 It is implicit from the foregoing reasoning of the Court of Appeals that it treated the forced closure of the petitioner's printing press, the arrest and incarceration without charges of Teodoro Locsin, Sr., the threats that he will be shot and the threats that other members of his family will be arrested as legal acts done by a dictator under the Martial Law regime. The same flawed reasoning led the Court of Appeals to the erroneous conclusion that such acts do not constitute force, intimidation, duress and undue influence that vitiated petitioner's consent to the Contracts of Sale. The contention is a rehash of petitioners bid to impute on private respond ent acts of force and intimidation that were made to bear on petitioner or Mr. Locsin, Sr. during the early years of martial law. It failed to take stock of a very plausible situation depicted in the appellate courts decision which supports its case disposition on the issue respecting vitiation. Wrote that court: Even assuming that the late president Marcos is indeed the owner of [respondent], it does not necessarily follow that he, acting through the late Hans Menzi, abused his power by resorting to intimidation and undue influence to coerce the Locsins into selling the assets of Free Press to them (sic). It is an equally plausible scenario that Menzi convinced the Locsins to sell the assets of the Free Press without resorting to threats or moral coercion by simply pointing out to them the hard fact that the Free Press was in dire financial straits after the declaration of Martial Law

and was being sued by its former employees, minority stockholders and creditors. Given such a state of affairs, the Locsins had no choice but to sell their assets.23 Petitioner laments that the scenario depicted in the immediately preceding quotation as a case of a court resorting to "mere surmises and speculations", 24 oblivious that petitioner itself can only offer, as counterpoint, also mere surmises and speculations, such as its claim about Eugenio Lopez Sr. and Imelda R. Marcos offering "enticing amounts" to buy Free Press.25 It bears stressing at this point that even after the imposition of martial law, petitioner, represented by Mr. Locsin, Sr., appeared to have dared the ire of the powers-that-be. He did not succumb to, but in fact spurned offers to buy, lock-stock-and-barrel, the Free Press magazine, dispatching Marcos emissaries with what amounts to a curt "Free Press is not for sale". This reality argues against petitioners thesis about vitiation of its contracting mind, and, to be sure, belying the notion that Martial Law worked as a Sword of Damocles that reduced petitioner or Mr. Locsin, Sr. into being a mere automaton. The following excerpt from the Court of Appeals decision is self-explanatory: 26 Noteworthy is the fact that although the threat of arrest hung over his head like the Sword of Damocles, Locsin Sr. was still able to reject the offers of Atty. Baizas and Secretary De Vega, both of whom were supposedly acting on behalf of the late President Marcos, without being subjected to reprisals. In fact, the Locsins testified that the initial offer of Menzi was rejected even though it was supposedly accompanied by the threat that "Marcos cannot be denied". Locsin, Sr. was, moreover, even able to secure a compromise that only the assets of the Free Press will be sold. It is, therefore, quite possible that plaintiff-appellants financial condition, albeit caused by the declaration of Martial Law, was a major factor in influencing Locsin, Sr. to accept Menzis offer. It is not farfetched to c onsider that Locsin, Sr. would have eventually proceeded with the sale even in the absence of the alleged intimidation and undue influence because of the absence of other buyers. Petitioners third assigned error centers on the gross inadequacy of the purc hase price, referring to the amount of P5,775,000.00 private respondent paid for the property in question. To petitioner, the amount thus paid does not even approximate the actual market value of the assets and properties,27 and is very much less than the P18 Million offered by Eugenio Lopez.28 Accordingly, petitioner urges the striking down, as erroneous, the ruling of the Court of Appeals on purchase price inadequacy, stating in this regard as follows: 29 Furthermore, the Court of Appeals in determining the adequacy of the price for the properties and assets of petitioner Free Press relied heavily on the claim that the audited financial statements for the years 1971 and 1972 stated that the book value of the land is set at Two Hundred Thirty-Seven Thousand Five Hundred Pesos (P237,500.00). However, the Court of Appeals' reliance on the book value of said assets is clearly misplaced. It should be noted that the book value of fixed assets bears very little correlation with the actual market value of an asset. (Emphasis and underscoring in the original). With the view we take of the matter, the book or actual market value of the property at the time of sale is presently of little moment. For, petitioner is effectively precluded, by force of the principle of estoppel ,30 from cavalierly disregarding with impunity its own books of account in which the property in question is assigned a value less than what was paid therefor. And, in line with the rule on the quantum of evidence required in civil cases, neither can we cavalierly brush aside private respondents evidence, cited with approval by the appellate court, that tends to prove that-31

xxx the net book value of the Properties was actually only P994,723.66 as appearing in Free Press's Balance Sheet as of November 30, 1972 (marked as Exh. 13 and Exh. V), which was duly audited by SyCip, Gorres, and Velayo, thus clearly showing that Free Press actually realized a hefty profit of P4,755,276.34 from the sale to Liwayway. Lest it be overlooked, gross inadequacy of the purchase price does not, as a matter of civil law, per se affect a contract of sale. Article 1470 of the Civil Code says so. It reads: Article 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. Following the aforequoted codal provision, it behooves petitioner to first prove "a defect in the consent", failing which its case for annulment contract of sale on ground gross inadequacy of price must fall. The categorical conclusion of the Court of Appeals, confirmatory of that of the trial court, is that the price paid for the Free Pressoffice building, and other physical assets is not unreasonable to justify the nullification of the sale. This factual determination, predicated as it were on offered evidence, notably petitioners Balance Sheet as of November 30, 19 72 (Exh. 13), must be accorded great weight if not finality.32 In the light of the foregoing disquisition, the question of whether or not petitioners undisputed utilization of the proceeds of the sale constitutes, within the purview of Article 1393 of the Civil Code,33 implied ratification of the contracts of sale need not detain us long. Suffice it to state in this regard that the ruling of the Court of Appeals on the matter is well-taken. Wrote the appellate court: 34 In the case at bench, Free Presss own witnesses admitted that the proceeds of the 1973 sale were used to settle the claims of its employees, redeem the shares of its stockholders and finance the companys entry into money-market shareholdings and fishpond business activities (TSN, 2 May 1988, pp. 16, 42-45). It need not be overemphasized that by using the proceeds in this manner, Free Press only too clearly confirmed the voluntaries of its consent and ratified the sale. Needless to state, such ratification cleanses the assailed contract from any alleged defects from the moment it was constituted (Art. 1396, Civil Code). Petitioners posture that its use of the proceeds of the sale does not translate to tacit ratification of what it viewed as voidable contracts of sale, such use being a "matter of [its financial] survival",35 is untenable. As couched, Article 1393 of the Civil Code is concerned only with the act which passes for ratification of contract, not the reason which actuated the ratifying person to act the way he did. "Ubi lex non distinguit nec nos distinguere debemus . When the law does not distinguish, neither should we". 36 Finally, petitioner would fault the Court of Appeals for excluding Exhibits "X-6" to "X-7" and "Y3" (proffer). These excluded documents which were apparently found in the presidential palace or turned over by the US Government to the PCGG, consist of, among others, what appears to be private respondents Certificate of Stock for 24,502 shares in the name of Gen. Menzi, but endorsed in blank. The proffer was evidently intended to show that then President Marcos owned private respondent, Liwayway Publishing Inc. Said exhibits are of little relevance to the resolution of the main issue tendered in this case. Whether or not the contracts of sale in question are voidable is the issue, not the ownership of Liwayway Publishing, Inc.

WHEREFORE, the petition is DENIED, and the challenged decision of the Court of Appeals AFFIRMED. Costs against petitioner. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 141811 November 15, 2001

equipment, furnishings and furnitures existing thereon; and (b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of all the obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00) each.8 Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del Sol's capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos (P200,000.00). In addition to the underwriting fee, the Underwriting Agreement provided that for supervising the public offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4) consecutive years. The Underwriting Agreement also stipulated for the payment by respondent Este del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the execution of and in accordance with the terms of the Underwriting Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant to render general consultancy services. 9 In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner FMIC in connection with the public offering of the common shares of stock of respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee for a period of four (4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for the year beginning February, 1978, in accordance to the Underwriting Agreement.10 The said amounts of fees were deemed paid by respondent Este del Sol to petitioner FMIC which deducted the same from the first release of the loan. Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos (P12,679,630.98) per the petitioner's Statement of Account dated June 23, 1980,11 to wit:
STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE, INC. AS OF JUNE 23, 1980 PARTICULARS Total amount due as of 11-22-78 per revised amortization schedule dated 1-3-78 Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-22-79 (92 days) Balance One time penalty of 20% of the entire unpaid obligations under Section 6.02 (ii) of Loan Agreement Past due interest under Section 6.02 (iii) of loan Agreement: @ 19% p.a. from 2-22-79 to 11-30-79 (281 days) @ 21% p.a. from 11-30-79 to 6-23-80 (206 days) Other charges publication of extra judicial foreclosure of REM made on 5-23-80 & 6-6-80 Total Amount Due and Collectible as of June 23, 1980 AMOUNT P7,999,631.42 327,096.04 8,326,727.46 1,665,345.49 1,481,879.93 1,200,714.10 4,964.00 P12,679,630.98

FIRST METRO INVESTMENT CORPORATION, petitioner, vs. ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and FELIPE B. SESE, respondents. DE LEON, JR., J.: Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals2 dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision3 of the Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals found and declared that the fees provided for in the Underwriting and Consultancy Agreements executed by and between petitioner First Metro Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with the Loan Agreement dated January 31, 1978 were mere subterfuges to camouflage the usurious interest charged by petitioner FMIC. The facts of the case are as follows: It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development of the Este del Sol Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal. 4 Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly amortizations to commence at the beginning of the thirteenth month from the date of the first release in accordance with the Schedule of Amortization.5 In case of default, an acceleration clause was, among others, provided and the amount due was made subject to a twenty (20%) percent one-time penalty on the amount due and such amount shall bear interest at the highest rate permitted by law from the date of default until full payment thereof plus liquidated damages at the rate of two (2%) percent per month compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid, plus attorney's fees equivalent to twenty-five (25%) percent of the sum sought to be recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were hired. 6 In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several documents7 as security for payment, among them, (a) a Real Estate Mortgage dated January 31, 1978 over two (2) parcels of land being utilized as the site of its development project with an area of approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square meters and particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of Rizal, inclusive of all improvements, as well as all the machineries,

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23, 1980.12At the public auction, petitioner FMIC was the highest bidder of the

mortgaged properties for Nine Million Pesos (P9,000,000.00). The total amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) was deducted therefrom, that is, for the publication fee for the publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees, Three Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos (P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and partly against the principal, due as of June 23, 1980, thereby leaving a balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the principal amount of the loan as of June 23, 1980. 13 Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol by virtue of their continuing surety agreements, the payment of the alleged deficiency balance, despite individual demands sent to each of them, 14 petitioner instituted on November 11, 1980 the instant collection suit15 against the respondents to collect the alleged deficiency balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney's fees and costs. In their Answer, the respondents sought the dismissal of the case and set up several special and affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements executed simultaneously with and as integral parts of the Loan Agreement and which provided for the payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges resorted to by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the usurious interest being charged by petitioner FMIC. 16 The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an Account Manager of its Account Management Group, as well as documentary evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja, former Senior Manager and Assistant Vice-President of FMIC, testified for the respondents. After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 plus 21% interest per annum, from June 24, 1980, until the entire amount is fully paid, plus the amount equivalent to 25% of the total amount due, as attorney's fees, plus costs of suit. Defendants' counterclaims are dismissed, for lack of merit. Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court of Appeals. On November 8, 1999, the appellate court reversed the challenged decision of the trial court. The appellate court found and declared that the fees provided for in the Underwriting and Consultancy Agreements were mere subterfuges to camouflage the excessively usurious interest charged by the petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated penalties, liquidated damages and attorney's fees were

"excessive, iniquitous, unconscionable and revolting to the conscience," and declared that in lieu thereof, the stipulated one time twenty (20%) percent penalty on the amount due and ten (10%) percent of the amount due as attorney's fees would be reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the complaint as against the individual respondents sureties and ordered petitioner FMIC to pay or reimburse respondent Este del Sol the amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing the difference between what is due to the petitioner and what is due to respondent Este del Sol, based on the following computation: 17
A: DUE TO THE [PETITIONER] Principal of Loan Add: 20% one-time Penalty Attorney's fees Less: Proceeds of foreclosure Sale Deficiency B. DUE TO [RESPONDENT ESTE DEL SOL] Return of usurious interest in the form of: Underwriting fee Supervision fee Consultancy fee Total amount due Este P 200,000.00 200,000.00 1,330,000.00 P1,730,000.00 P7,382,500.00 1,476,500.00 900,000.00

P9,759,000.00 9,000,000.00 P759,000.00

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of P971,000.00 or (P1,730,000.00 less P759,000.00). Petitioner moved for reconsideration of the appellate court's adverse decision. However, this was denied in a Resolution18 dated February 9, 2000 of the appellate court. Hence, the instant petition anchored on the following assigned errors: 19 THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT: a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE CONTRACT. b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE PETITIONER. c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON THE SERVICES PERFORMED BY PETITIONER. d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH PARTY AFTER THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE" AND [ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER. f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER. Petitioner essentially assails the factual findings and conclusion of the appellate court that the Underwriting and Consultancy Agreements were executed to conceal a usurious loan. Inquiry upon the veracity of the appellate court's factual findings and conclusion is not the function of this Court for the Supreme Court is not a trier of facts. Only when the factual findings of the trial court and the appellate court are opposed to each other does this Court exercise its discretion to re-examine the factual findings of both courts and weigh which, after considering the record of the case, is more in accord with law and justice. After a careful and thorough review of the record including the evidence adduced, we find no reason to depart from the findings of the appellate court. First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905 which took effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity, should be applied retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in full force and effect. It is an elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern it.20 More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity. 21 The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law.22 Thus, retroactive application of a Central Bank Circular cannot, and should not, be presumed. 23 Second, when a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine the intention of the parties. However, this rule is not without exception.24 The form of the contract is not conclusive for the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury.25 In the instant case, several facts and circumstances taken altogether show that the Underwriting and Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by petitioner FMIC to conceal and collect excessively usurious interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same date of the Loan Agreement.26 Furthermore, under the Underwriting Agreement payment of the supervision and consultancy fees was set for a period of four (4) years 27 to coincide ultimately with the term of the Loan Agreement.28 This fact means that all the said agreements which were executed simultaneously were set to mature or shall remain effective during the same period of time. b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting agreement29 and specifically mentioned that such underwriting agreement is a condition precedent30 for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and as admitted by petitioner FMIC's employees,31that such Underwriting Agreement is "part and parcel of the Loan Agreement."32 c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) 33 as consultancy fee despite the clear provision in the Consultancy Agreement that the said agreement is for Three Hundred ThirtyTwo Thousand Five Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy fee shall be due upon signing of the said consultancy agreement.34 d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978,35 that is, on the same occasion of the first partial release of the loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00). 36 It is from this first partial release of the loan that the said corresponding bills for Underwriting, Supervision and Constantly fees were conducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del Sol. 37 e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to comply with its obligation under the Underwriting Agreement. 38 Besides, there was really no need for an Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm to sell its shares and all its shares have been sold through its marketing arm.39 f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement,40 aside from the fact that there was no need for a Consultancy Agreement, since respondent Este del Sol's officers appeared to be more competent to be consultants in the development of the projected sports/resort complex. 41 All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that the Loan, Underwriting and Consultancy Agreements are separate and independent transactions. The Underwriting and Consultancy Agreements which were executed and delivered contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner FMIC as essential conditions for the grant of the loan. An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender's services which are of little value or which are not in fact to be rendered, such as in the instant case. 42 In this connection, Article 1957 of the New Civil Code clearly provides that:

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest.43 The reason for this rule was adequately explained in the case of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises 44 where this Court held: In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal. Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to receive back the principal amount of the loan. With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily. 45 This Court agrees with the factual findings and conclusion of the appellate court, to wit: We find the stipulated penalties, liquidated damages and attorney's fees, excessive, iniquitous and unconscionable and revolting to the conscience as they hardly allow the borrower any chance of survival in case of default. And true enough, ESTE folded up when the appellee extrajudicially foreclosed on its (ESTE's) development project and literally closed its offices as both the appellee and ESTE were at the time holding office in the same building. Accordingly, we hold that 20% penalty on the amount due and 10% of the proceeds of the foreclosure sale as attorney's fees would suffice to compensate the appellee, especially so because there is no clear showing that the appellee hired the services of counsel to effect the foreclosure, it engaged counsel only when it was seeking the recovery of the alleged deficiency. Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long as such stipulation does not contravene any law, morals, or public order, it is binding upon the parties. Nonetheless, courts are empowered to reduce the amount of attorney's fees if the same is "iniquitous or unconscionable."46 Articles 1229 and 2227 of the New Civil Code provide that: Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated attorney's fees equivalent to twenty-five (25%) percent of the alleged amount due, as of the date of the auction sale on June 23, 1980, is manifestly exorbitant and unconscionable.

Accordingly, we agree with the appellate court that a reduction of the attorney's fees to ten (10%) percent is appropriate and reasonable under the facts and circumstances of this case. Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in awarding an amount allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief was not expressly prayed for is of no moment for the reason that the relief was plainly warranted by the allegations of the respondents as well as by the facts as found by the appellate court. A party is entitled to as much relief as the facts may warrant 47 In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its challenged Decision. WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of Appeals is AFFIRMED. Costs against petitioner. SO ORDERED. Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.

Republic of the Philippines SUPREME COURT THIRD DIVISION G.R. No. 159592 October 25, 2005 Spouses FERDINAND AGUILAR and JOSEPHINE C. AGUILAR, Petitioners, vs. CITYTRUST FINANCE CORPORATION, Respondent. x-----------------------x G.R. No. 159706 WORLD CARS, INC., Petitioner, vs. Spouses FERDINAND and JOSEPHINE C. AGUILAR, Respondents. DECISION CARPIO MORALES, J.: Sometime in May 1992, Josephine Aguilar (Josephine) canvassed, via telephone, prices of cars from different car dealers listed in the yellow pages of the Philippine Long Distance Telephone directory. On May 23, 1992, World Cars, Inc. (World Cars) sent its representative Joselito Perez (Perez) and Vangie Tayag (Vangie) to the Aguilar residence in New Manila, Quezon City bringing with them calling cards, brochures and price list for different car models, among other things. The two representatives discussed with Josephine the advantages and disadvantages of the different models, their prices and terms of payment. 1 Josephine having decided to purchase a white 1992 Nissan California at the agreed price of P370,000.00, payable in 90 days, Perez and Vangie repaired to the Aguilar residence on May 30, 1992, bringing with them a white 1992 Nissan California bearing Motor No. GA16099086 and Chassis No. WGLB12-D10269, and the documents bearing on the sale. As Josephine and her husband Ferdinand Aguilar (the Aguilars) were being made to sign by the two representatives a promissory note, chattel mortgage, disclosures and other documents the dates of which were left blank and which showed that they would still be obliged to pay on installment in 12 months for the car even if checks in full payment thereof in 90 days were to be issued, the two replied that it was only for formality, for in case the checks were not cleared, the documents would take effect, otherwise they would be cancelled.2 The Aguilars did sign the promissory note3 binding them to be jointly and severally liable to World Cars in the amount of P301,992.00, payable in 12 months, with a monthly amortization of P25,166.00 and a late payment charge of 5% per month on each unpaid installment from due date until fully paid.

By Josephines claim, at the time she and her husband signed the promissory note, its date, May 30, 1992, and the due date of the monthly amortization which was agreed to be every 3rd day of each month starting July 1992 were not reflected therein. 4 The Aguilars did execute too a chattel mortgage5 in favor of World Cars which embodied a deed of assignment6 in favor of Citytrust Finance Corporation (Citytrust).7 Again by Josephines claim, the date May 30, 1992 appearing in the chattel mortgage cum deed of assignment was not yet filled up at the time she and her husband signed it. 8 After the Aguilars signing of the documents, Perez asked Josephine to make the check payments payable to him, prompting her to call up Perezs boss, a certain Lily Paloma, to inquire whether Perez could collect payment to which Lily replied in the affirmative, the latter advising her to just secure a receipt.9 Josephine thus issued four Far East Bank and Trust Company (FEBTC) checks, the details of which are indicated below: Check No. 11270310 11270411 11270512 112706 Payable to Joselito Perez World Cars Joselito Perez Joselito Perez Amount P148,000.00 P16,000.00 P111,000.00 P111,000.00 Dated May 30, 1992 May 30, 1992 June 30, 1992 July 30, 1992

For Check Nos. 112703, 112705, and 112706 which were made payable to Perez in the total amount ofP370,000.00, Perez issued Josephine World Cars Provisional Receipt No. 5965.13 Check No. 112704 which was made payable to World Cars represented payment of the premium on the car insurance, secured from Dominion Insurance which issued a policy in the name of Josephine.14 Josephine was subsequently issued on June 2, 1992 Official Receipt No. 61117975 15 by the Land Transportation Office covering the payment of the fees for the registration of the car. In mid-June of 1992, Perez and Vangie went back to the Aguilar residence requesting that Check No. 112705 dated June 30, 1992 payable to Perez in the amount of P111,000.00 be cancelled and that two checks in the total amount of P111,000.00 be issued in replacement thereof, one in the amount of P4,150.00 to be made payable to Sunny Motors, which appears to be a sales outlet of World Cars, for processing fee of the documents, and the other in the amount of P106,850.00 to be again made payable to Perez. Josephine obliged and accordingly issued Check No. 11272416 in the amount of P4,150.00 payable to Sunny Motors, and Check No. 11272517 in the amount of P106,850.00 payable to Perez. Check Nos. 112703,18 11272419 and 11272520 were in the meantime cleared.21 No official receipt for the checks having been issued to Josephine, she warned Perez that if she did not get any by the end of July 1992, she would request for stop payment of the last check she issued in his name, Check No. 11270622 dated July 30, 1992 in the amount of P111,000.00. Perez failed to deliver any receipt to Josephine, drawing her to advise, by telefax, FEBTC Del Monte, Quezon City Branch a letter 23 dated July 30, 1992 to stop the payment of Check No. 112706.

The clearing of Check No. 112706 having been stopped on Josephines advice, Perez repaired to the Aguilar residence, asking the reason therefor. On being informed by Josephine of the reason, Perez explained that receipts were in Bulacan where the main office of World Cars is, and he had no time to go there owing to its distance. Perez then advised Josephine that if she did not issue another check to replace Check No. 112706, the 12-month installment term of payment under the documents she and her husband signed would take effect. 24 Not wanting to be bound by the 12-month installment term, Josephine issued Check No. 11276725 dated August 4, 1992 in the amount of P111,000.00 payable to Perez who issued her Sunny Motor Sales Provisional Receipt No. 5028. 26 Check No. 112767 was also later cleared.27 In September 1992, Josephine received a letter 28 dated August 20, 1992 from Ana Marie Caber (Ana Marie), Account Specialist of Citytrust, advising her that as of August 20, 1992, her overdue account with it in connection with the purchase of the car had amounted to "P1,045.39" inclusive of past due charges. Josephine at once informed Ana Marie that she had fully paid the car to which Ana Marie replied that "maybe not all of the papers have been processed yet," hence, she advised Josephine not to worry about it.29 In December 1992, Josephine received another letter30 dated December 9, 1992 from Citytrust advising her that her account had been, as of December 9, 1992, overdue in the amount of P110,706.60 inclusive of unpaid installments for the months of August, September, October, November and December 1992 plus accumulated penalty charges; and that if she failed to arrange for another payment scheme, her account would be referred to its legal counsel for collection. Josephine again called Ana Marie inquiring what was going on and the latter replied that no payment for the car had been received. Josephine also called up World Cars and spoke to its Vice-President, a certain Domondon, who informed her that based on company records, the last payment had not been received.31 The spouses Aguilar thus filed a complaint 32 for "annulment of chattel mortgage plus damages" against Citytrust and World Cars before the Regional Trial Court (RTC) of Quezon City. In its Answer with Counterclaims and Crossclaim against World Cars,33 Citytrust disclaimed knowledge of the alleged prior arrangement and the alleged subsequent payments made by the Aguilars to World Cars. And it claimed that it accepted the endorsement and assignment of the promissory note and chattel mortgage in good faith, relying on the terms and conditions thereof; and that assuming that the Aguilars claim were true, World Cars appeared to have violated the terms and conditions of the Receivables Financing Agreement (RFA) it executed with it, the pertinent portions of which read: 34 1. [World Cars] hereby agrees and covenants to discount with [Citytrust] subject to the terms and conditions hereinafter stipulated, installment papers evidencing actual sales made by [World Cars] of brand new automobiles, trucks, household appliances and other durable goods acceptable to [Citytrust]. Wheresoever used herein, the term "installment paper" shall refer to any document or documents evidencing sale of personalty on the installment plan including "Conditional Sale Contracts, Deed of Chattel Mortgages, Trust

Receipts, Contracts of Lease and other evidences of indebtedness or choses in action, signed by the customers evidencing the unpaid obligations duly negotiated and/or assigned in favor of [Citytrust] by virtue of a Deed of Assignment duly notarized; 2. Discounting of the installment papers by virtues hereof shall be on without-recourse and offer-and-acceptance basis, and that if [Citytrust] finds the same acceptable, it shall purchase and pay [World Cars] the balance due and outstanding on the respective installment papers so purchased after deducting the financing and other charges. Discounting and purchase of installment papers shall be at the sole option and discretion of [Citytrust]; xxx 5. As further warranties, [World Cars] hereby agrees and shall be bound by the following: a. World Cars guarantees to [Citytrust] its successors, and assigns, that it has full right and legal authority to make the assignment or discounting; that the installment papers so discounted by virtue of this agreement, are subsisting, valid, enforceable and in all respects what they purport to be; that the papers contain the entire agreement between the customers and [World Cars]; that said papers are not subject to any defense, offset or counterclaim; that the personalty covered by said papers have been delivered to and accepted by the customers in full compliance with the orders and specifications of the latter; that the required downpayment has been paid in full by the customer and that the balances appearing in said documents are net and accurate and there are no contra-accounts, set-offs, or counterclaims whatsoever against said amounts; that the payment thereof is not contingent or conditioned on the fulfillment of any contract, condition or warranty, past or future, express or implied; that it has absolute and good title to such contracts and the personalties covered thereby and the right to sell and transfer the same in favor of [Citytrust]; and that said contracts and personalties have not been previously sold, discounted, assigned or pledged to any other party nor will [World Cars] sell, assign, discount or pledge the same hereafter; xxx 6. In the event that it shall at any time appear that an installment paper which [Citytrust] purchased from [World Cars] do not conform to the warranties under this Agreement or to the qualifications given in paragraph 5, [Citytrust] shall reassign, and [World Cars] repurchase, the installment paper(s) andthe latter shall pay [Citytrust] the unpaid balance of the account less any unearned service charges within ten (10) days from [World Cars] receipt of notice of reassignment. Said notice will contain a statement of the amount payable by [World Cars] as aforesaid. No tender or presentation of the paper reassigned shall be necessary. x x x (Emphasis and underscoring supplied) Citytrust prayed in its Crossclaim against World Cars that "in the remote event that the complaint is not dismissed . . . [World Cars] be ordered to pay all and whatever unpaid obligation due to [it] arising from [the] promissory note . . ." 35 In its Answer with Counterclaim,36 World Cars claimed that, among other things, it received only the check in the amount of P148,000.00 (Check No. 112703 payable to Perez) as downpayment for the car; and that the Aguilars defaulted in the payment of their monthly

amortizations to Citytrust, and it should not be held accountable for the personal and unilateral obligations of the Aguilars to Citytrust. At the pre-trial conference, only the counsels for the Aguilars and Citytrust appeared. World Cars was thus declared as in default. As defined in the Pre-trial Order37 dated November 11, 1994, the issues of the case were:

stated in the Chattel Mortgage cum Deed of Assignment which is simulated and, therefore, void, following Art. 1346 of the Civil Code which provides: Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. The trial court thus disposed:

1. Whether or not [the Aguilars] have duly paid the purchase price of the car, and if so, whether or not [they] can still be held liable to pay under the promissory note and the chattel mortgage. 2. Whether or not [Citytrust and World Cars] are liable to [the Aguilars] for damages and if so, how much. 3. Whether or not [the Aguilars] have fully paid the balance installment price of the [car] which was purchased from [World Cars]. 4. Whether or not [the Aguilars] are entitled to the damages prayed for in the complaint. 5. Whether or not [Citytrust] is entitled to the cross-claim prayed for against [World Cars]. 6. Whether or not [the Aguilars] are still liable for their unpaid obligations to [Citytrust]. 7. Whether or not [World Cars] is liable to pay the unpaid obligations of [the Aguilars] if the latter will be able to prove that they already fully paid the price of the subject car. 8. Who among the parties is entitled to damages and attorneys fees, and if so, how much? By Decision38 dated January 12, 1999, Branch 77 of the Quezon City RTC found Perez to be an agent of World Cars, hence, an extension of its personality as far as the sale of the car to the Aguilars was concerned. The trial court further found that Perez was authorized to receive payment for the car, hence, all payments made to him for the purchase of the car were payments made to his principal, World Cars; that the Aguilars had paid a total amount of P386,000.00 including their final payment on July 30, 2002, which date World Cars admitted to be the deadline therefor; and that the Aguilars had no intention to be bound by the promissory note which they signed in favor of World Cars or its assignee nor by the terms of the Chattel Mortgage, the conforme in the undated Letter (Notice of Assignment) of World Cars and the Disclosure Statement of Loan/Credit Transaction having been predicated on the validity of the promissory note. Moreover, the trial court held that the fact that on May 30, 1992, the same date of the promissory note, Josephine issued three checks to fully cover the purchase price of the car (the fourth represented payment of insurance premium), the last of which was still to mature on July 30, 1992, proves that the Aguilars signed the promissory note without intending to be bound by its terms. In fine, the trial court held that the Aguilars had paid World Cars the full purchase price of the car, and Citytrust as the assignee of World Cars had no right to collect from them the amount

WHEREFORE, premises considered, judgment is hereby rendered: 1. Finding [spouses Aguilar] to have fully paid the purchase price of the 1992 Nissan California car, which they bought from Worlds Cars, Inc. on May 30, 1992, through its agent, Joselito Perez; 2. Annulling the Promissory Note (Exhibit "D"), the Chattel Mortgage (Exhibit "D-1"), the conforme in the undated Letter-Notice of Assignment of defendant World Cars, Inc., (Exhibit "D-2"), and the Disclosure Statement Loan/Credit Transaction (Exhibit "D-3"), for being void as they are simulated contracts, thereby releasing [spouses Aguilar] from any liability arising from these documents; 3. Ordering [Citytrust and World Cars] to pay, jointly and severally, to [spouses Aguilar] the following sums:P500,000.00 as moral damages; P100,000.00 as exemplary damages; P50,000.00 as attorneyes fees andP20,000.00 as litigation expenses; 4. Dismissing the counterclaims and cross-claims of World Cars, Inc. and Citytrust Finance Corporation; and 5. Directing the [Citytrust and World Cars] to pay the costs of suit. Citytrust appealed to the Court of Appeals on the following assigned errors: I. THE COURT A QUO COMMITTED SERIOUS ERRORS OF FACT AND OF LAW IN NOT HOLDING THAT [SPOUSES AGUILAR] ARE LIABLE TO [CITYTRUST] FOR THE PAYMENT OF THE PROMISSORY NOTE (PN) (EXH. "I") AND ARE BOUND BY THE TERMS AND CONDITIONS OF SAID PN AND CHATTEL MORTGAGE (EXH. "2"). II. THAT ASSUMING, THAT SPOUSES AGUILAR ARE NOT LIABLE ON THE PROMISSORY NOTE, THE COURT A QUO COMMITTED SERIOUS ERRORS OF FACT AND OF LAW IN NOT HOLDING THAT WORLD CARS IS LIABLE TO CITYTRUST AS GENERAL ENDORSER OF THE PROMISSORY NOTE AND FOR VIOLATION OF ITS WARRANTY UNDER THE RECEIVABLES FINANCING AGREEMENT (RFA). III.

THE COURT A QUO, COMMITTED SERIOUS ERRORS IN FACT AND IN LAW WHEN IT ADJUDGED CITYTRUST JOINTLY AND SEVERALLY LIABLE TO [SPOUSES AGUILAR].39 (Emphasis supplied) World Cars appealed too, contending that the trial court erred in: I. . . . HOLDING WORLD CARS, INC., LIABLE FOR THE PERSONAL ACTIONS OR ACTIONS BEYOND THE SCOPE OF AUTHORITY OF ITS SALES AGENT JOSELITO PEREZ. II. . . . HOLDING THAT THE SALE IS A CASH SALE AND NOT AN INSTALLMENT SALE AS EVIDENCED BY THE PROMISSORY NOTE AND CHATTEL MORTGAGE EXECUTED BY [SPOUSES AGUILAR] IN FAVOR OF [WORLD CARS] AND ASSIGNED TO [CITYTRUST]. III. . . . AWARDING DAMAGES TO [SPOUSES AGUILAR].40

Hence, the present separate petitions of the Aguilars and World Cars. The Aguilars fault the appellate court in: A. . . . GIVING LEGAL EFFECT TO THE PROMISSORY NOTE (PN) AND ITS DERIVATIVE INSTRUMENTS WHEN IT RULED THE SAME NULL AND VOID SINCE IT IS NOT REALLY DESIRED OR INTENDED TO PRODUCE LEGAL EFFECT. B. . . . RULING [CITYTRUST] A HOLDER IN DUE COURSE CONTRARY TO EVIDENCE ON RECORD. C. . . . RULING [SPOUSES AGUILAR] LIABLE ON THE PN CONTRARY TO EVIDENCE ON RECORD. D.

By Decision41 of December 5, 2002, the appellate court modified that of the trial court, the dispositive portion of which reads verbatim: WHEREFORE, premises considered, the Decision of the court a quo is hereby MODIFIED to read as follows: 1. Ordering [the Aguilars] to pay Citytrust the amount of P252,486.58 representing the unpaid balance of the promissory note. 2. Ordering [World Cars] to pay [the Aguilars] the following amount, to wit: (a) P252,486.58 representing the unpaid balance of the promissory note which [spouses Aguilar] were heretofore ordered to pay Citytrust; (b) P500,000.00 as moral damages; P100,000.00 as exemplary damages; P50,000.00 as attorneys fees; andP20,000.00 as litigation expenses. 3. Ordering [World Cars] to pay [Citytrust] the following amount, to wit: a) Penalty charges based on P252,486.58 at the rate of 5% per month from date of default until fully paid; b) P50,000.00 as attorneys fees and appe arance fee of P500.00 per hearing. c) P50,000.00 as liquidated damages, cost of suit and other litigation expenses. (Underscoring supplied)

. . . RULING [CITYTRUST NOT JOINTLY AND SEVERALLY LIABLE WITH WORLD CARS FOR DAMAGES AND ATTORNEYS FEES CONTRARY TO EVIDENCE ON RECORD.42 (Underscoring supplied) On the other hand, World Cars contend that: A. THE ASSAILED DECISIONS OF THE HONORABLE COURT OF APPEALS ARE CONTRARY TO LAW AND PREVAILING JURISPRUDENCE. B. CONSIDERING THAT THE ASSAILED DECISIONS OF THE HONORABLE COURT OF APPEALS ARE CONTRARY TO LAW AND PREVAILING JURISPRUDENCE THE AWARDS OF MORAL DAMAGES AGAINST WORLD CARS, INC. ARE ALSO CONTRARY TO LAW. C. LIKEWISE, THE AWARDS OF EXEMPLARY DAMAGES, ATTORNEYS FEES AND APPEARANCE FEES, LITIGATION EXPENSES AND THE COST OF SUIT AGAINST [WORLD CARS] ARE ALSO CONTRARY TO LAW.43(Underscoring supplied) Clearly, Perez was the agent of World Cars and was duly authorized to accept payment for the car. Josephines testimony that before issuing the checks in the name of Perez, she verified from his supervisor and the latter confirmed Perez authority to recei ve payment remains unrefuted by World Cars. In fact, World Cars admitted in its Answer with Counterclaim that "[w]hat was actually paid [by the Aguilars] and received by [it] was [Josephines] check in the amount of P148,000.00 as downpayment for the said car."44 Parenthetically, as earlier stated, when Josephine spoke to World Cars Vice President Domondon, the latter informed her that the last payment had not been received.45 This information of Domondon does not jibe with the claim of World Cars that it received only Josephines first check in the amount of P148,000.00 as downpayment.

