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EN BANC

G.R. No. L-7089

August 31, 1954

DOMINGO DE LA CRUZ, plaintiff-appellant,


vs.
NORTHERN THEATRICAL ENTERPRISES INC., ET AL., defendantsappellees.
Conrado Rubio for appellant.
Ruiz, Ruiz, Ruiz, Ruiz, and Benjamin Guerrero for appellees.
MONTEMAYOR, J.:
The facts in this case based on an agreed statement of facts are simple. In
the year 1941 the Northern Theatrical Enterprises Inc., a domestic
corporation operated a movie house in Laoag, Ilocos Norte, and among the
persons employed by it was the plaintiff DOMINGO DE LA CRUZ, hired as a
special guard whose duties were to guard the main entrance of the cine, to
maintain peace and order and to report the commission of disorders within
the premises. As such guard he carried a revolver. In the afternoon of July 4,
1941, one Benjamin Martin wanted to crash the gate or entrance of the
movie house. Infuriated by the refusal of plaintiff De la Cruz to let him in
without first providing himself with a ticket, Martin attacked him with a bolo.
De la Cruz defendant himself as best he could until he was cornered, at
which moment to save himself he shot the gate crasher, resulting in the
latter's death.
For the killing, De la Cruz was charged with homicide in Criminal Case No.
8449 of the Court of First Instance of Ilocos Norte. After a re-investigation
conducted by the Provincial Fiscal the latter filed a motion to dismiss the
complaint, which was granted by the court in January 1943. On July 8, 1947,
De la Cruz was again accused of the same crime of homicide, in Criminal
Case No. 431 of the same Court. After trial, he was finally acquitted of the
charge on January 31, 1948. In both criminal cases De la Cruz employed a
lawyer to defend him. He demanded from his former employer
reimbursement of his expenses but was refused, after which he filed the
present action against the movie corporation and the three members of its
board of directors, to recover not only the amounts he had paid his lawyers
but also moral damages said to have been suffered, due to his worry, his
neglect of his interests and his family as well in the supervision of the
cultivation of his land, a total of P15,000. On the basis of the complaint and

the answer filed by defendants wherein they asked for the dismissal of the
complaint, as well as the agreed statement of facts, the Court of First
Instance of Ilocos Norte after rejecting the theory of the plaintiff that he was
an agent of the defendants and that as such agent he was entitled to
reimbursement of the expenses incurred by him in connection with the
agency (Arts. 1709-1729 of the old Civil Code), found that plaintiff had no
cause of action and dismissed the complaint without costs. De la Cruz
appealed directly to this Tribunal for the reason that only questions of law are
involved in the appeal.
We agree with the trial court that the relationship between the movie
corporation and the plaintiff was not that of principal and agent because the
principle of representation was in no way involved. Plaintiff was not employed
to represent the defendant corporation in its dealings with third parties. He
was a mere employee hired to perform a certain specific duty or task, that of
acting as special guard and staying at the main entrance of the movie house
to stop gate crashers and to maintain peace and order within the premises.
The question posed by this appeal is whether an employee or servant who in
line of duty and while in the performance of the task assigned to him,
performs an act which eventually results in his incurring in expenses, caused
not directly by his master or employer or his fellow servants or by reason of
his performance of his duty, but rather by a third party or stranger not in the
employ of his employer, may recover said damages against his employer.
The learned trial court in the last paragraph of its decision dismissing the
complaint said that "after studying many laws or provisions of law to find out
what law is applicable to the facts submitted and admitted by the parties, has
found none and it has no other alternative than to dismiss the complaint."
The trial court is right. We confess that we are not aware of any law or
judicial authority that is directly applicable to the present case, and realizing
the importance and far-reaching effect of a ruling on the subject-matter we
have searched, though vainly, for judicial authorities and enlightenment. All
the laws and principles of law we have found, as regards master and
servants, or employer and employee, refer to cases of physical injuries, light
or serious, resulting in loss of a member of the body or of any one of the
senses, or permanent physical disability or even death, suffered in line of
duty and in the course of the performance of the duties assigned to the
servant or employee, and these cases are mainly governed by the
Employer's Liability Act and the Workmen's Compensation Act. But a case
involving damages caused to an employee by a stranger or outsider while
said employee was in the performance of his duties, presents a novel
question which under present legislation we are neither able nor prepared to
decide in favor of the employee.

In a case like the present or a similar case of say a driver employed by a


transportation company, who while in the course of employment runs over
and inflicts physical injuries on or causes the death of a pedestrian; and such
driver is later charged criminally in court, one can imagine that it would be to
the interest of the employer to give legal help to and defend its employee in
order to show that the latter was not guilty of any crime either deliberately or
through negligence, because should the employee be finally held criminally
liable and he is found to be insolvent, the employer would be subsidiarily
liable. That is why, we repeat, it is to the interest of the employer to render
legal assistance to its employee. But we are not prepared to say and to hold
that the giving of said legal assistance to its employees is a legal obligation.
While it might yet and possibly be regarded as a normal obligation, it does
not at present count with the sanction of man-made laws.
If the employer is not legally obliged to give, legal assistance to its employee
and provide him with a lawyer, naturally said employee may not recover the
amount he may have paid a lawyer hired by him.
Viewed from another angle it may be said that the damage suffered by the
plaintiff by reason of the expenses incurred by him in remunerating his
lawyer, is not caused by his act of shooting to death the gate crasher but
rather by the filing of the charge of homicide which made it necessary for him
to defend himself with the aid of counsel. Had no criminal charge been filed
against him, there would have been no expenses incurred or damage
suffered. So the damage suffered by plaintiff was caused rather by the
improper filing of the criminal charge, possibly at the instance of the heirs of
the deceased gate crasher and by the State through the Fiscal. We say
improper filing, judging by the results of the court proceedings, namely,
acquittal. In other words, the plaintiff was innocent and blameless. If despite
his innocence and despite the absence of any criminal responsibility on his
part he was accused of homicide, then the responsibility for the improper
accusation may be laid at the door of the heirs of the deceased and the
State, and so theoretically, they are the parties that may be held responsible
civilly for damages and if this is so, we fail to see now this responsibility can
be transferred to the employer who in no way intervened, much less initiated
the criminal proceedings and whose only connection or relation to the whole
affairs was that he employed plaintiff to perform a special duty or task, which
task or duty was performed lawfully and without negligence.
Still another point of view is that the damages incurred here consisting of the
payment of the lawyer's fee did not flow directly from the performance of his
duties but only indirectly because there was an efficient, intervening cause,
namely, the filing of the criminal charges. In other words, the shooting to

death of the deceased by the plaintiff was not the proximate cause of the
damages suffered but may be regarded as only a remote cause, because
from the shooting to the damages suffered there was not that natural and
continuous sequence required to fix civil responsibility.
In view of the foregoing, the judgment of the lower court is affirmed. No
costs.

4. The court erred in reversing the finding of the trial judge that
Nielson's action had prescribed, but considering only the first claim
and ignoring the prescriptibility of the other claims.
Alternative Grounds:
5. The court erred in holding that the period of suspension of the
contract on account of the war lasted from February 1942 to June
26, 1948.
EN BANC
G.R. No. L-21601
December 28, 1968
NIELSON & COMPANY, INC., plaintiff-appellant,
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
RESOLUTION
ZALDIVAR, J.:

Lepanto seeks the reconsideration of the decision rendered on December


17, 1966. The motion for reconsideration is based on two sets of grounds
the first set consisting of four principal grounds, and the second set
consisting of five alternative grounds, as follows:
Principal Grounds:
1. The court erred in overlooking and failing to apply the proper law
applicable to the agency or management contract in question,
namely, Article 1733 of the Old Civil Code (Article 1920 of the new),
by virtue of which said agency was effectively revoked and
terminated in 1945 when, as stated in paragraph 20 of the complaint,
"defendant voluntarily ... prevented plaintiff from resuming
management and operation of said mining properties."
2. The court erred in holding that paragraph II of the management
contract (Exhibit C) suspended the period of said contract.
3. The court erred in reversing the ruling of the trial judge, based on
well-settled jurisprudence of this Supreme Court, that the
management agreement was only suspended but not extended on
account of the war.

6. Assuming arguendo that Nielson is entitled to any relief, the court


erred in awarding as damages (a) 10% of the cash dividends
declared and paid in December, 1941; (b) the management fee of
P2,500.00 for the month of January, 1942; and (c) the full contract
price for the extended period of sixty months, since these damages
were neither demanded nor proved and, in any case, not allowable
under the general law of damages.
7. Assuming arguendo that appellant is entitled to any relief, the
court erred in ordering appellee to issue and deliver to appellant
shares of stock together with fruits thereof.
8. The court erred in awarding to appellant an undetermined amount
of shares of stock and/or cash, which award cannot be ascertained
and executed without further litigation.
9. The court erred in rendering judgment for attorney's fees.
We are going to dwell on these grounds in the order they are presented.
1. In its first principal ground Lepanto claims that its own counsel and this
Court had overlooked the real nature of the management contract entered
into by and between Lepanto and Nielson, and the law that is applicable on
said contract. Lepanto now asserts for the first time and this is done in a
motion for reconsideration - that the management contract in question is a
contract of agency such that it has the right to revoke and terminate the said
contract, as it did terminate the same, under the law of agency, and
particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the
New Civil Code).
We have taken note that Lepanto is advancing a new theory. We have
carefully examined the pleadings filed by Lepanto in the lower court, its

memorandum and its brief on appeal, and never did it assert the theory that it
has the right to terminate the management contract because that contract is
one of agency which it could terminate at will. While it is true that in its ninth
and tenth special affirmative defenses, in its answer in the court below,
Lepanto pleaded that it had the right to terminate the management contract
in question, that plea of its right to terminate was not based upon the ground
that the relation between Lepanto and Nielson was that of principal and
agent but upon the ground that Nielson had allegedly not complied with
certain terms of the management contract. If Lepanto had thought of
considering the management contract as one of agency it could have
amended its answer by stating exactly its position. It could have asserted its
theory of agency in its memorandum for the lower court and in its brief on
appeal. This, Lepanto did not do. It is the rule, and the settled doctrine of this
Court, that a party cannot change his theory on appeal that is, that a party
cannot raise in the appellate court any question of law or of fact that was not
raised in the court below or which was not within the issue made by the
parties in their pleadings (Section 19, Rule 49 of the old Rules of Court, and
also Section 18 of the new Rules of Court; Hautea vs. Magallon, L-20345,
November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884,
February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207;
Agoncillo vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil 49).
At any rate, even if we allow Lepanto to assert its new theory at this very late
stage of the proceedings, this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is
one of agency because: (1) Nielson was to manage and operate the mining
properties and mill on behalf, and for the account, of Lepanto; and (2)
Nielson was authorized to represent Lepanto in entering, on Lepanto's
behalf, into contracts for the hiring of laborers, purchase of supplies, and the
sale and marketing of the ores mined. All these, Lepanto claims, show that
Nielson was, by the terms of the contract, destined to execute juridical acts
not on its own behalf but on behalf of Lepanto under the control of the Board
of Directors of Lepanto "at all times". Hence Lepanto claims that the contract
is one of agency. Lepanto then maintains that an agency is revocable at the
will of the principal (Article 1733 of the Old Civil Code), regardless of any
term or period stipulated in the contract, and it was in pursuance of that right
that Lepanto terminated the contract in 1945 when it took over and assumed
exclusive management of the work previously entrusted to Nielson under the
contract. Lepanto finally maintains that Nielson as an agent is not entitled to
damages since the law gives to the principal the right to terminate the agency
at will.

Because of Lepanto's new theory We consider it necessary to determine


the nature of the management contract whether it is a contract of agency
or a contract of lease of services. Incidentally, we have noted that the lower
court, in the decision appealed from, considered the management contract
as a contract of lease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:
By the contract of agency, one person binds himself to render some
service or do something for the account or at the request of another.
Article 1544, defining contract of lease of service, provides:
In a lease of work or services, one of the parties binds himself to
make or construct something or to render a service to the other for a
price certain.
In both agency and lease of services one of the parties binds himself to
render some service to the other party. Agency, however, is distinguished
from lease of work or services in that the basis of agency is representation,
while in the lease of work or services the basis is employment. The lessor of
services does not represent his employer, while the agent represents his
principal. Manresa, in his "Commentarios al Codigo Civil Espaol" (1931,
Tomo IX, pp. 372-373), points out that the element of representation
distinguishes agency from lease of services, as follows:
Nuestro art. 1.709 como el art. 1.984 del Codigo de Napoleon y
cuantos textos legales citamos en lasconcordancias, expresan
claramente esta idea de la representacion, "hacer alguna cosa por
cuenta o encargo de otra" dice nuestro Codigo; "poder de hacer
alguna cosa para el mandante o en su nombre" dice el Codigo de
Napoleon, y en tales palabras aparece vivo y luminoso el concepto y
la teoria de la representacion, tan fecunda en ensenanzas, que a su
sola luz es como se explican las diferencias que separan el mandato
del arrendamiento de servicios, de los contratos inominados, del
consejo y de la gestion de negocios.
En efecto, en el arrendamiento de servicios al obligarse para su
ejecucion, se trabaja, en verdad, para el dueno que remunera la
labor, pero ni se le representa ni se obra en su nombre....

On the basis of the interpretation of Article 1709 of the old Civil Code, Article
1868 of the new Civil Code has defined the contract of agency in more
explicit terms, as follows:
By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another,
with the consent or authority of the latter.
There is another obvious distinction between agency and lease of services.
Agency is a preparatory contract, as agency "does not stop with the agency
because the purpose is to enter into other contracts." The most characteristic
feature of an agency relationship is the agent's power to bring about
business relations between his principal and third persons. "The agent is
destined to execute juridical acts (creation, modification or extinction of
relations with third parties). Lease of services contemplate only material
(non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law,"
Vol. V, p. 277).
In the light of the interpretations we have mentioned in the foregoing
paragraphs let us now determine the nature of the management contract in
question. Under the contract, Nielson had agreed, for a period of five years,
with the right to renew for a like period, to explore, develop and operate the
mining claims of Lepanto, and to mine, or mine and mill, such pay ore as
may be found therein and to market the metallic products recovered
therefrom which may prove to be marketable, as well as to render for
Lepanto other services specified in the contract. We gather from the contract
that the work undertaken by Nielson was to take complete charge subject at
all times to the general control of the Board of Directors of Lepanto, of the
exploration and development of the mining claims, of the hiring of a sufficient
and competent staff and of sufficient and capable laborers, of the prospecting
and development of the mine, of the erection and operation of the mill, and of
the benefication and marketing of the minerals found on the mining
properties; and in carrying out said obligation Nielson should proceed
diligently and in accordance with the best mining practice. In connection with
its work Nielson was to submit reports, maps, plans and recommendations
with respect to the operation and development of the mining properties,
make recommendations and plans on the erection or enlargement of any
existing mill, dispatch mining engineers and technicians to the mining
properties as from time to time may reasonably be required to investigate
and make recommendations without cost or expense to Lepanto. Nielson
was also to "act as purchasing agent of supplies, equipment and other
necessary purchases by Lepanto, provided, however, that no purchase shall
be made without the prior approval of Lepanto; and provided further, that no

commission shall be claimed or retained by Nielson on such purchase"; and


"to submit all requisition for supplies, all constricts and arrangement with
engineers, and staff and all matters requiring the expenditures of money,
present or future, for prior approval by Lepanto; and also to make contracts
subject to the prior approve of Lepanto for the sale and marketing of the
minerals mined from said properties, when said products are in a suitable
condition for marketing."1
It thus appears that the principal and paramount undertaking of Nielson
under the management contract was the operation and development of the
mine and the operation of the mill. All the other undertakings mentioned in
the contract are necessary or incidental to the principal undertaking these
other undertakings being dependent upon the work on the development of
the mine and the operation of the mill. In the performance of this principal
undertaking Nielson was not in any way executing juridical acts for Lepanto,
destined to create, modify or extinguish business relations between Lepanto
and third persons. In other words, in performing its principal undertaking
Nielson was not acting as an agent of Lepanto, in the sense that the term
agent is interpreted under the law of agency, but as one who was performing
material acts for an employer, for a compensation.
It is true that the management contract provides that Nielson would also act
as purchasing agent of supplies and enter into contracts regarding the sale of
mineral, but the contract also provides that Nielson could not make any
purchase, or sell the minerals, without the prior approval of Lepanto. It is
clear, therefore, that even in these cases Nielson could not execute juridical
acts which would bind Lepanto without first securing the approval of Lepanto.
Nielson, then, was to act only as an intermediary, not as an agent.
Lepanto contends that the management contract in question being one of
agency it had the right to terminate the contract at will pursuant to the
provision of Article 1733 of the old Civil Code. We find, however, a proviso in
the management contract which militates against this stand of Lepanto.
Paragraph XI of the contract provides:
Both parties to this agreement fully recognize that the terms of this
Agreement are made possible only because of the faith or
confidence that the Officials of each company have in the other;
therefore, in order to assure that such confidence and faith shall
abide and continue, NIELSON agrees that LEPANTO may cancel
this Agreement at any time upon ninety (90) days written notice, in
the event that NIELSON for any reason whatsoever, except acts of
God, strike and other causes beyond its control, shall cease to