As the above table of checks issued by Josephine shows, the check in the amount of P148,000.00, Check No. 112703 dated May 30, 1992, was payable to Perez. Since the Aguilars payment to Perez is deemed payment to World Cars, the pro missory note, chattel mortgage and other accessory documents they executed which were to take effect only in the event the checks would be dishonored were deemed nullified, all the checks having been cleared. Since the condition for the instruments to become effective was fulfilled, the obligation on the part of the Aguilars to be bound thereby did not arise and World Cars did not thus acquire rights thereunder following Art. 1181 of the Civil Code which provides: ARTICLE 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.(Emphasis supplied) As no right against the Aguilars was acquired by World Cars under the promissory note and chattel mortgage, it had nothing to assign to Citytrust. Consequently, Citytrust cannot enforce the instruments against the Aguilars, for an assignee cannot acquire greater rights than those pertaining to the assignor.46 At all events, the Aguilars having fully paid the car before they became aware of the assignment of the instruments to Citytrust when they received notice thereof by Citytrust, they were released of their obligation thereunder. The Civil Code so provides: ARTICLE 1626. The debtor who, before having knowledge of the assignment, pays his creditor, shall be released from the obligation. While Citytrust cannot enforce the instruments against the Aguilars, since under the RFA, specifically paragraph 5(a) thereof, World Cars guaranteed as follows: 5. As further warranties, [World Cars] hereby agrees and shall be bound by the following:

7. That assuming that plaintiffs complaint is correct, defendant World Cars, Inc., appears to have violated the terms and conditions of the RFA it executed with Citytrust Finance Corporation; Moreover, if it is proven that said plaintiffs have already paid the amount on said promissory note, then defendant World Cars Inc. would appear to have received twice the considerations thereof because it likewise received the proceeds of discounting thereof, from defendant Citytrust at the time said note was endorsed and assigned thus, unjustly enriching itself; xxx 9. Assuming that plaintiffs claims are proven to be true and that defendant World Cars, Inc. violated its warranties and undertakings to the defendant Citytrust, defendant World Cars, Inc. should likewise be made liable to herein defendant Citytrust for all the unpaid obligations arising from said promissory note above alleged, plus damages and attorney s fees as maybe proven during the trial.47 (Emphasis and underscoring supplied), are well-taken. Respecting the award of moral and exemplary damages, attorneys fees and other litigation expenses to the Aguilars which World Cars assails, the same is in order. For by Josephines testimony,48 she was "annoyed, upset and angry"; and her husband became hypertensive on account of, and the credit line of their business was affected by World Cars fraudulent breach of its agreement with them.49 As for the award to Citytrust of attorneys fees, appearance fees, litigation expenses and costs of suit against World Cars, the same is in order too, World Ca rs violation of the RFA having compelled Citytrust to incur expenses to protect its interest. 50 WHEREFORE, the Court of Appeals decision is REVERSED and SET ASIDE and another rendered: 1. ANNULLING the promissory note, chattel mortgage and its accessory contracts;

a. World Cars guarantees to [Citytrust] its successors, and assigns, that it has full right and legal authority to make the assignment or discounting; that the installment papers so discounted by virtue of this agreement, are subsisting, valid, enforceable and in all respects what they purport to be; that the papers contain the entire agreement between the customers and [World Cars]; x x x that it has absolute and good title to such contracts and the personalties covered thereby and the right to sell and transfer the same in favor of [Citytrust]; x x x (Emphasis and underscoring supplied), Citytrusts allegations in its Crossclaim against World Cars Inc., to wit: xxx 6. That under the terms and conditions of the RFA, upon violation of the dealers warranties and undertakings, defendant Citytrust Finance Corporation is entitled to recourse the discounted/assigned installments papers to the former;

2. ORDERING World Cars to PAY: (a) Citytrust (1) whatever unpaid obligation due to it arising from the assignment of the promissory note; (2) P50,000.00 as attorneys fees and P500.00 per hearing; and (3) P50,000.00 as liquidated damages, cost of suit and other litigation expenses. (b) spouses Aguilar (1) P500,000.00 as moral damages; (2) P100,000.00 as exemplary damages;

(3) P50,000.00 as attorneys fees; and (4) P20,000.00 as litigation expenses. Costs against petitioner, World Cars, Inc. SO ORDERED. CONCHITA CARPIO MORALES Associate Justice WE CONCUR:

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 108346 July 11, 2001

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and valid title as provided by law, unto the VENDEE, her heirs, successors and assigns, the parcel of land mentioned and described above, together with the house and other improvements thereon. 'That the aforesaid parcel of land, together with the house and other improvements thereon, were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor of the said Bank of the Philippine Islands, on _____ and which Real Estate Mortgage was ratified before Notary Public for Makati, _____, as Doc. No. ______, Page No. _____, Book No. ___, Series of 1986 of his Notarial Register. 'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of Philippine Islands, in the name of the VENDOR, and further agrees to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI, including interests and other charges for late payment levied by the Bank, as if the same were originally signed and executed by the VENDEE. 'It is further agreed and understood by the parties herein that the capital gains tax and documentary stamps on the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer tax thereon shall be the account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).' "On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).' 'x x x xxx xxx

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents. PANGANIBAN, J.: A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitled the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received. The Case Before us is a Petition for Review on Certiorari 1 questioning the Decision2 of the Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution 3 dated December 29, 1992 denying petitioner's motion for reconsideration. 4 The dispositive portion of the assailed Decision reads: "WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The bonds posted by plaintiffs-appellees and defendants-appellants are hereby RELEASED."5 The Facts The factual antecedents of the case, as found by the CA, are as follows: "x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of land, together with the house and other improvements thereon, located at 1918 Kamias St., Dasmarias Village, Makati and covered by TCT No. 142177. Defendant George Raymundo [herein private petitioners] is David's father who negotiated with plaintiffs Avelina and Mariano Velarde [herein petitioners] for the sale of said property, which was, however, under lease (Exh. '6', p. 232, Record of Civil Case No. 15952). "On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms and conditions: 'x x x xxx xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage obligations on the property with the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the terms and conditions of the Deed of Real Estate Mortgage dated _____, signed and executed by Mr. David A. Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No. _____, Series of 1986 of his Notarial Register.

'WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the Bank in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said Deed of Real Estate Mortgage, including all interests and other charges for late payment. 'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of attesting and confirming our private understanding concerning the said mortgage obligations to be assumed. 'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the consent of my husband, Mariano Z. Velardo, do hereby bind and obligate myself, my heirs, successors and assigns, to strictly and faithfully comply with the following terms and conditions: '1. That until such time as my assumption of the mortgage obligations on the property purchased is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor. '2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr. David A. Raymundo shall resume total and complete ownership and possession of the property sold by way of Deed of Sale with Assumption of Mortgage, and the same shall be deemed automatically cancelled and be of no further force or effect, in the same manner as it (the) same had never been executed or entered into. '3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors and assigns, to strictly and faithfully comply with the terms and conditions of the mortgage obligations with the Bank of the Philippine Islands, and the covenants, stipulations and provisions of this Undertaking. 'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14, Record).' "This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds of a loan that plaintiffs were to secure from a bank with defendant's help. Defendants had a standing approved credit line with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's approval of an application for assumption of mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue paying the monthly interests of the loan secured by a real estate mortgage. "Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record). "On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further payment. "On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p. 220, Record). "In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows: 'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January 21, 1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987 for her immediate occupancy; (b) you cause the re- lease of title and mortgage from the Bank of P.I. and make the title available and free from any liens and encumbrances; and (c) you execute an absolute deed of sale in her favor free from any liens or encumbrances not later than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record). "On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended sale of the subject property allegedly due to the latter's failure to comply with the terms and conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."6 Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who dismissed the Complaint in a Decision dated November 14, 1990.7 Thereafter, petitioners filed a Motion for Reconsideration. 8 Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15, 1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration and directed the parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to private respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender possession of the disputed property to petitioners. Private respondents appealed to the CA.

Ruling of the Court of Appeal The CA set aside the Order of Judge Abad Santos and reinstated then Judge YnaresSantiago's earlier Decision dismissing petitioners' Complaint. Upholding the validity of the rescission made by private respondents, the CA explained its ruling in this wise: "In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration of this sale, the VENDEE (Velarde)' would assume to pay the mortgage obligation on the subject property in the amount of P 1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment of P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage obligation on the subject property. In other words, the assumption of the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed 'to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were originally signed and executed by the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the document entitled 'Undertaking' wherein the latter agreed to continue paying said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms and conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp 13-14, Record). "From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8 million. This would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the approval of the assumption of mortgage would mean that, in case of approval, payment of the mortgage obligation will now be in the name of Velarde. And in the event said application is disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the non-payment of the mortgage obligation would result in a violation of the contract. And, upon Velarde's failure to pay the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission (Article 1191, Civil Code). "The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for Velarde's non-payment of the balance of the purchase price. As borne out by the evidence, Velarde had to pay in full in case of BPI's disapproval of the application for assumption of mortgage. What Velarde should have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given weight by the lower court in reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the balance in cash but enumerated 3 new conditions which, to the mind of this Court, would constitute a new undertaking or new agreement which is subject to the consent or approval of Raymundo. These 3 conditions were not among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at most, an attempt to novate. But then again,

there can be no novation because there was no agreement of all the parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493). "It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with Assumption of Mortgage would be deemed 'automatically cancelled and of no further force and effect, as if the same had never been executed or entered into.' While it is true that even if the contract expressly provided for automatic rescission upon failure to pay the price, the vendee may still pay, he may do so only for as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde notarial notice dated January 8, 1987 of cancellation/rescission of the contract due to the latter's failure to comply with their obligation. The rescission was justified in view of Velarde's failure to pay the price (balance) which is substantial and fundamental as to defeat the object of the parties in making the agreement. As adverted to above, the agreement of the parties involved a reciprocal obligation wherein the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage obligation by appellees Velarde would create a right to demand payment or to rescind the contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellee's failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having violated the contract, they have lost their right to its enforcement and hence, cannot avail of the action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)."10 Hence, this appeal. 11 The Issues Petitioners, in their Memorandum,12 interpose the following assignment of errors: "I. The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a breach of the contract. "II The Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents was justified. "III The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new conditions' constituting mere offers or an attempt to novate necessitating a new agreement between the parties." The Court's Ruling

The Petition is partially meritorious. First Issue: Breach of Contract Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of contract, considering that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon private respondents again. However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase price balance of P1.8 million to private respondents in case the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received notice of the bank's disapproval of their application to assume respondents' mortgage, they should have paid the balance of the P1.8 million loan. Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a buyer under a contract of sale. In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate things, and the buyer to pay therefor a price certain in money or its equivalent. 13 Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery. 14 Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the full purchase price. Second Issue Validity of the Rescission Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former had signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified of the disapproval of their application for assumption of mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a rescission. They cite several cases15 in which this Court declared that rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in good faith, considering that they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under the contract of sale. Private respondents' right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly provides as follows: "Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible." The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them.16 The breach contemplated in the said provision is the obligor's failure to comply with an existing obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. 18 In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondent's right to rescind the same in accordance with law. True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance by private respondents of additional burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude the exercise of the right to rescind. Misplaced is petitioners' reliance on the cases 19 they cited, because the factual circumstances in those cases are not analogous to those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the seller. In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid. In Tan, the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing the title to the property; there was no reference whatsoever to the nonpayment of the contract price. In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private respondents new obligations as preconditions to the performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable under the contract of sale. Hence, private respondents were left with the legal option of seeking rescission to protect their own interest.

Mutual Restitution Required in Rescission As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this controversy. Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former. Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. 20 To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.21 Third Issue Attempt to Novate In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter of petitioners to private respondents were not part of the original contract. By that time, it was already incumbent upon the former to pay the balance of the sale price. They had no right to demand preconditions to the fulfillment of their obligation, which had become due. WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of rescission. No pronouncement as to costs. SO ORDERED.1wphi1.nt Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 129598 August 15, 2001

At the hearing in connection with the subpoena, PNB moved to be allowed to submit a position paper on its behalf and/or on behalf of PNB MADECOR. In its position paper dated April 3, 1995, PNB MADECOR alleged that it was the owner of the parcel of land located in Quezon City that was leased to PNEI for use as bus terminal. Moreover, PNB MADECOR claimed: "2. PNEI has not been paying its rentals from October 1990 to March 24, 1994 when it (PNEI) vacated the property. As of the latter date, PNB MADECOR's receivables against PNEI amounted to P8,784,227.48, representing accumulated rentals, inclusive of interest; 3. On the other hand, PNB MADECOR has payables to PNEI in the amount of P7,884,000.00 as evidenced by a promissory note executed on October 31, 1982 by then NAREDECO in favor of PNEI; 4. Considering that PNB MADECOR is a creditor of PNEI with respect to the P8,784,227.48 and at the same time its debtor with respect to the P7,884,000.00, PNB MADECOR and PNEI are therefore creditors and debtors of each other; and 5. By force of the law on compensation, both obligations of PNB MADECOR and PNEI are already considered extinguished to the concurrent amount or up to P7,884,000.00 so that PNEI is still obligated to pay PNB MADECOR the amount of P900,227.48. x x x ."4 On the other hand, Gerardo Uy filed an omnibus motion controverting PNB MADECOR's claim of compensation. Even if compensation were possible, according to him, PNEI would still have sufficient funds in the hands of PNB MADECOR to fully satisfy his claim. He explained' that: "The allegation of PNB MADECOR that it owes PNEI only . . . (P7,884,000.00) is not accurate. Apparently, PNB MADECOR only considered the principal amount. In the first place, to be precise, the principal debt amounts to exactly . . . (P7,884,921.10) as clearly indicated in the Promissory Note dated 31 October 1982 . . . In accordance with the stipulations contained in the promissory note, notice of demand was sent by PNEI to PNB MADECOR (then NAREDECO) through a letter dated 28 September 1984 and received by the latter on 1 October 1984 . . . The second paragraph of the subject promissory note states that '[F]ailure to pay the above amount by NAREDECO after due notice has been made by PNEI would entitle PNEI to collect an 18% [interest] per annum from date of notice of demand'. Hence, interest should be computed and start to run from November 1984 until the present in order to come up with the outstanding debt of PNB MADECOR to PNEI. And to be more precise, the outstanding debt of PNB MADECOR to PNEI as of April 1995 amounts to . . . (P75,813,508.26). Hence, even if the alleged debt of PNEI to PNB MADECOR amounting to . . . (P8,784,227.48) shall be compensated and deducted from PNB MADECOR's debt to PNEI, there shall still be a remainder of . . . (P67,029,380.78), largely sufficient enough to cover complainant's claim." 5 Also in his omnibus motion, he prayed for an order directing that levy be made upon all goods, credits, deposits, and other personal properties of PNEI under the control of PNB MADECOR, to the extent of his demand. PNB MADECOR opposed his omnibus motion, particularly the claim that its obligation to PNEI earned an interest of 18 percent annually. It argued that PNEI's letter dated September 28, 1984 was not a demand letter but merely a request for the implementation of the arrangement

PNB MADECOR, petitioner, vs. GERARDO C. UY, respondent. QUISUMBING,J.: This is a petition for review on certiorari filed by petitioner PNB Management and Development Corporation (PNB MADECOR) seeking to annul the decision of the Court of Appeals dated February 19, 1997, and its resolution dated June 19, 1997 in CA-G.R. CV No. 49693, affirming the order of the Regional Trial Court of Manila, Branch 38, dated August 21, 1995 in Civil Case No. 95-72685. In said order, the RTC directed the garnishment of the credits and receivables of Pantranco North Express, Inc. (PNEI), also known as Philippine National Express, Inc., in the possession of PNB MADECOR, and if these were insufficient to cover the debt of PNB MADECOR to PNEI, to levy upon the assets of PNB MADECOR. The facts of this case, culled from the decision of the CA, 1 are as follows: Guillermo Uy, doing business under the name G.U. Enterprises, assigned to respondent Gerardo Uy his receivables due from Pantranco North Express Inc. (PNEI) amounting to P4,660,558.00. The deed of assignment included sales invoices containing stipulations regarding payment of interest and attorney's fees. On January 23, 1995, Gerardo Uy filed with the RTC a collection suit with an application for the issuance of a writ of preliminary attachment against PNEI. He sought to collect from PNEI the amount of P8,397,440.00. He alleged that PNEI was guilty of fraud in contracting the obligation sued upon, hence his prayer for a writ of preliminary attachment. A writ of preliminary attachment was issued on January 26, 1995, commanding the sheriff "to attach the properties of the defendant, real or personal, and/or (of) any person representing the defendant"2 in such amount as to cover Gerardo Uy's demand. On January 27, 1995, the sheriff issued a notice of garnishment addressed to the Philippine National Bank (PNB) attaching the "goods, effects, credits, monies and all other personal properties"3 of PNEI in the possession of the bank, and requesting a reply within five days. PNB MADECOR received a similar notice. On March 1995, the RTC, through the application of Gerardo Uy, issued a subpoena duces tecum for the production of certain documents in the possession of PNB and PNB MADECOR: (1) from PNB, books of account of PNEI regarding trust account nos. T-8461-I, 8461-II, and T8565; and (2) from PNB MADECOR, contracts showing PNEI's receivables from the National Real Estate Development Corporation (NAREDECO), now PNB MADECOR, from 1981 up to the period when the documents were requested.

for set-off of receivables between PNEI and PNB, as provided in a dacion en pago executed on July 28, 1983.6 Gerardo Uy again controverted PNB MADECOR's arguments. Meanwhile, in the main case, the RTC rendered judgment on July 26, 1995 against PNEI. The corresponding writ of execution was issued on August 18, 1995. As regards the issue between PNEI and PNB MADECOR, the RTC issued the assailed order on August 21, 1995, the decretal portion of which provided: "WHEREFORE, the Sheriff of this Court is hereby directed to garnish/levy or cause to be garnished/levied the amount stated in the writ of attachment issued by this Court from the credits and receivables/collectibles of PNEI from PNB MADECOR (NAREDECO) and to levy and/or cause to levy upon the assets of the debtor PNB MADECOR should its personal assets be insufficient to cover its debt with PNEI. Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust Department, Philippine National Bank, and other concerned officials of said bank, is/are hereby directed to submit the books of accounts of Pantranco North Express, Inc./Philippine National Express, Inc. under Trust Account Nos. T-8461-I, T-8461-II, T-8565 with its position paper within five (5) days from notice hereof. SO ORDERED." Petitioner appealed said order to the CA which, however, affirmed the RTC in a decision dated February 19, 1997. Petitioner's motion for reconsideration was denied in a resolution dated June 19, 1997. According to the CA, there could not be any compensation between PNEI's receivables from PNB MADECOR and the latter's obligation to the former because PNB MADECOR's supposed debt to PNEI is the subject of attachment proceedings initiated by a third party, herein respondent Gerardo Uy. This is a controversy that would prevent legal compensation from taking place, per the requirements set forth in Article 1279 of the Civil Code. Moreover, the CA stressed that it was not clear whether, at the time compensation was supposed to have taken place, the rentals being claimed by petitioner were indeed still unpaid. The CA pointed out that petitioner did not present evidence in this regard, apart from a statement of account. The CA also questioned petitioner's inaction in claiming the unpaid rentals from PNEI, when the latter started defaulting in its payment as early as 1994. This, according to the CA, indicates that the debt was either already settled or not yet demandable and liquidated. The CA rejected petitioner's contention that Rule 39, Section 43 of the Revised Rules of Court applies to the present case. Said rule sets forth the procedure to follow when a person alleged to have property or to be indebted to a judgment obligor claims an interest in the property or denies the debt. In such a situation, under said Rule the judgment obligee is required to institute a separate action against such person. The CA held that there was no need for a separate action here since petitioner had already become a forced intervenor in the case by virtue of the notice of garnishment served upon it. Hence, this petition. Petitioner now assigns the following alleged errors for our consideration: I

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN THE INTERPRETATION OF THE APPLICABLE LAW HEREIN WHEN IT RULED THAT THE REQUISITES FOR LEGAL COMPENSATION AS SET FORTH UNDER ARTICLES 1278 AND 1279 OF THE CIVIL CODE DO NOT CONCUR IN THE CASE AT BAR. II THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN INTERPRETING THE PROVISIONS OF SECTION 45, RULE 39 OF THE RULES OF COURT, NOW SECTION 43, RULE 39 OF THE REVISED RULES OF COURT, AS AMENDED ON 1 JULY 1997, BY RULING THAT PETITIONER PNB-MADECOR, UPON BEING CITED FOR AND SERVED WITH A NOTICE OF GARNISHMENT BECAME A FORCED INTERVENOR, HENCE, DENYING THE RIGHT OF HEREIN PETITIONER TO VENTILATE ITS POSITION IN A FULL-BLOWN TRIAL AS PROVIDED FOR UNDER SEC. 10, RULE 57, WHICH REMAINS THE SAME RULE UNDER THE REVISED RULES OF COURT AS AMENDED ON 1 JULY 1997. III THE [COURT OF APPEALS] COMMITTED AN ERROR IN FINDING THAT A DEMAND WAS MADE BY PANTRANCO NORTH EXPRESS, INC. TO PNB MADECOR FOR THE PAYMENT OF THE PROMISSORY NOTE DATED 31 OCTOBER 1982.7 After considering these assigned errors carefully insofar as they raise issues of law, we find that the petition lacks merit. We shall now discuss the reasons for our conclusion. Petitioner admits its indebtedness to PNEI, in the principal sum of P7,884,921.10, per a promissory note dated October 31, 1982 executed by its precursor NAREDECO in favor of PNEI. It also admits that the principal amount should earn an interest of 18 percent per annum under the promissory note, in case NAREDECO fails to pay the principal amount after notice. Petitioner adds that the receivables of PNEI were thereafter conveyed to PNB in payment of PNEI's loan obligation to the latter, in accordance with a dacion en pago agreement executed between PNEI and PNB. Petitioner, however, maintains that there is nothing now that could be subject of attachment or execution in favor of respondent since compensation had already taken place as between its debt to PNEI and the latter's obligation to it, consistent with Articles 1278, 1279, and 1290 of the Civil Code. Petitioner assails the CA's ratiocination that compensation could not have taken place because the receivables in question were the subject of attachment proceedings commenced by a third party (respondent). This reasoning is contrary to law, according to petitioner. Petitioner insists that even the Asset Privatization Trust (APT), which now has control over PNEI, recognized the set-off between the subject receivables as indicated in its reply to petitioner's demand for payment of PNEI's unpaid rentals. 8 The APT stated in its letter: "xxx xxx xxx

While we have long considered the amount of SEVEN MILLION EIGHT HUNDRED EIGHTY FIVE THOUSAND PESOS (P7,885,000.00) which PNEI had earlier transmitted to you as its share in an aborted project as partial payment for PNEI's unpaid rentals in favor of PNB-Madecor, being a creditor like your goodself of PNEI, we are unable to be of assistance to you regarding your claim for the balance thereof. We trust that you will understand our common predicament. xxx xxx xxx"

Finally, respondent calls the attention of this Court to the sale by PNB of its shares in PNB MADECOR to the "Dy Group", which in turn assigned its majority interest to the "Atlanta Group". Respondent claims that the Dy Group set aside some P30 million for expenses to be incurred in litigating PNB MADECOR's pending cases, and asks that his "claim over this amount, arising from the instant case,"9 be given preference in case the PNEI properties already garnished prove insufficient to satisfy his claim. The first and third errors assigned by petitioner are obviously interrelated and must be resolved together. Worth stressing, compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right and as principals are reciprocally debtors and creditors of each other.10 Legal compensation takes place by operation of law when all the requisites are present,11 as opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.12 Legal compensation requires the concurrence of the following conditions:

Petitioner argues that PNEI's letter dated September 28, 1984 did not contain a demand for payment but only notice of the implementation of thedacion en pago agreement between PNB and PNEI. Petitioner contends that the CA's statement that PNEI's obligation to petitioner had either been settled or was not yet demandable is highly speculative and conjectural. On the contrary, petitioner asserts that its failure to institute a judicial action against PNEI proved that the receivables of petitioner and PNEI had already been subject to legal compensation. Petitioner submits that Rule 39, Section 43 of the Revised Rules of Court applies to the present case. It asserts that it stands to lose more than P7 million if not given the opportunity to present its side in a formal proceeding such as that provided under the cited rule. According to petitioner, it was not an original party to this case but only became involved when it was issued a subpoenaduces tecum by the trial court. For his part, respondent claims that the requisites for legal compensation are not present in this case, contrary to petitioner's assertion. He argues that the better rule should be that compensation cannot take place where one of the obligations sought to be compensated is the subject of a suit between a third party and a party interested in the compensation, as in this case. Moreover, respondent points out that, while the alleged demand letter sent by PNEI to petitioner was dated September 28, 1984, the unpaid rentals due petitioner from PNEI accrued during the period October 1990 to March 1994, or before petitioner's obligation to PNEI became due. This being so, respondent argues that there can be no compensation since there was as yet no compensable debt in 1984 when PNEI demanded payment from petitioner. Even granting that there had been compensation, according to respondent, PNEI would still have sufficient funds with petitioner since the PNB MADECOR's obligation to PNEI earned interest. Respondent echoes the observation of the CA that petitioner failed to file a suit against PNEI at the time when it should have. This failure gave rise to the presumption that PNEI's obligation might have already been settled, waived, or otherwise extinguished, according to him. He contends that petitioner's explanation that it did not sue PNEI because there had been legal compensation is only an afterthought and contrary to logic and reason. On petitioner's claim that it had been denied due process, respondent avers that he did not have to file a separate action against petitioner since this would only result in multiplicity of suits. Furthermore, he points out that the order of attachment is an interlocutory order that may not be the subject of appeal.

(1) that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) that both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) that the two debts be due; (4) that they be liquidated and demandable; (5) that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. 13 Petitioner insists that legal compensation had taken place such that no amount of money belonging to PNEI remains in its hands, and, consequently, there is nothing that could be garnished by respondent. We find, however, that legal compensation could not have occurred because of the absence of one requisite in this case: that both debts must be due and demandable. The CA observed: "Under the terms of the promissory note, failure on the part of NAREDECO (PNB MADECOR) to pay their value of the instrument 'after due notice has been made by PNEI would entitle PNEI to collect an 18% [interest] per annum from date of notice of demand'."14 Petitioner makes a similar assertion in its petition, that

"x x x It has been stipulated that the promissory note shall earn an interest of 18% per annum in case NAREDECO, after notice, fails to pay the amount stated therein."15 Petitioner's obligation to PNEI appears to be payable on demand, following the above observation made by the CA and the assertion made by petitioner. Petitioner is obligated to pay the amount stated in the promissory note upon receipt of a notice to pay from PNEI. If petitioner fails to pay after such notice, the obligation will earn an interest of 18 percent per annum. Respondent alleges that PNEI had already demanded payment. The alleged demand letter reads in part: "We wish to inform you that as of August 31, 1984 your outstanding accounts amounted to P10,376,078.67, inclusive of interest. In accordance with our previous arrangement, we have conveyed in favor of the Philippine National Bank P7,884,921.10 of said receivables from you. With this conveyance, the unpaid balance of your account will be P2,491,157.57. 16 To forestall further accrual of interest, we request that you take up with PNB the implementation of said arrangement. x x x."17 We agree with petitioner that this letter was not one demanding payment, but one that merely informed petitioner of (1) the conveyance of a certain portion of its obligation to PNEI per adacion en pago arrangement between PNEI and PNB, and (2) the unpaid balance of its obligation after deducting the amount conveyed to PNB. The import of this letter is not that PNEI was demanding payment, but that PNEI was advising petitioner to settle the matter of implementing the earlier arrangement with PNB. Apart from the aforecited letter, no other demand letter appears on record, nor has any of the parties adverted to another demand letter. Since petitioner's obligation to PNEI is payable on demand, and there being no demand made, it follows that the obligation is not yet due. Therefore, this obligation may not be subject to compensation for lack of a requisite under the law. Without compensation having taken place, petitioner remains obligated to PNEI to the extent stated in the promissory note. This obligation may undoubtedly be garnished in favor of respondent to satisfy PNEI's judgment debt.18 As to respondent's claim that legal compensation could not have taken place due to the existence of a controversy involving one of the mutual obligations, we find this matter no longer controlling. Said controversy was not seasonably communicated to petitioner as required under Article 1279 of the Civil Code. The controversy,i.e., the action instituted by respondent against PNEI, must have been communicated to PNB MADECOR in due time to prevent compensation from taking place. By "in due time" should be meant the period before legal compensation was supposed to take place, considering that legal compensation operates so long as the requisites concur, even without any conscious intent on the part of the parties. 19 A controversy that is communicated

to the parties after that time may no longer undo the compensation that had taken place by force of law, lest the law concerning legal compensation be for naught. Petitioner had notice of the present controversy when it received the subpoena duces tecum issued by the trial court. The exact date when petitioner received the subpoena is not on record, but petitioner was allowed to submit a position paper regarding said subpoena per order of the trial court dated March 27, 1995. 20 We assume that petitioner had notice of the pending litigation at least no later than this date. Now, was this date before that period when legal compensation would have occurred, assuming all other requisites to be present? Clearly, it is not. PNB MADECOR's obligation to PNEI was contracted in 1982 and the alleged demand letter was sent by PNEI to petitioner on September 1984. On the other hand, PNEI's obligation to petitioner, the payment of monthly rentals, accrued during the period October 1990 to March 1994 and a demand to pay was sent in 1993. Assuming the other requisites to be present, legal compensation of the mutual obligations would have taken place on March 1994 at the latest. Obviously, this was before petitioner received notice of the pendency of this litigation in 1995. The controversy communicated to petitioner in 1995 could not have affected the legal compensation that would have taken place in 1994. As regards respondent's averment that there was as yet no compensable debt when PNEI sent petitioner a demand letter on September 1984, since PNEI was not yet indebted to petitioner at that time, the law does not require that the parties' obligations be incurred at the same time. What the law requires only is that the obligations be due and demandable at the same time. Coming now to the second assigned error, which we reserved as the last for our discussion, petitioner contends that it did not become a forced intervenor in the present case even after being served with a notice of garnishment. Petitioner argues that the correct procedure would have been for respondent to file a separate action against PNB MADECOR, per Section 43 of Rule 39 of the Rules of Court.21 Petitioner insists it was denied its right to ventilate its claims in a separate, full-blown trial when the courtsa quo ruled that the abovementioned rule was inapplicable to the present case. On this score, we had occasion to rule as early as 1921 in Tayabas Land Co. v. Sharruf ,22 as follows: ". . . garnishment . . . consists in the citation of some stranger to the litigation, who is debtor to one of the parties to the action. By this means such debtor stranger becomes a forced intervenor; and the court, having acquired jurisdiction over his person by means of the citation, requires him to pay his debt, not to his former creditor, but to the new creditor, who is creditor in the main litigation. It is merely a case of involuntary novation by the substitution of one creditor for another. Upon principle the remedy is a species of attachment or execution for reaching any property pertaining to a judgment debtor which may be found owing to such debtor by a third person." Again, inPerla Compania de Seguros, Inc. v. Ramolete,23 we declared: "Through service of the writ of garnishment, the garnishee becomes a "virtual party" to, or a "forced intervenor" in, the case and the trial court thereby acquires jurisdiction to bind him to compliance with all orders and processes of the trial court with a view to the complete satisfaction of the judgment of the court."

Petitioner here became a forced intervenor by virtue of the notice of garnishment served upon him. It could have presented evidence on its behalf. The CA, in fact, noted that petitioner presented a statement of account purportedly showing that PNEI had not yet settled its obligation to petitioner.24 That petitioner failed to present any more proof of its claim, as observed by the CA, is no longer the fault of the courts. There is no need for the institution of a separate action under Rule 39, Section 43, contrary to petitioner's claim. This provision contemplates a situation where the person allegedly holding property of (or indebted to) the judgment debtor claims an adverse interest in the property (or denies the debt). In this case, petitioner expressly admits its obligation to PNEI.25 WHEREFORE, the petition is DENIED. The assailed decision and resolution of the Court of Appeals are AFFIRMED. Costs against petitioner. SO ORDERED. Bellosillo, Mendoza, Buena and De Leon, Jr., JJ ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 109087 May 9, 2001

The factual and procedural antecedents of the case are summarized by the Court of Appeals as follows: "In the complaint from which the present proceedings originated, it is alleged that on January 15, 1979, defendant Rodzssen Supply, Inc. opened with plaintiff Far East Bank and Trust Co. a 30-day domestic letter of credit, LC No. 52/0428/79-D, in the amount of P190,000.00 in favor of Ekman and Company, Inc. (Ekman) for the purchase from the latter of five units of hydraulic loaders, to expire on February 15, 1979; that subsequent amendments extended the validity of said LC up to October 16, 1979; that on March 16, 1979, three units of the hydraulic loaders were delivered to defendant for which plaintiff on March 26, 1979, paid Ekman the sum of P114,000.00, which amount defendant paid plaintiff before the expiry date of the LC; that the shipment of the remaining two units of hydraulic loaders valued at P76,000.00 sent by Ekman was 'readily received by the defendant' before the expiry date [of] subject LC; that upon Ekman's presentation of the documents for the P76,000.00 'representing final negotiation' on the LC before the expiry date, and 'after a series of negotiations', plaintiff paid to Ekman the amount of P76,000.00; and that upon plaintiff's demand on defendant to pay for said amount (P76,000.00), defendant' refused to pay ... without any valid reason'. Plaintiff prays for judgment ordering defendant to pay the abovementioned P76,000.00 plus due interest thereon, plus 25% of the amount of the award as attorney's fees. "In the Answer, defendant interposed, inter alia, by way of special and affirmative defenses that plaintiff ha[d] no cause of action against defendant; that there was a breach of contract by plaintiff who in bad faith paid Ekman, knowing that the two units of hydraulic loaders had been delivered to defendant after the expiry date of subject LC; and that in view of the breach of contract, defendant offered to return to plaintiff the two units of hydraulic loaders, 'presently still with the defendant' but plaintiff refused to take possession thereof. "The trial court's ruling that plaintiff [was] entitled to recover from defendant the amount of P76,000.00 was based on its following findings/conclusions: (1) under the contract of sale of the five loaders between Ekman and defendant, upon Ekman's delivery to, and acceptance by, defendant of the two remaining units of the five loaders, defendant became liable to Ekman for the payment of said two units. However, as defendant did not pay Ekman, the latter pressed plaintiff for the payment of said two loaders in the amount of P76,000.00. In the honest belief that it was still under obligation to Ekman for said amount, considering that Ekman had presented all the necessary documents, plaintiff voluntarily paid the said amount to Ekman. Plaintiff's x x x voluntary and lawful act of payment g[a]ve rise to a quasicontract between plaintiff and defendant; and if defendant should escape liability for said amount, the result would be to allow defendant to enrich itself at plaintiff's expense x x x. "x x x. While defendant, indeed offered to return the two loaders to plaintiff, x x x this offer was made 3 years after defendant's receipt of the goods, when plaintiff pressed for payment. By said voluntary acceptance of the two loaders, estoppel works against defendant who should have refused delivery of, and/or immediately offered to return, the goods. "Accordingly, judgment was rendered in favor of the plaintiff and against the defendant x x x."6

RODZSSEN SUPPLY CO. INC., petitioner, vs. FAR EAST BANK & TRUST CO., respondent. PANGANIBAN, J.: When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels the negligence of the other. Thus, their rights and obligations may be determined equitably. No one shall enrich oneself at the expense of another.1wphi1.nt The Case Before us is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court, assailing the January 21, 1993 Decision2 of the Court of Appeals3 (CA) in CA-GR CV No. 26045. The challenged Decision affirmed with modification the ruling of the Regional Trial Court of Bacolod City in Civil Case No. 2296. The CA ruled as follows: "WHEREFORE, the decision under appeal should be, as it is hereby affirmed in all its aspects, except for the deletion of paragraph 2 of its dispositive portion, which paragraph shall be replaced by a new paragraph which shall read as follows: '2. ordering the defendant to pay the plaintiff the sum equivalent to 10% of the total amount due and collectible, as attorney's fees; and' "No pronouncement as to costs."4 On the other hand, the trial court had rendered this judgment: "1. Ordering the defendant to pay the plaintiff the sum of P76,000.00, representing the principal amount being claimed in this action, plus interest thereon at the rate of 12% per annum counted from October 1979 until fully paid; "2. Ordering the defendant to pay the plaintiff the sum equivalent to 25% of the total amount due and collectible; and "3. Ordering the defendant to pay the costs of the suit."5 The Facts

The CA Ruling The CA rejected petitioner's imputation of bad faith and negligence to respondent bank for paying for the two hydraulic loaders, which had been delivered after the expiration of the subject letter of credit. The appellate court pointed out that petitioner received the equipment after the letter of credit had expired. "To absolve defendant from liability for the price of the same," the CA explained, "is to allow it to get away with its unjust enrichment at the expense of the plaintiff." Hence, this Petition.7 Issues Petitioner presents the following issues for resolution: "1. Whether or not it is proper for a banking institution to pay a letter of credit which has long expired or been cancelled. "2. Whether or not respondent courts were correct in their conclusion that there was a consummated sale between petitioner and Ekman Co. "3. Whether or not Respondent Court of Appeals was correct in evading the issues raised in the appeal that under the trust receipt, petitioner was merely the depositary of private respondent with respect to the goods covered by the trust receipt." 8 The Court's Ruling We affirm the Court of Appeals, but lower the interest rate to only 6 percent and delete the award of attorney's fees. First Issue: Efficacy of Letter of Credit Petitioner asserts that respondent bank was negligent in paying for the two hydraulic loaders, when it no longer had any obligation to do so in view of the expiration and cancellation of the Letter of Credit. Petitioner Rodzssen Supply Inc. applied for and obtained an irrevocable 30-day domestic Letter of Credit from Far East Bank and Trust Company Inc. on January 15, 1979, in favor of Ekman and Company Inc., in order to finance the purchase of five units of hydraulic loaders in the amount of P190,000. Originally set to expire on February 15, 1979, the subject Letter of Credit was amended several times to extend its validity until October 16, 1979. The Letter of Credit expressly restricted the negotiation to respondent bank and specifically instructed Ekman and Company Inc. to tender the following documents: (1) delivery receipt duly acknowledged by the buyer, (2) accepted draft, and (3) duly signed commercial invoices. Likewise, the instrument contained a provision with regard to its expiration date.8

For the first three hydraulic loaders that were delivered, the bank paid the amount specified in the letter of credit. The present dispute pertains only to the last two hydraulic loaders. Clearly, the bank paid Ekman when the former was no longer bound to do so under the subject Letter of Credit. The records show that respondent paid the latter P76,000 for the last two hydraulic loaders on March 14, 1980,10five months after the expiration of the Letter of Credit on October 16, 1979.11 In fact, on December 27, 1979, the bank had informed Rodzssen of the cancellation of the commercial paper and credited P22,800 to the account of the latter. The amount represented the marginal deposit, which petitioner had been required to put up for the unnegotiated portion of the Letter of Credit -- P76,000 for the two hydraulic loaders.12 The subject Letter of Credit had become invalid upon the lapse of the period fixed therein.13 Thus, respondent should not have paid Ekman; it was not obliged to do so. In the same vein, of no moment was Ekman's presentation, within the prescribed period, of all the documents necessary for collection, as the Letter of Credit had already expired and had in fact been cancelled. Second Issue: Was Petitioner Liable to Respondent? Be that as it may, we agree with the CA that petitioner should pay respondent bank the amount the latter expended for the equipment belatedly delivered by Ekman and voluntarily received and kept by petitioner. Respondent bank's right to seek recovery from petitioner is anchored, not upon the inefficacious Letter of Credit, but on Article 2142 of the Civil Code which reads as follows: "Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasicontract to the end that no one shall be unjustly enriched or benefited at the expense of another." Indeed, equitable considerations behoove us to allow recovery by respondent. True, it erred in paying Ekman, but petitioner itself was not without fault in the transaction. It must be noted that the latter had voluntarily received and kept the loaders since October 1979. Petitioner claims that it accepted the late delivery of the equipment, only because it was bound to accept it under the company's trust receipt arrangement with respondent bank. Granting that petitioner was bound under such arrangement to accept the late delivery of the equipment, we note its unexplained inaction for almost four years with regard to the status of the ownership or possession of the loaders. Bewildering was its lack of action to validate the ownership and possession of the loaders, as well as its stolidity over the purported failed sales transaction. Significant too is the fact that it formalized its offer to return the two pieces of equipment only after respondent's demand for payment, which came more than three years after it accepted delivery. When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels the negligence of the other and, as in this case, their rights and obligations may be determined equitably under the law proscribing unjust enrichment.