prosecute the operation and development of the properties herein


described, in good faith and in accordance with approved mining
practice.
It is thus seen, from the above-quoted provision of paragraph XI of the
management contract, that Lepanto could not terminate the agreement at
will. Lepanto could terminate or cancel the agreement by giving notice of
termination ninety days in advance only in the event that Nielson should
prosecute in bad faith and not in accordance with approved mining practice
the operation and development of the mining properties of Lepanto. Lepanto
could not terminate the agreement if Nielson should cease to prosecute the
operation and development of the mining properties by reason of acts of
God, strike and other causes beyond the control of Nielson.
The phrase "Both parties to this agreement fully recognize that the terms of
this agreement are made possible only because of the faith and confidence
of the officials of each company have in the other" in paragraph XI of the
management contract does not qualify the relation between Lepanto and
Nielson as that of principal and agent based on trust and confidence, such
that the contractual relation may be terminated by the principal at any time
that the principal loses trust and confidence in the agent. Rather, that phrase
simply implies the circumstance that brought about the execution of the
management contract. Thus, in the annual report for 1936 2, submitted by Mr.
C. A. Dewit, President of Lepanto, to its stockholders, under date of March
15, 1937, we read the following:
To the stockholders
The incorporation of our Company was effected as a result of
negotiations with Messrs. Nielson & Co., Inc., and an offer by these
gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August
11, 1936, reading as follows:
Messrs. Cookes and Lednicky,
Present
Re: Mankayan Copper Mines
GENTLEMEN:
After an examination of your property by our engineers, we
have decided to offer as we hereby offer to underwrite the

entire issue of stock of a corporation to be formed for the


purpose of taking over said properties, said corporation to
have an authorized capital of P1,750,000.00, of which
P700,000.00 will be issued in escrow to the claim-owners in
exchange for their claims, and the balance of P1,050,000.00
we will sell to the public at par or take ourselves.
The arrangement will be under the following conditions:
1. The subscriptions for cash shall be payable 50% at time of
subscription and the balance subject to the call of the Board
of Directors of the proposed corporation.
2. We shall have an underwriting and brokerage commission
of 10% of the P1,050,000.00 to be sold for cash to the
public, said commission to be payable from the first payment
of 50% on each subscription.
3. We will bear the cost of preparing and mailing any
prospectus that may be required, but no such prospectus will
be sent out until the text thereof has been first approved by
the Board of Directors of the proposed corporation.
4. That after the organization of the corporation, all operating
contract be entered into between ourselves and said
corporation, under the terms which the property will be
developed and mined and a mill erected, under our
supervision, our compensation to be P2,000.00 per month
until the property is put on a profitable basis and P2,500.00
per month plus 10% of the net profits for a period of five
years thereafter.
5. That we shall have the option to renew said operating
contract for an additional period of five years, on the same
basis as the original contract, upon the expiration thereof.
It is understood that the development and mining operations
on said property, and the erection of the mill thereon, and the
expenditures therefor shall be subject to the general control
of the Board of Directors of the proposed corporation, and, in
case you accept this proposition, that a detailed operating

contract will be entered into, covering the relationships


between the parties.
Yours
very
(Sgd.) L. R. Nielson

truly,

Pursuant to the provisions of paragraph 2 of this offer, Messrs.


Nielson & Co., took subscriptions for One Million Fifty Thousand
Pesos (P1,050,000.00) in shares of our Company and their
underwriting and brokerage commission has been paid. More than
fifty per cent of these subscriptions have been paid to the Company
in cash. The claim owners have transferred their claims to the
Corporation, but the P700,000.00 in stock which they are to receive
therefor, is as yet held in escrow.
Immediately upon the formation of the Corporation Messrs. Nielson
& Co., assumed the Management of the property under the control of
the Board of Directors. A modification in the Management Contract
was made with the consent of all the then stockholders, in virtue of
which the compensation of Messrs. Nielson & Co., was increased to
P2,500.00 per month when mill construction began. The formal
Management Contract was not entered into until January 30, 1937.
Manila, March 15, 1937
(Sgd.) C. A. DeWitt
President
We can gather from the foregoing statements in the annual report for 1936,
and from the provision of paragraph XI of the Management contract, that the
employment by Lepanto of Nielson to operate and manage its mines was
principally in consideration of the know-how and technical services that
Nielson offered Lepanto. The contract thus entered into pursuant to the offer
made by Nielson and accepted by Lepanto was a "detailed operating
contract". It was not a contract of agency. Nowhere in the record is it shown
that Lepanto considered Nielson as its agent and that Lepanto terminated the
management contract because it had lost its trust and confidence in Nielson.
The contention of Lepanto that it had terminated the management contract in
1945, following the liberation of the mines from Japanese control, because
the relation between it and Nielson was one of agency and as such it could
terminate the agency at will, is, therefore, untenable. On the other hand, it

can be said that, in asserting that it had terminated or cancelled the


management contract in 1945, Lepanto had thereby violated the express
terms of the management contract. The management contract was renewed
to last until January 31, 1947, so that the contract had yet almost two years
to go upon the liberation of the mines in 1945. There is no showing that
Nielson had ceased to prosecute the operation and development of the
mines in good faith and in accordance with approved mining practice which
would warrant the termination of the contract upon ninety days written notice.
In fact there was no such written notice of termination. It is an admitted fact
that Nielson ceased to operate and develop the mines because of the war
a cause beyond the control of Nielson. Indeed, if the management contract in
question was intended to create a relationship of principal and agent
between Lepanto and Nielson, paragraph XI of the contract should not have
been inserted because, as provided in Article 1733 of the old Civil Code,
agency is essentially revocable at the will of the principal that means, with
or without cause. But precisely said paragraph XI was inserted in the
management contract to provide for the cause for its revocation. The
provision of paragraph XI must be given effect.
In the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give
effect to all,3 and if some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.4
It is Our considered view that by express stipulation of the parties, the
management contract in question is not revocable at the will of Lepanto. We
rule that this management contract is not a contract of agency as defined in
Article 1709 of the old Civil Code, but a contract of lease of services as
defined in Article 1544 of the same Code. This contract can not be
unilaterally revoked by Lepanto.
The first ground of the motion for reconsideration should, therefore, be
brushed aside.
2. In the second, third and fifth grounds of its motion for reconsideration,
Lepanto maintains that this Court erred, in holding that paragraph 11 of the
management contract suspended the period of said contract, in holding that
the agreement was not only suspended but was extended on account of the
war, and in holding that the period of suspension on account of the war
lasted from February, 1942 to June 26, 1948. We are going to discuss these
three grounds together because they are interrelated.

In our decision we have dwelt lengthily on the points that the management
contract was suspended because of the war, and that the period of the
contract was extended for a period equivalent to the time when Nielson was
unable to perform the work of mining and milling because of the adverse
effects of the war on the work of mining and milling.

situation will depend on whether the event wholly or partially affected


adversely the work of mining and milling. In the instant case, the war had
adversely affected and wholly at that the work of mining and milling. We
have clearly stated in Our decision the circumstances brought about by the
war which caused the whole or total suspension of the agreement or of the
management contract.

It is the contention of Lepanto that the happening of those events, and the
effects of those events, simply suspended the performance of the obligations
by either party in the contract, but did not suspend the period of the contract,
much less extended the period of the contract.

LEPANTO itself admits that the management contract was suspended. We


quote from the brief of LEPANTO:

We have conscientiously considered the arguments of Lepanto in support of


these three grounds, but We are not persuaded to reconsider the rulings that
We made in Our decision.

Probably, what Nielson meant was, it was prevented by Lepanto to


assume again the management of the mine in 1945, at the precise
time when defendant was at the feverish phase of rehabilitation and
although the contract had already been suspended. (Lepanto's Brief,
p. 9).

We want to say a little more on these points, however. Paragraph II of the


management contract provides as follows:
In the event of inundation, flooding of the mine, typhoon, earthquake
or any other force majeure, war, insurrection, civil commotion,
organized strike, riot, fire, injury to the machinery or other event or
cause reasonably beyond the control of NIELSON and which
adversely affects the work of mining and milling; NIELSON shall
report such fact to LEPANTO and without liability or breach of the
terms of this Agreement,the same shall remain in suspense, wholly
or partially during the terms of such inability. (Emphasis supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that
upon the happening of any of the events enumerated therein, which
adversely affects the work of mining and milling, the agreement is deemed
suspended for as long as Nielson is unable to perform its work of mining and
milling because of the adverse effects of the happening of the event on the
work of mining and milling. During the period when the adverse effects on the
work of mining and milling exist, neither party in the contract would be held
liable for non-compliance of its obligation under the contract. In other words,
the operation of the contract is suspended for as long as the adverse effects
of the happening of any of those events had impeded or obstructed the work
of mining and milling. An analysis of the phraseology of the above-quoted
paragraph II of the management contract readily supports the conclusion that
it is the agreement, or the contract, that is suspended. The phrase "the
same" can refer to no other than the term "Agreement" which immediately
precedes it. The "Agreement" may be wholly or partially suspended, and this