Payment of Interest We, however, disagree with both the CA and the trial court's imposition of 12 percent interest on the sum to be paid by petitioner. In Eastern Shipping Lines v. CA,14 the Court laid down the following guidelines in the imposition of interest: "x x x xxx xxx

SO ORDERED. Melo Vitug, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concur.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit." Although the sum of money involved in this case was payable to a bank, the present factual milieu clearly shows that it was not a loan or forbearance of money. Thus, pursuant to established jurisprudence and Article 2009 of the Civil Code, petitioner is bound to pay interest at 6 percent per annum, computed from April 7, 1983, the time respondent bank demanded payment from petitioner. From the finality of the judgment until its satisfaction, the interest shall be 12 percent per annum.1wphi1.nt Attorney's Fees Considering that negligence is imputable to both parties, both should bear their respective costs of the suit. We also delete the award of attorney's fees in favor of respondent bank. 15 WHEREFORE, the Petition is DENIED and the assailed Decision of the Court of Appeals AFFIRMED with the following MODIFICATIONS: 1. Petitioner Rodzssen Supply Co., Inc. is ORDERED to reimburse Respondent Far East Bank and Trust Co., Inc. P76,000 plus interest thereon at the rate of 6 percent per annum computed from April 7, 1983. After this judgment becomes final, the interest shall be 12 percent per annum. 2. The award of attorney's fees in favor of respondent is DELETED. 3. No pronouncement as to costs.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 149683 June 16, 2003

records about what might have transpired next not until seven years later when the Soriano couple filed a motion to submit anew the amicable settlement. The motion was opposed by ITF on the ground that the amount expressed in the settlement would no longer be accurate considering the lapse of seven years, implying in a way that it could be amendable thereto if the computation were to be revised. The trial court denied the Soriano motion. Significantly, while the order of denial was made on the thesis that the debtor spouses, without the consent of ITF, could not unilaterally resurrect the amicable settlement, the trial court, nevertheless, made the following observations "x x x (T)hat in relation to the disapproved Amicable Settlement, the intention of ITF to agree and abide by the provisions thereof, as evidenced by the signatures thereto of its President and counsels, cannot be ignored. That intention pervades to the present time since the disapproval by the court pertains only to a technicality which in no way intruded into the substance of the agreement reached by the parties. Such being the case, the Amicable Settlement had novated the original agreement of that parties as embodied in the promissory note. The rights and obligations of the parties, therefore, at this time should be based on the provisions of the amicable settlement, these should pertain to the principal amount as of that date which the parties pegged at P431,200.00 and the legal rate of interest thereon. "The foregoing should however be a good issue in another forum, not in the present case." 2 Taking cue from the court order, the Sorianos withdrew their complaint and, on 16 October 1991, filed a case for novation and specific performance, docketed Civil Case No. 20047, before the Regional Trial Court, Branch 37, of Iloilo City. The case ultimately concluded with a finding made by the trial court in favor of herein respondents. On appeal to it, the Court of Appeals affirmed the judgment of the court a quo. The parties have submitted that the issue focuses on whether or not the amicable settlement entered into between the parties has novated the original obligation and also, as they would correctly suggest in their argument, on whether the proposed terms of the amicable settlement were carried out or have been rendered inefficacious. The "amicable settlement" read -

ILOILO TRADERS FINANCE INC., Petitioner, vs. HEIRS OF OSCAR SORIANO JR., and MARTA L. SORIANO, Respondents. DECISION VITUG, J.: On 23 October 1979 and 29 February 1980, the spouses Oscar Soriano and Marta Soriano executed two promissory notes, secured by real property mortgages, in favor of petitioner Iloilo Traders Finance, Inc. (ITF). When the Sorianos defaulted on the notes, ITF, on 23 June 1981, moved for the extrajudicial foreclosure of the mortgages. Evidently, in order to forestall the foreclosure, respondent spouses filed, on 27 August 1981, a complaint for "Declaration of a Void Contract, Injunction and Damages." On 06 January 1982, the trial court issued a writ of preliminary injunction to suspend the public sale of the hypothecated property. On 16 August 1983, the parties entered into an "Amicable Settlement" and, after affixing their signatures thereon, submitted the agreement before the court. Instead of approving forthwith the amicable settlement, the trial court required the parties to first give some clarifications on a number of items. The order read in part "Paragraph 4 of the compromise agreement dated August 16, 1983 states: That the plaintiffs waive any claims, counterclaims, attorneys fees or damages that they may hav e against herein defendants. "Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify whether the words herein defendants include defendants Bernadette Castellano and the provincial sheriff of Iloilo. "If the plaintiffs desire to dismiss the complaint against defendants Castellano and the provincial sheriff of Iloilo, they should state it categorically and in writing. "Furthermore, the Court wants to know from the plaintiffs and defendant Iloilo Traders Finance, Inc., if the writ of preliminary injunction issued on January 6, 1982 should be lifted as to all three defendants. "The clarification herein sought after by the Court shall be made in writing and signed by the parties concerned, assisted by their respective attorneys. "This Order shall be complied with within a period of ten (10) days from notice hereof." 1 The parties failed to comply with the court order. Resultantly, the trial court disapproved the amicable settlement and set the case for pre-trial. Nothing much could be gleaned from the

"COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted by their respective undersigned counsels and to this Honorable Court most respectfully submit the following Amicable Settlement, thus: "1. That the total of the two (2) accounts of plaintiff to herein defendant as of June 30, 1983 is Two Hundred Ninety Thousand Six Hundred Ninety One Pesos (P290,691.00) of which amount P10,691.00 shall be paid by plaintiffs to herein defendant at the time of the signing of this Amicable Settlement; "2. That to this amount of P290,691.00 shall be added P151,200.00 by way of interest for 36 months thus making a total of Four Hundred Thirty One Thousand Two Hundred Pesos (P431,200.00); "3. That this amount of P431,200.00 shall be paid by plaintiffs to herein defendant in 36 monthly installments as follows, the first installment at P12,005.00 shall be paid on or before August 16, 1983 and the 2nd to 36th installments at P11,977.00 shall be paid on the 15th day of each month thereafter until fully paid;

"4. That the plaintiffs waive any claims, counterclaims, attorneys fees or damages that they may have against herein defendants; "5. That should plaintiffs fail to comply with the terms of this Amicable Settlement the preliminary injunction issued in the case shall be immediately dissolved and the foreclosure and public auction sale of the properties of the plaintiffs subject of the mortgage to defendant shall immediately take place and the corresponding writ of execution shall issue from this Court; "6. That this Amicable Settlement is submitted as the basis for decision in this case. "WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing Amicable Settlement be approved."3 Novation may either be extinctiv or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate;4 in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one.5 Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first. An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation.6 Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates7 or an extension of time to pay8); in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.1wphi1 An amicable settlement or a compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. 9 It may be judicial or extrajudicial; the absence of court approval notwithstanding, 10 the agreement can become the source of rights and obligations of the parties. It would appear that the arrangement reached by the Soriano spouses and ITF would have the original obligation of respondent spouses on two promissory notes for the sums of P150,000.00 and P80,000.00, both secured by real estate mortgages, impliedly modified. The amicable settlement contained modificatory changes. Thus, (1) it increased the indebtedness of the Soriano spouses, merely due to accruing interest, from P290,691.00 to P431,200.00; (2) it extended the period of payment and provided for new terms of payment; and (3) it provided for a waiver of claims, counterclaims, attorneys fees or damages that the debtor -spouses might have against their creditor, but the settlement neither cancelled, nor materially altered the usual clauses in, the real estate mortgages, e.g., the foreclosure of the mortgaged property in case of default. Verily, the parties entered into the agreement basically to put an end to Civil Case No. 14007 then pending before the Regional Trial Court. 11 Concededly, the provisions of the settlement

were beneficial to the respondent couple. The compromise extended the terms of payment and implicitly deferred the extrajudicial foreclosure of the mortgaged property. It was well to the interest of respondent spouses to ensure its judicial approval; instead, they went to ignore the order of the trial court and virtually failed to make any further appearance in court. This conduct on the part of respondent spouses gave petitioner the correct impression that the Sorianos did not intend to be bound by the compromise settlement, and its non-materialization negated the very purpose for which it was executed. Given the circumstances, the provisions of Article 2041 of the Civil Code come in point "If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand." As so well put in Diongzon vs. Court of Appeals,12 a "supposed new agreement is deemed not to have taken effect where a debtor never complied with his undertaking." In such a case, the other party is given the option to enforce the provisions of the amicable settlement or to rescind it13 and may insist upon the original demand without the necessity for a prior judicial declaration of rescission.14 WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No. 46910, affirming that of the court a quo, is REVERSED and SET ASIDE, and another is entered dismissing the complaint in Civil Case No. 20047 before the Regional Trial Court, Branch 37, of Iloilo City. No costs. SO ORDERED. Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Republic of the Philippines SUPREME COURT FIRST DIVISION G.R. No. 145441. April 26, 2005 PHILIPPINE SAVINGS BANK, Petitioners, vs. SPS. RODOLFO C. MAALAC, JR. and ROSITA P. MAALAC, Respondents. DECISION YNARES-SANTIAGO, J.: This appeal by certiorari assails the decision of the Court of Appeals dated October 12, 2000 in CA-G.R. CV No. 502922 which affirmed with modifications the decision of the Regional Trial Court of Pasig, Branch 1613 dated April 27, 1993 in Civil Case No. 53967 which ordered the annulment of the Certificate of Sale involving TCT Nos. N-1347, N-1348 and N-3267 issued in favor of petitioner Philippine Savings Bank (PSBank) and dismissing Land Registration Case No. R-3951. The facts as culled from the records are as follows: On October 8, 1976, respondent-spouses Rodolfo and Rosita Maalac (Maalac) obtained a P1,300,000.00 loan from PSBank covered by promissory note L.C. No. 76-269. As security for the loan, Maalac executed a Real Estate Mortgage in favor of the bank over 8 parcels of land covered by TCT Nos. 417012, N-1348, N-1347, N-3267, N-8552, N-6162, 469843 and 343593. In view of Maalacs inability to pay the loan installments as they fell due, their loan obligation was restructured on October 13, 1977. Accordingly, Maalac signed another promissory note denominated as LC No. 77-232 for P1,550,000.00 payable to the order of PSBank with interest rate of 19% annum.4 To secure the payment of the restructured loan, Maalac executed a Real Estate Mortgage dated October 13, 1977 in favor of PSBank over the same aforementioned 8 real properties. On March 5, 1979, Maalac and spouses Igmidio and Dolores Galicia, with the prior consent of PSBank,5 entered into a Deed of Sale with Assumption of Mortgage involving 3 of the mortgaged properties covered by TCT Nos. N-6162 (now N-36192), N-8552 (now TCT No. N36193), and 469843 (now TCT No. N-36194). The Deed of Sale with Assumption of Mortgage contained the following stipulations: 1. The VENDEES shall assume as they hereby assume as part of the purchase price, the amount of P550,000.00, representing the portion of the mortgaged obligation of the VENDORS in favor of the Philippine Savings Bank, which is secured by that Real Estate Mortgage contract mentioned in the Second Whereas Clause hereof covering among others the above-described parcels of land under the same terms and conditions as originally constituted.
1

2. The VENDORS hereby warrant valid title to, and peaceful possession of the property herein sold subject to the encumbrance hereinbefore mentioned. 3. This instrument shall be subject to the Consent of the Philippine Savings Bank. 4. All expenses relative to this instrument including documentary stamps, registration fees, transfer taxes and other charges shall be for the account of the VENDEES. 6 Thereafter, the 3 parcels of land purchased by the Galicias, together with another property, were in turn mortgaged by them to secure a P2,600,000.00 loan which they obtained from PSBank. Specifically, the mortgaged properties include TCT Nos. N-36192, N-36193, N36194, (formerly TCT Nos. N-6162, N-8552 and 469843, respectively) and 75584.7 This loan is evidenced by Promissory Note LC-79-36.8 On March 12, 1979, Maalac paid PSBank P919,698.11 which corresponds to the value of the parcels of land covered by TCT Nos. N-36192, N-36193, and N-36194, now registered in the name of the spouses Galicia. Accordingly, PSBank executed a partial release of the real estate mortgage covered by the aforesaid properties. 9 On August 25, 1981, the spouses Galicia obtained a second loan from PSBank in the amount of P3,250,000.00 for which they executed Promissory Note LC No. 81-108. They also executed a Real Estate Mortgage in favor of the bank covering TCT Nos. N-36192, N-36193, N-36194, 75584 and 87690.10 Since Maalac defaulted again in the payment of their loan installments and despite repeated demands still failed to pay their past due obligation which now amounted to P1,804,241.76, PSBank filed with the Office of the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of their 5 remaining mortgaged properties, specifically those covered by TCT Nos. 417012, N-1347, N-1348, N-3267, and 343593. Despite several postponements of the public auction sale, Maalac still failed to pay their mortgage obligation. Thus, on May 3, 1982, the foreclosure sale of the subject real properties proceeded with PSBank as the highest bidder in the amount of P2,185,225.76. 11 On the same date, the Certificate of Sale was issued by the Acting Ex-Oficio Provincial Sheriff for Rizal province.12 Maalac failed to redeem the properties hence titles thereto were consolidated in the name of PSBank and new certificates of title were issued in favor of the bank, namely, TCT No. N79995 in lieu of TCT No. 343593; TCT No. 79996 in lieu of TCT No. 417012; TCT No. 79997 in lieu of TCT No. N-3267; TCT No. N-79998 in lieu of TCT No. N-1347; and TCT No. N-79999 in lieu of TCT No. N-1348. On December 16, 1983, Maalac wrote the Chairman of the Board of PSBank asking information on their request for the partial release of the mortgage covered by TCT Nos. N36192, N-36193, N-36194, and 417012 (now TCT No. 79996). TCT Nos. 36192, 36193, and 36194 were registered in the name of the Galicias, and mortgaged to partially secure their outstanding loan from the bank. Enclosed in the same letter is a Cashiers Check for P1,200,000.00 with a notation which reads:

Re: Payment to effect release of TCT Nos. N-36192, 36193, and 36194 under loan account of Spouses Igmedio and Dolores Galicia; and TCT No. 417012 under Loan Account of Spouses Rodolfo and Rosita Maalac. Upon receipt of the check, PSBanks Acting Manager Lino L. Macasaet issued a typewritten receipt with the inscription:13 Received from Sps. Rodolfo and Rosita Maalac and Sps. Igmidio and Dolores Galicia PCIB Check No. 002133 in the amount of One Million Two Hundred Thousand Pesos Only (P1,200,000.00). It is understood however, that receipt of said check is not a commitment on the part of the Bank to release the Four (4) TCTs requested to be released on your letter dated 19 December 1983. On December 19, 1983, the bank applied P1,000,000.00 of the P1,200,000.00 to the loan account of the Galicias as payment for the arrearages in interest and the remaining P200,000.00 thereof was applied to the expenses relative to the account of Maalac. 14 On May 23, 1985, the bank sold the property covered by TCT No. 79996 (previously TCT No. 343593) to Ester Villanueva who thereafter sold it to Maalac. On October 30, 1985, the land covered by TCT No. 79995 was sold by the bank to Teresita Jalbuena. Thereafter, or on October 20, 1986, Maalac instituted an action for damages, docketed as Civil Case No. 53967, before the Regional Trial Court of Pasig, Branch 161, against PSBank and its officers namely Cezar Valenzuela, Alfredo Barretto and Antonio Viray, and spouses Alejandro and Teresita Jalbuena. The bank also filed a petition, docketed as LRC Case No. R-3951, before the Regional Trial Court of Pasig, Branch 159, for the issuance of a writ of possession against the properties covered by TCT Nos. N-79997, N-79998, and N-79999 (formerly TCT Nos. N-3267, N-1347, and N-1348) and the ejectment of the respondents. In an order dated January 2, 1989, the trial court consolidated LRC Case No. R-3951 with Civil Case No. 53967. On April 27, 1993, a judgment was rendered the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered ordering: For Civil Case No. 53967 1. The annulment of the Certificate of Sale issued by the acting Ex-Oficio Provincial Sheriff of Rizal on May 3, 1982 involving Transfer Certificate of Title Nos. N-1347-Rizal, N-1348-Rizal and N-3267-Rizal and the Contract to Sell executed by defendant PSB in favor of defendants spouses Alejandro Jalbuena and Teresita Jalbuena involving the real property covered by Transfer Certificate of Title No. N-79995; and, 2. The dismissal of counterclaims for lack of merit. For Land Registration Case No. R-3951

3. The dismissal of the petition for lack of merit. No costs. SO ORDERED.15 The Court of Appeals affirmed with modification the decision of the trial court, the decretal portion of which reads: WHEREFORE, the decision appealed from is AFFIRMED with the modification that the defendant-appellant Philippine Savings Bank is directed to indemnify the plaintiffs-appellants in the amount of Two Hundred Thousand Pesos (200,000.00) each as moral damages. Costs against the defendant-appellant bank. SO ORDERED.16 Hence the instant petition which raises the following issues: THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY PROBABLY NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT: a.] HELD THAT THE GENERAL RULE WITH RESPECT TO THE ISSUANCE OF WRITS OF POSSESSION SHOULD NOT BE APPLIED IN THIS CASE, AND WHAT SHOULD INSTEAD BE APPLIED IS THE EXCEPTION ENUNCIATED IN VACA VS. COURT OF APPEALS, 234 SCRA 146; b.] UPHELD THE CONSOLIDATION OF CIVIL CASE NO. 53967 WITH LRC CASE NO. 3951 WHEN PROCEDURALLY THOSE TWO PROCEEDINGS COULD SCARCELY BE CONSOLIDATED; c.] HELD THAT SUPPOSEDLY THERE WAS A NOVATION "OF THE PREVIOUS MORTGAGE OF THE PROPERTIES" WHEN IN TRUTH AND IN FACT THE MORTGAGE HAD ALREADY CEASED TO EXIST, THAT IS, THE MORTGAGE HAD BECOME NULL AND VOID AS THE SAME HAD BEEN FORECLOSED BY PETITIONER; d.] AWARDED MORAL DAMAGES IN FAVOR OF RESPONDENTS.17 Petitioner claims that the Court of Appeals erred in sustaining the trial courts order consolidating Civil Case No. 53967 with LRC Case No. R-3951, arguing that consolidation is proper only when it involves actions, which means an ordinary suit in a court of justice by which one party prosecutes another for the enforcement or protection of a right, or a prevention of a wrong. Citing A.G. Development Corp. v. Court of Appeals ,18 petitioner posits that LRC Case No. R-3951, being summary in nature and not being an action within the contemplation of the Rules of Court, should not have been consolidated with Civil Case No. 53967. We do not agree. In Active Wood Products Co., Inc. v. Court of Appeals ,19 this Court also deemed it proper to consolidate Civil Case No. 6518-M, which was an ordinary civil action, with LRC Case No. P-39-84, which was a petition for the issuance of a writ of possession. The

Court held that while a petition for a writ of possession is an ex parte proceeding, being made on a presumed right of ownership, when such presumed right of ownership is contested and is made the basis of another action, then the proceedings for writ of possession would also become groundless. The entire case must be litigated and if need be must be consolidated with a related case so as to thresh out thoroughly all related issues. In the same case, the Court likewise rejected the contention that under the Rules of Court only actions can be consolidated. The Court held that the technical difference between an action and a proceeding, which involve the same parties and subject matter, becomes insignificant and consolidation becomes a logical conclusion in order to avoid confusion and unnecessary expenses with the multiplicity of suits. In the instant case, the consolidation of Civil Case No. 53967 with LRC Case No. R-3951 is more in consonance with the rationale behind the consolidation of cases which is to promote a more expeditious and less expensive resolution of the controversy than if they were heard independently by separate branches of the trial court. Hence, the technical difference between Civil Case No. 53967 and LRC Case No. R-3951 must be disregarded in order to promote the ends of justice. Petitioner also contends that the Court of Appeals committed reversible error in applying the doctrine laid down inBarican v. Intermediate Appellate Court.20 It insists on the application of the general rule that it is ministerial upon the court to issue a writ of possession on the part of the purchaser in a foreclosure sale. It argues that the Baricandoctrine is inapplicable because the sale with assumption of mortgage in the present case involves properties different from those which are the subject of the writ of possession while in Barican, the assumption of mortgage refers to the same property subject of the writ of possession. We recall that the Court of Appeals applied the Barican doctrine based on the following factual similarities between the two cases, thus:21 "In Civil Case No. C-11232, the petitioner-spouses claim ownership of the foreclosed property against the respondent bank and Nicanor Reyes to whom the former sold the property by negotiated sale; the complaint alleged that the DBP knew the assumption of mortgage between the mortgagors and the petitioner-spouses and the latter have paid to the respondent bank certain amounts to update the loan balances of the mortgagors and transfer and restructuring fees which payments are duly receipted; the petitioner-spouses were already in possession of the property since September 28, 1979 and long before the respondent bank sold the same property to respondent Nicanor Reyes on October 28, 1984; and the respondent bank never took physical possession of the property." In a similar manner, the following facts were duly established in the case at bench: 1. The petition for issuance of the writ of possession was only filed sometime in May 1988 although the right of redemption lapsed as early as May 7, 1983; 2. Appellant bank neither obtained physical possession of the properties nor did they file any action for ejectment against the plaintiffs-appellants; 3. On December 16, 1983, the plaintiffs-appellants issued a check in favor of the appellant bank to effect the release of TCT Nos. 36192, 36193, 36194 and 417012 which was applied by appellant bank to the plaintiffs-appellants account and that of the Galicias and; 4. Appellant bank executed a Deed of Absolute Sale over TCT No. 79996 (formerly TCT No. 417012) on May 23, 1985 in favor of a certain Elsa Calusa Villanueva who thereafter sold it back to the plaintiffs-appellants. Hence, the same ruling in the Barican case should be applied, that is, "the obligation of a court to issue a writ of possession in favor of the purchaser in a foreclosure of mortgage case ceases to be ministerial. We agree with the petitioner. While indeed the two cases demonstrate palpable similarities, the Court of Appeals overlooked essential differences that would render the Barican doctrine inapplicable to the instant case. In Barican, the issuance of the writ of possession was

deferred because a pending action for the declaration of ownership over the foreclosed property was made by an adverse claimant who was in possession of the subject property. Clearly, the rights of the third parties, who are plaintiffs in the pending civil case, would be adversely affected with the implementation of the writ. In the instant case, the petitioner bank became the absolute owner of the properties subject of the writ of possession, after they were foreclosed, and titles thereto were consolidated in the name of the bank. It sufficiently established its ownership over the parcels of land subject of the writ of possession, by presenting in evidence the Certificate of Sale, 22 Affidavit of Consolidation of Ownership,23 and copies of new TCTs of the foreclosed properties in the name of the petitioner.24 Unlike in Barican, the ownership of the foreclosed properties are not open to question the ownership thereof being established by competent evidence. Moreover, as earlier pointed out by the petitioner, the parcels of land subject of the writ of possession are different from those sold by the petitioner bank to Jalbuena and Villanueva. Hence, unlike in the Barican case, the implementation of the writ will not affect the rights of innocent third persons. On the issue of novation, the Court of Appeals held that novation occurred when PSBank applied P1,000,000.00 of the P1,200,000.00 PCIB Check No. 002133 tendered by Maalac to the loan account of the Galicias and the remaining P200,000.00 thereof to Maalacs account. It held that when the bank applied the amount of the check in accordance with the instructions contained therein, there was novation of the previous mortgage of the properties. It further observed that the bank was fully aware that the issuance of the check was conditional hence, when it made the application thereof, it agreed to be bound by the conditions imposed by Maalac.25 Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or, by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. In order for novation to take place, the concurrence of the following requisites is indispensable: 1. There must be a previous valid obligation, 2. There must be an agreement of the parties concerned to a new contract, 3. There must be the extinguishment of the old contract, and 4. There must be the validity of the new contract. 26 The elements of novation are patently lacking in the instant case. Maalac tendered a check for P1,200,000.00 to PSBank for the release of 4 parcels of land covered by TCT Nos. N36192, 36193, and 36194, under the loan account of the Galicias and 417012 (now TCT No. 79996) under the loan account of Maalac. However, while the bank applied the tendered amount to the accounts as specified by Maalac, it nevertheless refused to release the subject properties. Instead, it issued a receipt with a notation that the acceptance of the check is not a commitment on the part of the bank to release the 4 TCTs as requested by Maalac. From the foregoing, it is obvious that there was no agreement to form a new contract by novating the mortgage contracts of the Maalacs and the Galicias. In accepting the check, the

bank only acceded to Maalacs instruction on whose loan accounts the proceeds shall be applied but rejected the other condition that the 4 parcels of land be released from mortgage. Clearly, there is no mutual consent to replace the old mortgage contract with a new obligation. The conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement. Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unmistakable. The extinguishment of the old obligation by the new one is a necessary element of novation, which may be effected either expressly or impliedly. The term "expressly" means that the contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations. 27 A fortiori, 3 of the 4 properties sought to be released from mortgage, namely, TCT Nos. N36192, N-36193, and N-36194, have already been sold by Maalac to Galicia and are now registered in the name of the latter who thereafter mortgaged the same as security to a separate loan they obtained from the bank. Thus, without the consent of PSBank as the mortgagee bank, Maalac, not being a party to the mortgage contract between the Galicias and the bank, cannot demand much less impose upon the bank the release of the subject properties. Unless there is a stipulation to the contrary, the release of the mortgaged property can only be made upon the full satisfaction of the loan obligation upon which the mortgage attaches. Unfortunately, Maalac has not shown that the P1,000,000.00 was sufficient to cover not only the accrued interests but also the entire indebtedness of the Galicias to the bank. Neither can Maalac be deemed substitute debtor within the contemplation of Article 1293 of the Civil Code, which states that: Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.28 In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume the formers place in the relation. Novation is never presumed. Consequently, that which arises from a purported change in the person of the debtor must be clear and express. It is thus incumbent on Maalac to show clearly and unequivocally that novation has indeed taken place. 29 InMagdalena Estates Inc. v. Rodriguez,30 we held that "the mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor." Maalac has not shown by competent evidence that they were expressly taking the place of Galicia as debtor, or that the latter were being released from their solidary obligation. Nor was it shown that the obligation of the Galicias was being extinguished and replaced by a new one. The existence of novation must be shown in clear and unmistakable terms.

Likewise, we hold that Maalac cannot demand to repurchase the foreclosed piece of land covered by TCT No. 417012 (now TCT No. 79996) from the bank. Its foreclosure and the consolidation of ownership in favor of the bank and the resultant cancellation of mortgage effectively cancelled the mortgage contract between Maalac and the bank. Insofar as TCT No. 417012 is concerned, there is no more existing mortgage to speak of. As the absolute owner of the foreclosed property, the petitioner has the discretion to reject or accept any offer to repurchase. Granting arguendo that a new obligation was established with the acceptance by the bank of the PCIB Check and its application to the loan account of Maalac on the condition that TCT No. 417012 would be released, this new obligation however could not supplant the October 13, 1977 real estate mortgage executed by Maalac, which, by all intents and purposes, is now a defunct and non-existent contract. As mentioned earlier, novation cannot be presumed. We however sustain the award of moral damages. While the bank had the legal basis to withhold the release of the mortgaged properties, nevertheless, it was not forthright and was lacking in candor in dealing with Maalac. In accepting the PCIB Check, the bank knew fully well that the payment was conditioned on its commitment to release the specified properties. At the first instance, the bank should not have accepted the check or returned the same had it intended beforehand not to honor the request of Maalac. In accepting the check and applying the proceeds thereof to the loan accounts of Maalac and Galicia, the former were led to believe that the bank was favorably acting on their request. In justifying the award of moral damages, the Court of Appeals correctly observed that "there is the unjustified refusal of the appellant bank to make a definite commitment while profiting from the proceeds of the check by applying it to the principal and the interest of the Galicias and plaintiff-appellants."31 Moral damages are meant to compensate the claimant for any physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injuries unjustly caused. Although incapable of pecuniary estimation, the amount must somehow be proportional to and in approximation of the suffering inflicted. Moral damages are not punitive in nature and were never intended to enrich the claimant at the expense of the defendant. There is no hard-and-fast rule in determining what would be a fair and reasonable amount of moral damages, since each case must be governed by its own peculiar facts. Trial courts are given discretion in determining the amount, with the limitation that it "should not be palpably and scandalously excessive." Indeed, it must be commensurate to the loss or injury suffered.32 Respondent Rosita Maalac has adequately established the factual basis for the award of moral damages when she testified that she suffered mental anguish and social humiliation as a result of the failure of the bank to release the subject properties or its failure to return the check despite its refusal to make a definite commitment to comply with the clearly-stated object of the payment. Respondent Rodolfo Maalac however is not similarly entitled to moral damages. The award of moral damages must be anchored on a clear showing that he actually experienced mental anguish, besmirched reputation, sleepless nights, wounded feelings or similar injury. There was no better witness to this experience than respondent himself. Since respondent Rodolfo Maalac failed to testify on the witness stand, the trial court did not have any factual basis to award moral damages to him.33 Indeed, respondent Rodolfo Maalac should have taken the witness stand and should have testified on the mental anguish, serious anxiety, wounded feelings and other emotional and mental suffering he purportedly suffered to sustain his claim for moral damages. Mere allegations do not suffice; they must be substantiated by clear and convincing proof.