... it was impossible, as a result of the destruction of the mine, for the
plaintiff to manage and operate the same and because, as provided
in the agreement, the contract was suspended by reason of the war
(Lepanto's Brief, pp. 9-10).
Clause II, by its terms, is clear that the contract is suspended in case
fortuitous event or force majeure, such as war, adversely affects the
work of mining and milling. (Lepanto's Brief, p. 49).
Lepanto is correct when it said that the obligations under the contract were
suspended upon the happening of any of the events enumerated in
paragraph II of the management contract. Indeed, those obligations were
suspended because the contract itself was suspended. When we talk of a
contract that has been suspended we certainly mean that the contract
temporarily ceased to be operative, and the contract becomes operative
again upon the happening of a condition or when a situation obtains
which warrants the termination of the suspension of the contract.
In Our decision We pointed out that the agreement in the management
contract would be suspended when two conditions concur, namely: (1) the
happening of the event constituting a force majeure that was reasonably
beyond the control of Nielson, and (2) that the event constituting the force
majeure adversely affected the work of mining and milling. The suspension,
therefore, would last not only while the event constituting the force majeure
continued to occur but also for as long as the adverse effects of the force
majeure on the work of mining and milling had not been eliminated. Under

the management contract the happening alone of the event constituting the
force majeure which did not affect adversely the work of mining and milling
would not suspend the period of the contract. It is only when the two
conditions concur that the period of the agreement is suspended.
It is not denied that because of the war, in February 1942, the mine, the
original mill, the original power plant, the supplies and equipment, and all
installations at the Mankayan mines of Lepanto, were destroyed upon order
of the United States Army, to prevent their utilization by the enemy. It is not
denied that for the duration of the war Nielson could not undertake the work
of mining and milling. When the mines were liberated from the enemy in
August, 1945, the condition of the mines, the mill, the power plant and other
installations, was not the same as in February 1942 when they were ordered
destroyed by the US army. Certainly, upon the liberation of the mines from
the enemy, the work of mining and milling could not be undertaken by
Nielson under the same favorable circumstances that obtained before
February 1942. The work of mining and milling, as undertaken by Nielson in
January, 1942, could not be resumed by Nielson soon after liberation
because of the adverse effects of the war, and this situation continued until
June of 1948. Hence, the suspension of the management contract did not
end upon the liberation of the mines in August, 1945. The mines and the mill
and the installations, laid waste by the ravages of war, had to be
reconstructed and rehabilitated, and it can be said that it was only on June
26, 1948 that the adverse effects of the war on the work of mining and milling
had ended, because it was on that date that the operation of the mines and
the mill was resumed. The period of suspension should, therefore, be
reckoned from February 1942 until June 26, 1948, because it was during this
period that the war and the adverse effects of the war on the work of mining
and milling had lasted. The mines and the installations had to be rehabilitated
because of the adverse effects of the war. The work of rehabilitation started
soon after the liberation of the mines in August, 1945 and lasted until June
26, 1948 when, as stated in Lepanto's annual report to its stockholders for
the year 1948, "June 28, 1948 marked the official return to operation of this
company at its properties at Mankayan, Mountain Province, Philippines"
(Exh. F-1).
Lepanto would argue that if the management contract was suspended at all
the suspension should cease in August of 1945, contending that the effects
of the war should cease upon the liberation of the mines from the enemy.
This contention cannot be sustained, because the period of rehabilitation was
still a period when the physical effects of the war the destruction of the
mines and of all the mining installations adversely affected, and made
impossible, the work of mining and milling. Hence, the period of the

reconstruction and rehabilitation of the mines and the installations must be


counted as part of the period of suspension of the contract.
Lepanto claims that it would not be unfair to end the period of suspension
upon the liberation of the mines because soon after the liberation of the
mines Nielson insisted to resume the management work, and that Nielson
was under obligation to reconstruct the mill in the same way that it was under
obligation to construct the mill in 1937. This contention is untenable. It is true
that Nielson insisted to resume its management work after liberation, but this
was only for the purpose of restoring the mines, the mill, and other
installations to their operating and producing condition as of February 1942
when they were ordered destroyed. It is not shown by any evidence in the
record, that Nielson had agreed, or would have agreed, that the period of
suspension of the contract would end upon the liberation of the mines. This is
so because, as found by this Court, the intention of the parties in the
management contract, and as understood by them, the management
contract was suspended for as long as the adverse effects of the force
majeure on the work of mining and milling had not been removed, and the
contract would be extended for as long as it was suspended. Under the
management contract Nielson had the obligation to erect and operate the
mill, but not to erect or reconstruct the mill in case of its destruction by force
majeure.
It is the considered view of this court that it would not be fair to Nielson to
consider the suspension of the contract as terminated upon the liberation of
the mines because then Nielson would be placed in a situation whereby it
would have to suffer the adverse effects of the war on the work of mining and
milling. The evidence shows that as of January 1942 the operation of the
mines under the management of Nielson was already under beneficial
conditions, so much so that dividends were already declared by Lepanto for
the years 1939, 1940 and 1941. To make the management contract
immediately operative after the liberation of the mines from the Japanese, at
the time when the mines and all its installations were laid waste as a result of
the war, would be to place Nielson in a situation whereby it would lose all the
benefits of what it had accomplished in placing the Lepanto mines in
profitable operation before the outbreak of the war in December, 1941. The
record shows that Nielson started its management operation way back in
1936, even before the management contract was entered into. As early as
August 1936 Nielson negotiated with Messrs. C. I. Cookes and V. L. Lednicky
for the operation of the Mankayan mines and it was the result of those
negotiations that Lepanto was incorporated; that it was Nielson that helped to
capitalize Lepanto, and that after the formation of the corporation (Lepanto)
Nielson immediately assumed the management of the mining properties of

Lepanto. It was not until January 30, 1937 when the management contract in
question was entered into between Lepanto and Nielson (Exhibit A).

was suspended from February, 1942 to June 26, 1948, and that from the
latter date the contract had yet five years to go.

A contract for the management and operation of mines calls for a speculative
and risky venture on the part of the manager-operator. The manageroperator invests its technical know-how, undertakes back-breaking efforts
and tremendous spade-work, so to say, in the first years of its management
and operation of the mines, in the expectation that the investment and the
efforts employed might be rewarded later with success. This expected
success may never come. This had happened in the very case of the
Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various
persons and entities of different nationalities, including Lednicky himself,
invested all their money and failed. The manager-operator may not strike
sufficient ore in the first, second, third, or fourth year of the management
contract, or he may not strike ore even until the end of the fifth year. Unless
the manager-operator strikes sufficient quantity of ore he cannot expect
profits or reward for his investment and efforts. In the case of Nielson, its
corps of competent engineers, geologists, and technicians begun working on
the Mankayan mines of Lepanto since the latter part of 1936, and continued
their work without success and profit through 1937, 1938, and the earlier part
of 1939. It was only in December of 1939 when the efforts of Nielson started
to be rewarded when Lepanto realized profits and the first dividends were
declared. From that time on Nielson could expect profit to come to it as in
fact Lepanto declared dividends for 1940 and 1941 if the development and
operation of the mines and the mill would continue unhampered. The
operation, and the expected profits, however, would still be subject to
hazards due to the occurrence of fortuitous events, fires, earthquakes,
strikes, war, etc., constituting force majeure, which would result in the
destruction of the mines and the mill. One of these diverse causes, or one
after the other, may consume the whole period of the contract, and if it should
happen that way the manager-operator would reap no profit to compensate
for the first years of spade-work and investment of efforts and know-how.
Hence, in fairness to the manager-operator, so that he may not be deprived
of the benefits of the work he had accomplished, the force majeure clause is
incorporated as a standard clause in contracts for the management and
operation of mines.

3. In the fourth ground of its motion for reconsideration, Lepanto maintains


that this Court erred in reversing the finding of the trial court that Nielson's
action has prescribed, by considering only the first claim and ignoring the
prescriptibility of the other claims.

The nature of the contract for the management and operation of mines
justifies the interpretation of the force majeure clause, that a period equal to
the period of suspension due to force majeure should be added to the
original term of the contract by way of an extension. We, therefore, reiterate
the ruling in Our decision that the management contract in the instant case

This ground of the motion for reconsideration has no merit.


In Our decision We stated that the claims of Nielson are based on a written
document, and, as such, the cause of action prescribes in ten
years.5 Inasmuch as there are different claims which accrued on different
dates the prescriptive periods for all the claims are not the same. The claims
of Nielson that have been awarded by this Court are itemized in the
dispositive part of the decision.
The first item of the awards in Our decision refers to Nielson's compensation
in the sum of P17,500.00, which is equivalent to 10% of the cash dividends
declared by Lepanto in December, 1941. As we have stated in Our decision,
this claim accrued on December 31, 1941, and the right to commence an
action thereon started on January 1, 1942. We declared that the action on
this claim did not prescribe although the complaint was filed on February 6,
1958 or after a lapse of 16 years, 1 month and 5 days because of the
operation of the moratorium law.
We declared that under the applicable decisions of this Court 6 the
moratorium period of 8 years, 2 months and 8 days should be deducted from
the period that had elapsed since the accrual of the cause of action to the
date of the filing of the complaint, so that there is a period of less than 8
years to be reckoned for the purpose of prescription.
This claim of Nielson is covered by Executive Order No. 32, issued on March
10, 1945, which provides as follows:
Enforcement of payments of all debts and other monetary
obligations payable in the Philippines, except debts and other
monetary obligations entered into in any area after declaration by
Presidential Proclamation that such area has been freed from enemy
occupation and control, is temporarily suspended pending action by
the Commonwealth Government. (41 O.G. 56-57; Emphasis
supplied)