Nevertheless, we find the award of P200,000.00 excessive and unconscionable. As we said, moral damages are not intended to enrich the complainant at the expense of the defendant. Rather, these are awarded only to enable the injured party to obtain "means, diversions or amusements" that will serve to alleviate the moral suffering that resulted by reason of the defendants culpable action. The purpose of such damages is essentially indemnity or reparation, not punishment or correction. In other words, the award thereof is aimed at a restoration within the limits of the possible, of the spiritual status quo ante; therefore, it must always reasonably approximate the extent of injury and be proportional to the wrong committed.34 The award of P50,000.00 as moral damages is reasonable under the circumstances.35 WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 12, 2000 in CA-G.R. CV No. 50292 is REVERSED and SET ASIDE. The petitioner Philippine Savings Bank is DIRECTED to indemnify respondent Rosita P. Maalac in the amount of P50,000.00 as moral damages. The Regional Trial Court of the City of Pasig, Branch 161 is ORDERED to issue a writ of possession in favor of Philippine Savings Bank. No costs. SO ORDERED. Davide, Jr., C.J. (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

On December 21, 1991, Sarao filed against the Ramos spouses a Petition "for consolidation of ownership in pacto de retro sale" docketed as Civil Case No. 91-3434 and raffled to Branch 61 of the RTC of Makati City.10 Civil Case Nos. 91-2188 and 91-3434 were later consolidated and jointly tried before Branch 145 of the said Makati RTC. 11 The two lower courts narrated the trial in this manner:

G.R. No. 149756

February 11, 2005 "x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and her husband borrowed from Sarao the amount of P1,234,000.00, payable within six (6) months, with an interest thereon at 4.5% compounded monthly from said date until August 21, 1991, in order for them to pay [the] mortgage on their house. For and in consideration of the said amount, they executed a deed of sale under a [pacto de retro] in favor of Sarao over their conjugal house and lot registered under TCT No. 151784 of the Registry of Deeds of Makati (Exhibit A). She further claimed that Sarao will keep the torrens title until the lapse of the 6-month period, in which case she will redeem [the] subject property and the torrens title covering it. When asked why it was the amount of P1,310,430 instead of the aforestated amount which appeared in the deed, she explained that upon signing of the deed in question, the sum of P20,000.00 representing attorneys fees was added, and its total amount was multiplied with 4.5% interest rate, so that they could pay in advance the compounded interest. She also stated that although the market value of the subject property as of February 1991 [was] calculated to [be] more or less P10 million, it was offered [for] only P1,310,430.00 for the reason that they intended nothing but to redeem the same. In May 1991, she wrote a letter to Atty. Mario Aguinaldo requesting him to give a computation of the loan obligation, and [expressed] her intention to redeem the subject property, but she received no reply to her letter. Instead, she, through her husband, secured directly from Sarao a handwritten computation of their loan obligation, the total of which amount[ed] to P1,562,712.14. Later, she sent several letters to Sarao, [furnishing] Atty. Aguinaldo with copies, asking them for the updated computation of their loan obligation as of July 1991, but [no reply was again received]. During the hearing of February 17, 1992, she admitted receiving a letter dated July 23, 1991 from Atty. Aguinaldo which show[ed] the computation of their loan obligation [totaling] to P2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she claimed that she offered the redemption price in the form of two (2) managers checks amounting to P1,633,034.20 (Exhs. H-1 & H-2) to Atty. Aguinaldo, but the latter refused to accept them because they [were] not enough to pay the loan obligation. Having refused acceptance of the said checks covering the redemption price, on August 13, 1991 she came to Court to consign the checks (Exhs. L-4 and L-5). Subsequently, she proceeded to the Register of Deeds to cause the annotation of lis pendens on TCT No. 151784 (Exh. B-1-A). Hence, she filed the x x x civil case against Sarao. "On the other hand, Sarao testified as follows: On February 21, 1991, spouses Ramos together with a certain Linda Tolentino and her husband, Nestor Tolentino approached her and offered transaction involv[ing a] sale of property[. S]he consulted her lawyer, Atty. Aguinaldo, and on the same date a corresponding deed of sale underpacto de retro was executed and signed (Exh. 1 ). Later on, she sent, through her lawyer, a demand letter dated June 10, 1991 (Exh. 6) in view of Myrnas failure to pay the monthly interest of 4.5% as agreed upon under the deed[. O]n June 14, 1991 Jonas replied to said demand letter (Exh. 8); in the reply Jonas admitted that he no longer ha[d] the capacity to redeem the property and to pay the interest. In view of the said reply of Jonas, [Sarao] filed the corresponding consolidation proceedings. She [further claimed] that before filing said action she incurred expenses including payment of real estate taxes in arrears, x x x transfer tax and capital [gains] tax, and [expenses] for [the] consolidated proceedings, for which these expenses were accordingly receipted (Exhs. 6, 6-1 to 6-0). She also presented a modified computation of the expenses she had incurred in connection with the execution of the subject deed (Exh. 9). She also testified that Myrna did not tender payment of the correct and sufficient price for said real property within the 6-month period as stipulated in the contract, despite her having been

MYRNA RAMOS, petitioner, vs. SUSANA S. SARAO and JONAS RAMOS, respondents. DECISION PANGANIBAN, J.: Although the parties in the instant case denominated their contract as a "DEED OF SALE UNDER PACTO DE RETRO," the "sellers" have continued to possess and to reside at the subject house and lot up to the present. This evident factual circumstance was plainly overlooked by the trial and the appellate courts, thereby justifying a review of this case. This overlooked fact clearly shows that the petitioner intended merely to secure a loan, not to sell the property. Thus, the contract should be deemed an equitable mortgage. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the August 31, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 50095, which disposed as follows: "WHEREFORE, the instant appeal is DISMISSED for lack of merit. The decision dated January 19, 1995 of the Regional Trial Court, Branch 145, Makati City is AFFIRMEDin toto."3 The Facts On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract over their conjugal house and lot in favor of Susana S. Sarao for and in consideration of P1,310,430.4 Entitled "DEED OF SALE UNDER PACTO DE RETRO," the contract, inter alia, granted the Ramos spouses the option to repurchase the property within six months from February 21, 1991, for P1,310,430 plus an interest of 4.5 percent a month. 5 It was further agreed that should the spouses fail to pay the monthly interest or to exercise the right to repurchase within the stipulated period, the conveyance would be deemed an absolute sale.6 On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the form of two managers checks, which the latter refused to accept for being allegedly insufficient.7 On August 8, 1991, Myrna filed a Complaint for the redemption of the property and moral damages plus attorneys fees.8 The suit was docketed as Civil Case No. 91-2188 and raffled to Branch 145 of the Regional Trial Court (RTC) of Makati City. On August 13, 1991, she deposited with the RTC two checks that Sarao refused to accept. 9

shown the computation of the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna has tendered payment amounting to P1,633,034.20 in the form of two managers checks, but these were refused acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the computation of the loan obligation inclusive of said expenses. Finally, she denied the allegations made in the complaint that she allied herself with Jonas, and claimed that she ha[d] no knowledge about said allegation." 12 After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to consolidate the title of the property in her favor.13 Aggrieved, Myrna elevated the case to the CA. Ruling of the Court of Appeals

substantial injustice would have been inflicted on petitioner. Since the Court of Appeals is not a party here, failure to serve it a copy of the Petition would not violate any right of respondent. Service to the CA is indeed mentioned in the Rules, but only to inform it of the pendency of the appeal before this Court. As regards Item 2, there are exceptions to the general rule barring a review of questions of fact.19 The Court reviewed the factual findings in the present case, because the CA had manifestly overlooked certain relevant and undisputed facts which, after being considered, justified a different conclusion.20 Pacto de Retro Sale Distinguished from Equitable Mortgage

The appellate court sustained the RTCs finding that the disputed contract was a bonafide pacto de retro sale, not a mortgage to secure a loan.14 It ruled that Myrna Ramos had failed to exercise the right of repurchase, as the consignation of the two managers checks was deemed invalid. She allegedly failed (1) to deposit the correct repurchase price and (2) to comply with the required notice of consignation. 15 Hence, this Petition. The Issues Petitioner raises the following issues for our consideration: "1. Whether or not the honorable appellate court erred in ruling the subject Deed of Sale under Pacto de Retro was, and is in reality and under the law an equitable mortgage; "2. Whether or not the honorable appellate court erred in affirming the ruling of the court a quo that there was no valid tender of payment of the redemption price neither [sic] a valid consignation in the instant case; and "3. Whether or not [the] honorable appellate court erred in affirming the ruling of the court a quo denying the claim of petitioner for damages and attorneys fees." 17 The Courts Ruling The Petition is meritorious in regard to Issues 1 and 2. First Issue: A Pacto de Retro Sale or an Equitable Mortgage? Respondent Sarao avers that the herein Petition should have been dismissed outright, because petitioner (1) failed to show proof that she had served a copy of it to the Court of Appeals and (2) raised questions of fact that were not proper issues in a petition under Rule 45 of the Rules of Court.18 This Court, however, disregarded the first ground; otherwise,
16

The pivotal issue in the instant case is whether the parties intended the contract to be a bona fide pacto de retrosale or an equitable mortgage. In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a retro, subject only to the repurchase by the vendor a retro within the stipulated period. 21 The vendor a retros failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by operation of law, absolute title to the property. 22 Such title is not impaired even if the vendee a retro fails to consolidate title under Article 1607 of the Civil Code.23 On the other hand, an equitable mortgage is a contract that -- although lacking the formality, the form or words, or other requisites demanded by a statute -- nevertheless reveals the intention of the parties to burden a piece or pieces of real property as security for a debt. 24 The essential requisites of such a contract are as follows: (1) the parties enter into what appears to be a contract of sale, but (2) their intention is to secure an existing debt by way of a mortgage.25 The nonpayment of the debt when due gives the mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to the satisfaction of the loan obligation.26 This Court has consistently decreed that the nomenclature used by the contracting parties to describe a contract does not determine its nature.27 The decisive factor is their intention -- as shown by their conduct, words, actions and deeds -- prior to, during, and after executing the agreement.28 This juristic principle is supported by the following provision of law: Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. 29 Even if a contract is denominated as a pacto de retro, the owner of the property may still disprove it by means of parol evidence,30 provided that the nature of the agreement is placed in issue by the pleadings filed with the trial court.31 There is no single conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage. 32 However, the law enumerates several instances that show when a contract is presumed to be an equitable mortgage, as follows: Article 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. 33 Furthermore, a contract purporting to be a pacto de retro is construed as an equitable mortgage when the terms of the document and the surrounding circumstances so require.34 The law discourages the use of a pacto de retro, because this scheme is frequently used to circumvent a contract known as a pactum commissorium. The Court has frequently noted that a pacto de retro is used to conceal a contract of loan secured by a mortgage. 35Such construction is consistent with the doctrine that the law favors the least transmission of rights.36 Equitable Mortgage Presumed to be Favored by Law Jurisprudence has consistently declared that the presence of even just one of the circumstances set forth in the forgoing Civil Code provision suffices to convert a contract to an equitable mortgage.37 Article 1602 specifically states that the equitable presumption applies to any of the cases therein enumerated. In the present factual milieu, the vendor retained possession of the property allegedly sold.38 Petitioner and her children continued to use it as their residence, even after Jonas Ramos had abandoned them.39 In fact, it remained as her address for the service of court orders and copies of Respondent Saraos pleadings. 40 The presumption of equitable mortgage imposes a burden on Sarao to present clear evidence to rebut it. Corollary to this principle, the favored party need not introduce proof to establish such presumption; the party challenging it must overthrow it, lest it persist. 41 To overturn that prima facie fact that operated against her, Sarao needed to adduce substantial and credible evidence to prove that the contract was a bona fide pacto de retro. This evidentiary burden she miserably failed to discharge. Contrary to Saraos bare assertions, a meticulous review of the evidence reveals that the alleged contract was executed merely as security for a loan.

The July 23, 1991 letter of Respondent Saraos lawyer had required petitioner to pay a computed amount -- under the heading "House and Lot Loan"42 -- to enable the latter to repurchase the property. In effect, respondent would resell the property to petitioner, once the latters loan obligation would have been paid. This explicit requirement was a clear indicati on that the property was to be used as security for a loan. The loan obligation was clear from Saraos evidence as found by the trial court, which we quote: "x x x [Sarao] also testified that Myrna did not tender payment of the correct and sufficient price for said real property within the 6-month period as stipulated in the contract, despite her having been shown the computation of the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna has tendered payment amounting to P1,633,034.20 in the form of two managers checks, but these were refused acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the computation of the loan obligation inclusive of said expenses. x x x."43 Respondent herself stressed that the pacto de retro had been entered into on the very same day that the property was to be foreclosed by a commercial bank. 44 Such circumstance proves that the spouses direly needed funds to avert a foreclosure sale. Had they intended to sell the property just to realize some profit, as Sarao suggests,45they would not have retained possession of the house and continued to live there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a loan obligation, not to transfer ownership of the property. Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer that the contract was a pacto de retro.46 That letter, however, cannot override the finding that the pacto de retro was executed merely as security for a loan obligation. Moreover, on May 17, 1991, prior to the transmittal of the letter, petitioner had already sent a letter to Saraos lawyer expressing the formers desire to settle the mortgage on the property. 47Considering that she had already denominated the transaction with Sarao as a mortgage, petitioner cannot be prejudiced by her husbands alleged admission, especially at a time when they were already estranged.48 Inasmuch as the contract between the parties was an equitable mortgage, Respondent Saraos remedy was to recover the loan amount from petitioner by filing an action for the amount due or by foreclosing the property.49 Second Issue: Propriety of Tender of Payment and Consignation Tender of payment is the manifestation by debtors of their desire to comply with or to pay their obligation.50 If the creditor refuses the tender of payment without just cause, the debtors are discharged from the obligation by the consignation of the sum due. 51 Consignation is made by depositing the proper amount to the judicial authority, before whom the tender of payment and the announcement of the consignation shall be proved. 52 All interested parties are to be notified of the consignation.53 Compliance with these requisites is mandatory. 54

The trial and the appellate courts held that there was no valid consignation, because petitioner had failed to offer the correct amount and to provide ample consignation notice to Sarao.55 This conclusion is incorrect. Note that the principal loan was P1,310,430 plus 4.5 per cent monthly interest compounded for six months. Expressing her desire to pay in the fifth month, petitioner averred that the total amount due was P1,633,034.19, based on the computation of Sarao herself.56 The amount of P2,911,579.22 that the latter demanded from her to settle the loan obligation was plainly exorbitant, since this sum included other items not covered by the agreement. The property had been used solely as secure ty for the P1,310,430 loan; it was therefore improper to include in that amount payments for gasoline and miscellaneous expenses, taxes, attorneys fees, and other alleged loans. When Sarao unjustly refused the tender of payment in the amount of P1,633,034.20, petitioner correctly filed suit and consigned the amount in order to be released from the latters obligation. The two lower courts cited Article 1257 of the Civil Code to justify their ruling that petitioner had failed to notify Respondent Sarao of the consignation. This provision of law states that the obligor may be released, provided the consignation is first announced to the parties interested in the fulfillment of the obligation. The facts show that the notice requirement was complied with. In her August 1, 1991 letter, petitioner said that should the respondent fail to accept payment, the former would consign the amount.57 This statement was an unequivocal announcement of consignation. Concededly, sending to the creditor a tender of payment and notice of consignation -- which was precisely what petitioner did -- may be done in the same act.58 Because petitioners consignation of the amount of P1,633,034.20 was valid, it produced the effect of payment.59"The consignation, however, has a retroactive effect, and the payment is deemed to have been made at the time of the deposit of the thing in court or when it was placed at the disposal of the judicial authority."60 "The rationale for consignation is to avoid making the performance of an obligation more onerous to the debtor by reason of causes not imputable to him."61 Third Issue: Moral Damages and Attorneys Fees Petitioner seeks moral damages in the amount of P500,000 for alleged sleepless nights and anxiety over being homeless.62 Her bare assertions are insufficient to prove the legal basis for granting any award under Article 2219 of the Civil Code.63 Verily, an award of moral damages is uncalled for, considering that it was Respondent Saraos accommodation that settled the earlier obligation of the spouses with the commercial bank and allowed them to retain ownership of the property. Neither have attorneys fees been shown to be proper. 64 As a general rule, in the absence of a contractual or statutory liability therefor, sound public policy frowns on penalizing the right to litigate.65 This policy applies especially to the present case, because there is a need to determine whether the disputed contract was a pacto de retro sale or an equitable mortgage. Other Matters

In a belated Manifestation filed on October 19, 2004, Sarao declared that she was the "owner of the one-half share of Jonas Ramos in the conjugal property," because of his alleged failure to file a timely appeal with the CA.66 Such declaration of ownership has no basis in law, considering that the present suit being pursued by petitioner pertains to a mortgage covering the whole property. Besides, it is basic that defenses and issues not raised below cannot be considered on appeal.67 The Court, however, observes that Respondent Sarao paid real property taxes amounting to P67,567.10 to halt the auction sale scheduled for October 8, 2004, by the City of Muntinlupa.68 Her payment was made in good faith and benefited petitioner. Accordingly, Sarao should be reimbursed; otherwise, petitioner would be unjustly enriched, 69 under Article 2175 of the Civil Code which provides: Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled to reimbursement from the latter. WHEREFORE, the Petition is partly GRANTED and the assailed Decision SET ASIDE. Judgment is hereby rendered: (1) DECLARING (a) the disputed contract as an equitable mortgage, (b) petitioners loan to Respondent Sarao to be in the amount of P1,633,034.19 as of July 30, 1991; and (c) the mortgage on the property -- covered by TCT No. 151784 in the name of the Ramos spouses and issued by the Register of Deeds of Makati City --as discharged (2) ORDERING the RTC to release to Sarao the consigned amount of P1,633,034.19 (3) COMMANDING Respondent Sarao to return to petitioner the owners copy of TCT No. 151784 in the name of the Ramos spouses and issued by the Register of Deeds of Makati City (4) DIRECTING the Register of Deeds of Makati City to cancel Entry No. 24057, the annotation appearing on TCT No. 151784 (5) ORDERING petitioner to pay Sarao in the amount of P67,567.10 as reimbursement for real property taxes No pronouncement as to costs. SO ORDERED. Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 142439 December 6, 2006

industrial and residential site and to transfer the same to the National Housing Authority. Section 2. Individuals who have legally acquired farm lots in the Estate under Orders of Award or Certificates of Land Transfer or Agreement to Sell or Deeds of Sale, may sell or transfer their lots covered thereby or convert the same for the purposes mentioned in Section 1 hereof. The Register of Deeds of the Province of Laguna issued Transfer Certificate of Title (TCT) No. 62731, covering the subject land, in the name of Ricardo Alvarez on 25 May 1979. On 10 June 1979, only 16 days after the title was issued, Ricardo Alvarez and his wife, Rosario Param, sold the said land to Mercedes Oliver for Ten Thousand Pesos (P10, 000.00). Oliver was not a relative within the third degree of consanguinity and had no capacity to personally cultivate the land, as required of a qualified beneficiary. Thus, TCT No. 62731 was cancelled, and TCT No. 64967 was issued in the name of Mercedes Oliver.7 On 22 December 1989, Mercedes Oliver sold the subject land to Filinvest, resulting in the issuance of TCT No. 201836 on 23 January 1990 in the name of Filinvest. 8 On 7 March 1982, the heirs of the late Ricardo Alvarez filed a case for reconveyance, redemption and damages against Mercedes Oliver, Avelino Ramos and Jose Nunez, before the Regional Trial Court (RTC) of Bian, Laguna. 9 Respondents filed an Amended Complaint for Annulment of Title with Reconveyance, dated 4 December 1985, wherein they claim that the sale of the subject land was made without their knowledge, and it was only in the 1980s that they learned of such sale. They alleged that their mother and father, both illiterate, were deceived by the defendants into executing the Deed of Sale covering the subject land in favor of Mercedes Oliver. Respondents also argued that such sale was void since the Deed of Sale was executed in violation of the law which enjoins the sale of the subject land. 10 This case was, however, dismissed for failure of the respondents and counsel to appear during the hearing for the reception of their evidence, despite due notice and after eight postponements11. The RTC, in its Order,12 dated 17 February 1989, ruled that: Further considering that without the evidence of said witness and the plaintiffs not having presented any evidence on record, upon motion of counsel for defendants that this case be dismissed and further manifestation by the defendants that they are waiving their right to a counterclaim, the Court hereby orders the dismissal of this case (both the complaint and counterclaim). Let copy of this Order be furnished party plaintiff. The order became final and executory when the respondents failed to file a motion for reconsideration of this Order, despite receipt thereof. 13 On 26 March 1990, respondents filed a complaint against Mercedes Oliver and Filinvest before the Provincial Agrarian Reform Adjudication (PARAD) of Sta. Cruz, Laguna, seeking to annul the Deed of Sale between the Spouses Alvarez and Mercedes Oliver and the subsequent transfer between Mercedes Oliver and Filinvest, on grounds similar to the complaint filed before the RTC of Bian. They also sought the issuance of a restraining order enjoining Filinvest from bulldozing the subject land, which was occupied and cultivated by the respondents. Mercedes Oliver filed a Motion to Dismiss on the grounds of res judicata and that the PARAD had no jurisdiction over the subject matter of the case. Filinvest similarly filed a motion to dismiss on the grounds of res judicata and laches. It also alleged, in its defense, that

FILINVEST LAND, INC., petitioner, vs. HON. COURT OF APPEALS and ROMEO, ANTONIO, JOSEFINA, RICARDO (JR.), all surnamed ALVAREZ and VENANCIA R. Vda. de ALVAREZ, for herself as guardian ad litem for her minor children, RAMON, VERONICA, and FLORDELIZA, all surnamed ALVAREZ, and as necessary and indispensable party plaintiffs JAIME, VICTORIA, and MANUEL, all surnamed ALVAREZ, and ROSARIO PARAM Vda. de ALVAREZ, respondents. DECISION CHICO-NAZARIO, J.: This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Court, as amended, seeking to set aside a Decision1 of the Court of Appeals dated 11 November 1998 in CAG.R. SP No. 48396 annulling the sale of a parcel of land specified as Lot No. 329, GSS-877 of the Laguna Resettlement Project, to the late Ricardo Alvarez and the subsequent transfers to Mercedes Oliver and petitioner Filinvest Land Inc. (Filinvest); and the reversion of the subject property to the ownership of the government. The Court of Appeals in its assailed Decision affirmed the Decision2 of the Department of Agrarian Reform Adjudication Board (DARAB) dated 1 July 1998. The subject matter in this case is a parcel of land registered as Lot No. 329 of the Laguna Resettlement Project, located in Barrio San Vicente, San Pedro, Laguna, with an area of 16,495 square meters. The Department of Agrarian Reform (DAR) awarded to Ricardo Alvarez the right to purchase the land in question, pursuant to an Order of Award dated 9 October 1973.3 On 15 August 1977, Ricardo Alvarez, with the consent of his wife, respondent Rosario Param, purchased the land, evidenced by a Deed of Sale executed by the DAR. 4 This Deed of Sale specifically prohibited the transfer of the land within ten (10) years from the issuance of the certificate of title to any person other than the vendees relatives within the third civil degree by consanguinity or affinity who are, at the same time, qualified beneficiaries.5 This restriction was in accordance with Section 62 of Republic Act No. 3844, or the Agricultural Land Reform Code.6 However, pending the issuance of the certificate of title of the said land, Presidential Decree No. 1474, Declaring the San Pedro Tunasan Estate (also known as the Laguna Resettlement Project) of the Department of Agrarian Reform Suitable for Residential, Commercial, or Industrial, or other Non-Agricultural Purposes, was enacted on 11 June 1978 and published in the Official Gazette on 27 November 1978. This effectively repealed the ten-year prohibition on the transfer of agrarian lands situated in the Laguna Resettlement Project. Presidential Decree No. 1474 provided that: Section 1. The Department of Agrarian Reform, as Administrator of the San Pedro Tunasan Estate, is hereby ordered to convert such estate into a commercial,

it was a purchaser for value and in good faith. In its Position Paper, Filinvest likewise asserted that the restriction against selling the subject land within ten years, provided under the Deed of Sale executed by DAR in favor of the Spouses Alvarez had already been superseded by Presidential Decree No. 1474, which took effect in 1978.14 On 25 August 1993, the PARAD of Sta. Cruz, Laguna, dismissed the complaint on the ground of res judicata. Moreover, it ruled that the sale between the Spouses Alvarez and Mercedes Oliver was valid.15 The dispositive part of this Decision16 reads: WHEREFORE, in view therefrom, Judgment is hereby rendered dismissing the instant case for lack of merit. On appeal, the DARAB reversed and set aside the Decision dismissing the complaint, and ordered the reversion of the subject property to the government. The dispositive portion of the said Order,17 dated 1 July 1998 reads: WHEREFORE, premises considered, the challenged decision dated August 25, 1993 is hereby REVERSED and SET ASIDE and a new judgment is hereby rendered as follows: 1. Annulling the transfer of the land in question to the late Ricardo Alvarez and its subsequent transfers to defendant Mercedes Oliver and defendant Filinvest Land Incorporated; 2. Ordering the cancellation of Transfer Certificate of Title No. 201836, covering the subject land, issued by the Register of Deeds for the Province of Laguna, Calamba branch, in the name of defendant Filinvest; and 3. Directing the Register of Deeds for the Province of Laguna, Calamba branch, to issue in lieu of TCT No. 201836, a Certificate of Title in the name of the Republic of the Philippines, through DAR, for distribution to qualified farmer-beneficiary in accordance with Administrative Order No. 01, Series of 1992, which is the Revised Rules and Procedures Governing the Disposition of Homelots and other Lots in Barangay Sites and Residential, Commercial, and Industrial Lots in Townsites within DAR Settlement Project and Similar Other Areas under DAR Jurisdiction. The DARAB ruled, too, that res judicata as a bar against filing a complaint with the PARAD is not applicable in this case since there was no adjudication of the merits before the RTC of Bian. The DARAB considered as self-serving and unsupported by evidence the allegations of the respondents that the consent of the Spouses Alvarez was obtained through fraud in connection with the sale made in favor of Mercedes Oliver. It also ruled that the sale between Ricardo Alvarez and Mercedes Oliver was a violation of the ten-year prohibition against the transfer of the land imposed by the Deed of Sale between the government and Ricardo Alvarez, in accordance with Section 62 of Republic Act No. 3844. Such act rendered the Deed of Sale executed by the DAR in favor of Ricardo Alvarez void, and, therefore, the subsequent transfers to Mercedes Oliver and Filinvest were, likewise, void. 18 In negating Filinvests claim that Presidential Decree No. 1474 has superseded Section 62 of Republic Act No. 3844, the DARAB cited the case of Tipon v. Intermediate Appellate

Court,19 where the Court upheld the validity of the ten-year prohibition on the transfer of land given by the government to farmer-beneficiaries. The DARAB added that the restriction on transfer of land is contained in our present agrarian laws, particularly Republic Act No. 6675. 20 The petitioners then filed a Petition for Certiorari under Section 43 of the 1997 Rules of Court before the Court of Appeals, but on 11 November 1998, the appeal was again dismissed for lack of merit and the assailed Decision of the DARAB was affirmed. 21 The petitioners filed a Motion for Reconsideration, which was subsequently denied in a Resolution dated 8 February 1999.22 Hence this petition, wherein Filinvest raised the following issues: I WHETHER OR NOT THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION AND COMMITTED REVERSIBLE ERROR IN HOLDING THAT THE SALE OF THE SUBJECT PARCEL OF LAND BY RICARDO ALVAREZ TO MERCEDES OLIVER VIOLATED THE TRANSFER RESTRICTION CONTAINED IN THE PRIOR DEED OF SALE OF THE SAME PROPERTY EXECUTED BY THE DEPARTMENT OF AGRARIAN REFORM IN FAVOR OF RICARDO ALVAREZ AND SECTION 62, ARTICLE II, CHAPTER III OF REPUBLIC ACT NO. 3844 II WHETHER OR NOT THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION AND COMMITTED REVERSIBLE ERROR IN APPLYING SECTION 1 (C), RULE II OF THE NEW RULES OF PROCEDURE OF THE DEPARTMENT OF AGRARIAN REFORM ADJUDICATION BOARD (DARAB), CONFERRING JURISDICTION OF THE DARAB OVER THE INSTANT CASE, IN DISREGARD OF THE PROVISIONS OF PRESIDENTIAL DECREE NO. 1474 III WHETHER OR NOT THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION AND COMMITTED REVERSIBLE ERROR IN RULING THAT THE DOCTRINE OF RES JUDICATA DOES NOT APPLY TO BAR RESPONDENTS COMPLAINT IN DARAB CASE NO. IV-032-L IV WHETHER OR NOT THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION AND COMMITTED REVERSIBLE ERROR IN NOT RULING THAT PETITIONER IS A BUYER IN GOOD FAITH WHO SHOULD BE ENTITLED TO PROTECTION AGAINST THE ALLEGED CLAIM OF THE RESPONDENT HEREIN, PURSUANT TO THIS HONORABLE COURTS RULING IN AGRICULTURAL AND HOME EXTENSION DEVELOPMENT GROUP VS. COURT OF APPEALS, ET AL., G.R. NO. 92319, SEPTEMBER 3, 199223 This petition is meritorious.

The first issue raised by Filinvest is whether the sale between Ricardo Alvarez and Mercedes Oliver was void because it violated the prohibitory condition contained in the Deed of Sale between Ricardo Alvarez and the Government, to wit: 2. That from the date of the pertinent Order of Award and within TEN (10) years from the date of issuance by the proper Register of Deeds of the certificate of title, the land subject hereof shall not, except by hereditary succession, be subdivided, sold or in any manner transferred or encumbered except in favor of any of the VENDEES relative within the third civil degree by consanguinity or affinity who fulfill the four (4) requirements in Section 6 Land Authority Administrative Order No. 4, Series of 1967, or in favor of the Government and its financial or banking institutions or rural banks, and only upon prior written consent of the Secretary of the Department of Agrarian Reform; and any sale, transfer, encumberance or alienation made in violation hereof shall be null and void: x x x24 This condition is in accordance with Section 62 of Republic Act No. 3844, The Agricultural Land Reform Code, which provided that: Section 62. Limitation on Land Rights. - Except in case of hereditary succession by one heir, landholdings acquired under this Code may not be resold, mortgaged, encumbered, or transferred until after the lapse of ten years from the date of full payment and acquisition and after such ten-year period, any transfer, sale or disposition may be made only in favor of persons qualified to acquire economic family-size farm units in accordance with the provisions of this Code: Provided, That a purchaser who acquired his landholding under a contract to sell may secure a loan on the same from any private lending institution or individual for an amount not exceeding his equity on said landholding upon a guaranty by the Land Bank. Filinvest, however, contends that these restrictions were already revoked by the issuance of Presidential Decree No. 1474, Declaring the San Pedro Tunasan Estate of the Department of Agrarian Reform Suitable for Residential, Commercial or Industrial, or Other Non-Agricultural Purposes. This law reclassifies the San Pedro Tunasan Estate, known as and hereinafter referred to as the Laguna Resettlement Project, into a commercial, industrial and residential site as it is no longer conducive to agricultural development. The position taken by Filinvest is justified. Section 2 of Presidential Decree No. 147425 categorically empowers "individuals who have legally acquired lots in the (San Pedro Tunasan) Estate" under Orders of Awards or Deeds of Sale, among others things, to "sell or transfer their lots covered thereby." Therefore, transfers of land located within the Laguna Resettlement Project, made after the law took effect, are valid and the restriction on transfer of the land within ten years after its registration is no longer applicable. In the present case, the government, through the DAR had already issued an Order of Award and a Deed of Sale in favor of Ricardo Alvarez covering a parcel of land located within the Laguna Resettlement Project, when Presidential Decree No. 1474 was enacted on 11 June 1978. In 1979, Alvarez, with the consent of his spouse, Rosario Param, transferred the same parcel of land to Mercedes Oliver. Such transfer was clearly sanctioned. As earlier adverted to, Section 2 of Presidential Decree No. 1474 revoked the application of Section 62 of Republic Act No. 3844 and the condition prohibiting the transfer of the land contained in the Deed of Sale executed by the DAR in favor of Alvarez, in so far as land within the Laguna Resettlement Project was concerned. Since the transfer made by Ricardo Alvarez to Mercedes Oliver was valid, the subsequent transfer made by Mercedes Oliver to Filinvest is also valid.

DARABs reliance on the ruling of the Court in Tipon v. Intermediate Appellate Court,26 upholding the ten-year prohibition on the transfer of land distributed by the government in favor of its beneficiaries, is misplaced. This case is not applicable for it did not take into account Presidential Decree No. 1474 because of different factual circumstances. It is true that the Tipon case shares some similarities with the present case - the subject property was part of the Laguna Resettlement Project, and the Deed of Sale between the DAR and the farmer-beneficiary, Renato Tipon, was executed before the enactment of Presidential Decree No. 1474 in 1978. However, there is a crucial difference. Unlike the present case where the subsequent transfer by the farmer-beneficiary, Ricardo Alvarez, to Mercedes Oliver was made in 1979 after Presidential Decree No. 1474 took effect, the subsequent transfer by farmer-beneficiary Renato Tipon to Atty. Umiral Matic, was made in 1976 before the enactment of Presidential Decree No. 1474. The factual background of the T ipon case, as recounted by the Court, are thus: Petitioner Renato Tipon acquired the lot in question (Lot No. 386 of the Laguna Settlement Project) from the government by virtue of a Deed of Sale executed in his favor by the Department of Agrarian Reform on November 23, 1976, for the price of P1,251.20. x x x. xxxx On the day the Deed of Sale was executed in his favor, Tipon filed a request with the Department of Agrarian Reform for permission to transfer his rights and interest over the lot in question in favor of Atty. Umiral P. Matic (respondent herein). This request was granted by the Regional Director of Region IV of the Department of Agrarian Reform on December 9, 1976 "subject to the condition that the Deed of Transfer is submitted to this department for verification and final approval. On December 10, 1976, Tipon submitted the Deed of Absolute Sale in favor of Matic for approval and, on the same day, it was approved by the Regional Director of Region IV of the Department of Agrarian Reform. Thereafter, Matic caused the titling of the property in the name of Tipon to whom was issued Transfer Certificate of Title No. 50617 and later, had the same transferred to his name under Transfer Certificate of Title No. 53850 dated July 12, 1977, of the Registry of Deeds for the Province of Laguna.27 A basic principle of statutory construction mandates that general legislation must give way to special legislation on the same subject, and generally be so interpreted as to embrace only cases in which the special provisions are not applicable.28 There is no question that Section 2 of Presidential Decree No. 1474 is inconsistent with Section 62 of Republic Act No. 3844. The former authorizes the sale or transfer of agricultural lands within the Laguna Resettlement Project, while the latter law prohibits the transfer of agricultural lands distributed by the government to farmer-beneficiaries, at least for a limited period. Presidential Decree No. 1474 as a special law should govern lands within the Laguna Resettlement Project, while Republic Act No. 3844 is a law generally applied to agrarian lands. The second issue Filinvest raised is whether the DARAB had jurisdiction over a case involving the subject land. Rule II, Section 1, of the DARAB Revised Rules of Procedure provides that the DARAB shall have primary jurisdiction, both original and appellate over: (c) Cases involving the annulment or cancellation of orders or decisions of DAR officials other than the Secretary, lease contracts or deeds of sale or their amendments under the administration and disposition of the DAR and LBP; x x x.

However, Filinvest argued that under Section 1 of Presidential Decree No. 1474, the Laguna Resettlement Project was no longer agricultural land but was effectively converted into a commercial, industrial and residential site, and was therefore outside the jurisdiction of the DARAB. Section 1 of Presidential Decree No. 1474 reads: Section 1. The Department of Agrarian Reform, as Administrator of the San Pedro Tunasan Estate, is hereby ordered to convert such estate into a commercial, industrial and residential site and to transfer the same to the National Housing Authority. From the aforecited provision, it is clear that the DAR had lost jurisdiction over government lands located in the Laguna Resettlement Project formerly under its administration which it was ordered to transfer to the National Housing Authority (NHA). More importantly, the DARAB can no longer annul the Deed of Sale between the government and Ricardo Alvarez, or the subsequent transfers, on the ground that Alvarez violated Section 62 of Republic Act No. 3844 and the conditions laid down in the Deed of Sale regarding the ten-year restriction on the transfer of the same land. At that time, the transfer between Alvarez and Oliver was made, these aforementioned rules were repealed by the provisions of Presidential Decree No. 1474. These rules were no longer applicable to the land in question, as it was no longer under the administration of the DAR nor agrarian in character. The validity of the subsequent transfer of the subject land between Ricardo Alvarez and Mercedes Oliver, or even the later transfer between Mercedes Oliver and Filinvest, was no longer subject to agrarian laws, as the land was already commercial, industrial, or residential in nature at the time of the transfer. Therefore, any proceeding which attacks the validity of the subsequent transfers are within the jurisdiction of regular courts. Clearly, the respondents filed the case before the PARAD, not because the case involved a dispute that would be properly resolved by the PARAD, but because they were already barred from filing the case before the proper forum. The allegations and relief found in the Complaint filed by the respondents before the PARAD are conspicuously similar to those in the Amended Complaint which they had earlier filed before the trial court of Bian. 29 As earlier discussed, the trial court ordered the dismissal of the case for failure to prosecute. When the respondents failed to file a motion for reconsideration, despite due notice, such order became final. This Court cannot countenance the party-litigants recourse to such measures. The foundation principle upon which the doctrine of res judicata rests is that parties should not be permitted to litigate the same issue more than once. 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 is not reversed, should be conclusive upon the parties and those in privity with them in law or estate.30 The following requisites must concur in order that a prior judgment may bar a subsequent action: (1) the former judgment or order must be final; (2) it must be a judgment or order on the merits, that is, it was rendered after a consideration of the evidence or stipulations submitted by the parties at the trial of the case; (3) it must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4) there must be, between the first and second actions, identity of parties, of subject matter and of cause of action. 31 A perusal of the records easily shows that the first, third and fourth requirements have been complied with in this case. The Order rendered by Branch XXIV of the RTC of Bian, dated 17 February 1989, dismissing the case, is clearly final, as it disposed of all the rights and obligations of the parties before it.32 There was never any question raised on the jurisdiction of Branch XXIV of the RTC to hear and decide the question of whether the sale executed

between Ricardo Alvarez and Mercedes Oliver was valid. It is also obvious that the allegations of the respondents in their Amended Complaint filed before the RTC of Bian are substantially identical to the Complaint filed before the PARAD; involved the same subject matter, and raised the same causes of action.33 Filinvest was named as a party only in the complaint before the PARAD, since it acquired the property from Mercedes Oliver only on 22 December 1989,34 after the case before the RTC was dismissed on 17 February 1997. Moreover, the fact that its predecessor-in interest, Mercedes Oliver, was a party in the case filed before the RTC of Bian satisfies the requirement on the identity of parties. In the case of Camara v. Court of Appeals,35 this Court has ruled that, "[t]here is identity of parties not only where the parties are the same, but also those in privity with them, as between their successors-in-interest by title subsequent to the commencement of the action, litigating for the same thing and under the same title and in the same capacity." The only contention between the parties was whether the second requirement, that the decision or order must have been based on the merits of the case, was met. In situations contemplated in Section 3, Rule 17 of the Rules of Court, 36 where a complaint is dismissed for failure of the plaintiff to comply with a lawful order of the court, such dismissal has the effect of an adjudication upon the merits.37 A dismissal for failure to prosecute has the effect of an adjudication on the merits, and operates as res judicata, particularly when the court did not direct that the dismissal was without prejudice. 38 Having complied with the four requisites needed for the doctrine of res judicata to operate, the Order rendered by the RTC of Bian dismissing Civil Case No. B-1941 finally determined the ownership of the subject land, the heirs of the late Ricardo Alvarez, Mercedes Oliver, and her successor-in-interest, Filinvest, as no motion for reconsideration on this Order was filed. Moreover, this would bar any dispute over the subject land from being brought before any judicial forum. Rule 39, Section 47 of the Rules of Court 39 provides that in case of a judgment or final order over a specific thing, rendered by a court having jurisdiction, the judgment or final order is conclusive upon the title to the thing and binding upon the parties and their successors-in-interest. Furthermore, the allegations of the private respondents of their counsels negligence cannot be given any credence. In the Affidavit of private respondent Romeo Alvarez, and reiterated in the Comment filed by the private respondents before the Court of Appeals, it was alleged that on 12 December 1986, their counsel, Atty. Rosendo O. Chavez, executed a Notice of Withdrawal, which was not filed before the trial court and did not bear the conformity of the private respondents.40 Thereafter, Atty. Chavez allegedly stopped attending the hearings before the trial court. As a result thereof, the private respondents were not notified of the 17 February 1989 hearing, when the Order dismissing the case was issued. Records clearly show that Atty. Chavez could not have withdrawn from the case on 12 December 1986. As of 14 December 1987, Atty. Chavez presented as his witness, Rosario Param, one of the private respondents.41 Since he requested for continuance, he was required to bring the witness on the next hearing date. However, seven postponements later, he was unable to bring the witness he presented.42 On 17 October 1988, Atty. Chavez attended the hearing. He failed to attend the next hearing on 20 January 1989. Nevertheless, he was still at that time the counsel of the private respondents and therefore the notice to him was binding upon the parties. Moreover, the private respondent Rosario Param was perfectly aware that her testimony was far from finished, and that she still needed to appear before the Court. Given the foregoing facts, private respondents allegations that their counsel was grossl y negligent and that he had deceived them is not credible. Even if the allegations of the private respondents are to be believed, they should have raised them in a Motion for Reconsideration, or a petition to annul the Order of the trial court

dismissing the case. While they alleged that they did not receive the Order requiring them to appear on the 17 February 1989 hearing, they never denied receiving the Order of dismissal. As the records stand, the counsel for the respondents received the Order dismissing the case on 28 February 1989,43 and the respondents never filed a Motion for Reconsideration or even a belated appeal to question the Order dismissing case. Instead, they waited for a full year and filed with the DARAB a case which was under the jurisdiction of the regular courts. WHEREFORE, premises considered, this Court GRANTS this petition and REVERSES the Decision of the Court of Appeals in CA-G.R. SP No. 48396, dated 11 November 1998, affirming the Order of the DARAB nullifying the transfer certificate titles issued in the names of Ricardo Alvarez, Mercedes Oliver and Filinvest Land Inc. since the DARAB was without jurisdiction to issue the said Order. No costs. SO ORDERED. Panganiban, CJ, Chairman, Ynares-Santiago Austria-Martinez, And Callejo, Sr., JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 150843

March 14, 2003

would not be allowed to take the flight. Eventually, after talking to his two friends, Dr. Vazquez gave in. He and Mrs. Vazquez then proceeded to the First Class Cabin. Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathays Country Manager, demanded that they be indemnified in the amount of P1million for the "humiliation and embarrassment" caused by its employees. They also demanded "a written apology from the management of Cathay, preferably a responsible person with a rank of no less than the Country Manager, as well as the apology from Ms. Chiu" within fifteen days from receipt of the letter. In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathays Country Manager Argus Guy Robson, informed the Vazquezes that Cathay would investigate the incident and get back to them within a weeks time. On 8 November 1996, after Cathays failure to give them any feedback within its self -imposed deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for damages against Cathay, praying for the payment to each of them the amounts of P250,000 as temperate damages; P500,000 as moral damages; P500,000 as exemplary or corrective damages; and P250,000 as attorneys fees. In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred to stay in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a loud, discourteous and harsh voice threatened" that they could not board and leave with the flight unless they go to First Class, since the Business Class was overbooked. Ms. Chius loud and stringent shouting annoyed, embarrassed, and humiliated them because the incident was witnessed by all the other passengers waiting for boarding. They also claimed that they were unjustifiably delayed to board the plane, and when they were finally permitted to get into the aircraft, the forward storage compartment was already full. A flight stewardess instructed Dr. Vazquez to put his roll-on luggage in the overhead storage compartment. Because he was not assisted by any of the crew in putting up his luggage, his bilateral carpal tunnel syndrome was aggravated, causing him extreme pain on his arm and wrist. The Vazquezes also averred that they "belong to the uppermost and absolutely top elite of both Philippine Society and the Philippine financial community, [and that] they were among the wealthiest persons in the Philippine[s]." In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade passengers to the next better class of accommodation, whenever an opportunity arises, such as when a certain section is fully booked. Priority in upgrading is given to its frequent flyers, who are considered favored passengers like the Vazquezes. Thus, when the Business Class Section of Flight CX-905 was fully booked, Cathays computer sorted out the names of favored passengers for involuntary upgrading to First Class. When Ms. Chiu informed the Vazquezes that they were upgraded to First Class, Dr. Vazquez refused. He then stood at the entrance of the boarding apron, blocking the queue of passengers from boarding the plane, which inconvenienced other passengers. He shouted that it was impossible for him and his wife to be upgraded without his two friends who were traveling with them. Because of Dr. Vazquezs outburst, Ms. Chiu thought of upgrading the traveling companions of the Vazquezes. But when she checked the computer, she learned that the Vazquezes companions did not have priority for upgrading. She then tried to book the Vazquezes again to their original seats. However, since the Business Class Section was already fully booked, she politely informed Dr. Vazquez of such fact and explained that the upgrading was in recognition of their status as Cathays valued passengers. Finally, after talking to their guests, the Vazquezes eventually decided to take the First Class accommodation.

CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL VAZQUEZ, respondents. DAVIDE, JR., C.J.: Is an involuntary upgrading of an airline passengers accommodation from one class to a more superior class at no extra cost a breach of contract of carriage that would entitle the passenger to an award of damages? This is a novel question that has to be resolved in this case. The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific Airways, Ltd., (hereinafter Cathay) are as follows: Cathay is a common carrier engaged in the business of transporting passengers and goods by air. Among the many routes it services is the Manila-Hongkong-Manila course. As part of its marketing strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The members enjoy several privileges, such as priority for upgrading of booking without any extra charge whenever an opportunity arises. Thus, a frequent flyer booked in the Business Class has priority for upgrading to First Class if the Business Class Section is fully booked. Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September 1996, the Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel de Dios, went to Hongkong for pleasure and business. For their return flight to Manila on 28 September 1996, they were booked on Cathays Flight CX-905, with departure time at 9:20 p.m. Two hours before their time of departure, the Vazquezes and their companions checked in their luggage at Cathays check -in counter at Kai Tak Airport and were given their respective boarding passes, to wit, Business Class boarding passes for the Vazquezes and their two friends, and Economy Class for their maid. They then proceeded to the Business Class passenger lounge. When boarding time was announced, the Vazquezes and their two friends went to Departure Gate No. 28, which was designated for Business Class passengers. Dr. Vazquez presented his boarding pass to the ground stewardess, who in turn inserted it into an electronic machine reader or computer at the gate. The ground stewardess was assisted by a ground attendant by the name of Clara Lai Han Chiu. When Ms. Chiu glanced at the computer monitor, she saw a message that there was a "seat change" from Business Class to First Class for the Vazquezes. Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes accommo dations were upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice for them as hosts to travel in First Class and their guests, in the Business Class; and moreover, they were going to discuss business matters during the flight. He also told Ms. Chiu that she could have other passengers instead transferred to the First Class Section. Taken aback by the refusal for upgrading, Ms. Chiu consulted her supervisor, who told her to handle the situation and convince the Vazquezes to accept the upgrading. Ms. Chiu informed the latter that the Business Class was fully booked, and that since they were Marco Polo Club members they had the priority to be upgraded to the First Class. Dr. Vazquez continued to refuse, so Ms. Chiu told them that if they would not avail themselves of the privilege, they

Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing with the Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of disrespect against them (the Vazquezes). Assuming that there was indeed a breach of contractual obligation, Cathay acted in good faith, which negates any basis for their claim for temperate, moral, and exemplary damages and attorneys fees. Hence, it prayed for the dismissal of the complaint and for payment of P100,000 for exemplary damages and P300,000 as attorneys fees and litigation expenses. During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony was corroborated by his two friends who were with him at the time of the incident, namely, Pacita G. Cruz and Josefina Vergel de Dios. For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu; Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson testified on Cathays policy of upgrading the seat accommodation of its Ma rco Polo Club members when an opportunity arises. The upgrading of the Vazquezes to First Class was done in good faith; in fact, the First Class Section is definitely much better than the Business Class in terms of comfort, quality of food, and service from the cabin crew. They also testified that overbooking is a widely accepted practice in the airline industry and is in accordance with the International Air Transport Association (IATA) regulations. Airlines overbook because a lot of passengers do not show up for their flight. With respect to Flight CX-905, there was no overall overbooking to a degree that a passenger was bumped off or downgraded. Yuen and Robson also stated that the demand letter of the Vazquezes was immediately acted upon. Reports were gathered from their office in Hong Kong and immediately forwarded to their counsel Atty. Remollo for legal advice. However, Atty. Remollo begged off because his services were likewise retained by the Vazquezes; nonetheless, he undertook to solve the problem in behalf of Cathay. But nothing happened until Cathay received a copy of the complaint in this case. For her part, Ms. Chiu denied that she shouted or used foul or impolite language against the Vazquezes. Ms. Barrientos testified on the amount of attorneys fees and other litigation expenses, such as those for the taking of the depositions of Yuen and Chiu. In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed as follows: WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay Pacific Airways, Ltd., ordering the latter to pay each plaintiff the following: a) Nominal damages in the amount of P100,000.00 for each plaintiff; b) Moral damages in the amount of P2,000,000.00 for each plaintiff; c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff; d) Attorneys fees and expenses of litigation in the amount of P1,000,000.00 for each plaintiff; and e) Costs of suit.

SO ORDERED. According to the trial court, Cathay offers various classes of seats from which passengers are allowed to choose regardless of their reasons or motives, whether it be due to budgetary constraints or whim. The choice imposes a clear obligation on Cathay to transport the passengers in the class chosen by them. The carrier cannot, without exposing itself to liability, force a passenger to involuntarily change his choice. The upgrading of the Vazquezes accommodation over and above their vehement objections was due to the overbooking of the Business Class. It was a pretext to pack as many passengers as possible into the plane to maximize Cathays revenues. Cathays actuations in this case displayed deceit, gross negligence, and bad faith, which entitled the Vazquezes to awards for damages. On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001, 2 deleted the award for exemplary damages; and it reduced the awards for moral and nominal damages for each of the Vazquezes to P250,000 and P50,000, respectively, and the attorneys fees and litigation expenses to P50,000 for both of them. The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay novated the contract of carriage without the formers consent. There was a breach of contract not because Cathay overbooked the Business Class Section of Flight CX-905 but because the latter pushed through with the upgrading despite the objections of the Vazquezes. However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a member of the elite in Philippine society and was not therefore used to being harangued by anybody. Ms. Chiu was a Hong Kong Chinese whose fractured Chinese was difficult to understand and whose manner of speaking might sound harsh or shrill to Filipinos because of cultural differences. But the Court of Appeals did not find her to have acted with deliberate malice, deceit, gross negligence, or bad faith. If at all, she was negligent in not offering the First Class accommodations to other passengers. Neither can the flight stewardess in the First Class Cabin be said to have been in bad faith when she failed to assist Dr. Vazquez in lifting his baggage into the overhead storage bin. There is no proof that he asked for help and was refused even after saying that he was suffering from "bilateral carpal tunnel syndrome." Anent the delay of Yuen in responding to the demand letter of the Vazquezes, the Court of Appeals found it to have been sufficiently explained. The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of which were denied by the Court of Appeals. Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for moral damages has no basis, since the Court of Appeals found that there was no "wanton, fraudulent, reckless and oppressive" display of manners on the part of its personnel; and that the breach of contract was not attended by fraud, malice, or bad faith. If any damage had been suffered by the Vazquezes, it was damnum absque injuria, which is damage without injury, damage or injury inflicted without injustice, loss or damage without violation of a legal right, or a wrong done to a man for which the law provides no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court of Appeals3 where we recognized that, in accordance with the Civil Aeronautics Boards Economic Regulation No. 7, as amended, an overbooking that does not exceed ten percent cannot be considered deliberate and done in bad faith. We thus deleted in that case the awards for moral and exemplary damages, as well as attorneys fees, for lack of proof of overbooking exceeding ten percent or of bad faith on the part of the airline carrier.

On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards for moral and nominal damages and attorneys fees in view of the breach o f contract committed by Cathay for transferring them from the Business Class to First Class Section without prior notice or consent and over their vigorous objection. They likewise argue that the issuance of passenger tickets more than the seating capacity of each section of the plane is in itself fraudulent, malicious and tainted with bad faith. The key issues for our consideration are whether (1) by upgrading the seat accommodation of the Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are entitled to damages. We resolve the first issue in the affirmative. A contract is a meeting of minds between two persons whereby one agrees to give something or render some service to another for a consideration. There is no contract unless the following requisites concur: (1) consent of the contracting parties; (2) an object certain which is the subject of the contract; and (3) the cause of the obligation which is established.4 Undoubtedly, a contract of carriage existed between Cathay and the Vazquezes. They voluntarily and freely gave their consent to an agreement whose object was the transportation of the Vazquezes from Manila to Hong Kong and back to Manila, with seats in the Business Class Section of the aircraft, and whose cause or consideration was the fare paid by the Vazquezes to Cathay. The only problem is the legal effect of the upgrading of the seat accommodation of the Vazquezes. Did it constitute a breach of contract? Breach of contract is defined as the "failure without legal reason to comply with the terms of a contract."5 It is also defined as the "[f]ailure, without legal excuse, to perform any promise which forms the whole or part of the contract."6 In previous cases, the breach of contract of carriage consisted in either the bumping off of a passenger with confirmed reservation or the downgrading of a passengers seat accommodation from one class to a lower class. In this case, what happened was the reverse. The contract between the parties was for Cathay to transport the Vazquezes to Manila on a Business Class accommodation in Flight CX-905. After checking-in their luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given boarding cards indicating their seat assignments in the Business Class Section. However, during the boarding time, when the Vazquezes presented their boarding passes, they were informed that they had a seat change from Business Class to First Class. It turned out that the Business Class was overbooked in that there were more passengers than the number of seats. Thus, the seat assignments of the Vazquezes were given to waitlisted passengers, and the Vazquezes, being members of the Marco Polo Club, were upgraded from Business Class to First Class. We note that in all their pleadings, the Vazquezes never denied that they were members of Cathays Marco Polo Club. They knew that as members of the Club, they had priority for upgrading of their seat accommodation at no extra cost when an opportunity arises. But, just like other privileges, such priority could be waived. The Vazquezes should have been consulted first whether they wanted to avail themselves of the privilege or would consent to a change of seat accommodation before their seat assignments were given to other passengers. Normally, one would appreciate and accept an upgrading, for it would mean a better accommodation. But, whatever their reason was and however odd it might be, the Vazquezes had every right to decline the upgrade and insist on the Business Class accommodation they

had booked for and which was designated in their boarding passes. They clearly waived their priority or preference when they asked that other passengers be given the upgrade. It should not have been imposed on them over their vehement objection. By insisting on the upgrade, Cathay breached its contract of carriage with the Vazquezes. We are not, however, convinced that the upgrading or the breach of contract was attended by fraud or bad faith. Thus, we resolve the second issue in the negative. Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious accusations that can be so conveniently and casually invoked, and that is why they are never presumed. They amount to mere slogans or mudslinging unless convincingly substantiated by whoever is alleging them. Fraud has been defined to include an inducement through insidious machination. Insidious machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the party, with intent to deceive, conceals or omits to state material facts and, by reason of such omission or concealment, the other party was induced to give consent that would not otherwise have been given.7 Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud.8 We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced to agree to the upgrading through insidious words or deceitful machination or through willful concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes that their accommodations were upgraded to First Class in view of their being Gold Card members of Cathays Marco Polo Club. She was honest in telling them that their seats were already given to other passengers and the Business Class Section was fully booked. Ms. Chiu might have failed to consider the remedy of offering the First Class seats to other passengers. But, we find no bad faith in her failure to do so, even if that amounted to an exercise of poor judgment. Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified to by Mr. Robson, the First Class Section is better than the Business Class Section in terms of comfort, quality of food, and service from the cabin crew; thus, the difference in fare between the First Class and Business Class at that time was $250. 9 Needless to state, an upgrading is for the better condition and, definitely, for the benefit of the passenger. We are not persuaded by the Vazquezes argument that the overboo king of the Business Class Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7 of the Civil Aeronautics Board, as amended, provides: Sec 3. Scope. This regulation shall apply to every Philippine and foreign air carrier with respect to its operation of flights or portions of flights originating from or terminating at, or serving a point within the territory of the Republic of the Philippines insofar as it denies boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines, for which he holds confirmed reserved space. Furthermore, this Regulation is designed to cover only honest mistakes on the part of the carriers and excludes deliberate and willful acts of non-accommodation. Provided, however, that overbooking not exceeding 10% of the seating capacity of the aircraft shall not be considered as a deliberate and willful act of non-accommodation.

It is clear from this section that an overbooking that does not exceed ten percent is not considered deliberate and therefore does not amount to bad faith. 10 Here, while there was admittedly an overbooking of the Business Class, there was no evidence of overbooking of the plane beyond ten percent, and no passenger was ever bumped off or was refused to board the aircraft. Now we come to the third issue on damages. The Court of Appeals awarded each of the Vazquezes moral damages in the amount of P250,000. Article 2220 of the Civil Code provides: Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendants wrongful act or omission.11 Thus, case law establishes the following requisites for the award of moral damages: (1) there must be an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil Code.12 Moral damages predicated upon a breach of contract of carriage may only be recoverable in instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of a passenger.13 Where in breaching the contract of carriage the airline is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach of the obligation which the parties had foreseen or could have reasonably foreseen. In such a case the liability does not include moral and exemplary damages.14 In this case, we have ruled that the breach of contract of carriage, which consisted in the involuntary upgrading of the Vazquezes seat accommodation, was not attended by fraud or bad faith. The Court of Appeals award of moral damages has, therefore, no leg to stand on. The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a requisite in the grant of exemplary damages that the act of the offender must be accompanied by bad faith or done in wanton, fraudulent or malevolent manner. 15 Such requisite is absent in this case. Moreover, to be entitled thereto the claimant must first establish his right to moral, temperate, or compensatory damages.16 Since the Vazquezes are not entitled to any of these damages, the award for exemplary damages has no legal basis. And where the awards for moral and exemplary damages are eliminated, so must the award for attorneys fees. 17 The most that can be adjudged in favor of the Vazquezes for Cathays breach of contract is an award for nominal damages under Article 2221 of the Civil Code, which reads as follows: Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. Worth noting is the fact that in Cathays Memorandum filed with this Court, it prayed only for the deletion of the award for moral damages. It deferred to the Court of Appeals discretion in awarding nominal damages; thus: As far as the award of nominal damages is concerned, petitioner respectfully defers to the Honorable Court of Appeals discretion. Aware as it is that somehow, due to the resistance of respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their accommodations, petitioner may have disturbed the respondents-spouses wish to be with their companions (who traveled to Hong Kong with them) at the Business Class on their flight to Manila. Petitioner regrets that in its desire to provide the respondents-spouses with additional amenities for the one and one-half (1 1/2) hour flight to Manila, unintended tension ensued. 18 Nonetheless, considering that the breach was intended to give more benefit and advantage to the Vazquezes by upgrading their Business Class accommodation to First Class because of their valued status as Marco Polo members, we reduce the award for nominal damages to P5,000. Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court of Appeals regarding the awards adjudged by the trial court: We are not amused but alarmed at the lower courts unbelievable alacrity, bordering on the scandalous, to award excessive amounts as damages. In their complaint, appellees asked for P1 million as moral damages but the lower court awarded P4 million; they asked for P500,000.00 as exemplary damages but the lower court cavalierly awarded a whooping P10 million; they asked for P250,000.00 as attorneys fees but were awarded P2 million; they did not ask for nominal damages but were awarded P200,000.00. It is as if the lower court went on a rampage, and why it acted that way is beyond all tests of reason. In fact the excessiveness of the total award invites the suspicion that it was the result of "prejudice or corruption on the part of the trial court." The presiding judge of the lower court is enjoined to hearken to the Supreme Courts admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said: The well-entrenched principle is that the grant of moral damages depends upon the discretion of the court based on the circumstances of each case. This discretion is limited by the principle that the amount awarded should not be palpably and scandalously excessive as to indicate that it was the result of prejudice or corruption on the part of the trial court . and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held: Nonetheless, we agree with the injunction expressed by the Court of Appeals that passengers must not prey on international airlines for damage awards, like "trophies in a safari." After all neither the social standing nor prestige of the passenger should determine the extent to which he would

suffer because of a wrong done, since the dignity affronted in the individual is a quality inherent in him and not conferred by these social indicators. 19 We adopt as our own this observation of the Court of Appeals. WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the awards for moral damages and attorneys fees are set aside and deleted, and the award for nominal damages is reduced to P5,000. No pronouncement on costs. SO ORDERED. Vitug, Carpio, and Azcuna, JJ., concur. Ynares-Santiago, J., on leave.

Republic of the Philippines SUPREME COURT SECOND DIVISION

G.R. No. 130982 September 16, 2005 SPOUSES DOMINGO and LOURDES PAGUYO, Petitioners, vs. Pierre astorga and St. Andrew Realty, Inc., Respondent. DECISION CHICO-NAZARIO, J.: . . . Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them indeed, all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of the law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it.1 The case at bar demonstrates a long drawn-out litigation between parties who already entered into a valid contract that has subsisted for almost twenty (20) years but one of them later balks from being bound by it, alleging fraud, gross inadequacy of consideration, mistake, and undue influence. This is a petition for review on certiorari where petitioner Spouses Domingo and Lourdes Paguyo seek the reversal of the Decision2 and the Resolution,3 dated 30 April 1997 and 12 September 1997, respectively, of the Court of Appeals in CA-G.R. CV No. 47034, affirming in toto the Decision4 dated 21 April 1994 of the Regional Trial Court (RTC), Branch 142 of Makati City. The Antecedents

On 29 November 1988, in order to raise the much needed amount, petitioner Lourdes Paguyo entered into an agreement captioned as Receipt of Earnest Money with respondent Pierre Astorga, for the sale of the formers property consisting of the lot which was to be purchased from the Armases, together with the improvements thereon, particularly, the existing building known as the Paguyo Building, under the following terms and conditions as stated in the document, to wit: RECEIVED from MR. PIERRE M. ASTORGA the sum of FIFTY THOUSAND (P50,000.00) PESOS (U.C.P.B. Managers Check No. 013085 dated November 29, 1988) as earnest money for the sale of our property consisting of a parcel of land designated as Lot 12 located at Makati Avenue, Makati, Metro Manila, covered by and described in T.C.T. No. 154806 together with the improvements thereon particularly the existing building known as the Paguyo Bldg. under the following terms and conditions: 1. The earnest money (Exh. "D") shall be good for fifteen (15) days from date of this document during which period the owner is bound to sell the property to the buyer; 2. Should the buyer decide not to buy the subject property within the earnest/option period, the seller has the right to forfeit Fifteen Thousand (P15,000.00) pesos, and return the difference to the buyer; 3. The agreed total purchase price is seven million (P7,000,000.00) pesos Philippine Currency; 4. Within fifteen (15) days from execution of this document, the buyer shall pay Fifty (50%) percent of the total purchase price less the aforesaid earnest money, upon payment of which the following documents shall be executed or caused to be executed as the case may be, namely: a. Deed of Absolute Sale of the Paguyo Bldg., in favor of the buyer.

The undisputed facts, per summary of the Court of Appeals, follow. Herein petitioners, Spouses Domingo Paguyo and Lourdes Paguyo, were the owners of a small five-storey building known as the Paguyo Building located at Makati Avenue, corner Valdez Street, Makati City. With one (1) unit per floor, the building has an average area of 100 square meters per floor and is constructed on a land belonging to the Armas family. 5 This lot on which the Paguyo Building stands was the subject of Civil Case No. 5715 entitled, Armas, et al., v. Paguyo, et al., wherein the RTC of Makati City, Branch 57, rendered a decision on 20 January 1988 approving a Compromise Agreement made between the Armases and the petitioners. The compromise agreement provided that in consideration of the total sum of One Million Seven Hundred Thousand Pesos (P1,700,000.00), the Armases committed to execute in favor of petitioners a deed of sale and/or conveyance assigning and transferring unto said petitioners all their rights and interests over the parcel of land containing an area of 299 square meters.6 In order for the petitioners to complete their title and ownership over the lot in question, there was an urgent need to make complete payment to the Armases, which at that time stood at P917,470.00 considering that petitioners had previously made partial payments to the Armases. b. Deed of Absolute Sale to be executed by the Armases who still appear as the registered owners of the lot in favor of the buyer. c. Deed of Real Estate Mortgage of the same subject lot and Bldg. to secure the 50% balance of the total purchase price to be executed by the buyer in favor of the herein seller. 5. The Deed of Real Estate Mortgage shall contain the following provisions, namely: a. payment of the 50% balance of the purchase price shall be payable within fifteen (15) days from actual vacating of the Armases from the subject lot. b. During the period commencing from the execution of the documents mentioned under paragraph 4 (which should be done simultaneously) the buyer is entitled to one-half (1/2) of the rental due and actually received from the tenants of the Paguyo Bldg. plus the use of the penthouse while the seller shall retain possession and use of the basement free of rent until the balance of the purchase price is fully paid in accordance with the herein terms and conditions. The one-half (1/2) of the tenants deposits shall be credited in favor of the buyer. 7

However, contrary to their express representation with respect to the subject lot, petitioners failed to comply with their obligation to acquire the lot from the Armas family despite the full financial support of respondents. Nevertheless, the parties maintained their business relationship under the terms and conditions of the above-mentioned Receipt of Earnest Money.8 On 12 December 1988, petitioners asked for and were given by respondents an additional P50,000.00 to meet the formers urgent need for money in connection with their construction business. Due also to the urgent necessity of obtaining money to finance their construction business, petitioner Lourdes Paguyo, who was also the attorney-in-fact of her husband, proposed to the respondents the separate sale of the building in question while she continued to work on the acquisition of the lot from the Armas family, assuring the respondents that she would succeed in doing so.9 Aware of the risk of buying an improvement on the lot of a third party who appeared ambivalent on whether to dispose their property in favor of the respondents, respondents took a big business gamble and, relying on the assurance of petitioners that they would eventually acquire the lot and transfer the same to respondents in accordance with their undertaking in the Receipt of Earnest Money, respondents agreed to petitioner Lourdes Paguyos proposal to buy the building first. Thus, on 5 January 1989, the parties executed the four documents in question namely, the Deed of Absolute Sale of the Paguyo Building, the Mutual Undertaking, the Deed of Real Estate Mortgage, and the Deed of Assignment of Rights and Interest.10 Simultaneously with the signing of the four documents, respondents paid petitioners the additional amount of P500,000.00.11 Thereafter, the respondents renamed the Paguyo Building into GINZA Bldg. and registered the same in the name of respondent St. Andrew Realty, Inc. at the Makati Assessors Office after paying accrued real estate taxes in the total amount ofP169,174.95. Since 1990, respondents paid the real estate taxes on subject building as registered owners thereof. Further, respondents obtained fire insurance and applied for the conversion of Paguyo Building into a condominium. All of these acts of ownership exercised by respondents over the building were with the express knowledge and consent of the petitioners.12 Pursuant to their agreement contained in the aforecited documents, particularly in the Mutual Undertaking,13respondent company filed an ejectment case and obtained a favorable decision against petitioners in the Metropolitan Trial Court (MeTC) of Makati in Civil Case No. 40050. The case reached this Court which affirmed the decision of the MeTC in favor of respondent company. This decision had already been executed and the respondent company is now in possession of the building. Accordingly, respondents continued to exercise acts of full ownership, possession and use over the building. 14 On 06 October 1989, petitioners filed a Complaint for the rescission of the Receipt of Earnest Money15 with the undertaking to return the sum of P763,890.50. They also sought the rescission of the Deed of Real Estate Mortgage,16 the Mutual Undertaking, the Deed of Absolute Sale of Building,17 and the Deed of Assignment of Rights and Interest.18 In their complaint, petitioners alleged that respondents Astorga and St. Andrew Realty, Inc., led them to believe that they would advance the P917,470.00, which was needed by petitioners to complete payment with the Armases, with the understanding that said amount would simply be deducted from the P7 Million total consideration due them for the sale of the lot and the building as agreed upon in their Receipt of Earnest Money. The same, however, did not materialize because instead of making available the check for the said amount, respondents did not produce the amount and even ordered the "stop payment" of the same before it could be deposited in court.19

Respondents, in their Answer, however, interjected that as gleaned from the Receipt of Earnest Money, theMutual Undertaking, the Deed of Assignment of Rights and Interest, their original intention was to purchase the Paguyo Building and the lot on which it stands simultaneously. Respondents interposed that at the time the decision on the compromise agreement between petitioners and Armases was rendered, petitioners were badly in need of money because they were financing their construction business and, with the balance payable to the Armases, the former were in a huff to produce an amount sufficient to cover both transactions. Thus, petitioners prevailed upon respondents to purchase the Paguyo Building first with the lot to follow after petitioners have successfully acquired it from the Armas family. Respondents, likewise, stated in their Answer that sometime in July of 1989, petitioners asked respondent corporation to execute a check in the amount of P917,470.0020 for the final execution of the Deed of Conveyance of the lot, saying that they were finally able to negotiate the purchase of the lot owned by the Armases. To settle the transaction, respondent corporation again complied. After investigation, however, respondents learned that petitioners were not in the position to deliver the land, all the rights and interest thereof having allegedly been transferred already to spouses Rodolfo and Aurora Bacani. They were able to confirm this after obtaining a copy of a letter dated 22 September 1989 of petitioners counsel (same counsel representing them presently) to the Register of Deeds of Makati a month prior to the filing of the instant case. The letter stated: Ms. Mila Flores Register of Deeds Makati, Metro Manila Dear Ms. Flores: We represent the spouses Rodolfo and Aurora Bacani, who happen to be the assignees of all the rights and interests that the couple Domingo and Lourdes Paguyo have over that parcel of land located along Makati Avenue, the particulars and description of which are indicated on TCT No. 154806 which, for reasons we perceive to be not legitimate, was cancelled. ... (SGD.) HECTOR B. ALMEYDA For the Firm21 (Emphasis supplied.) Respondents further explained in their Answer that because of this development, they were constrained to order "stop payment" of the P917,470.00 check, which was duly communicated to petitioners in a letter dated 14 July 1989, to wit: I am very sorry to inform you that I have to stop payment on Philtrust Check No. 006759 because I was just reliably informed that you are no longer in a position to deliver the lot subject of our agreement. While the financier had already advanced half million pesos which

was already placed in my account, I discouraged her from putting another million pesos to cover my check with you. I therefore find myself with no alternative but to order stop payment on my check to protect my rights and interests.22 The Ruling of the Trial Court After trial, the RTC ruled in favor of respondents in a Decision 23 dated 21 April 1994, the dispositive portion of which reads: Judgment is hereby rendered dismissing the complaint for lack of cause of action, the petition for preliminary injunction is hereby denied, judgment is rendered in favor of the defendants and ordering the plaintiff spouses Domingo and Lourdes Paguyo to pay the defendants Pierre Astorga and St. Andrew Realty, Inc. on their counterclaim. 1. P400,000.00 for moral damages; 2. P200,000.00 as exemplary damages; 3. P100,00.00 for attorneys fees and litigation expenses and pay the cost of suit. The Ruling of the Court of Appeals On appeal, the Court of Appeals promulgated its Decision25 dated 30 April 1997 in CA-G.R. CV No. 47034 affirming the decision of the trial court, the dispositive portion of which reads as follows: WHEREFORE, We find the lower courts decision in full accord with the facts and the law. Judgment is hereby rendered affirming the assailed decision dated April 21, 1994 in toto.26 Aggrieved by the ruling, petitioners elevated the matter to us via the instant petition, contending that the Court of Appeals erred: 1. In concluding that the supposed acts of ownership and possession of respondents preclude petitioners from seeking rescission and declaration of nullity of documents signed and executed under mistaken premises that were not all true and accurate; 2. IN FAILING to find that fraud, mistake and undue influence had been exerted on petitioner Lourdes Paguyo to make her a party to the assailed documents; 3. In reading the documents involved without regard to the contemporaneous acts of the parties prior, during and immediately after the signing process; 4. In affirming the dismissal of the complaint; and 5. In awarding damages and attorneys fees in favor of the respondents. 27 The questions the Court is now tasked to answer are: (1) Did the Court of Appeals err in upholding the trial courts decision denying petitioners complaint for rescission? (2) Was the award of damages and attorneys fees to respondents proper?
24

On the first issue, petitioners claim that the 05 January 1989 documents, particularly the Deed of Absolute Sale of Building, Mutual Undertaking, Real Estate Mortgage, and Assignment of Rights and Interests read together with the 29 November 1988 Receipt of Earnest Money, were all designed, per the respondents representations, to secure their exposure in the tota l sum of P763,890.50 which constituted their outlay in the projected purchase of the Paguyo lot and building. Respondents dispute petitioners' line of reasoning. They say that the Deed of Absolute Sale over the building was absolute and unconditional. Our Ruling Petitioners contentions lack merit. The right to rescind a contract involving reciprocal obligations is provided for in Article 1191 of the Civil Code. Article 1191 states: M The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. The law speaks of the right of the "injured party" to choose between rescission or fulfillment of the obligation, with the payment of damages in either case. 28 Here, petitioners claim to be the injured party and consequently seek the rescission of the Deed of Absolute Sale of the Building and the other documents in question. Petitioners aver that they are entitled to cancel the Deed of Sale altogether in view of fraud, gross inadequacy of price, mistake, and undue influence. To boost their claim that the Deed of Absolute Sale was intended merely to document the cash outlays of respondents, petitioners say that the P600,000.00 consideration as contained in the Deed of Absolute Sale of the 5-storey Paguyo building is a far cry from the P3 Million valuation attached to it by respondent Astorga himself and the buildings fair market value of P2,848,000.00 assessed by the Cuervo Appraisers, Inc. We find no such inadequacy of consideration in the case at bar. For one, on top of the P600,000.00 which petitioners received, respondents had to shoulder the accrued real estate taxes of P169,174.95. For another, respondent Pierre Astorga explained that said price was what St. Andrew Realty, Inc., believed as value for their money inasmuch as the building stands on the lot owned by another and there were separate owners of the land, who appear reluctant to sell it. For a third, said amount was arrived at considering the depreciated value of

the building and in view of the economic and political uncertainties in the country at that time, marked by a series ofcoup detat, which caused real estate prices to plummet. Respondent Astorga was explicit on this score ATTY. JOSE Q: There was statement here by Mrs. Paguyo that this document entitled the deed of absolute sale of a building marked Exhibit "9" was not expressive of the intention of the parties meaning to say that she did not intend to sell the said building and one of the reasons she tried to raise was the fact that the building was only sold for P500,000.00, what can you say to that? A: Well, the P500,000.00 amount that she would want to impress to be an inadequate amount is what we in St. Andrews end believed as value for money for the reason that the building stands on the lot she does not own and there were separate owners and apparent conflict between them even the seeming impossibility of getting the lot Q: By the way, before the plaintiffs decided to dispose the building or sell the building by virtue of this deed of sale marked Exhibit "98" was your company ever interested in acquiring the said building? A: The building alone, no. In fact, on December 21 when we had the problem as to acquiring the lot, we did not part with any payment to Mrs. Paguyo demonstrating that we had really and truly intended a simultaneous buy of the building and the lot to acquire the property simultaneously the building and as well as the lot. Q: Now, you mentioned that you are a realtor, I will ask you the same question, which Atty. Almeyda asked me when I was on the witness stand, as a realtor will you please tell the court what would be your appraisal of the value of the building? ATTY. COLOMA - Objection, your Honor. May we know if the witness is going to express an opinion or is he testifying now as an expert realtor? COURT - As an opinion but it would not bind the Court.