Executive Order No. 32 covered all debts and monetary obligation contracted
before the war (or before December 8, 1941) and those contracted
subsequent to December 8, 1941 and during the Japanese occupation.
Republic Act No. 342, approved on July 26, 1948, lifted the moratorium
provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941)
debts of debtors who had not filed war damage claims with the United States
War Damage Commission. In other words, after the effectivity of Republic Act
No. 342, the debt moratorium was limited: (1) to debts and other monetary
obligations which were contracted after December 8, 1941 and during the
Japanese occupation, and (2) to those pre-war (or pre-December 8, 1941)
debts and other monetary obligations where the debtors filed war damage
claims. That was the situation up to May 18, 1953 when this Court declared
Republic Act No. 342 unconstitutional. 7 It has been held by this Court,
however, that from March 10, 1945 when Executive Order No. 32 was
issued, to May 18, 1953 when Republic Act No. 342 was declared
unconstitutional or a period of 8 years, 2 months and 8 days the debt
moratorium was in force, and had the effect of suspending the period of
prescription.8
Lepanto is wrong when in its motion for reconsideration it claims that the
moratorium provided for in Executive Order No. 32 was continued by
Republic Act No. 342 "only with respect to debtors of pre-war obligations or
those incurred prior to December 8, 1941," and that "the moratorium
was lifted and terminated with respect to obligations incurred after December
8, 1941."9
This Court has held that Republic Act No. 342 does not apply to debts
contracted during the war and did not lift the moratorium in relations
thereto.10 In the case of Abraham, et al. vs. Intestate Estate of Juan C.
Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:

What we have stated herein regarding the non-prescription of the cause of


action of the claim involved in the first item in the award also holds true with
respect to the second item in the award, which refers to Nielson's claim for
management fee of P2,500.00 for January, 1942. Lepanto admits that this
second item, like the first, is a monetary obligation. The right of action of
Nielson regarding this claim accrued on January 31, 1942.
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the
moratorium law is not applicable. That is the reason why in Our decision We
did not discuss the question of prescription regarding these items. The claims
of Nielson involved in these items are based on the management contract,
and Nielson's cause of action regarding these claims prescribes in ten years.
Corollary to Our ruling that the management contract was suspended from
February, 1942 until June 26, 1948, and that the contract was extended for
five years from June 26, 1948, the right of action of Nielson to claim for what
is due to it during that period of extension accrued during the period from
June 26, 1948 till the end of the five-year extension period or until June 26,
1953. And so, even if We reckon June 26, 1948 as the starting date of the
ten-year period in connection with the prescriptibility of the claims involved in
items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when
the complaint was filed on February 6, 1958 the ten-year prescriptive period
had not yet lapsed.
In Our decision We have also ruled that the right of action of Nielson against
Lepanto had not prescribed because of the arbitration clause in the
Management contract. We are satisfied that there is evidence that Nielson
had asked for arbitration, and an arbitration committee had been constituted.
The arbitration committee, however, failed to bring about any settlement of
the differences between Nielson and Lepanto. On June 25, 1957 counsel for
Lepanto definitely advised Nielson that they were not entertaining any claim
of Nielson. The complaint in this case was filed on February 6, 1958.

Respondents, however, contend that Republic Act No. 342, which


took effect on July 26, 1948, lifted the moratorium on debts
contracted during the Japanese occupation. The court has already
held that Republic Act No. 342 did not lift the moratorium on debts
contracted during the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830,
Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war
debts, making the protection available only to debtors who had war
damage claims (Sison v. Mirasol, G.R. No. L-4711, Oct. 3, 1952).

4. In the sixth ground of its motion for reconsideration, Lepanto maintains


that this Court "erred in awarding as damages (a) 10% of the cash dividends
declared and paid in December, 1941; (b) the management fee of P2,500.00
for the month of January 1942; and (c) the full contract price for the extended
period of 60 months, since the damages were never demanded nor proved
and, in any case, not allowable under the general law on damages."

We therefore reiterate the ruling in Our decision that the claim involved in the
first item awarded to Nielson had not prescribed.

We have stated in Our decision that the original agreement in the


management contract regarding the compensation of Nielson was modified,
such that instead of receiving a monthly compensation of P2,500.00 plus
10% of the net profits from the operation of the properties for the preceding

month,11 Nielson would receive a compensation of P2,500.00 a month, plus


(1) 10% of the dividends declared and paid, when and as paid, during the
period of the contract, and at the end of each year, (2) 10% of any depletion
reserve that may be set up, and (3) 10% of any amount expended during the
year out of surplus earnings for capital account.
It is shown that in December, 1941, cash dividends amounting to
P175,000.00 was declared by Lepanto.12Nielson, therefore, should receive
the equivalent of 10% of this amount, or the sum of P17,500.00. We have
found that this amount was not paid to Nielson.
In its motion for reconsideration, Lepanto inserted a photographic copy of
page 127 of its cash disbursement book, allegedly for 1941, in an effort to
show that this amount of P17,500.00 had been paid to Nielson. It appears,
however, in this photographic copy of page 127 of the cash disbursement
book that the sum of P17,500.00 was entered on October 29 as "surplus a/c
Nielson & Co. Inc." The entry does not make any reference to dividends or
participation of Nielson in the profits. On the other hand, in the photographic
copy of page 89 of the 1941 cash disbursement book, also attached to the
motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941
which states "Accts. Pay. Particip. Nielson & Co. Inc." This entry for April 23,
1941 may really be the participation of Nielson in the profits based on
dividends declared in April 1941 as shown in Exhibit L. But in the same
Exhibit L it is not stated that any dividend was declared in October 1941. On
the contrary it is stated in Exhibit L that dividends were declared in December
1941. We cannot entertain this piece of evidence for several reasons: (1)
because this evidence was not presented during the trial in the court below;
(2) there is no showing that this piece of evidence is newly discovered and
that Lepanto was not in possession of said evidence when this case was
being tried in the court below; and (3) according to Exhibit L cash dividends
of P175,000.00 were declared in December, 1941, and so the sum of
P17,500.00 which appears to have been paid to Nielson in October 1941
could not be payment of the equivalent of 10% of the cash dividends that
were later declared in December, 1941.
As regards the management fee of Nielson corresponding to January, 1942,
in the sum of P2,500.00, We have also found that Nielson is entitled to be
paid this amount, and that this amount was not paid by Lepanto to Nielson.
Whereas, Lepanto was able to prove that it had paid the management fees of
Nielson for November and December, 1941,13 it was not able to present any
evidence to show that the management fee of P2,500.00 for January, 1942
had been paid.

It having been declared in Our decision, as well as in this resolution, that the
management contract had been extended for 5 years, or sixty months, from
June 27, 1948 to June 26, 1953, and that the cause of action of Nielson to
claim for its compensation during that period of extension had not prescribed,
it follows that Nielson should be awarded the management fees during the
whole period of extension, plus the 10% of the value of the dividends
declared during the said period of extension, the 10% of the depletion
reserve that was set up, and the 10% of any amount expended out of surplus
earnings for capital account.
5. In the seventh ground of its motion for reconsideration, Lepanto maintains
that this Court erred in ordering Lepanto to issue and deliver to Nielson
shares of stock together with fruits thereof.
In Our decision, We declared that pursuant to the modified agreement
regarding the compensation of Nielson which provides, among others, that
Nielson would receive 10% of any dividends declared and paid, when and as
paid, Nielson should be paid 10% of the stock dividends declared by Lepanto
during the period of extension of the contract.
It is not denied that on November 28, 1949, Lepanto declared stock
dividends worth P1,000,000.00; and on August 22, 1950, it declared stock
dividends worth P2,000,000.00). In other words, during the period of
extension Lepanto had declared stock dividends worth P3,000,000.00. We
held in Our decision that Nielson is entitled to receive l0% of the stock
dividends declared, or shares of stock worth P300,000.00 at the par value of
P0.10 per share. We ordered Lepanto to issue and deliver to Nielson those
shares of stocks as well as all the fruits or dividends that accrued to said
shares.
In its motion for reconsideration, Lepanto contends that the payment to
Nielson of stock dividends as compensation for its services under the
management contract is a violation of the Corporation Law, and that it was
not, and it could not be, the intention of Lepanto and Nielson as
contracting parties that the services of Nielson should be paid in shares of
stock taken out of stock dividends declared by Lepanto. We have
assiduously considered the arguments adduced by Lepanto in support of its
contention, as well as the answer of Nielson in this connection, and We have
arrived at the conclusion that there is merit in the contention of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:

No corporation organized under this Act shall create or issue bills,


notes or other evidence of debt, for circulation as money, and no
corporation shall issue stock or bonds except in exchange for actual
cash paid to the corporation or for: (1) property actually received by it
at a fair valuation equal to the par or issued value of the stock or
bonds so issued; and in case of disagreement as to their value, the
same shall be presumed to be the assessed value or the value
appearing in invoices or other commercial documents, as the case
may be; and the burden or proof that the real present value of the
property is greater than the assessed value or value appearing in
invoices or other commercial documents, as the case may be, shall
be upon the corporation, or for (2) profits earned by it but not
distributed among its stockholders or members; Provided, however,
That no stock or bond dividend shall be issued without the approval
of stockholders representing not less than two-thirds of all stock then
outstanding and entitled to vote at a general meeting of the
corporation or at a special meeting duly called for the purpose.
xxx

xxx

xxx

No corporation shall make or declare any dividend except from the


surplus profits arising from its business, or divide or distribute its
capital stock or property other than actual profits among its members
or stockholders until after the payment of its debts and the
termination
of
its
existence
by
limitation
or
lawful
dissolution: Provided, That banking, savings and loan, and trust
corporations may receive deposits and issue certificates of deposit,
checks, drafts, and bills of exchange, and the like in the transaction
of the ordinary business of banking, savings and loan, and trust
corporations. (As amended by Act No. 2792, and Act No. 3518;
Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the
consideration for which shares of stock may be issued are: (1) cash; (2)
property; and (3) undistributed profits. Shares of stock are given the special
name "stock dividends" only if they are issued in lieu of undistributed profits.
If shares of stocks are issued in exchange of cash or property then those
shares do not fall under the category of "stock dividends". A corporation may
legally issue shares of stock in consideration of services rendered to it by a
person not a stockholder, or in payment of its indebtedness. A share of stock
issued to pay for services rendered is equivalent to a stock issued in
exchange of property, because services is equivalent to property.14 Likewise
a share of stock issued in payment of indebtedness is equivalent to issuing a

stock in exchange for cash. But a share of stock thus issued should be part
of the original capital stock of the corporation upon its organization, or part of
the stocks issued when the increase of the capitalization of a corporation is
properly authorized. In other words, it is the shares of stock that are originally
issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the
corporation has original shares of stock unsold or unsubscribed, either
coming from the original capitalization or from the increased capitalization.
Those shares of stock may be issued to a person who is not a stockholder, or
to a person already a stockholder in exchange for services rendered or for
cash or property. But a share of stock coming from stock dividends declared
cannot be issued to one who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is, what the term itself
implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend
paid in shares of stock instead of cash, and is properly payable only out of
surplus profits.15 So, a stock dividend is actually two things: (1) a dividend,
and (2) the enforced use of the dividend money to purchase additional
shares of stock at par.16 When a corporation issues stock dividends, it shows
that the corporation's accumulated profits have been capitalized instead of
distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far from being a
realization of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been
transferred from surplus to assets and no longer available for actual
distribution.17 Thus, it is apparent that stock dividends are issued only to
stockholders. This is so because only stockholders are entitled to dividends.
They are the only ones who have a right to a proportional share in that part of
the surplus which is declared as dividends. A stock dividend really adds
nothing to the interest of the stockholder; the proportional interest of each
stockholder remains the same.18If a stockholder is deprived of his stock
dividends - and this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder then the proportion of the
stockholder's interest changes radically. Stock dividends are civil fruits of the
original investment, and to the owners of the shares belong the civil fruits. 19
The term "dividend" both in the technical sense and its ordinary acceptation,
is that part or portion of the profits of the enterprise which the corporation, by
its governing agents, sets apart for ratable division among the holders of the
capital stock. It means the fund actually set aside, and declared by the
directors of the corporation as dividends and duly ordered by the director, or

by the stockholders at a corporate meeting, to be divided or distributed


among the stockholders according to their respective interests. 20
It is Our considered view, therefore, that under Section 16 of the Corporation
Law stock dividends can not be issued to a person who is not a stockholder
in payment of services rendered. And so, in the case at bar Nielson can not
be paid in shares of stock which form part of the stock dividends of Lepanto
for services it rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto and Nielson
was simply to make the cash value of the stock dividends declared as the
basis for determining the amount of compensation that should be paid to
Nielson, in the proportion of 10% of the cash value of the stock dividends
declared. And this conclusion of Ours finds support in the record.
We had adverted to in Our decision that in 1940 there was some dispute
between Lepanto and Nielson regarding the application and interpretation of
certain provisions of the original contract particularly with regard to the 10%
participation of Nielson in the net profits, so that some adjustments had to be
made. In the minutes of the meeting of the Board of Directors of Lepanto on
August 21, 1940, We read the following:
The Chairman stated that he believed that it would be better to tie
the computation of the 10% participation of Nielson & Company, Inc.
to the dividend, because Nielson will then be able to definitely
compute its net participation by the amount of the dividends
declared. In addition to the dividend, we have been setting up a
depletion reserve and it does not seem fair to burden the 10%
participation of Nielson with the depletion reserve, as the depletion
reserve should not be considered as an operating expense. After a
prolonged discussion, upon motion duly made and seconded, it was

RESOLVED, That the President, be, and he hereby is, authorized to


enter into an agreement with Nielson & Company, Inc., modifying
Paragraph V of management contract of January 30, 1937, effective
January 1, 1940, in such a way that Nielson & Company, Inc. shall
receive 10% of any dividends declared and paid, when and as paid
during the period of the contract and at the end of each year, 10% of
any depletion reserve that may be set up and 10% of any amount
expended during the year out of surplus earnings for capital account.
(Emphasis supplied.)

From the sentence, "The Chairman stated that he believed that it would be
better to tie the computation of the 10% participation of Nielson & Company,
Inc., to the dividend, because Nielson will then be able to definitely compute
its net participation by the amount of the dividends declared" the idea is
conveyed that the intention of Lepanto, as expressed by its Chairman C. A.
DeWitt, was to make the value of the dividends declared whether the
dividends were in cash or in stock as the basis for determining the amount
of compensation that should be paid to Nielson, in the proportion of 10% of
the cash value of the dividends so declared. It does not mean, however, that
the compensation of Nielson would be taken from the amount actually
declared as cash dividend to be distributed to the stockholder, nor from the
shares of stocks to be issued to the stockholders as stock dividends, but
from the other assets or funds of the corporation which are not burdened by
the dividends thus declared. In other words, if, for example, cash dividends of
P300,000.00 are declared, Nielson would be entitled to a compensation of
P30,000.00, but this P30,000.00 should not be taken from the P300,000.00
to be distributed as cash dividends to the stockholders but from some other
funds or assets of the corporation which are not included in the amount to
answer for the cash dividends thus declared. This is so because if the
P30,000.00 would be taken out from the P300,000.00 declared as cash
dividends, then the stockholders would not be getting P300,000.00 as
dividends but only P270,000.00. There would be a dilution of the dividend
that corresponds to each share of stock held by the stockholders. Similarly, if
there were stock dividends worth one million pesos that were declared, which
means an issuance of ten million shares at the par value of ten centavos per
share, it does not mean that Nielson would be given 100,000 shares. It only
means that Nielson should be given the equivalent of 10% of the aggregate
cash value of those shares issued as stock dividends. That this was the
understanding of Nielson itself is borne out by the fact that in its appeal brief
Nielson urged that it should be paid "P300,000.00 being 10% of the
P3,000,000.00 stock dividends declared on November 28, 1949 and August
20, 1950...."21
We, therefore, reconsider that part of Our decision which declares that
Nielson is entitled to shares of stock worth P300,000.00 based on the stock
dividends declared on November 28, 1949 and on August 20, 1950, together
with all the fruits accruing thereto. Instead, We declare that Nielson is entitled
to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of
the money value of the stock dividends worth P3,000,000.00 which were
declared on November 28, 1949 and on August 20, 1950, with interest
thereon at the rate of 6% from February 6, 1958.

6. In the eighth ground of its motion for reconsideration Lepanto maintains


that this Court erred in awarding to Nielson an undetermined amount of
shares of stock and/or cash, which award can not be ascertained and
executed without further litigation.

(3) One hundred fifty thousand pesos (P150,000.00), representing


management fees for the sixty-month period of extension of the management
contract, with legal interest thereon from the date of the filing of the
complaint;

In view of Our ruling in this resolution that Nielson is not entitled to receive
shares of stock as stock dividends in payment of its compensation under the
management contract, We do not consider it necessary to discuss this
ground of the motion for reconsideration. The awards in the present case are
all reduced to specific sums of money.