A: Okay, appraisal can take many forms if its appraised value based on the construction cost it could be different from appraising per se the building. That is now existing in that address also appraisal will depend on where the building is and there is only one owner of the building and the lot. As the case here is, the building in a manner of speaking stands on thin air. That is so including depreciation and timing that we were doing in this transaction which was 1989, my appraisal will be in the range of a Million may be. Q: You made mentioned the word timing in 1989, why did you mention that? A: Well, 89 was not the best real estate year. In fact, we have a boom in 1988 but prices were already deep during this year such that it is in 1988 when it could have been another price. But this transaction happened or entered into in 1989, there were no interested buyers during that time, sir. Q: Why? A: coup de etat was one, and many other issue on hand that causes value to take deep. Q: You mentioned that word depreciation, will you please explain to us what that depreciation has got to do with that building? A: In appraisal terms the building is in an economic line in every year of which a certain value is allocated as depreciation for wear and tear for breakdowns and all that is depreciation. This is deductible from the amount of the building (sic). Q: Before you went into this agreement with the plaintiff Paguyo have you inspected the building? A: Yes, sir. Thoroughly, sir. Q: Will you please explain to the court the size of the building and the description of the building? A: That building is five (5) storey it has only one (1) unit per floor, sir. There is a narrow stairway that leads up to the penthouse. It is, I would say, in an advance deteriorating stage, it needed some renovations here and there.29(Emphasis supplied.) Moreover, Articles 1355 and 1470 of the Civil Code state:

WITNESS - I can explain to you. ATTY. JOSE - Yes, please explain. WITNESS Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (Emphasis supplied) Petitioners herein failed to prove any of the instances mentioned in Articles 1355 and 1470 of the Civil Code, which would invalidate, or even affect, the Deed of Sale of the Building and the Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,unless there has been fraud, mistake or undue influence. (Emphasis supplied)

related documents. Indeed, there is no requirement that the price be equal to the exact value of the subject matter of sale.30 In Sps. Buenaventura v. Court of Appeals,31 the Court was unequivocal: Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally incompetent. Courts operate not because one person has been defeated or overcome by another, but because he has been defeated or overcome illegally. Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them indeed, all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of the law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it. (Emphases in the original) What is more, petitioners would wish to convince this Court that petitioner Lourdes Paguyo was nave enough to accept at face value the assurance of respondent Astorga that the Deed of Sale was merely to document respondents cash outlay. Far from being the nave and easy to fleece lady that she wants this Court to perceive her to be, evidence on record reveals that petitioner Lourdes Paguyo is in reality an astute businesswoman, having insured that legal minds would be available at her disposal at the time she entered into the transactions she now impugns. As she herself admitted in her testimony before the trial court, during her receipt of the earnest money and during the transactions subject of the instant case, her lawyers, one Atty. Lalin and a certain Atty. Cario, assisted her. She testified as follows: ATTY. JOSE Wait, wait, your Honor. I have one question. Now, madam witness, you mentioned that you were accompanied by a certain Atty. Molina when you executed the receipt of the earnest money with me. Now, during the transaction of this subject matter, you will also recall that at times you were represented in dealing with me as counsel for defendant corporation by Atty. Lalin and Atty. Carino? A Yes, sir.32 Neither does the fact that the subject contracts have been prepared by respondents ipso facto entail that their validity and legality be strictly interpreted against them. Petitioner Lourdes Paguyos insinuation that she was disadvantaged will not hold. True, Arti cle 24 of the New Civil Code provides that "(i)n all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his protection."33 Thus, the validity and/or enforceability of the impugned contracts will have to be determined by the peculiar circumstances obtaining in each case and the situation of the parties concerned. Here, petitioner Lourdes Paguyo, being not only cultured but a person with great business acumen as well, cannot claim to be the weaker or disadvantaged party in the subject contract so as to call for a strict interpretation against respondents. More importantly, the parties herein went through a series of negotiations before the documents were signed and executed. 34

Further, we find the stipulations in the subject documents plain and unambiguous. For instance, the Deed of Sale provides in no uncertain termsWHEREAS, the VENDOR is the true and absolute owner, free from any lien or encumbrance, of a concrete building presently known as the Paguyo Building, constructed on Lot 12, Blk. 4 (described in T.C.T No. 154806-Makati) located at No. 7856 Makati Ave. corner Valdez St., Makati, Metro Manila, covered by and described in Tax Declaration No. 93762 for the year 1984, and more particularly described as follows: WHEREAS, the VENDOR is desirous of selling and the VENDEE is willing to buy the aforedescribed building; NOW THEREFORE, for and in consideration of the foregoing premises and of the sum of SIX HUNDRED THOUSAND (P600,000.00) PESOS, Philippine currency, the receipt of which is hereby acknowledged, the VENDOR hereby cedes, transfers, and conveys, by way of absolute sale, unto and in favor of the VENDEE, his successors and assigns, the aforementioned building with all the improvements therein. The Municipal Assessor of Makati is therefore hereby authorized to register this sale in the new Tax Declaration in the name of the VENDEE. IN WITNESS WHEREOF, the VENDOR hereby affixed his signature by his wife and attorneyin-fact, LOURDES S. Paguyo, this 5th day of January, 1989, in Pasay City. 35 Inasmuch as the stipulations in the aforesaid contract and in the other contracts being questioned leave no room for interpretation, there was no cause for applying Article 24 of the New Civil Code. In sum, in the case at bar, petitioners pray for rescission of the Deed of Sale of the building and offer to repay the purchase price after their liquidity position would have improved and after respondents would have refurbished the building, updated the real property taxes, and turned the building into a profitable business venture. This Court, however, will not allow itself to be an instrument to the dissolution of contract validly entered into. A party should not, after its opportunity to enjoy the benefits of an agreement, be allowed to later disown the arrangement when the terms thereof ultimately would prove to operate against its hopeful expectations.36 On the matter of damages, the Court of Appeals affirmed the trial courts award of damages and attorneys fees to respondents, namely P400,000 as moral damages, P200,000 as exemplary damages, P100,000 as attorneys fees and the costs of suit. We have held that moral damages may be recovered in cases where one willfully causes injury to property, or in cases of breach of contract where the other party acts fraudulently or in bad faith.37 There is no hard and fast rule in the determination of what would be a fair amount of moral damages, since each case must be governed by its own peculiar circumstances.38 Exemplary damages, on the other hand, are imposed by way of example or correction for the public good, when the party to a contract acts in a wanton, fraudulent, oppressive or malevolent manner.39 Attorneys fees are allowed when exemplary damages are awarded and when the party to a suit is compelled to incur expenses to protect his interest. 40

While it has been sufficiently proven that the respondents are entitled to damages, the actual amounts awarded by the lower court must be reduced because damages are not intended for a litigants enrichment, at the expense of the petitioners. 41 Judicial discretion granted to the courts in the assessment of damages must always be exercised with balanced restraint and measured objectivity.42 Thus, the amount of moral damages should be set at only P30,000.00, and the award of exemplary damages at only P20,000.00. The award of attorneys fees should also be reduced to P20,000.00 which, under the circumstances of this case, appears justified and reasonable. All told, we find no reason to reverse the assailed decision of respondent court. The factual findings of the appellate court are conclusive on the parties and carry greater weight when they coincide with the factual findings of the trial court.43 This Court will not weigh the evidence anew lest there is a showing that the findings of the lower court are totally devoid of support or are clearly erroneous so as to constitute serious abuse of discretion. In the instant case, the trial court found that the documents, which petitioners seek to rescind, were entered into as a result of an arms-length transaction. These are factual findings that are now conclusive upon us.44 WHEREFORE, the Decision and the Resolution dated 30 April 1997 and 12 September 1997, respectively, of the Court of Appeals in CA-G.R. CV No. 47034, are hereby AFFIRMED with MODIFICATION as to the amount of damages and attorneys fees recoverable, as follows: (1) moral damages is reduced to P30,000.00, (2) exemplary damages is reduced to P20,000.00, and (3) attorneys fees is reduced to P20,000.00. Costs against petitioners. SO ORDERED.

Republic of the Philippines SUPREME COURT SECOND DIVISION G.R. No. 149252. April 28, 2005 DONALD KWOK, Petitioners, vs. PHILIPPINE CARPET MANUFACTURING CORPORATION, Respondents. DECISION CALLEJO, SR., J.: This is a petition for review of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 60232 dismissing Donald Kwoks petition for review on certiorari and affirming the majority Decision of the National Labor Relations Commission (NLRC), as well as its resolution in NLRC NCR Case No. 00-12-07454-96 dismissing the motion for reconsideration of the said decision. The Antecedents In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim, along with some other stockholders, established a corporation, the respondent Philippine Carpet Manufacturing Corporation (PCMC). The petitioner became its general manager, executive vice-president and chief operations officer. Lim, on the other hand, was its president and chairman of the board of directors. When the petitioner retired 36 years later or on October 31, 1996, he was receiving a monthly salary of P160,000.00.2 He demanded the cash equivalent of what he believed to be his accumulated vacation and sick leave credits during the entire length of his service with the respondent corporation, i.e., from November 16, 1965 to October 31, 1996, in the total amount of P7,080,546.00 plus interest.3 However, the respondent corporation refused to accede to the petitioners demands, claiming that the latter was not entitled thereto. 4 The petitioner filed a complaint against the respondent corporation for the payment of his accumulated vacation and sick leave credits before the NLRC. He claimed that Lim made a verbal promise to give him unlimited sick leave and vacation leave benefits and its cash conversion upon his retirement or resignation without the need for any application therefor. In addition, Lim also promised to grant him other benefits, such as golf and country club membership; the privilege to charge the respondent corporations account; 6% profit -sharing in the net income of the respondent corporation (while Lim got 4%); and other corporate perquisites. According to the petitioner, all of these promises were complied with, except for the grant of the cash equivalent of his accumulated vacation and sick leave credits upon his retirement.5 The respondent corporation denied all these, claiming that upon the petitioners retirement, he received the amount of P6,902,387.19 representing all the benefits due him. Despite this, the petitioner again demandedP7,080,546.00, which demand was without factual and legal basis. The respondent corporation asserted that the chairman of its board of directors and its president/vice-president had unlimited discretion in the use of their time, and had never been required to file applications for vacation and sick leaves; as such, the said officers were not

entitled to vacation and sick leave benefits. The respondent corporation, likewise, pointed out that even if the petitioner was entitled to the said additional benefits, his claim had already prescribed. It further averred that it had no policy to grant vacation and sick leave credits to the petitioner.6 In his Affidavit7 dated May 19, 1998, Lim denied making any such verbal promise to his son-inlaw on the grant of unlimited vacation and sick leave credits and the cash conversion thereof. Lim averred that the petitioner had received vacation and sick leave benefits from 1994 to 1996. Moreover, assuming that he did make such promise to the petitioner, the same had not been confirmed or approved via resolution of the respondent corporations board of directors. It was further pointed out that as per the Memorandum dated November 6, 1981, only regular employees and managerial and confidential employees falling under Category I were entitled to vacation and sick leave credits. The petitioner, whose position did not fall under Category I, was, thus, not entitled to the benefits under the said memorandum. The respondent corporation alleged that this was admitted by the petitioner himself and affirmed by Raoul Rodrigo, its incumbent executive vice-president and general manager. In a Decision8 dated November 27, 1998, the Labor Arbiter ruled in favor of the petitioner. The fallo of the decision reads: WHEREFORE, all the foregoing premises being considered, judgment is hereby rendered ordering the respondent company to pay complainant the sum of P7,080,546.00, plus ten percent (10%) thereof as and for attorneys fees. SO ORDERED.9 Undaunted, the respondent corporation appealed the decision to the NLRC, alleging that: I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS COVERED BY THE NOVEMBER 6, 1981 MEMORANDUM ON VACATION AND SICK LEAVE CREDITS.10 II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS DISCRIMINATORY NOT TO GRANT KWOK THESE BENEFITS.11 III. KWOKS CLAIMS ARE BASELESS.12 IV. KWOKS CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE BARRED BY PRESCRIPTION.13 V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.14 The respondent corporation averred that based on the petitioners memorandum, his admissions and the contract of employment, the petitioner was not entitled to the cash conversion of his sick and vacation leave credits. While the respondent corporation conceded that the petitioner may have been entitled to unlimited sick and vacation leave benefits during his employment, it maintained that no such promise was made by Lim to convert the same; even assuming that such verbal promise was made, the respondent corporation was not bound thereby since the petitioner failed to adduce the written conformity of its board of

directors. The respondent corporation insisted that the claims of the petitioner were barred under Article 291 of the Labor Code. For his part, the petitioner made the following averments in his memorandum: The non-performance by PCMC of this particular promise to convert in cash all of his unused cash (sic) and sick leave credits was precipitated by the falling out of the marriage between Mr. Kwok and his wife, the daughter of Mr. Lim. In fact, even while Mr. Kwok was still the Executive Vice-President and General Manager of PCMC, when the falling out of the said marriage became apparent, the other benefits or perquisites which Mr. Kwok used to enjoy were immediately curtailed by Mr. Lim to the prejudice of Mr. Kwok. 15 On November 29, 1999, the NLRC, by majority vote, rendered judgment granting the appeal, reversing and setting aside the decision of the Labor Arbiter. 16 The NLRC ordered the dismissal of the complaint. Commissioner Angelita A. Gacutan filed a dissenting opinion. 17 Aggrieved, the petitioner filed a petition for review with the CA, on the following grounds: I

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT RULED THAT THE MEMORANDUM DATED APRIL 26, 1997 APPLICABLE TO MR. RAOUL RODRIGO WAS ALSO APPLICABLE TO PETITIONER.18 On February 28, 2001, the CA rendered judgment affirming the decision of the NLRC and dismissing the petition.19 The petitioners motion for reconsideration thereof was denied by the appellate court, per its Resolution20 dated July 17, 2001. The petitioner, thus, filed the instant petition for review on certiorari with this Court, assailing the decision and resolution of the CA on the following claims: I The Hon. Court of Appeals, contrary to law, gravely erred and disregarded established jurisprudence in ruling that petitioner has not adduced sufficient evidence to support his claim that he was, indeed, promised the cash conversion of his unused vacation and sick leave credits upon retirement.21 II

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT DECLARED THAT THE VERBAL PROMISE OF MR. LIM TO PETITIONER WAS UNENFORCEABLE. II THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT RULED THAT THE VERBAL PROMISE BY MR. LIM TO PETITIONER WAS NOT BINDING AS IT WAS NOT APPROVED BY THE BOARD OF DIRECTORS. III THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT IGNORED STRONG EVIDENCE THAT PCMC CLOTHED MR. LIM WITH AWESOME POWERS TO GRANT BENEFITS TO ITS EMPLOYEES INCLUDING PETITIONER AND RATIFIED THE SAME BY ITS SILENCE AND WHEN IT IGNORED TOO EXISTING JURISPRUDENCE ON THE MATTER. IV THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT IGNORED STRONG AND CLEAR EVIDENCE THAT IN PCMC THE GIVING OF BENEFITS TO PETITIONER, THOUGH NOT IN WRITING, WAS A PREVALENT PRACTICE. V

The Hon. Court of Appeals gravely erred in ruling that even if private respondents (sic) Mr. Lim did make him such promise, the same cannot be enforced.22 III The Hon. Court of Appeals gravely erred and disregarded clear jurisprudence on the matter when it ruled that there is no showing that private respondent, thru its board of directors either recognized, approved or ratified the promise made by Mr. Lim to petitioner. 23 As gleaned from his Memorandum, the petitioner posits that he had adduced substantial evidence to prove that Lim, as president and chairman of the respondent corporations board of directors, made a verbal promise to give him the cash conversion of his accumulated vacation and sick leave credits upon his retirement (that is, benefits at par with the number of days to which the officer next in rank to him was entitled). According to the petitioner, his claim is fortified by the fact that his successor, Raoul Rodrigo, has unlimited vacation and sick leave credits. The petitioner further asserts that he would not have accepted the positions in the respondent corporation without such benefit, especially since his subordinates were also enjoying the same. He posits that he was entitled to the said privilege because of his rank. He, likewise, claims that, in contrast to the evidence he has presented, the respondent corporation failed to adduce proof of its affirmative allegations. The petitioner further argues that his complaint was not time-barred since he filed it on December 5, 1996. Even if this were so, he is, nevertheless, entitled to the cash value of his vacation and sick leave credits for three years before his retirement. Moreover, the evidence on record shows that officers belonging to Category I had been granted the cash conversion of their earned leave credits after the lapse of three years. The respondent corporation, for its part, asserts that the petitioner failed to adduce substantial evidence to the claims in his complaint. Even if Lim had made such verbal promise to the petitioner, the same is not binding on the respondent corporation absent its conformity through

board resolution. Moreover, the petitioner is not covered by the Memorandum dated November 6, 1981 because he had unlimited leave credits; hence, it cannot be gainsaid that he still had unused leave credits to be converted. According to the respondent corporation, the petitioner himself admitted that he was not included in the Memorandum dated November 6, 1981; and even assuming that he was covered by the said memorandum, the fact that his complaint was filed only in 1996 precludes him from claiming the cash conversion of such leave credits for the years 1966 to 1993. The Courts Ruling The petition has no merit. The threshold issue in this case is factual whether or not the petitioner is entitled, based on the documentary and testimonial evidence on record, to the cash value of his vacation and sick leave credits in the total amount ofP7,080,546.00. The resolution of the issue is riveted to our resolution of whether the petitioners mainly testimonial evidence of an alleged verbal promise made by a corporate officer to grant him the privilege of converting accumulated vacation and sick leave credits after retirement or separation from employment is entitled to probative weight. Under Rule 45 of the Rules of Court, only questions of law may be raised under a petition for review on certiorari. The Court, not being a trier of facts, is not wont to reexamine and reevaluate the evidence of the parties, whether testimonial or documentary. Moreover, the findings of facts of the CA on appeal from the NLRC are, more often than not, given conclusive effect by the Court. The Court may delve into and resolve factual issues only in exceptional circumstances, such as when the findings of facts of the Labor Arbiter, on one hand, and those of the NLRC and the CA, on the other, are capricious and arbitrary; or when the CA has reached an erroneous conclusion based on arbitrary findings of fact; and when substantial justice so requires. In this case, however, the petitioner failed to convince the Court that the factual findings of the CA which affirmed the findings of the NLRC on appeal, as well as its conclusions based on the said findings, are capricious and arbitrary. While the petitioner was unequivocal in claiming that the respondent corporation, through its president and chairman of the board of directors, obliged itself, as a matter of policy, to grant him the cash value of his vacation and sick leave credits upon his retirement, he was burdened to prove his claim by substantial evidence. 24 The petitioner failed to discharge this burden. We agree with the petitioners contention that for a contract to be binding on the parties thereto, it need not be in writing unless the law requires that such contract be in some form in order that it may be valid or enforceable or that it be executed in a certain way, in which case that requirement is absolute and independent. 25 Indeed, corporate policies need not be in writing. Contracts entered into by a corporate officer or obligations or prestations assumed by such officer for and in behalf of such corporation are binding on the said corporation only if such officer acted within the scope of his authority or if such officer exceeded the limits of his authority, the corporation has ratified such contracts or obligations. In the present case, the petitioner relied principally on his testimony to prove that Lim made a verbal promise to give him vacation and sick leave credits, as well as the privilege of converting the same into cash upon retirement. The Court agrees that those who belong to the upper corporate echelons would have more privileges. However, the Court cannot presume the existence of such privileges or benefits. The petitioner was burdened to prove not only the existence of such benefits but also that he is entitled to the same, especially considering that

such privileges are not inherent to the positions occupied by the petitioner in the respondent corporation, son-in-law of its president or not. In dismissing the petition before it, the CA disbelieved the petitioners testimony and gave credence and probative weight to the collective testimonies of the respondent corporations witnesses, who were its employees and officers, including Lim, whom the petitioner presented as a hostile witness. We agree with the appellate courts encompassing synthesis and analysis of the evidence on record: Except for his bare assertions, petitioner has not adduced sufficient evidence to support his claim that he was, indeed, promised the cash conversion of his unused vacation and sick leaves upon retirement. Petitioner harps on what he calls the prevalent practice in PCMC of giving him benefits, such as the use of golf and country club facilities, salary increases, the use of the company vehicle and driver, and sharing in PCMCs annual net income, without either a written contract or a Board resolution to back it up. Respondent PCMC denies all these, however. According to respondent, petitioners share in the income of the comp any is actually part of the consultancy fee which PCMC pays DK Management Services, Inc., a firm owned by petitioners company. PCMC adds that the yearly salary increases of corporate officers were always with the prior approval of the Board. Nevertheless, assuming that petitioner was, indeed, given the benefits which he so claimed, it does not necessarily follow that among those is the cash conversion of his accumulated leaves. It is a basic rule in evidence that each party must prove his affirmative allegation. Since the burden of proof lies with the party who asserts an affirmative allegation, the plaintiff or complainant has to prove his affirmative allegations in the complaint and the defendant or respondent has to prove the affirmative allegations in his affirmative defenses and counterclaim. Petitioner, in the case at bar, has failed to discharge this burden. 26 The CA made short shift of the claim of the petitioner that per Memorandum dated November 6, 1981, he was not entitled to the benefits of the company policy of commutation of leave credits. Indeed, the company policy of conversion into equivalent cash of unused vacation and sick leave credits applied only to its regular employees. The petitioner failed to offer evidence to rebut the testimony of Nel Gopez, Chief Accountant of the respondent, that the petitioner was not among the regular employees covered by the policy for the simple reason that he had unlimited vacation leave benefits. As stated by the CA, the petitioner no less corroborated the testimony of Gopez, thus: ATTY. PIMENTEL And, so you mention[ed] earlier that the policy on vacation leave benefits apply for category one employee(s) and rank-and-file employee(s)? WITNESS (Mr. Nel Gopez) Yes. ATTY. PIMENTEL And who are considered category one employee(s)? WITNESS

Category One employees are from the rank and of Senior Vice-President and Assistant General Manager and below, up to the level of department managers. ATTY. PIMENTEL

Yes, right. ATTY. PIMENTEL And this policy does not apply to you?

How about the complainant, Mr. Kwok, does he falling (sic) to the category one? WITNESS WITNESS As far as Im concerned, it does not apply for ( sic) me. As far as I can remember, he is (sic) not belong to category one employee. ATTY. PIMENTEL Therefore, he is not entitled to the lump sum benefit? WITNESS Yes, Maam. ATTY. PIMENTEL And would you know, Mr. Witness, why he is (sic) not given the conversion of the vacation leave benefits at the time category one employees sectors ( sic) are given? WITNESS Because he has, as far as I can remember, he has unlimited vacation leave." This was corroborated by petitioner himself when he testified in this wise: ATTY. PIMENTEL Mr. Witness, you occupied the position of Executive Vice-President and General Manager. You agree with me that this position or this office of Executive Vice-President and General Manager are not covered by this policy. WITNESS (Donald Kwok) Yes, it is not covered by this policy. ATTY. PIMENTEL So this policy applies to persons below you and your father-in-law? WITNESS Anent the third assigned error, petitioner maintains that the PCMC Board of Directors has granted its President, Patricio Lim, awesome powers to grant benefits to its employees, adding that the Board has always given its consent to the way Lim ran the affairs of the company especially on matters relating to the benefits that its corporate officers enjoyed. We have reviewed the records and found no evidence to controvert the following findings of the CA and its ratiocinations on its resolution of the petitioners submissions: Second, even assuming that petitioner is included among the "regular employees" of PCMC referred to in said memorandum, there is no evidence that he complied with the cut-off dates for the filing of the cash conversion of vacation and sick leaves. This being so, we find merit in respondents argument that petitioners money claims have already been barred by the three year prescriptive period under Article 291 of the Labor Code, as amended. Third, and this is of primordial importance, there is no proof that petitioner has filed vacation and sick leaves with PCMCs personnel department. Without a record of petitioners absences, there is no way to determine the actual number of leave credits he is entitled to. The P7,080,546.00 figure arrived at by petitioner supposedly representing the cash equivalent of his earned sick and vacation leaves is thus totally baseless. And, fourth, even assuming that PCMC President Patricio Lim did promise petitioner the cash conversion of his leaves, we agree with respondent that this cannot bind the company in the absence of any Board resolution to that effect. We must stress that the personal act of the company president cannot bind the corporation. As explicitly stated by the Supreme Court in Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals: "The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its stockholders and members, having xxx powers, attributes and properties expressly authorized by law or incident to its existence. " the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, by-laws, or relevant provisions of law." In all respects, therefore, petitioner, by virtue of his position as Executive Vice-President, is not covered by the November 6, 1981 Memorandum granting PCMC employees the conversion of their unused vacation and sick leaves into cash.27

True, jurisprudence holds that the president of a corporation possesses the power to enter into a contract for the corporation when "the conduct on the part of both the president and corporation [shows] that he had been in the habit of acting in similar matters on behalf of the company and that the company had authorized him so to act and had recognized, approved and ratified his former and similar actions." In the case at bar, however, there is no showing that PCMC had either recognized, approved or ratified the cash conversion of petitioners leave credits as purportedly promised to him by Lim. On the contrary, PCMC has steadfastly maintained that "the Company, through the Board, has long adopted the policy of granting its earlier mentioned corporate officers unlimited leave benefits denying them the privilege of converting their unused vacation or sick leave benefits into their cash equivalent." As to the last assigned error, petitioner faults the NLRC for holding as applicable to petitioner, the April 26, 1997 Memorandum issued by PCMC to Raoul Rodrigo, Donald Kwoks successor as company executive vice-president. The said memo granted Rodrigo unlimited sick and vacation leave credits but disallowed the cash conversion thereof. Before he became executive vice-president, Rodrigo was senior vice-president and enjoyed the commutation of his unused vacation and sick leaves. We note that the April 26, 1997 memo was issued to Rodrigo when petitioner was already retired from PCMC. While said memorandum was particularly directed to Rodrigo, however, this does not necessarily mean that petitioner, as former executive vice-president, was then not prohibited from converting his earned vacation and sick leaves into cash since he was not issued a similar memo. On the contrary, the memo simply affirms the long-standing company practice of excluding PCMCs top two positions, that of president and executive vice -president, from the commutation of leaves. As heretofore discussed, among the perks of those occupying these posts is the privilege of having unlimited leaves, which is totally incompatible with the concept of converting unused leave credits into their cash equivalents. 28 We are not convinced by the petitioners claim that Lim capriciously deprived him of his entitlement to the cash conversion of his accumulated vacation and sick leave credits simply because of his estrangement from his wife, who happens to be Lims daughter. The petitioner did not adduce any evidence to show that he appealed to the respondent corporations board of directors for the implementation of the said privilege which was allegedly granted to him. Even if Lim was the president and chairman of the respondent corporations board of directors, the rest of the membership of the board could have overruled him and granted to the petitioner his claim if, indeed, the latter was entitled thereto. Indeed, even the petitioner admitted that, after his retirement, the board of directors granted to him salary increase for two years prior to his retirement. If the claim of the petitioner had been approved by the board of directors, for sure, it would have approved the same despite his falling out with the daughter of Lim. IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner. SO ORDERED. Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC

the Commission have not only desecrated legal and jurisprudential norms, but have also cast serious doubts upon the poll bodys ability and capacity to conduct automated elections. Truly, the pith and soul of democracy -- credible, orderly, and peaceful elections -- has been put in jeopardy by the illegal and gravely abusive acts of Comelec. The Case

G.R. No. 159139

January 13, 2004 Before us is a Petition4 under Rule 65 of the Rules of Court, seeking (1) to declare null and void Resolution No. 6074 of the Commission on Elections (Comelec), which awarded "Phase II of the Modernization Project of the Commission to Mega Pacific Consortium (MPC);" (2) to enjoin the implementation of any further contract that may have been entered into by Comelec "either with Mega Pacific Consortium and/or Mega Pacific eSolutions, Inc. (MPEI);" and (3) to compel Comelec to conduct a re-bidding of the project. The Facts The following facts are not disputed. They were culled from official documents, the parties pleadings, as well as from admissions during the Oral Argument on October 7, 2003. On June 7, 1995, Congress passed Republic Act 8046, 5 which authorized Comelec to conduct a nationwide demonstration of a computerized election system and allowed the poll body to pilot-test the system in the March 1996 elections in the Autonomous Region in Muslim Mindanao (ARMM). On December 22, 1997, Congress enacted Republic Act 8436 6 authorizing Comelec to use an automated election system (AES) for the process of voting, counting votes and canvassing/consolidating the results of the national and local elections. It also mandated the poll body to acquire automated counting machines (ACMs), computer equipment, devices and materials; and to adopt new electoral forms and printing materials. Initially intending to implement the automation during the May 11, 1998 presidential elections, Comelec -- in its Resolution No. 2985 dated February 9, 19987 -- eventually decided against full national implementation and limited the automation to the Autonomous Region in Muslim Mindanao (ARMM). However, due to the failure of the machines to read correctly some automated ballots in one town, the poll body later ordered their manual count for the entire Province of Sulu.8 In the May 2001 elections, the counting and canvassing of votes for both national and local positions were also done manually, as no additional ACMs had been acquired for that electoral exercise allegedly because of time constraints. On October 29, 2002, Comelec adopted in its Resolution 02-0170 a modernization program for the 2004 elections. It resolved to conduct biddings for the three (3) phases of its Automated Election System; namely, Phase I - Voter Registration and Validation System; Phase II Automated Counting and Canvassing System; and Phase III - Electronic Transmission. On January 24, 2003, President Gloria Macapagal-Arroyo issued Executive Order No. 172, which allocated the sum of P2.5 billion to fund the AES for the May 10, 2004 elections. Upon the request of Comelec, she authorized the release of an additional P500 million.

INFORMATION TECHNOLOGY FOUNDATION OF THE PHILIPPINES, MA. CORAZON M. AKOL, MIGUEL UY, EDUARDO H. LOPEZ, AUGUSTO C. LAGMAN, REX C. DRILON, MIGUEL HILADO, LEY SALCEDO, and MANUEL ALCUAZ JR., petitioners, vs. COMMISSION ON ELECTIONS; COMELEC CHAIRMAN BENJAMIN ABALOS SR.; COMELEC BIDDING and AWARD COMMITTEE CHAIRMAN EDUARDO D. MEJOS and MEMBERS GIDEON DE GUZMAN, JOSE F. BALBUENA, LAMBERTO P. LLAMAS, and BARTOLOME SINOCRUZ JR.; MEGA PACIFIC eSOLUTIONS, INC.; and MEGA PACIFIC CONSORTIUM, respondents. DECISION PANGANIBAN, J.: There is grave abuse of discretion (1) when an act is done contrary to the Constitution, the law or jurisprudence;1or (2) when it is executed whimsically, capriciously or arbitrarily out of malice, ill will or personal bias.2 In the present case, the Commission on Elections approved the assailed Resolution and awarded the subject Contract not only in clear violation of law and jurisprudence, but also in reckless disregard of its own bidding rules and procedure. For the automation of the counting and canvassing of the ballots in the 2004 elections, Comelec awarded the Contract to "Mega Pacific Consortium" an entity that had not participated in the bidding. Despite this grant, the poll body signed the actual automation Contract with "Mega Pacific eSolutions, Inc.," a company that joined the bidding but had not met the eligibility requirements. Comelec awarded this billion-peso undertaking with inexplicable haste, without adequately checking and observing mandatory financial, technical and legal requirements. It also accepted the proferred computer hardware and software even if, at the time of the award, they had undeniably failed to pass eight critical requirements designed to safeguard the integrity of elections, especially the following three items: They failed to achieve the accuracy rating criteria of 99.9995 percent set-up by the Comelec itself They were not able to detect previously downloaded results at various canvassing or consolidation levels and to prevent these from being inputted again They were unable to print the statutorily required audit trails of the count/canvass at different levels without any loss of data Because of the foregoing violations of law and the glaring grave abuse of discretion committed by Comelec, the Court has no choice but to exercise its solemn "constitutional duty"3 to void the assailed Resolution and the subject Contract. The illegal, imprudent and hasty actions of

On January 28, 2003, the Commission issued an "Invitation to Apply for Eligibility and to Bid," which we quote as follows: "INVITATION TO APPLY FOR ELIGIBILITY AND TO BID The Commission on Elections (COMELEC), pursuant to the mandate of Republic Act Nos. 8189 and 8436, invites interested offerors, vendors, suppliers or lessors to apply for eligibility and to bid for the procurement by purchase, lease, lease with option to purchase, or otherwise, supplies, equipment, materials and services needed for a comprehensive Automated Election System, consisting of three (3) phases: (a) registration/verification of voters, (b) automated counting and consolidation of votes, and (c) electronic transmission of election results, with an approved budget of TWO BILLION FIVE HUNDRED MILLION (Php2,500,000,000) Pesos. Only bids from the following entities shall be entertained: a. Duly licensed Filipino citizens/proprietorships; b. Partnerships duly organized under the laws of the Philippines and of which at least sixty percent (60%) of the interest belongs to citizens of the Philippines; c. Corporations duly organized under the laws of the Philippines, and of which at least sixty percent (60%) of the outstanding capital stock belongs to citizens of the Philippines; d. Manufacturers, suppliers and/or distributors forming themselves into a joint venture, i.e., a group of two (2) or more manufacturers, suppliers and/or distributors that intend to be jointly and severally responsible or liable for a particular contract, provided that Filipino ownership thereof shall be at least sixty percent (60%); and e. Cooperatives duly registered with the Cooperatives Development Authority. Bid documents for the three (3) phases may be obtained starting 10 February 2003, during office hours from the Bids and Awards Committee (BAC) Secretariat/Office of Commissioner Resurreccion Z. Borra, 7th Floor, Palacio del Governador, Intramuros, Manila, upon payment at the Cash Division, Commission on Elections, in cash or cashiers check, payable to the Commission on Elections, of a non -refundable amount of FIFTEEN THOUSAND PESOS (Php15,000.00) for each phase. For this purpose, interested offerors, vendors, suppliers or lessors have the option to participate in any or all of the three (3) phases of the comprehensive Automated Election System. A Pre-Bid Conference is scheduled on 13 February 2003, at 9:00 a.m. at the Session Hall, Commission on Elections, Postigo Street, Intramuros, Manila. Should there be questions on the bid documents, bidders are required to submit their queries in writing to the BAC Secretariat prior to the scheduled Pre-Bid Conference.

Deadline for submission to the BAC of applications for eligibility and bid envelopes for the supply of the comprehensive Automated Election System shall be at the Session Hall, Commission on Elections, Postigo Street, Intramuros, Manila on 28 February 2003 at 9:00 a.m. The COMELEC reserves the right to review the qualifications of the bidders after the bidding and before the contract is executed. Should such review uncover any misrepresentation made in the eligibility statements, or any changes in the situation of the bidder to materially downgrade the substance of such statements, the COMELEC shall disqualify the bidder upon due notice without any obligation whatsoever for any expenses or losses that may be incurred by it in the preparation of its bid."9 On February 11, 2003, Comelec issued Resolution No. 5929 clarifying certain eligibility criteria for bidders and the schedule of activities for the project bidding, as follows: "1.) Open to Filipino and foreign corporation duly registered and licensed to do business and is actually doing business in the Philippines, subject to Sec. 43 of RA 9184 (An Act providing In the Modernization Standardization and Regulation of the Procurement Activities of the Government and for other purposes etc.) 2.) Track Record: a) For counting machines should have been used in at least one (1) political exercise with no less than Twenty Million Voters; b) For verification of voters the reference site of an existing data base installation using Automated Fingerprint Identification System (AFIS) with at least Twenty Million. 3.) Ten percent (10%) equity requirement shall be based on the total project cost; and 4.) Performance bond shall be twenty percent (20%) of the bid offer. RESOLVED moreover, that: 1) A. Due to the decision that the eligibility requirements and the rest of the Bid documents shall be released at the same time, and the memorandum of Comm. Resurreccion Z. Borra dated February 7, 2003, the documents to be released on Friday, February 14, 2003 at 2:00 oclock p.m. shall be the eligibility criteria, Terms of Reference (TOR) and other pertinent documents; B. Pre-Bid conference shall be on February 18, 2003; and C. Deadline for the submission and receipt of the Bids shall be on March 5, 2003. 2) The aforementioned documents will be available at the following offices:

a) Voters Validation: Office of Comm. Javier b) Automated Counting Machines: Office of Comm. Borra c) Electronic Transmission: Office of Comm. Tancangco"10 On February 17, 2003, the poll body released the Request for Proposal (RFP) to procure the election automation machines. The Bids and Awards Committee (BAC) of Comelec convened a pre-bid conference on February 18, 2003 and gave prospective bidders until March 10, 2003 to submit their respective bids. Among others, the RFP provided that bids from manufacturers, suppliers and/or distributors forming themselves into a joint venture may be entertained, provided that the Philippine ownership thereof shall be at least 60 percent. Joint venture is defined in the RFP as "a group of two or more manufacturers, suppliers and/or distributors that intend to be jointly and severally responsible or liable for a particular contract." 11 Basically, the public bidding was to be conducted under a two-envelope/two stage system. The bidders first envelope or the Eligibility Envelope should establish the bidders eligibility to bid and its qualifications to perform the acts if accepted. On the other hand, the second envelope would be the Bid Envelope itself. The RFP outlines the bidding procedures as follows: "25. Determination of Eligibility of Prospective Bidders "25.1 The eligibility envelopes of prospective Bidders shall be opened first to determine their eligibility. In case any of the requirements specified in Clause 20 is missing from the first bid envelope, the BAC shall declare said prospective Bidder as ineligible to bid. Bid envelopes of ineligible Bidders shall be immediately returned unopened. "25.2 The eligibility of prospective Bidders shall be determined using simple pass/fail criteria and shall be determined as either eligible or ineligible. If the prospective Bidder is rated passed for all the legal, technical and financial requirements, he shall be considered eligible. If the prospective Bidder is rated failed in any of the requ irements, he shall be considered ineligible. "26. Bid Examination/Evaluation "26.1 The BAC will examine the Bids to determine whether they are complete, whether any computational errors have been made, whether required securities have been furnished, whether the documents have been properly signed, and whether the Bids are generally in order. "26.2 The BAC shall check the submitted documents of each Bidder against the required documents enumerated under Clause 20, to ascertain if they are all present in the Second bid envelope (Technical Envelope). In case one (1) or more of the required documents is missing, the BAC shall rate the Bid concerned as failed and immediately return to the Bidder its

Third bid envelope (Financial Envelope) unopened. Otherwise, the BAC shall rate the first bid envelope as passed. "26.3 The BAC shall immediately open the Financial Envelopes of the Bidders whose Technical Envelopes were passed or rated on or above the passing score. Only Bids that are determined to contain all the bid requirements for both components shall be rated passed and shall immediately be considered for evaluation and comparison. "26.4 In the opening and examination of the Financial Envelope, the BAC shall announce and tabulate the Total Bid Price as calculated. Arithmetical errors will be rectified on the following basis: If there is a discrepancy between words and figures, the amount in words will prevail. If there is a discrepancy between the unit price and the total price that is obtained by multiplying the unit price and the quantity, the unit price shall prevail and the total price shall be corrected accordingly. If there is a discrepancy between the Total Bid Price and the sum of the total prices, the sum of the total prices prevail and the Total Bid Price shall be corrected accordingly. "26.5 Financial Proposals which do not clearly state the Total Bid Price shall be rejected. Also, Total Bid Price as calculated that exceeds the approved budget for the contract shall also be rejected. 27. Comparison of Bids 27.1 The bid price shall be deemed to embrace all costs, charges and fees associated with carrying out all the elements of the proposed Contract, including but not limited to, license fees, freight charges and taxes. 27.2 The BAC shall establish the calculated prices of all Bids rated passed and rank the same in ascending order. xxxxxxxxx "29. Postqualification "29.1 The BAC will determine to its satisfaction whether the Bidder selected as having submitted the lowest calculated bid is qualified to satisfactorily perform the Contract. "29.2 The determination will take into account the Bidders financial, technical and production capabilities/resources. It will be based upon an examination of the documentary evidence of the Bidders qualific ation submitted by the Bidder as well as such other information as the BAC deems necessary and appropriate. "29.3 A bid determined as not substantially responsive will be rejected by the BAC and may not subsequently be made responsive by the Bidder by correction of the non-conformity.