(4) One million four hundred thousand pesos (P1,400,000.00), equivalent to


10% of the cash dividends declared during the period of extension of the
management contract, with legal interest thereon from the date of the filing of
the complaint;

7. In the ninth ground of its motion for reconsideration Lepanto maintains that
this Court erred in rendering judgment or attorney's fees.
The matter of the award of attorney's fees is within the sound discretion of
this Court. In Our decision We have stated the reason why the award of
P50,000.00 for attorney's fees is considered by this Court as reasonable.
Accordingly, We resolve to modify the decision that We rendered on
December 17, 1966, in the sense that instead of awarding Nielson shares of
stock worth P300,000.00 at the par value of ten centavos (P0.10) per share
based on the stock dividends declared by Lepanto on November 28, 1949
and August 20, 1950, together with their fruits, Nielson should be awarded
the sum of P300,000.00 which is an amount equivalent to 10% of the cash
value of the stock dividends thus declared, as part of the compensation due
Nielson under the management contract. The dispositive portion of the
decision should, therefore, be amended, to read as follows:
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the
decision of the court a quo and enter in lieu thereof another, ordering the
appellee Lepanto to pay the appellant Nielson the different amounts as
specified hereinbelow:
(1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10%
of the cash dividends of December, 1941, with legal interest thereon from the
date of the filing of the complaint;
(2) Two thousand five hundred pesos (P2,500.00) as management fee for
January 1942, with legal interest thereon from the date of the filing of the
complaint;

(5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the


cash value of the stock dividends declared on November 28, 1949 and
August 20, 1950, with legal interest thereon from the date of the filing of the
complaint;
(6) Fifty three thousand nine hundred twenty eight pesos and eighty eight
centavos (P53,928.88), equivalent to 10% of the depletion reserve set up
during the period of extension, with legal interest thereon from the date of the
filing of the complaint;
(7) Six hundred ninety four thousand three hundred sixty four pesos and
seventy six centavos (P694,364.76), equivalent to 10% of the expenses for
capital account during the period of extension, with legal interest thereon
from the date of the filing of the complaint;
(8) Fifty thousand pesos (P50,000.00) as attorney's fees; and
(9) The costs.
It is so ordered.

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received,
within a period of sixty days from the date of their shipment.
(C) The expenses for transportation and shipment shall be borne by M.
Quiroga, and the freight, insurance, and cost of unloading from the
vessel at the point where the beds are received, shall be paid by Mr.
Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its
payment, said payment when made shall be considered as a prompt
payment, and as such a deduction of 2 per cent shall be made from the
amount of the invoice.
EN BANC
G.R. No. L-11491
August 23, 1918
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEA, J.:

On January 24, 1911, in this city of manila, a contract in the following tenor
was entered into by and between the plaintiff, as party of the first part, and J.
Parsons (to whose rights and obligations the present defendant later
subrogated itself), as party of the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES
QUIROGA AND J. PARSONS, BOTH MERCHANTS
ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE
OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his
beds in the Visayan Islands to J. Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for
the latter's establishment in Iloilo, and shall invoice them at the same
price he has fixed for sales, in Manila, and, in the invoices, shall make
and allowance of a discount of 25 per cent of the invoiced prices, as
commission on the sale; and Mr. Parsons shall order the beds by the
dozen, whether of the same or of different styles.

The same discount shall be made on the amount of any invoice which
Mr. Parsons may deem convenient to pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen days before
hand of any alteration in price which he may plan to make in respect to
his beds, and agrees that if on the date when such alteration takes effect
he should have any order pending to be served to Mr. Parsons, such
order shall enjoy the advantage of the alteration if the price thereby be
lowered, but shall not be affected by said alteration if the price thereby be
increased, for, in this latter case, Mr. Quiroga assumed the obligation to
invoice the beds at the price at which the order was given.
(F) Mr. Parsons binds himself not to sell any other kind except the
"Quiroga" beds.
ART. 2. In compensation for the expenses of advertisement which, for
the benefit of both contracting parties, Mr. Parsons may find himself
obliged to make, Mr. Quiroga assumes the obligation to offer and give
the preference to Mr. Parsons in case anyone should apply for the
exclusive agency for any island not comprised with the Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the
sale of "Quiroga" beds in all the towns of the Archipelago where there are
no exclusive agents, and shall immediately report such action to Mr.
Quiroga for his approval.
ART. 4. This contract is made for an unlimited period, and may be
terminated by either of the contracting parties on a previous notice of
ninety days to the other party.

Of the three causes of action alleged by the plaintiff in his complaint, only two
of them constitute the subject matter of this appeal and both substantially
amount to the averment that the defendant violated the following obligations:
not to sell the beds at higher prices than those of the invoices; to have an
open establishment in Iloilo; itself to conduct the agency; to keep the beds on
public exhibition, and to pay for the advertisement expenses for the same;
and to order the beds by the dozen and in no other manner. As may be seen,
with the exception of the obligation on the part of the defendant to order the
beds by the dozen and in no other manner, none of the obligations imputed
to the defendant in the two causes of action are expressly set forth in the
contract. But the plaintiff alleged that the defendant was his agent for the sale
of his beds in Iloilo, and that said obligations are implied in a contract of
commercial agency. The whole question, therefore, reduced itself to a
determination as to whether the defendant, by reason of the contract
hereinbefore transcribed, was a purchaser or an agent of the plaintiff for the
sale of his beds.
In order to classify a contract, due regard must be given to its essential
clauses. In the contract in question, what was essential, as constituting its
cause and subject matter, is that the plaintiff was to furnish the defendant
with the beds which the latter might order, at the price stipulated, and that the
defendant was to pay the price in the manner stipulated. The price agreed
upon was the one determined by the plaintiff for the sale of these beds in
Manila, with a discount of from 20 to 25 per cent, according to their class.
Payment was to be made at the end of sixty days, or before, at the plaintiff's
request, or in cash, if the defendant so preferred, and in these last two cases
an additional discount was to be allowed for prompt payment. These are
precisely the essential features of a contract of purchase and sale. There
was the obligation on the part of the plaintiff to supply the beds, and, on the
part of the defendant, to pay their price. These features exclude the legal
conception of an agency or order to sell whereby the mandatory or agent
received the thing to sell it, and does not pay its price, but delivers to the
principal the price he obtains from the sale of the thing to a third person, and
if he does not succeed in selling it, he returns it. By virtue of the contract
between the plaintiff and the defendant, the latter, on receiving the beds, was
necessarily obliged to pay their price within the term fixed, without any other
consideration and regardless as to whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the
defendant and the plaintiff is one of purchase and sale, in order to show that
it was not one made on the basis of a commission on sales, as the plaintiff
claims it was, for these contracts are incompatible with each other. But,
besides, examining the clauses of this contract, none of them is found that

substantially supports the plaintiff's contention. Not a single one of these


clauses necessarily conveys the idea of an agency. The words commission
on sales used in clause (A) of article 1 mean nothing else, as stated in the
contract itself, than a mere discount on the invoice price. The word agency,
also used in articles 2 and 3, only expresses that the defendant was the only
one that could sell the plaintiff's beds in the Visayan Islands. With regard to
the remaining clauses, the least that can be said is that they are not
incompatible with the contract of purchase and sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vicepresident of the defendant corporation and who established and managed
the latter's business in Iloilo. It appears that this witness, prior to the time of
his testimony, had serious trouble with the defendant, had maintained a civil
suit against it, and had even accused one of its partners, Guillermo Parsons,
of falsification. He testified that it was he who drafted the contract Exhibit A,
and, when questioned as to what was his purpose in contracting with the
plaintiff, replied that it was to be an agent for his beds and to collect a
commission on sales. However, according to the defendant's evidence, it was
Mariano Lopez Santos, a director of the corporation, who prepared Exhibit A.
But, even supposing that Ernesto Vidal has stated the truth, his statement as
to what was his idea in contracting with the plaintiff is of no importance,
inasmuch as the agreements contained in Exhibit A which he claims to have
drafted, constitute, as we have said, a contract of purchase and sale, and not
one of commercial agency. This only means that Ernesto Vidal was mistaken
in his classification of the contract. But it must be understood that a contract
is what the law defines it to be, and not what it is called by the contracting
parties.
The plaintiff also endeavored to prove that the defendant had returned beds
that it could not sell; that, without previous notice, it forwarded to the
defendant the beds that it wanted; and that the defendant received its
commission for the beds sold by the plaintiff directly to persons in Iloilo. But
all this, at the most only shows that, on the part of both of them, there was
mutual tolerance in the performance of the contract in disregard of its terms;
and it gives no right to have the contract considered, not as the parties
stipulated it, but as they performed it. Only the acts of the contracting parties,
subsequent to, and in connection with, the execution of the contract, must be
considered for the purpose of interpreting the contract, when such
interpretation is necessary, but not when, as in the instant case, its essential
agreements are clearly set forth and plainly show that the contract belongs to
a certain kind and not to another. Furthermore, the return made was of
certain brass beds, and was not effected in exchange for the price paid for
them, but was for other beds of another kind; and for the letter Exhibit L-1,

requested the plaintiff's prior consent with respect to said beds, which shows
that it was not considered that the defendant had a right, by virtue of the
contract, to make this return. As regards the shipment of beds without
previous notice, it is insinuated in the record that these brass beds were
precisely the ones so shipped, and that, for this very reason, the plaintiff
agreed to their return. And with respect to the so-called commissions, we
have said that they merely constituted a discount on the invoice price, and
the reason for applying this benefit to the beds sold directly by the plaintiff to
persons in Iloilo was because, as the defendant obligated itself in the
contract to incur the expenses of advertisement of the plaintiff's beds, such
sales were to be considered as a result of that advertisement.
In respect to the defendant's obligation to order by the dozen, the only one
expressly imposed by the contract, the effect of its breach would only entitle
the plaintiff to disregard the orders which the defendant might place under
other conditions; but if the plaintiff consents to fill them, he waives his right
and cannot complain for having acted thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by and
between the plaintiff and the defendant was one of purchase and sale, and
that the obligations the breach of which is alleged as a cause of action are
not imposed upon the defendant, either by agreement or by law.
The judgment appealed from is affirmed, with costs against the appellant. So
ordered.
EN BANC
G.R. No. L-47538
June 20, 1941
GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro
Arco), respondent.
Feria & Lao for petitioner.
J. W. Ferrier and Daniel Me. Gomez for respondent.
LAUREL, J.:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals
for the purpose of reviewing its Amusement Company (formerly known as
Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc., defendantappellee."