"29.4 The BAC may waive any informality or non-conformity or irregularity in a bid which does not constitute a material deviation, provided such waiver does not prejudice or affect the relative ranking of any Bidder. "29.5 Should the BAC find that the Bidder complies with the legal, financial and technical requirements, it shall make an affirmative determination which shall be a prerequisite for award of the Contract to the Bidder. Otherwise, it will make a negative determination which will result in rejection of the Bidders bid, in which event the BAC will proceed to the next lowest calculated bid to make a similar determination of that Bidders capabilities to perform satisfactorily."12 Out of the 57 bidders,13 the BAC found MPC and the Total Information Management Corporation (TIMC) eligible. For technical evaluation, they were referred to the BACs Technical Working Group (TWG) and the Department of Science and Technology (DOST). In its Report on the Evaluation of the Technical Proposals on Phase II, DOST said that both MPC and TIMC had obtained a number of failed marks in the technical evaluation. Notwithstanding these failures, Comelec en banc, on April 15, 2003, promulgated Resolution No. 6074 awarding the project to MPC. The Commission publicized this Resolution and the award of the project to MPC on May 16, 2003. On May 29, 2003, five individuals and entities (including the herein Petitioners Information Technology Foundation of the Philippines, represented by its president, Alfredo M. Torres; and Ma. Corazon Akol) wrote a letter14 to Comelec Chairman Benjamin Abalos Sr. They protested the award of the Contract to Respondent MPC "due to glaring irregularities in the manner in which the bidding process had been conducted." Citing therein the noncompliance with eligibility as well as technical and procedural requirements (many of which have been discussed at length in the Petition), they sought a re-bidding. In a letter-reply dated June 6, 2003,15 the Comelec chairman -- speaking through Atty. Jaime Paz, his head executive assistant -- rejected the protest and declared that the award "would stand up to the strictest scrutiny." Hence, the present Petition.16 The Issues In their Memorandum, petitioners raise the following issues for our consideration: "1. The COMELEC awarded and contracted with a non-eligible entity; x x x "2. Private respondents failed to pass the Technical Test as required in the RFP. Notwithstanding, such failure was ignored. In effect, the COMELEC changed the rules after the bidding in effect changing the nature of the contract bidded upon. "3. Petitioners have locus standi. "4. Instant Petition is not premature. Direct resort to the Supreme Court is justified." 17

In the main, the substantive issue is whether the Commission on Elections, the agency vested with the exclusive constitutional mandate to oversee elections, gravely abused its discretion when, in the exercise of its administrative functions, it awarded to MPC the contract for the second phase of the comprehensive Automated Election System. Before discussing the validity of the award to MPC, however, we deem it proper to first pass upon the procedural issues: the legal standing of petitioners and the alleged prematurity of the Petition. This Courts Ruling The Petition is meritorious. First Procedural Issue: Locus Standi of Petitioners Respondents chorus that petitioners do not possess locus standi, inasmuch as they are not challenging the validity or constitutionality of RA 8436. Moreover, petitioners supposedly admitted during the Oral Argument that no law had been violated by the award of the Contract. Furthermore, they allegedly have no actual and material interest in the Contract and, hence, do not stand to be injured or prejudiced on account of the award. On the other hand, petitioners -- suing in their capacities as taxpayers, registered voters and concerned citizens -- respond that the issues central to this case are "of transcendental importance and of national interest." Allegedly, Comelecs flawed bidding and questionable award of the Contract to an unqualified entity would impact directly on the success or the failure of the electoral process. Thus, any taint on the sanctity of the ballot as the expression of the will of the people would inevitably affect their faith in the democratic system of government. Petitioners further argue that the award of any contract for automation involves disbursement of public funds in gargantuan amounts; therefore, public interest requires that the laws governing the transaction must be followed strictly. We agree with petitioners. Our nations political and economic future virtually hangs in the balance, pending the outcome of the 2004 elections. Hence, there can be no serious doubt that the subject matter of this case is "a matter of public concern and imbued with public interest";18 in other words, it is of "paramount public interest" 19and "transcendental importance."20 This fact alone would justify relaxing the rule on legal standing, following the liberal policy of this Court whenever a case involves "an issue of overarching significance to our society."21Petitioners legal standing should therefore be recognized and upheld. Moreover, this Court has held that taxpayers are allowed to sue when there is a claim of "illegal disbursement of public funds,"22 or if public money is being "deflected to any improper purpose";23 or when petitioners seek to restrain respondent from "wasting public funds through the enforcement of an invalid or unconstitutional law."24 In the instant case, individual petitioners, suing as taxpayers, assert a material interest in seeing to it that public funds are properly and lawfully used. In the Petition, they claim that the bidding was defective, the winning bidder not a qualified entity, and the award of the Contract contrary to law and regulation. Accordingly, they seek to restrain respondents from implementing the Contract and, necessarily, from making any unwarranted expenditure of public funds pursuant thereto. Thus, we hold that petitioners possess locus standi.

Second Procedural Issue: Alleged Prematurity Due to Non-Exhaustion of Administrative Remedies Respondents claim that petitioners acted prematurely, since they had not first utilized the protest mechanism available to them under RA 9184, the Government Procurement Reform Act, for the settlement of disputes pertaining to procurement contracts. Section 55 of RA 9184 states that protests against decisions of the Bidding and Awards Committee in all stages of procurement may be lodged with the head of the procuring entity by filing a verified position paper and paying a protest fee. Section 57 of the same law mandates that in no case shall any such protest stay or delay the bidding process, but it must first be resolved before any award is made. On the other hand, Section 58 provides that court action may be resorted to only after the protests contemplated by the statute shall have been completed. Cases filed in violation of this process are to be dismissed for lack of jurisdiction. Regional trial courts shall have jurisdiction over final decisions of the head of the procuring entity, and court actions shall be instituted pursuant to Rule 65 of the 1997 Rules of Civil Procedure. Respondents assert that throughout the bidding process, petitioners never questioned the BAC Report finding MPC eligible to bid and recommending the award of the Contract to it (MPC). According to respondents, the Report should have been appealed to the Comelc en banc, pursuant to the aforementioned sections of RA 9184. In the absence of such appeal, the determination and recommendation of the BAC had become final. The Court is not persuaded. Respondent Comelec came out with its en banc Resolution No. 6074 dated April 15, 2003, awarding the project to Respondent MPC even before the BAC managed to issue its written report and recommendation on April 21, 2003. Thus, how could petitioners have appealed the BACs recommendation or report to the head of the procuring entity (the chairman of Comelec), when the Comelec en banc had already approved the award of the contract to MPC even before petitioners learned of the BAC recommendation? It is claimed25 by Comelec that during its April 15, 2003 session, it received and approved the verbal report and recommendation of the BAC for the award of the Contract to MPC, and that the BAC subsequently re-affirmed its verbal report and recommendation by submitting it in writing on April 21, 2003. Respondents insist that the law does not require that the BAC Report be in writing before Comelec can act thereon; therefore, there is allegedly nothing irregular about the Report as well as the en banc Resolution. However, it is obvious that petitioners could have appealed the BACs report and recommendation to the head of the procuring entity (the Comelec chair) only upon their discovery thereof, which at the very earliest would have been on April 21, 2003, when the BAC actually put its report in writing and finally released it. Even then, what would have been the use of protesting/appealing the report to the Comelec chair, when by that time the Commission en banc (including the chairman himself) had already approved the BAC Report and awarded the Contract to MPC?

And even assuming arguendo that petitioners had somehow gotten wind of the verbal BAC report on April 15, 2003 (immediately after the en banc session), at that point the Commission en banc had already given its approval to the BAC Report along with the award to MPC. To put it bluntly, the Comelec en banc itself made it legally impossible for petitioners to avail themselves of the administrative remedy that the Commission is so impiously harping on. There is no doubt that they had not been accorded the opportunity to avail themselves of the process provided under Section 55 of RA 9184, according to which a protest against a decision of the BAC may be filedwith the head of the procuring entity. Nemo tenetur ad impossible,26 to borrow private respondents favorite Latin excuse. 27 Some Observations on the BAC Report to the Comelec We shall return to this issue of alleged prematurity shortly, but at this interstice, we would just want to put forward a few observations regarding the BAC Report and the Comelec en bancs approval thereof. First, Comelec contends that there was nothing unusual about the fact that the Report submitted by the BAC came only after the former had already awarded the Contract, because the latter had been asked to render its report and recommendation orally during the Commissions en banc session on April 15, 2003. Accordingly, Comelec supposedly acted upon such oral recommendation and approved the award to MPC on the same day, following which the recommendation was subsequently reduced into writing on April 21, 2003. While not entirely outside the realm of the possible, this interesting and unique spiel does not speak well of the process that Comelec supposedly went through in making a critical decision with respect to a multi-billion-peso contract. We can imagine that anyone else standing in the shoes of the Honorable Commissioners would have been extremely conscious of the overarching need for utter transparency. They would have scrupulously avoided the slightest hint of impropriety, preferring to maintain an exacting regularity in the performance of their duties, instead of trying to break a speed record in the award of multi-billion-peso contracts. After all, between April 15 and April 21 were a mere six (6) days. Could Comelec not have waited out six more days for the written report of the BAC, instead of rushing pell-mell into the arms of MPC? Certainly, respondents never cared to explain the nature of the Commissions dire need to act immediately without awaiting the formal, written BAC Report. In short, the Court finds it difficult to reconcile the uncommon dispatch with which Comelec acted to approve the multi-billion-peso deal, with its claim of having been impelled by only the purest and most noble of motives. At any rate, as will be discussed later on, several other factors combine to lend negative credence to Comelecs tale. Second, without necessarily ascribing any premature malice or premeditation on the part of the Comelec officials involved, it should nevertheless be conceded that this cart-before-thehorse maneuver (awarding of the Contract ahead of the BACs written report) would definitely serve as a clever and effective way of averting and frustrating any impending protest under Section 55. Having made the foregoing observations, we now go back to the question of exhausting administrative remedies. Respondents may not have realized it, but the letter addressed to Chairman Benjamin Abalos Sr. dated May 29, 200328 serves to eliminate the prematurity issue

as it was an actual written protest against the decision of the poll body to award the Contract. The letter was signed by/for, inter alia, two of herein petitioners: the Information Technology Foundation of the Philippines, represented by its president, Alfredo M. Torres; and Ma. Corazon Akol. Such letter-protest is sufficient compliance with the requirement to exhaust administrative remedies particularly because it hews closely to the procedure outlined in Section 55 of RA 9184. And even without that May 29, 2003 letter-protest, the Court still holds that petitioners need not exhaust administrative remedies in the light of Paat v. Court of Appeals. 29 Paat enumerates the instances when the rule on exhaustion of administrative remedies may be disregarded, as follows: "(1) when there is a violation of due process, (2) when the issue involved is purely a legal question, (3) when the administrative action is patently illegal amounting to lack or excess of jurisdiction, (4) when there is estoppel on the part of the administrative agency concerned, (5) when there is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter ego of the President bears the implied and assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be unreasonable, (8) when it would amount to a nullification of a claim, (9) when the subject matter is a private land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy, and (11) when there are circumstances indicating the urgency of judicial intervention."30 The present controversy precisely falls within the exceptions listed as Nos. 7, 10 and 11: "(7) when to require exhaustion of administrative remedies would be unreasonable; (10) when the rule does not provide a plain, speedy and adequate remedy, and (11) when there are circumstances indicating the urgency of judicial intervention." As already stated, Comelec itself made the exhaustion of administrative remedies legally impossible or, at the very least, "unreasonable." In any event, the peculiar circumstances surrounding the unconventional rendition of the BAC Report and the precipitate awarding of the Contract by the Comelec en banc -- plus the fact that it was racing to have its Contract with MPC implemented in time for the elections in May 2004 (barely four months away) -- have combined to bring about the urgent need for judicial

intervention, thus prompting this Court to dispense with the procedural exhaustion of administrative remedies in this case. Main Substantive Issue: Validity of the Award to MPC We come now to the meat of the controversy. Petitioners contend that the award is invalid, since Comelec gravely abused its discretion when it did the following: 1. Awarded the Contract to MPC though it did not even participate in the bidding 2. Allowed MPEI to participate in the bidding despite its failure to meet the mandatory eligibility requirements 3. Issued its Resolution of April 15, 2003 awarding the Contract to MPC despite the issuance by the BAC of its Report, which formed the basis of the assailed Resolution, only on April 21, 200331 4. Awarded the Contract, notwithstanding the fact that during the bidding process, there were violations of the mandatory requirements of RA 8436 as well as those set forth in Comelecs own Request for Proposal on the automated election system 5. Refused to declare a failed bidding and to conduct a re-bidding despite the failure of the bidders to pass the technical tests conducted by the Department of Science and Technology 6. Failed to follow strictly the provisions of RA 8436 in the conduct of the bidding for the automated counting machines After reviewing the slew of pleadings as well as the matters raised during the Oral Argument, the Court deems it sufficient to focus discussion on the following major areas of concern that impinge on the issue of grave abuse of discretion: A. Matters pertaining to the identity, existence and eligibility of MPC as a bidder B. Failure of the automated counting machines (ACMs) to pass the DOST technical tests C. Remedial measures and re-testings undertaken by Comelec and DOST after the award, and their effect on the present controversy A. Failure to Establish the Identity, Existence and Eligibility of the Alleged Consortium as a Bidder On the question of the identity and the existence of the real bidder, respondents insist that, contrary to petitioners allegations, the bidder was not Mega Pacific eSolutions, Inc. (MPEI), which was incorporated only on February 27, 2003, or 11 days prior to the bidding itself.

Rather, the bidder was Mega Pacific Consortium (MPC), of which MPEI was but a part. As proof thereof, they point to the March 7, 2003 letter of intent to bid, signed by the president of MPEI allegedly for and on behalf of MPC. They also call attention to the official receipt issued to MPC, acknowledging payment for the bidding documents, as proof that it was the "consortium" that participated in the bidding process. We do not agree. The March 7, 2003 letter, signed by only one signatory -- "Willy U. Yu, President, Mega Pacific eSolutions, Inc., (Lead Company/ Proponent) For: Mega Pacific Consortium" -- and without any further proof, does not by itself prove the existence of the consortium. It does not show that MPEI or its president have been duly pre-authorized by the other members of the putative consortium to represent them, to bid on their collective behalf and, more important, to commit them jointly and severally to the bid undertakings. The letter is purely self-serving and uncorroborated. Neither does an official receipt issued to MPC, acknowledging payment for the bidding documents, constitute proof that it was the purported consortium that participated in the bidding. Such receipts are issued by cashiers without any legally sufficient inquiry as to the real identity orexistence of the supposed payor. To assure itself properly of the due existence (as well as eligibility and qualification) of the putative consortium, Comelecs BAC should have examined the bidding documents submit ted on behalf of MPC. They would have easily discovered the following fatal flaws. Two-Envelope, Two-Stage System As stated earlier in our factual presentation, the public bidding system designed by Comelec under its RFP (Request for Proposal for the Automation of the 2004 Election) mandated the use of a two-envelope, two-stage system. A bidders first envelope (Eligibility Envelope) was meant to establish its eligibility to bid and its qualifications and capacity to perform the contract if its bid was accepted, while the second envelope would be the Bid Envelope itself. The Eligibility Envelope was to contain legal documents such as articles of incorporation, business registrations, licenses and permits, mayors permit, VAT certification, and so forth; technical documents containing documentary evidence to establish the track record of the bidder and its technical and production capabilities to perform the contract; and financial documents, including audited financial statements for the last three years, to establish the bidders financial capacity. In the case of a consortium or joint venture desirous of participating in the bidding, it goes without saying that the Eligibility Envelope would necessarily have to include a copy of the joint venture agreement, the consortium agreement or memorandum of agreement -- or a business plan or some other instrument of similar import -- establishing the due existence, composition and scope of such aggrupation. Otherwise, how would Comelec know who it was dealing with, and whether these parties are qualified and capable of delivering the products and services being offered for bidding?32 In the instant case, no such instrument was submitted to Comelec during the bidding process. This fact can be conclusively ascertained by scrutinizing the two-inch thick "Eligibility Requirements" file submitted by Comelec last October 9, 2003, in partial compliance with this Courts instructions given during the Oral Argument. This file purports to replicate the eligibility

documents originally submitted to Comelec by MPEI allegedly on behalf of MPC, in connection with the bidding conducted in March 2003. Included in the file are the incorporation papers and financial statements of the members of the supposed consortium and certain certificates, licenses and permits issued to them. However, there is no sign whatsoever of any joint venture agreement, consortium agreement, memorandum of agreement, or business plan executed among the members of the purported consortium. The only logical conclusion is that no such agreement was ever submitted to the Comelec for its consideration, as part of the bidding process. It thus follows that, prior the award of the Contract, there was no documentary or other basis for Comelec to conclude that a consortium had actually been formed amongst MPEI, SK C&C and WeSolv, along with Election.com and ePLDT.33 Neither was there anything to indicate the exact relationships between and among these firms; their diverse roles, undertakings and prestations, if any, relative to the prosecution of the project, the extent of their respective investments (if any) in the supposed consortium or in the project; and the precise nature and extent of their respective liabilities with respect to the contract being offered for bidding. And apart from the self-serving letter of March 7, 2003, there was not even any indication that MPEI was the lead company duly authorized to act on behalf of the others. So, it necessarily follows that, during the bidding process, Comelec had no basis at all for determining that the alleged consortium really existed and was eligible and qualified; and that the arrangements among the members were satisfactory and sufficient to ensure delivery on the Contract and to protect the governments interest. Notwithstanding such deficiencies, Comelec still deemed the "consortium" eligible to participate in the bidding, proceeded to open its Second Envelope, and eventually awarded the bid to it, even though -- per the Comelecs own RFP -- the BAC should have declared the MPC ineligible to bid and returned the Second (Bid) Envelope unopened. Inasmuch as Comelec should not have considered MPEI et al. as comprising a consortium or joint venture, it should not have allowed them to avail themselves of the provision in Section 5.4 (b) (i) of the IRR for RA 6957 (the Build-Operate-Transfer Law), as amended by RA 7718. This provision states in part that a joint venture/consortium proponent shall be evaluated based on the individual or collective experience of the member-firms of the joint venture or consortium and of the contractor(s) that it has engaged for the project. Parenthetically, respondents have uniformly argued that the said IRR of RA 6957, as amended, have suppletory application to the instant case. Hence, had the proponent MPEI been evaluated based solely on its own experience, financial and operational track record or lack thereof, it would surely not have qualified and would have been immediately considered ineligible to bid, as respondents readily admit. At any rate, it is clear that Comelec gravely abused its discretion in arbitrarily failing to observe its own rules, policies and guidelines with respect to the bidding process, thereby negating a fair, honest and competitive bidding. Commissioners Not Aware of Consortium

In this regard, the Court is beguiled by the statements of Commissioner Florentino Tuason Jr., given in open court during the Oral Argument last October 7, 2003. The good commissioner affirmed that he was aware, of his own personal knowledge, that there had indeed been a written agreement among the "consortium" members, 34although it was an internal matter among them,35 and of the fact that it would be presented by counsel for private respondent. 36 However, under questioning by Chief Justice Hilario G. Davide Jr. and Justice Jose C. Vitug, Commissioner Tuason in effect admitted that, while he was the commissioner-in-charge of Comelecs Legal Department, he had never seen, even up to that late date, the agreement he spoke of.37 Under further questioning, he was likewise unable to provide any information regarding the amounts invested into the project by several members of the claimed consortium.38 A short while later, he admitted that the Commission had not taken a look at the agreement (if any).39 He tried to justify his position by claiming that he was not a member of the BAC. Neither was he the commissioner-in-charge of the Phase II Modernization project (the automated election system); but that, in any case, the BAC and the Phase II Modernization Project Team did look into the aspect of the composition of the consortium. It seems to the Court, though, that even if the BAC or the Phase II Team had taken charge of evaluating the eligibility, qualifications and credentials of the consortium-bidder, still, in all probability, the former would have referred the task to Commissioner Tuason, head of Comelecs Legal Department. That task was the appreciation and evaluation of the legal effects and consequences of the terms, conditions, stipulations and covenants contained in any joint venture agreement, consortium agreement or a similar document -- assuming of course that any of these was available at the time. The fact that Commissioner Tuason was barely aware of the situation bespeaks the complete absence of such document, or the utter failure or neglect of the Comelec to examine it -- assuming it was available at all -- at the time the award was made on April 15, 2003. In any event, the Court notes for the record that Commissioner Tuason basically contradicted his statements in open court about there being one written agreement among all the consortium members, when he subsequently referred40 to the four (4) Memoranda of Agreement (MOAs) executed by them.41 At this juncture, one might ask: What, then, if there are four MOAs instead of one or none at all? Isnt it enough that there are these corporations coming together to carry out the automation project? Isnt it true, as respondent aver, that nowhere in the RFP issued by Comelec is it required that the members of the joint venture execute a single written agreement to prove the existence of a joint venture. Indeed, the intention to be jointly and severally liable may be evidenced not only by a single joint venture agreement, but also by supplementary documents executed by the parties signifying such intention. What then is the big deal? The problem is not that there are four agreements instead of only one. The problem is that Comelec never bothered to check. It never based its decision on documents or other proof that would concretely establish the existence of the claimed consortium or joint venture or agglomeration. It relied merely on the self-serving representation in an uncorroborated letter signed by only one individual, claiming that his company represented a "consortium" of several different corporations. It concluded forthwith that a consortium indeed existed, composed of such and such members, and thereafter declared that the entity was eligible to bid.

True, copies of financial statements and incorporation papers of the alleged "consortium" members were submitted. But these papers did not establish the existence of a consortium, as they could have been provided by the companies concerned for purposes other than to prove that they were part of a consortium or joint venture. For instance, the papers may have been intended to show that those companies were each qualified to be a sub-contractor (and nothing more) in a major project. Those documents did not by themselves support the assumption that a consortium or joint venture existed among the companies. In brief, despite the absence of competent proof as to the existence and eligibility of the alleged consortium (MPC), its capacity to deliver on the Contr act, and the members joint and several liability therefor, Comelec nevertheless assumed that such consortium existed and was eligible. It then went ahead and considered the bid of MPC, to which the Contract was eventually awarded, in gross violation of the formers own bidding rules and procedures contained in its RFP. Therein lies Comelecs grave abuse of discretion. Sufficiency of the Four Agreements Instead of one multilateral agreement executed by, and effective and binding on, all the five "consortium members" -- as earlier claimed by Commissioner Tuason in open court -- it turns out that what was actually executed were four (4) separate and distinct bilateral Agreements.42 Obviously, Comelec was furnished copies of these Agreements only after the bidding process had been terminated, as these were not included in the Eligibility Documents. These Agreements are as follows: A Memorandum of Agreement between MPEI and SK C&C A Memorandum of Agreement between MPEI and WeSolv A "Teaming Agreement" between MPEI and Election.com Ltd. A "Teaming Agreement" between MPEI and ePLDT In sum, each of the four different and separate bilateral Agreements is valid and binding only between MPEI and the other contracting party, leaving the other "consortium" members total strangers thereto. Under this setup, MPEI dealt separately with each of the "members," and the latter (WeSolv, SK C&C, Election.com, and ePLDT) in turn had nothing to do with one another, each dealing only with MPEI. Respondents assert that these four Agreements were sufficient for the purpose of enabling the corporations to still qualify (even at that late stage) as a consortium or joint venture, since the first two Agreements had allegedly set forth the joint and several undertakings among the parties, whereas the latter two clarified the parties respective roles with regard to the Project, with MPEI being the independent contractor and Election.com and ePLDT the subcontractors. Additionally, the use of the phrase "particular contract" in the Comelecs Request for Proposal (RFP), in connection with the joint and several liabilities of companies in a joint venture, is taken by them to mean that all the members of the joint venture need not be solidarily liable for the entire project or joint venture, because it is sufficient that the lead company and the member in charge of a particular contract or aspect of the joint venture agree to be solidarily liable.

At this point, it must be stressed most vigorously that the submission of the four bilateral Agreements to Comelec after the end of the bidding process did nothing to eliminate the grave abuse of discretion it had already committed on April 15, 2003. Deficiencies Have Not Been "Cured" In any event, it is also claimed that the automation Contract awarded by Comelec incorporates all documents executed by the "consortium" members, even if these documents are not referred to therein. The basis of this assertion appears to be the passages from Section 1.4 of the Contract, which is reproduced as follows: "All Contract Documents shall form part of the Contract even if they or any one of them is not referred to or mentioned in the Contract as forming a part thereof. Each of the Contract Documents shall be mutually complementary and explanatory of each other such that what is noted in one although not shown in the other shall be considered contained in all, and what is required by any one shall be as binding as if required by all, unless one item is a correction of the other. "The intent of the Contract Documents is the proper, satisfactory and timely execution and completion of the Project, in accordance with the Contract Documents. Consequently, all items necessary for the proper and timely execution and completion of the Project shall be deemed included in the Contract." Thus, it is argued that whatever perceived deficiencies there were in the supplementary contracts -- those entered into by MPEI and the other members of the "consortium" as regards their joint and several undertakings -- have been cured. Better still, such deficiencies have supposedly been prevented from arising as a result of the above-quoted provisions, from which it can be immediately established that each of the members of MPC assumes the same joint and several liability as the other members. The foregoing argument is unpersuasive. First, the contract being referred to, entitled "The Automated Counting and Canvassing Project Contract," is between Comelec and MPEI, not the alleged consortium, MPC. To repeat, it is MPEI -- not MPC -- that is a party to the Contract. Nowhere in that Contract is there any mention of a consortium or joint venture, of members thereof, much less of joint and several liability. Supposedly executed sometime in May 2003,43 the Contract bears a notarization date of June 30, 2003, and contains the signature of Willy U. Yu signing as president of MPEI (not for and on behalf of MPC), along with that of the Comelec chair. It provides in Section 3.2 that MPEI (not MPC) is to supply the Equipment and perform the Services under the Contract, in accordance with the appendices thereof; nothing whatsoever is said about any consortium or joint venture or partnership. Second, the portions of Section 1.4 of the Contract reproduced above do not have the effect of curing (much less preventing) deficiencies in the bilateral agreements entered into by MPEI with the other members of the "consortium," with respect to their joint and several liabilities. The term "Contract Documents," as used in the quoted passages of Section 1.4, has a welldefined meaning and actually refers only to the following documents: The Contract itself along with its appendices The Request for Proposal (also known as "Terms of Reference") issued by the Comelec, including the Tender Inquiries and Bid Bulletins

The Tender Proposal submitted by MPEI In other words, the term "Contract Documents" cannot be understood as referring to or including the MOAs and the Teaming Agreements entered into by MPEI with SK C&C, WeSolv, Election.com and ePLDT. This much is very clear and admits of no debate. The attempt to use the provisions of Section 1.4 to shore up the MOAs and the Teaming Agreements is simply unwarranted. Third and last, we fail to see how respondents can arrive at the conclusion that, from the above-quoted provisions, it can be immediately established that each of the members of MPC assumes the same joint and several liability as the other members. Earlier, respondents claimed exactly the opposite -- that the two MOAs (between MPEI and SK C&C, and between MPEI and WeSolv) had set forth the joint and several undertakings among the parties; whereas the two Teaming Agreements clarified the parties respective roles with regard to the Project, with MPEI being the independent contractor and Election.com and ePLDT the subcontractors. Obviously, given the differences in their relationships, their respective liabilities cannot be the same. Precisely, the very clear terms and stipulations contained in the MOAs and the Teaming Agreements -- entered into by MPEI with SK C&C, WeSolv, Election.com and ePLDT -negate the idea that these "members" are on a par with one another and are, as such, assuming the same joint and several liability. Moreover, respondents have earlier seized upon the use of the term "particular contract" in the Comelecs Request for Proposal (RFP), in order to argue that all the members of the joint venture did not need to be solidarily liable for the entire project or joint venture. It was sufficient that the lead company and the member in charge of a particular contract or aspect of the joint venture would agree to be solidarily liable. The glaring lack of consistency leaves us at a loss. Are respondents trying to establish the same joint and solidary liability among all the "members" or not? Enforcement of Liabilities Problematic Next, it is also maintained that the automation Contract between Comelec and the MPEI confirms the solidary undertaking of the lead company and the consortium member concerned for each particular Contract, inasmuch as the position of MPEI and anyone else performing the services contemplated under the Contract is described therein as that of an independent contractor. The Court does not see, however, how this conclusion was arrived at. In the first place, the contractual provision being relied upon by respondents is Article 14, "Independent Contractors," which states: "Nothing contained herein shall be construed as establishing or creating between the COMELEC and MEGA the relationship of employee and employer or principal and agent, it being understood that the position of MEGA and of anyone performing the Services contemplated under this Contract, is that of an independent contractor." Obviously, the intent behind the provision was simply to avoid the creation of an employeremployee or a principal-agent relationship and the complications that it would produce. Hence, the Article states that the role or position of MPEI, or anyone else performing on its behalf, is that of an independent contractor. It is obvious to the Court that respondents are stretching matters too far when they claim that, because of this provision, the Contract in effect confirms

the solidary undertaking of the lead company and the consortium member concerned for the particular phase of the project. This assertion is an absolute non sequitur. Enforcement of Liabilities Under the Civil Code Not Possible In any event, it is claimed that Comelec may still enforce the liability of the "consortium" members under the Civil Code provisions on partnership, reasoning that MPEI et al. represented themselves as partners and members of MPC for purposes of bidding for the Project. They are, therefore, liable to the Comelec to the extent that the latter relied upon such representation. Their liability as partners is solidary with respect to everything chargeable to the partnership under certain conditions. The Court has two points to make with respect to this argument. First, it must be recalled that SK C&C, WeSolv, Election.com and ePLDT never represented themselves as partners and members of MPC, whether for purposes of bidding or for something else. It was MPEI alone that represented them to be members of a "consortium" it supposedly headed. Thus, its acts may not necessarily be held against the other "members." Second, this argument of the OSG in its Memorandum44 might possibly apply in the absence of a joint venture agreement or some other writing that discloses the relationship of the "members" with one another. But precisely, this case does not deal with a situation in which there is nothing in writing to serve as reference, leaving Comelec to rely on mere representations and therefore justifying a falling back on the rules on partnership. For, again, the terms and stipulations of the MOAs entered into by MPEI with SK C&C and WeSolv, as well as the Teaming Agreements of MPEI with Election.com and ePLDT (copies of which have been furnished the Comelec) are very clear with respect to the extent and the limitations of the firms respective liabilities. In the case of WeSolv and SK C&C, their MOAs state that their liabilities, while joint and several with MPEI, are limited only to the particular areas of work wherein their services are engaged or their products utilized. As for Election.com and ePLDT, their separate "Teaming Agreements" specifically ascribe to them the role of subcontractor vis--vis MPEI as contractor and, based on the terms of their particular agreements, neither Election.com nor ePLDT is, with MPEI, jointly and severally liable to Comelec. 45 It follows then that in the instant case, there is no justification for anyone, much less Comelec, to resort to the rules on partnership and partners liabilities. Eligibility of a Consortium Based on the Collective Qualifications of Its Members Respondents declare that, for purposes of assessing the eligibility of the bidder, the members of MPC should be evaluated on a collective basis. Therefore, they contend, the failure of MPEI to submit financial statements (on account of its recent incorporation) should not by itself disqualify MPC, since the other members of the "consortium" could meet the criteria set out in the RFP. Thus, according to respondents, the collective nature of the undertaking of the members of MPC, their contribution of assets and sharing of risks, and the community of their interest in the performance of the Contract lead to these reasonable conclusions: (1) that their collective qualifications should be the basis for evaluating their eligibility; (2) that the sheer enormity of the project renders it improbable to expect any single entity to be able to comply with all the eligibility requirements and undertake the project by itself; and (3) that, as argued by the OSG, the RFP allows bids from manufacturers, suppliers and/or distributors that have formed

themselves into a joint venture, in recognition of the virtual impossibility of a single entitys ability to respond to the Invitation to Bid. Additionally, argues the Comelec, the Implementing Rules and Regulations of RA 6957 (the Build-Operate-Transfer Law) as amended by RA 7718 would be applicable, as proponents of BOT projects usually form joint ventures or consortiums. Under the IRR, a joint venture/consortium proponent shall be evaluated based on the individual or the collective experience of the member-firms of the joint venture/consortium and of the contractors the proponent has engaged for the project. Unfortunately, this argument seems to assume that the "collective" nature of the undertaking of the members of MPC, their contribution of assets and sharing of risks, and the "community" of their interest in the performance of the Contract entitle MPC to be treated as a joint venture or consortium; and to be evaluated accordingly on the basis of the members collective qualifications when, in fact, the evidence before the Court suggest otherwise. This Court in Kilosbayan v. Guingona46 defined joint venture as "an association of persons or companies jointly undertaking some commercial enterprise; generally, all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and [a] duty, which may be altered by agreement to share both in profit and losses." Going back to the instant case, it should be recalled that the automation Contract with Comelec was not executed by the "consortium" MPC -- or by MPEI for and on behalf of MPC - but by MPEI, period. The said Contract contains no mention whatsoever of any consortium or members thereof. This fact alone seems to contradict all the suppositions about a joint undertaking that would normally apply to a joint venture or consortium: that it is a commercial enterprise involving a community of interest, a sharing of risks, profits and losses, and so on. Now let us consider the four bilateral Agreements, starting with the Memorandum of Agreement between MPEI and WeSolv Open Computing, Inc., dated March 5, 2003. The body of the MOA consists of just seven (7) short paragraphs that would easily fit in one page! It reads as follows: "1. The parties agree to cooperate in successfully implementing the Project in the substance and form as may be most beneficial to both parties and other subcontractors involved in the Project. "2. Mega Pacific shall be responsible for any contract negotiations and signing with the COMELEC and, subject to the latters approval, agrees to give WeSolv an opportunity to be present at meetings with the COMELEC concerning WeSolvs portion of the Project. "3. WeSolv shall be jointly and severally liable with Mega Pacific only for the particular products and/or services supplied by the former for the Project. "4. Each party shall bear its own costs and expenses relative to this agreement unless otherwise agreed upon by the parties.

"5. The parties undertake to do all acts and such other things incidental to, necessary or desirable or the attainment of the objectives and purposes of this Agreement. "6. In the event that the parties fail to agree on the terms and conditions of the supply of the products and services including but not limited to the scope of the products and services to be supplied and payment terms, WeSolv shall cease to be bound by its obligations stated in the aforementioned paragraphs. "7. Any dispute arising from this Agreement shall be settled amicably by the parties whenever possible. Should the parties be unable to do so, the parties hereby agree to settle their dispute through arbitration in accordance with the existing laws of the Republic of the Philippines." (Underscoring supplied.) Even shorter is the Memorandum of Agreement between MPEI and SK C&C Co. Ltd., dated March 9, 2003, the body of which consists of only six (6) paragraphs, which we quote: "1. All parties agree to cooperate in achieving the Consortiu ms objective of successfully implementing the Project in the substance and form as may be most beneficial to the Consortium members and in accordance w/ the demand of the RFP. "2. Mega Pacific shall have full powers and authority to represent the Consortium with the Comelec, and to enter and sign, for and in behalf of its members any and all agreement/s which maybe required in the implementation of the Project. "3. Each of the individual members of the Consortium shall be jointly and severally liable with the Lead Firm for the particular products and/or services supplied by such individual member for the project, in accordance with their respective undertaking or sphere of responsibility. "4. Each party shall bear its own costs and expenses relative to this agreement unless otherwise agreed upon by the parties. "5. The parties undertake to do all acts and such other things incidental to, necessary or desirable for the attainment of the objectives and purposes of this Agreement. "6. Any dispute arising from this Agreement shall be settled amicably by the parties whenever possible. Should the parties be unable to do so, the parties hereby agree to settle their dispute through arbitration in accordance with the existing laws of the Republic of the Philippines." (Underscoring supplied.) It will be noted that the two Agreements quoted above are very similar in wording. Neither of them contains any specifics or details as to the exact nature and scope of the parties respective undertakings, performances and deliverables under the Agreement with respect to the automation project. Likewise, the two Agreements are quite bereft of pesos-and-centavos data as to the amount of investments each party contributes, its respective share in the revenues and/or profit from the Contract with Comelec, and so forth -- all of which are normal for agreements of this nature. Yet, according to public and private respondents, the participation of MPEI, WeSolv and SK C&C comprises fully 90 percent of the entire undertaking with respect to the election automation project, which is worth about P1.3 billion.

As for Election.com and ePLDT, the separate "Teaming Agreements" they entered into with MPEI for the remaining 10 percent of the entire project undertaking are ironically much longer and more detailed than the MOAs discussed earlier. Although specifically ascribing to them the role of subcontractor vis--vis MPEI as contractor, these Agreements are, however, completely devoid of any pricing data or payment terms. Even the appended Schedules supposedly containing prices of goods and services are shorn of any price data. Again, as mentioned earlier, based on the terms of their particular Agreements, neither Election.com nor ePLDT -- with MPEI -- is jointly and severally liable to Comelec. It is difficult to imagine how these bare Agreements -- especially the first two -- could be implemented in practice; and how a dispute between the parties or a claim by Comelec against them, for instance, could be resolved without lengthy and debilitating litigations. Absent any clear-cut statement as to the exact nature and scope of the parties respective undertakings, commitments, deliverables and covenants, one party or another can easily dodge its obligation and deny or contest its liability under the Agreement; or claim that it is the other party that should have delivered but failed to. Likewise, in the absence of definite indicators as to the amount of investments to be contributed by each party, disbursements for expenses, the parties respective sha res in the profits and the like, it seems to the Court that this situation could readily give rise to all kinds of misunderstandings and disagreements over money matters. Under such a scenario, it will be extremely difficult for Comelec to enforce the supposed joint and several liabilities of the members of the "consortium." The Court is not even mentioning the possibility of a situation arising from a failure of WeSolv and MPEI to agree on the scope, the terms and the conditions for the supply of the products and services under the Agreement. In that situation, by virtue of paragraph 6 of its MOA, WeSolv would perforce cease to be bound by its obligations -- including its joint and solidary liability with MPEI under the MOA -and could forthwith disengage from the project. Effectively, WeSolv could at any time unilaterally exit from its MOA with MPEI by simply failing to agree. Where would that outcome leave MPEI and Comelec? To the Court, this strange and beguiling arrangement of MPEI with the other companies does not qualify them to be treated as a consortium or joint venture, at least of the type that government agencies like the Comelec should be dealing with. With more reason is it unable to agree to the proposal to evaluate the members of MPC on a collective basis. In any event, the MPC members claim to be a joint venture/consortium; and respondents have consistently been arguing that the IRR for RA 6957, as amended, should be applied to the instant case in order to allow a collective evaluation of consortium members. Surprisingly, considering these facts, respondents have not deemed it necessary for MPC members to comply with Section 5.4 (a) (iii) of the IRR for RA 6957 as amended. According to the aforementioned provision, if the project proponent is a joint venture or consortium, the members or participants thereof are required to submit a sworn statement that, if awarded the contract, they shall bind themselves to be jointly, severally and solidarily liable for the project proponents obligations ther eunder. This provision was supposed to mirror Section 5 of RA 6957, as amended, which states: "In all cases, a consortium that participates in a bid must present proof that the members of the consortium have bound themselves jointly and severally to assume responsibility for any project. The withdrawal of any member of the consortium prior to the implementation of the project could be a ground for the cancellation of the contract." The Court has certainly not seen any joint and several undertaking by the MPC members that even approximates the tenor of that which is described above. We fail to see

why respondents should invoke the IRR if it is for their benefit, but refuse to comply with it otherwise. B. DOST Technical Tests Flunked by the Automated Counting Machines Let us now move to the second subtopic, which deals with the substantive issue: the ACMs failure to pass the tests of the Department of Science and Technology (DOST). After respondent "consortium" and the other bidder, TIM, had submitted their respective bids on March 10, 2003, the Comelecs BAC -- through its Technical Working Group (TWG) and the DOST -- evaluated their technical proposals. Requirements that were highly technical in nature and that required the use of certain equipment in the evaluation process were referred to the DOST for testing. The Department reported thus:

TEST RESULTS MATRIX47 Technical Evaluation of Automated Counting Machine MEGA-PACIFIC CONSORTIUM YES 1. Does the machine have an accuracy rating of at least 99.995 percent At COLD environmental condition At NORMAL environmental conditions At HARSH environmental conditions 2. Accurately records and reports the date and time of the start and end of counting of ballots per precinct? 3. Prints election returns without any loss of date during generation of such reports? 4. Uninterruptible back-up power system, that will engage immediately to allow operation of at least 10 minutes after outage, power surge or abnormal electrical occurrences? 5. Machine reads two-sided ballots in one pass? NO TOTAL INFORMATION MANAGEMENT YES NO

KEY REQUIREMENTS QUESTIONS

Note: This particular requirement needs further verification

6. Machine can detect previously counted ballots and prevent previously counted ballots from being counted more than once? 7. Stores results of counted votes by precinct in external (removable) storage device?

Note: This particular requirement needs further verification

8. Data stored in external media is encrypted?

Note: This particular requirement needs further verification

9. Physical key or similar device allows, limits, or restricts

operation of the machine? 10. CPU speed is at least 400mHz? Note: This particular requirement needs further verification 11. Port to allow use of dot-matrix printers? 12. Generates printouts of the election returns in a format specified by the COMELEC? Generates printouts In format specified by COMELEC 13. Prints election returns without any loss of data during generation of such report? 14. Generates an audit trail of the counting machine, both hard copy and soft copy? Hard copy Soft copy Note: This particular requirement needs further verification 15. Does the City/Municipal Canvassing System consolidate results from all precincts within it using the encrypted soft copy of the data generated by the counting machine and stored on the removable data storage device? Note: This particular requirement needs further verification Note: This particular requirement needs further verification Note: This particular requirement needs further verification Note: This particular requirement needs further verification

16. Does the City/Municipal Canvassing System consolidate results from all precincts within it using the encrypted soft copy of the data generated by the counting machine and transmitted through an electronic transmission media?

17. Does the system output a Zero City/Municipal Canvass Report, which is printed on election day prior to the conduct of the actual canvass operation, that shows that all totals for all the votes for all the candidates and other information, are indeed zero or null?

18. Does the system consolidate results from all precincts in the city/municipality using the data storage device coming from the counting machine?

Note: This particular requirement needs further verification

19. Is the machine 100% accurate?

Note: This particular requirement needs further verification

20. Is the Program able to detect previously downloaded precinct results and prevent these from being inputted again into the System?

Note: This particular requirement needs further verification

21. The System is able to print the specified reports and the audit trail without any loss of data during generation of the abovementioned reports? Prints specified reports Audit Trail 22. Can the result of the city/municipal consolidation be stored in a data storage device? Note: This particular requirement needs further verification 23. Does the system consolidate results from all precincts in the provincial/district/ national using the data storage device from different levels of consolidation? Note: This particular requirement needs further verification Note: This particular requirement needs further verification 25. Is the Program able to detect previously downloaded precinct results and prevent these from being inputted again into the System?

24. Is the system 100% accurate?

Note: This particular requirement needs further verification 26. The System is able to print the specified reports and the audit trail without any loss of data during generation of the abovementioned reports? Prints specified reports Audit Trail Note: This particular requirement needs further verification 27. Can the results of the provincial/district/national consolidation be stored in a data storage device? Note: This particular requirement needs further verification

According to respondents, it was only after the TWG and the DOST had conducted their separate tests and submitted their respective reports that the BAC, on the basis of these reports formulated its comments/recommendations on the bids of the consortium and TIM. The BAC, in its Report dated April 21, 2003, recommended that the Phase II project involving the acquisition of automated counting machines be awarded to MPEI. It said: "After incisive analysis of the technical reports of the DOST and the Technical Working Group for Phase II Automated Counting Machine, the BAC considers adaptability to advances in modern technology to ensure an effective and efficient method, as well as the security and integrity of the system. "The results of the evaluation conducted by the TWG and that of the DOST (14 April 2003 report), would show the apparent advantage of Mega-Pacific over the other competitor, TIM. "The BAC further noted that both Mega-Pacific and TIM obtained some failed marks in the technical evaluation. In general, the failed marks of Total Information Management as enumerated above affect the counting machine itself which are material in nature, constituting non-compliance to the RFP. On the other hand, the failed marks of Mega-Pacific are mere formalities on certain documentary requirements which the BAC may waive as clearly indicated in the Invitation to Bid. "In the DOST test, TIM obtained 12 failed marks and mostly attributed to the counting machine itself as stated earlier. These are requirements of the RFP and therefore the BAC cannot disregard the same. "Mega-Pacific failed in 8 items however these are mostly on the software which can be corrected by reprogramming the software and therefore can be readily corrected. "The BAC verbally inquired from DOST on the status of the retest of the counting machines of the TIM and was informed that the report will be forthcoming after the holy week. The BAC was informed that the retest is on a different parameters theyre being two different machines being tested. One purposely to test if previously read ballots will be read again and the other for the other features such as two sided ballots. "The said machine and the software therefore may not be considered the same machine and program as submitted in the Technical proposal and therefore may be considered an enhancement of the original proposal. "Advance information relayed to the BAC as of 1:40 PM of 15 April 2003 by Executive Director Ronaldo T. Viloria of DOST is that the result of the test in the two counting machines of TIM contains substantial errors that may lead to the failure of these machines based on the specific items of the RFP that DOST has to certify. OPENING OF FINANCIAL BIDS "The BAC on 15 April 2003, after notifying the concerned bidders opened the financial bids in their presence and the results were as follows:

Mega-Pacific: Option 1 Outright purchase: Bid Price if Php1,248,949,088.00 Option 2 Lease option: 70% Down payment of cost of hardware or Php642,755,757.07 Remainder payable over 50 months or a total of Php642,755,757.07 Discount rate of 15% p.a. or 1.2532% per month. Total Number of Automated Counting Machine 1,769 ACMs (Nationwide) TIM: Total Bid Price Php1,297,860,560.00 Total Number of Automated Counting Machine 2,272 ACMs (Mindanao and NCR only) "Premises considered, it appears that the bid of Mega Pacific is the lowest calculated responsive bid, and therefore, the Bids and Awards Committee (BAC) recommends that the Phase II project re Automated Counting Machine be awarded to Mega Pacific eSolutions, Inc."48 The BAC, however, also stated on page 4 of its Report: "Based on the 14 April 2003 report (Table 6) of the DOST, it appears that both Mega-Pacific and TIM (Total Information Management Corporation) failed to meet some of the requirements. Below is a comparative presentation of the requirements wherein Mega-Pacific or TIM or both of them failed: x x x." What followed was a list of "key requirements," referring to technical requirements, and an indication of which of the two bidders had failed to meet them. Failure to Meet the Required Accuracy Rating The first of the key requirements was that the counting machines were to have an accuracy rating of at least 99.9995 percent. The BAC Report indicates that both Mega Pacific and TIM failed to meet this standard. The key requirement of accuracy rating happens to be part and parcel of the Comelecs Request for Proposal (RFP). The RFP, on page 26, even states that the ballot counting machines and ballot counting software " must have an accuracy rating of 99.9995% (not merely 99.995%) or better as certified by a reliable independent testing agency ." When questioned on this matter during the Oral Argument, Commissioner Borra tried to wash his hands by claiming that the required accuracy rating of 99.9995 percent had been set by a private sector group in tandem with Comelec. He added that the Commission had merely adopted the accuracy rating as part of the groups recommended bid requirements, which it had not bothered to amend even after being advised by DOST that such standard was

unachievable. This excuse, however, does not in any way lessen Comelecs responsibility to adhere to its own published bidding rules, as well as to see to it that the consortium indeed meets the accuracy standard.Whichever accuracy rating is the right standard -- whether 99.995 or 99.9995 percent -- the fact remains that the machines of the so-called "consortium" failed to even reach the lesser of the two. On this basis alone, it ought to have been disqualified and its bid rejected outright. At this point, the Court stresses that the essence of public bidding is violated by the practice of requiring very high standards or unrealistic specifications that cannot be met -- like the 99.9995 percent accuracy rating in this case -- only to water them down after the bid has been award. Such scheme, which discourages the entry of prospective bona fide bidders, is in fact a sure indication of fraud in the bidding, designed to eliminate fair competition. Certainly, if no bidder meets the mandatory requirements, standards or specifications, then no award should be made and a failed bidding declared. Failure of Software to Detect Previously Downloaded Data Furthermore, on page 6 of the BAC Report, it appears that the "consortium" as well as TIM failed to meet another key requirement -- for the counting machines software program to be able to detect previously downloaded precinct results and to prevent these from being entered again into the counting machine. This same deficiency on the part of both bidders reappears on page 7 of the BAC Report, as a result of the recurrence of their failure to meet the said key requirement. That the ability to detect previously downloaded data at different canvassing or consolidation levels is deemed of utmost importance can be seen from the fact that it is repeated three times in the RFP. On page 30 thereof, we find the requirement that the city/municipal canvassing system software must be able to detect previously downloaded precinct results and prevent these from being "inputted" again into the system. Again, on page 32 of the RFP, we read that the provincial/district canvassing system software must be able to detect previously downloaded city/municipal results and prevent these from being "inputted" again into the system. And once more, on page 35 of the RFP, we find the requirement that the national canvassing system software must be able to detect previously downloaded provincial/district results and prevent these from being "inputted" again into the system. Once again, though, Comelec chose to ignore this crucial deficiency, which should have been a cause for the gravest concern. Come May 2004, unscrupulous persons may take advantage of and exploit such deficiency by repeatedly downloading and feeding into the computers results favorable to a particular candidate or candidates. We are thus confronted with the grim prospect of election fraud on a massive scale by means of just a few key strokes. The marvels and woes of the electronic age! Inability to Print the Audit Trail But that grim prospect is not all. The BAC Report, on pages 6 and 7, indicate that the ACMs of both bidders wereunable to print the audit trail without any loss of data. In the case of MPC, the audit trail system was "not yet incorporated" into its ACMs. This particular deficiency is significant, not only to this bidding but to the cause of free and credible elections. The purpose of requiring audit trails is to enable Comelec to trace and verify the identities of the ACM operators responsible for data entry and downloading, as well

as the times when the various data were downloaded into the canvassing system, in order to forestall fraud and to identify the perpetrators. Thus, the RFP on page 27 states that the ballot counting machines and ballot counting software must print an audit trail of all machine operations for documentation and verification purposes. Furthermore, the audit trail must be stored on the internal storage device and be available on demand for future printing and verifying. On pages 30-31, the RFP also requires that the city/municipal canvassing system software be able to print an audit trail of the canvassing operations, including therein such data as the date and time the canvassing program was started, the log-in of the authorized users (the identity of the machine operators), the date and time the canvass data were downloaded into the canvassing system, and so on and so forth. On page 33 of the RFP, we find the same audit trail requirement with respect to the provincial/district canvassing system software; and again on pages 35-36 thereof, the same audit trail requirement with respect to the national canvassing system software. That this requirement for printing audit trails is not to be lightly brushed aside by the BAC or Comelec itself as a mere formality or technicality can be readily gleaned from the provisions of Section 7 of RA 8436, which authorizes the Commission to use an automated system for elections. The said provision which respondents have quoted several times, provides that ACMs are to possess certain features divided into two classes: those that the statute itself considers mandatory and other features or capabilities that the law deems optional. Among those considered mandatory are "provisions for audit trails"! Section 7 reads as follows: " The System shall contain the following features: (a) use of appropriate ballots; (b) stand-alone machine which can count votes and an automated system which can consolidate the results immediately; (c) with provisions for audit trails; (d) minimum human intervention; and (e) adequate safeguard/security measures." (Italics and emphases supplied.) In brief, respondents cannot deny that the provision requiring audit trails is indeed mandatory, considering the wording of Section 7 of RA 8436. Neither can Respondent Comelec deny that it has relied on the BAC Report, which indicates that the machines or the software was deficient in that respect. And yet, the Commission simply disregarded this shortcoming and awarded the Contract to private respondent, thereby violating the very law it was supposed to implement. C. Inadequacy of Post Facto Remedial Measures Respondents argue that the deficiencies relating to the detection of previously downloaded data, as well as provisions for audit trails, are mere shortcomings or minor deficiencies in software or programming, which can be rectified. Perhaps Comelec simply relied upon the BAC Report, which states on page 8 thereof that "Mega Pacific failed in 8 items[;] however these are mostly on the software which can be corrected by re-programming x x x and therefore can be readily corrected." The undersigned ponentes questions, some of which were addressed to Commissioner Borra during the Oral Argument, remain unanswered to this day. First of all, who made the determination that the eight "fail" marks of Mega Pacific were on account of the software -was it DOST or TWG? How can we be sure these failures were not the results of machine defects? How was it determined that the software could actually be re-programmed and

thereby rectified? Did a qualified technical expert read and analyze the source code49 for the programs and conclude that these could be saved and remedied? (Such determination cannot be done by any other means save by the examination and analysis of the source code.) Who was this qualified technical expert? When did he carry out the study? Did he prepare a written report on his findings? Or did the Comelec just make a wild guess? It does not follow that all defects in software programs can be rectified, and the programs saved. In the information technology sector, it is common knowledge that there are many badly written programs, with significant programming errors written into them; hence it does not make economic sense to try to correct the programs; instead, programmers simply abandon them and just start from scratch. Theres no telling if any of these programs is unrectifiable, unless a qualified programmer reads the source code. And if indeed a qualified expert reviewed the source code, did he also determine how much work would be needed to rectify the programs? And how much time and money would be spent for that effort? Who would carry out the work? After the rectification process, who would ascertain and how would it be ascertained that the programs have indeed been properly rectified, and that they would work properly thereafter? And of course, the most important question to ask: could the rectification be done in time for the elections in 2004? Clearly, none of the respondents bothered to think the matter through. Comelec simply took the word of the BAC as gospel truth, without even bothering to inquire from DOST whether it was true that the deficiencies noted could possibly be remedied by re-programming the software. Apparently, Comelec did not care about the software, but focused only on purchasing the machines. What really adds to the Courts dismay is the admission made by Commissioner Borra during the Oral Argument that the software currently being used by Comelec was merely the "demo" version, inasmuch as the final version that would actually be used in the elections was still being developed and had not yet been finalized. It is not clear when the final version of the software would be ready for testing and deployment. It seems to the Court that Comelec is just keeping its fingers crossed and hoping the final product would work. Is there a "Plan B" in case it does not? Who knows? But all these software programs are part and parcel of the bidding and the Contract awarded to the Consortium. Why is it that the machines are already being brought in and paid for, when there is as yet no way of knowing if the final version of the software would be able to run them properly, as well as canvass and consolidate the results in the manner required ? The counting machines, as well as the canvassing system, will never work properly without the correct software programs. There is an old adage that is still valid to this day: "Garbage in, garbage out." No matter how powerful, advanced and sophisticated the computers and the servers are, if the software being utilized is defective or has been compromised, the results will be no better than garbage. And to think that what is at stake here is the 2004 national elections -- the very basis of our democratic life. Correction of Defects? To their Memorandum, public respondents proudly appended 19 Certifications issued by DOST declaring that some 285 counting machines had been tested and had passed the acceptance testing conducted by the Department on October 8-18, 2003. Among those tested

were some machines that had failed previous tests, but had undergone adjustments and thus passed re-testing. Unfortunately, the Certifications from DOST fail to divulge in what manner and by what standards or criteria the condition, performance and/or readiness of the machines were reevaluated and re-appraised and thereafter given the passing mark. Apart from that fact, the remedial efforts of respondents were, not surprisingly, apparently focused again on the machines -- the hardware. Nothing was said or done about the software -- the deficiencies as to detection and prevention of downloading and entering previously downloaded data, as well as the capability to print an audit trail. No matter how many times the machines were tested and re-tested, if nothing was done about the programming defects and deficiencies, the same danger of massive electoral fraud remains. As anyone who has a modicum of knowledge of computers would say, "Thats elementary!" And only last December 5, 2003, an Inq7.net news report quoted the Comelec chair as saying that the new automated poll system would be used nationwide in May 2004, even as the software for the system remained unfinished. It also reported that a certain Titus Manuel of the Philippine Computer Society, which was helping Comelec test the hardware and software, said that the software for the counting still had to be submitted on December 15, while the software for the canvassing was due in early January . Even as Comelec continues making payments for the ACMs, we keep asking ourselves: who is going to ensure that the software would be tested and would work properly? At any rate, the re-testing of the machines and/or the 100 percent testing of all machines (testing of every single unit) would not serve to eradicate the grave abuse of discretion already committed by Comelec when it awarded the Contract on April 15, 2003, despite the obvious and admitted flaws in the bidding process, the failure of the "winning bidder" to qualify, and the inability of the ACMs and the intended software to meet the bid requirements and rules. Comelecs Latest "Assurances" Are Unpersuasive Even the latest pleadings filed by Comelec do not serve to allay our apprehensions. They merely affirm and compound the serious violations of law and gravely abusive acts it has committed. Let us examine them. The Resolution issued by this Court on December 9, 2003 required respondents to inform it as to the number of ACMs delivered and paid for, as well as the total payment made to date for the purchase thereof. They were likewise instructed to submit a certification from the DOST attesting to the number of ACMs tested, the number found to be defective; and " whether the reprogrammed software has been tested and found to have complied with the requirements under Republic Act No. 8436."50 In its "Partial Compliance and Manifestation" dated December 29, 2003, Comelec informed the Court that 1,991 ACMs had already been delivered to the Commission as of that date. It further certified that it had already paid the supplier the sum of P849,167,697.41, which corresponded to 1,973 ACM units that had passed the acceptance testing procedures conducted by the MIRDC-DOST51 and which had therefore been accepted by the poll body. In the same submission, for the very first time, Comelec also disclosed to the Court the following:

"The Automated Counting and Canvassing Project involves not only the manufacturing of the ACM hardware but also the development of three (3) types of software, which are intended for use in the following: 1. Evaluation of Technical Bids 2. Testing and Acceptance Procedures 3. Election Day Use." Purchase of the First Type of Software Without Evaluation In other words, the first type of software was to be developed solely for the purpose of enabling the evaluation of the bidders technical bid. Comelec explained thus: " In addition to the presentation of the ACM hardware, the bidders were required to develop a base software program that will enable the ACM to function properly. Since the software program utilized during the evaluation of bids is not the actual software program to be employed on election day, there being two (2) other types of software program that will still have to be developed and thoroughly tested prior to actual election day use, defects in the base software that can be readily corrected by reprogramming are considered minor in nature, and may therefore be waived." In short, Comelec claims that it evaluated the bids and made the decision to award the Contract to the "winning" bidder partly on the basis of the operation of the ACMs running a "base" software. That software was therefore nothing but a sample or "demo" software, which would not be the actual one that would be used on election day. Keeping in mind that the Contract involves the acquisition of not just the ACMs or the hardware, but also the software that would run them, it is now even clearer that the Contract was awarded without Comelec having seen, much less evaluated, the final product -- the software that would finally be utilized come election day. (Not even the "near-final" product, for that matter). What then was the point of conducting the bidding, when the software that was the subject of the Contract was still to be created and could conceivably undergo innumerable changes before being considered as being in final form? And that is not all! No Explanation for Lapses in the Second Type of Software

subsequently been re-tested and had passed. To repeat, however, until now, there has never been any mention of a second set or type of software pertaining to the testing and acceptance process. In any event, apart from making that misplaced and uncorroborated claim, Comelec in the same submission also professes (in response to the concerns expressed by this Court) that the reprogrammed software has been tested and found to have complied with the requirements of RA 8436. It reasoned thus: "Since the software program is an inherent element in the automated counting system, the certification issued by the MIRDC-DOST that one thousand nine hundred seventy-three (1,973) units passed the acceptance test procedures is an official recognition by the MIRDC-DOST that the software component of the automated election system, which has been reprogrammed to comply with the provisions of Republic Act No. 8436 as prescribed in the Ad Hoc Technical Evaluation Committees ACM Testing and Acceptance Manual, has passed the MIRDC-DOST tests." The facts do not support this sweeping statement of Comelec. A scrutiny of the MIRDC-DOST letter dated December 15, 2003, 52 which it relied upon, does not justify its grand conclusion. For claritys sake, we quote in full the letter-certification, as follows: "15 December 2003 "HON. RESURRECCION Z. BORRA Commissioner-in-Charge Phase II, Modernization Project Commission on Elections Intramuros, Manila Attention: Atty. Jose M. Tolentino, Jr. Project Director "Dear Commissioner Borra:

The second phase, allegedly involving the second type of software, is simply denominated "Testing and Acceptance Procedures." As best as we can construe, Comelec is claiming that this second type of software is also to be developed and delivered by the supplier in connection with the "testing and acceptance" phase of the acquisition process. The previous pleadings, though -- including the DOST reports submitted to this Court -- have not heretofore mentioned any statement, allegation or representation to the effect that a particular set of software was to be developed and/or delivered by the supplier in connection with the testing and acceptance of delivered ACMs. What the records do show is that the imported ACMs were subjected to the testing and acceptance process conducted by the DOST. Since the initial batch delivered included a high percentage of machines that had failed the tests, Comelec asked the DOST to conduct a 100 percent testing; that is, to test every single one of the ACMs delivered. Among the machines tested on October 8 to 18, 2003, were some units that had failed previous tests but had

"We are pleased to submit 11 DOST Test Certifications representing 11 lots and covering 158 units of automated counting machines (ACMs) that we have tested from 02-12 December 2003. "To date, we have tested all the 1,991 units of ACMs, broken down as follow: (sic) 1st batch - 30 units 4th batch - 438 units 2nd batch - 288 units 5th batch - 438 units 3rd batch - 414 units 6th batch - 383 units

"It should be noted that a total of 18 units have failed the test. Out of these 18 units, only one (1) unit has failed the retest. "Thank you and we hope you will find everything in order. "Very truly yours, "ROLANDO T. VILORIA, CESO III Executive Director cum Chairman, DOST-Technical Evaluation Committee" Even a cursory glance at the foregoing letter shows that it is completely bereft of anything that would remotely support Comelecs contention that the "software component of the automated election system x x x has been reprogrammed to comply with" RA 8436, and "has passed the MIRDC-DOST tests." There is no mention at all of any software reprogramming. If the MIRDCDOST had indeed undertaken the supposed reprogramming and the process turned out to be successful, that agency would have proudly trumpeted its singular achievement. How Comelec came to believe that such reprogramming had been undertaken is unclear. In any event, the Commission is not forthright and candid with the factual details. If reprogramming has been done, who performed it and when? What exactly did the process involve? How can we be assured that it was properly performed? Since the facts attendant to the alleged reprogramming are still shrouded in mystery, the Court cannot give any weight to Comelecs bare allegations. The fact that a total of 1,973 of the machines has ultimately passed the MIRDC-DOST tests does not by itself serve as an endorsement of the soundness of the software program, much less as a proof that it has been reprogrammed. In the first place, nothing on record shows that the tests and re-tests conducted on the machines were intended to address the serious deficiencies noted earlier. As a matter of fact, the MIRDC-DOST letter does not even indicate what kinds of tests or re-tests were conducted, their exact nature and scope, and the specific objectives thereof.53 The absence of relevant supporting documents, combined with the utter vagueness of the letter, certainly fails to inspire belief or to justify the expansive confidence displayed by Comelec. In any event, it goes without saying that remedial measures such as the alleged reprogramming cannot in any way mitigate the grave abuse of discretion already committed as early as April 15, 2003. Rationale of Public Bidding Negated by the Third Type of Software Respondent Comelec tries to assuage this Courts anxiety in these words: "The reprogrammed software that has already passed the requirements of Republic Act No. 8436 during the MIRDC-DOST testing and acceptance procedures will require further customization since the following additional elements, among other things, will have to be considered before the final software can be used on election day: 1. Final Certified List of Candidates x x x 2. Project of Precincts x x x 3. Official Ballot Design and Security Features x x x 4. Encryption, digital certificates and digital signatures x x x. The certified list of candidates for national elective positions will be finalized on or before 23 January 2004 while the final list of projects

of precincts will be prepared also on the same date. Once all the above elements are incorporated in the software program, the Test Certification Group created by the Ad Hoc Technical Evaluation Committee will conduct meticulous testing of the final software before the same can be used on election day. In addition to the testing to be conducted by said Test Certification Group, the Comelec will conduct mock elections in selected areas nationwide not only for purposes of public information but also to further test the final election day program. Public respondent Comelec, therefore, requests that it be given up to 16 February 2004 to comply with this requirement." The foregoing passage shows the imprudent approach adopted by Comelec in the bidding and acquisition process. The Commission says that before the software can be utilized on election day, it will require "customization" through addition of data -- like the list of candidates, project of precincts, and so on. And inasmuch as such data will become available only in January 2004 anyway, there is therefore no perceived need on Comelecs part to rush the supplier into producing the final (or near-final) version of the software before that time. In any case, Comelec argues that the software needed for the electoral exercise can be continuously developed, tested, adjusted and perfected, practically all the way up to election day, at the same time that the Commission is undertaking all the other distinct and diverse activities pertinent to the elections. Given such a frame of mind, it is no wonder that Comelec paid little attention to the counting and canvassing software during the entire bidding process, which took place in FebruaryMarch 2003. Granted that the software was defective, could not detect and prevent the re-use of previously downloaded data or produce the audit trail -- aside from its other shortcomings -nevertheless, all those deficiencies could still be corrected down the road. At any rate, the software used for bidding purposes would not be the same one that will be used on election day, so why pay any attention to its defects? Or to the Comelecs own bidding rules for that matter? Clearly, such jumbled ratiocinations completely negate the rationale underlying the bidding process mandated by law. At the very outset, the Court has explained that Comelec flagrantly violated the public policy on public biddings (1) by allowing MPC/MPEI to participate in the bidding even though it was not qualified to do so; and (2) by eventually awarding the Contract to MPC/MPEI. Now, with the latest explanation given by Comelec, it is clear that the Commission further desecrated the law on public bidding by permitting the winning bidder to change and alter the subject of the Contract (the software), in effect allowing a substantive amendment without public bidding. This stance is contrary to settled jurisprudence requiring the strict application of pertinent rules, regulations and guidelines for public bidding for the purpose of placing each bidder, actual or potential, on the same footing. The essence of public bidding is, after all, an opportunity for fair competition, and a fair basis for the precise comparison of bids. In common parlance, public bidding aims to "level the playing field." That means each bidder must bid under the same conditions; and be subject to the same guidelines, requirements and limitations, so that the best offer or lowest bid may be determined, all other things being equal. Thus, it is contrary to the very concept of public bidding to permit a variance between the conditions under which bids are invited and those under which proposals are submitted and approved; or, as in this case, the conditions under which the bid is won and those under which the awarded Contract will be complied with. The substantive amendment of the contract bidded out, without any public bidding -- after the bidding process had been concluded -- is violative of the public policy on public biddings, as well as the spirit and intent of RA 8436. The

whole point in going through the public bidding exercise was completely lost. The very rationale of public bidding was totally subverted by the Commission. From another perspective, the Comelec approach also fails to make sense. Granted that, before election day, the software would still have to be customized to each precinct, municipality, city, district, and so on, there still was nothing at all to prevent Comelec from requiring prospective suppliers/bidders to produce, at the very start of the bidding process , the "next-to-final" versions of the software (the best software the suppliers had) -- pre-tested and ready to be customized to the final list of candidates and project of precincts, among others, and ready to be deployed thereafter. The satisfaction of such requirement would probably have provided far better bases for evaluation and selection, as between suppliers, than the socalled demo software.Respondents contend that the bidding suppliers countin g machines were previously used in at least one political exercise with no less than 20 million voters. If so, it stands to reason that the software used in that past electoral exercise would probably still be available and, in all likelihood, could have been adopted for use in this instance. Paying for machines and software of that category (already tried and proven in actual elections and ready to be adopted for use) would definitely make more sense than paying the same hundreds of millions of pesos for demo software and empty promises of usable programs in the future. But there is still another gut-level reason why the approach taken by Comelec is reprehensible. It rides on the perilous assumption that nothing would go wrong; and that, come election day, the Commission and the supplier would have developed, adjusted and "reprogrammed" the software to the point where the automated system could function as envisioned. But what if such optimistic projection does not materialize? What if, despite all their herculean efforts, the software now being hurriedly developed and tested for the automated system performs dismally and inaccurately or, worse, is hacked and/or manipulated?54 What then will we do with all the machines and defective software already paid for in the amount of P849 million of our tax money? Even more important, what will happen to our country in case of failure of the automation ? The Court cannot grant the plea of Comelec that it be given until February 16, 2004 to be able to submit a "certification relative to the additional elements of the software that will be customized," because for us to do so would unnecessarily delay the resolution of this case and would just give the poll body an unwarranted excuse to postpone the 2004 elections. On the other hand, because such certification will not cure the gravely abusive actions complained of by petitioners, it will be utterly useless. Is this Court being overly pessimistic and perhaps even engaging in speculation? Hardly. Rather, the Court holds that Comelec should not have gambled on the unrealistic optimism that the suppliers software development efforts would turn out well. The Commission should have adopted a much more prudent and judicious approach to ensure the delivery of tried and tested software, and readied alternative courses of action in case of failure. Considering that the nations future is at stake here, it should have done no less. Epilogue Once again, the Court finds itself at the crossroads of our nations history. At stake in this controversy is not just the business of a computer supplier, or a questionable proclamation by Comelec of one or more public officials. Neither is it about whether this country should switch from the manual to the automated system of counting and canvassing votes. At its core is the ability and capacity of the Commission on Elections to perform properly, legally and prudently its legal mandate to implement the transition from manual to automated elections.

Unfortunately, Comelec has failed to measure up to this historic task. As stated at the start of this Decision, Comelec has not merely gravely abused its discretion in awarding the Contract for the automation of the counting and canvassing of the ballots. It has also put at grave risk the holding of credible and peaceful elections by shoddily accepting electronic hardware and software that admittedly failed to pass legally mandated technical requirements. Inadequate as they are, the remedies it proffers post facto do not cure the grave abuse of discretion it already committed (1) on April 15, 2003, when it illegally made the award; and (2) "sometime" in May 2003 when it executed the Contract for the purchase of defective machines and non-existent software from a non-eligible bidder. For these reasons, the Court finds it totally unacceptable and unconscionable to place its imprimatur on this void and illegal transaction that seriously endangers the breakdown of our electoral system. For this Court to cop-out and to close its eyes to these illegal transactions, while convenient, would be to abandon its constitutional duty of safeguarding public interest. As a necessary consequence of such nullity and illegality, the purchase of the machines and all appurtenances thereto including the still-to-be-produced (or in Comelecs words, to be "reprogrammed") software, as well as all the payments made therefor, have no basis whatsoever in law. The public funds expended pursuant to the void Resolution and Contract must therefore be recovered from the payees and/or from the persons who made possible the illegal disbursements, without prejudice to possible criminal prosecutions against them. Furthermore, Comelec and its officials concerned must bear full responsibility for the failed bidding and award, and held accountable for the electoral mess wrought by their grave abuse of discretion in the performance of their functions. The State, of course, is not bound by the mistakes and illegalities of its agents and servants. True, our country needs to transcend our slow, manual and archaic electoral process. But before it can do so, it must first have a diligent and competent electoral agency that can properly and prudently implement a well-conceived automated election system. At bottom, before the country can hope to have a speedy and fraud-free automated election, it must first be able to procure the proper computerized hardware and software legally, based on a transparent and valid system of public bidding. As in any democratic system, the ultimate goal of automating elections must be achieved by a legal, valid and above-board process of acquiring the necessary tools and skills therefor. Though the Philippines needs an automated electoral process, it cannot accept just any system shoved into its bosom through improper and illegal methods. As the saying goes, the end never justifies the means. Penumbral contracting will not produce enlightened results. WHEREFORE, the Petition is GRANTED. The Court hereby declares NULL and VOID Comelec Resolution No. 6074 awarding the contract for Phase II of the AES to Mega Pacific Consortium (MPC). Also declared null and void is the subject Contract executed between Comelec and Mega Pacific eSolutions (MPEI). 55 Comelec is furtherORDERED to refrain from implementing any other contract or agreement entered into with regard to this project. Let a copy of this Decision be furnished the Office of the Ombudsman which shall determine the criminal liability, if any, of the public officials (and conspiring private individuals, if any) involved in the subject Resolution and Contract. Let the Office of the Solicitor General also take measures to protect the government and vindicate public interest from the ill effects of the illegal disbursements of public funds made by reason of the void Resolution and Contract.

SO ORDERED. Carpio, Austria-Martinez, Carpio-Morales, and Callejo, Sr., JJ., concur. Davide, C.J., Jr., Vitug, Ynares-Santiago, JJ., see separate opinion. Puno, J., concur, and also joins the opinion of J. Ynares-Santiago. Quisumbing, J., in the result. Sandoval-Gutierrez, J., see concurring opinion. Corona, Azcuna, JJ., joins the dissent of J. Tinga. Tinga, J., pls. see dissenting opinion.