It appears that the respondent herein brought an action against the herein
petitioner in the Court of First Instance of Manila to secure a reimbursement
of certain amounts allegedly overpaid by it on account of the purchase price
of sound reproducing equipment and machinery ordered by the petitioner
from the Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the
case as found by the trial court and confirmed by the appellate court, which
are admitted by the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized
under the laws of the Philippine Islands, with its office in Manila, was
engaged in the business of operating cinematographs. In 1930, its
name was changed to Arco Amusement Company. C. S. Salmon was
the president, while A. B. Coulette was the business manager. About
the same time, Gonzalo Puyat & Sons, Inc., another corporation
doing business in the Philippine Islands, with office in Manila, in
addition to its other business, was acting as exclusive agents in the
Philippines for the Starr Piano Company of Richmond, Indiana, U.S.
A. It would seem that this last company dealt in cinematographer
equipment and machinery, and the Arco Amusement Company
desiring to equipt its cinematograph with sound reproducing devices,
approached Gonzalo Puyat & Sons, Inc., thru its then president and
acting manager, Gil Puyat, and an employee named Santos. After
some negotiations, it was agreed between the parties, that is to say,
Salmon and Coulette on one side, representing the plaintiff, and Gil
Puyat on the other, representing the defendant, that the latter would,
on behalf of the plaintiff, order sound reproducing equipment from
the Starr Piano Company and that the plaintiff would pay the
defendant, in addition to the price of the equipment, a 10 per cent
commission, plus all expenses, such as, freight, insurance, banking
charges, cables, etc. At the expense of the plaintiff, the defendant
sent a cable, Exhibit "3", to the Starr Piano Company, inquiring about
the equipment desired and making the said company to quote its
price without discount. A reply was received by Gonzalo Puyat &
Sons, Inc., with the price, evidently the list price of $1,700 f.o.b.
factory Richmond, Indiana. The defendant did not show the plaintiff
the cable of inquiry nor the reply but merely informed the plaintiff of
the price of $1,700. Being agreeable to this price, the plaintiff, by
means of Exhibit "1", which is a letter signed by C. S. Salmon dated
November 19, 1929, formally authorized the order. The equipment
arrived about the end of the year 1929, and upon delivery of the
same to the plaintiff and the presentation of necessary papers, the
price of $1.700, plus the 10 per cent commission agreed upon and

plus all the expenses and charges, was duly paid by the plaintiff to
the defendant.
Sometime the following year, and after some negotiations between
the same parties, plaintiff and defendants, another order for sound
reproducing equipment was placed by the plaintiff with the
defendant, on the same terms as the first order. This agreement or
order was confirmed by the plaintiff by its letter Exhibit "2", without
date, that is to say, that the plaintiff would pay for the equipment the
amount of $1,600, which was supposed to be the price quoted by the
Starr Piano Company, plus 10 per cent commission, plus all
expenses incurred. The equipment under the second order arrived in
due time, and the defendant was duly paid the price of $1,600 with
its 10 per cent commission, and $160, for all expenses and charges.
This amount of $160 does not represent actual out-of-pocket
expenses paid by the defendant, but a mere flat charge and rough
estimate made by the defendant equivalent to 10 per cent of the
price of $1,600 of the equipment.
About three years later, in connection with a civil case in Vigan, filed
by one Fidel Reyes against the defendant herein Gonzalo Puyat &
Sons, Inc., the officials of the Arco Amusement Company discovered
that the price quoted to them by the defendant with regard to their
two orders mentioned was not the net price but rather the list price,
and that the defendants had obtained a discount from the Starr
Piano Company. Moreover, by reading reviews and literature on
prices of machinery and cinematograph equipment, said officials of
the plaintiff were convinced that the prices charged them by the
defendant were much too high including the charges for out-ofpocket expense. For these reasons, they sought to obtain a
reduction from the defendant or rather a reimbursement, and failing
in this they brought the present action.
The trial court held that the contract between the petitioner and the
respondent was one of outright purchase and sale, and absolved that
petitioner from the complaint. The appellate court, however, by a division
of four, with one justice dissenting held that the relation between petitioner
and respondent was that of agent and principal, the petitioner acting as agent
of the respondent in the purchase of the equipment in question, and
sentenced the petitioner to pay the respondent alleged overpayments in the
total sum of $1,335.52 or P2,671.04, together with legal interest thereon from
the date of the filing of the complaint until said amount is fully paid, as well as
to pay the costs of the suit in both instances. The appellate court further

argued that even if the contract between the petitioner and the respondent
was one of purchase and sale, the petitioner was guilty of fraud in concealing
the true price and hence would still be liable to reimburse the respondent for
the overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the
appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al declarar
que, segun hechos, entre la recurrente y la recurrida existia una
relacion implicita de mandataria a mandante en la transaccion de
que se trata, en vez de la de vendedora a compradora como ha
declarado el Juzgado de Primera Instncia de Manila, presidido
entonces por el hoy Magistrado Honorable Marcelino Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar
que, suponiendo que dicha relacion fuerra de vendedora a
compradora, la recurrente obtuvo, mediante dolo, el consentimiento
de la recurrida en cuanto al precio de $1,700 y $1,600 de las
maquinarias y equipos en cuestion, y condenar a la recurrente ha
obtenido de la Starr Piano Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the
petitioner and the respondent was one of purchase and sale, and not one of
agency, for the reasons now to be stated.
In the first place, the contract is the law between the parties and should
include all the things they are supposed to have been agreed upon. What
does not appear on the face of the contract should be regarded merely as
"dealer's" or "trader's talk", which can not bind either party. (Nolbrook v.
Conner, 56 So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120 III., 161; Bank
v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173
Mass., 411.) The letters, Exhibits 1 and 2, by which the respondent accepted
the prices of $1,700 and $1,600, respectively, for the sound reproducing
equipment subject of its contract with the petitioner, are clear in their terms
and admit no other interpretation that the respondent in question at the prices
indicated which are fixed and determinate. The respondent admitted in its
complaint filed with the Court of First Instance of Manila that the petitioner
agreed to sell to it the first sound reproducing equipment and machinery. The
third paragraph of the respondent's cause of action states:

3. That on or about November 19, 1929, the herein plaintiff


(respondent) and defendant (petitioner) entered into an agreement,
under and by virtue of which the herein defendant was to secure
from the United States, and sell and deliver to the herein plaintiff,
certain sound reproducing equipment and machinery, for which the
said defendant, under and by virtue of said agreement, was to
receive the actual cost price plus ten per cent (10%), and was also to
be reimbursed for all out of pocket expenses in connection with the
purchase and delivery of such equipment, such as costs of
telegrams, freight, and similar expenses. (Emphasis ours.)
We agree with the trial judge that "whatever unforseen events might have
taken place unfavorable to the defendant (petitioner), such as change in
prices, mistake in their quotation, loss of the goods not covered by insurance
or failure of the Starr Piano Company to properly fill the orders as per
specifications, the plaintiff (respondent) might still legally hold the defendant
(petitioner) to the prices fixed of $1,700 and $1,600." This is incompatible
with the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all liability in the
discharge of his commission provided he acts in accordance with the
instructions received from his principal (section 254, Code of Commerce),
and the principal must indemnify the agent for all damages which the latter
may incur in carrying out the agency without fault or imprudence on his part
(article 1729, Civil Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten
per cent (10%) commission, this does not necessarily make the petitioner an
agent of the respondent, as this provision is only an additional price which
the respondent bound itself to pay, and which stipulation is not incompatible
with the contract of purchase and sale. (See Quiroga vs. Parsons Hardware
Co., 38 Phil., 501.)
In the second place, to hold the petitioner an agent of the respondent in the
purchase of equipment and machinery from the Starr Piano Company of
Richmond, Indiana, is incompatible with the admitted fact that the petitioner
is the exclusive agent of the same company in the Philippines. It is out of the
ordinary for one to be the agent of both the vendor and the purchaser. The
facts and circumstances indicated do not point to anything but plain ordinary
transaction where the respondent enters into a contract of purchase and sale
with the petitioner, the latter as exclusive agent of the Starr Piano Company
in the United States.

It follows that the petitioner as vendor is not bound to reimburse the


respondent as vendee for any difference between the cost price and the
sales price which represents the profit realized by the vendor out of the
transaction. This is the very essence of commerce without which merchants
or middleman would not exist.
The respondents contends that it merely agreed to pay the cost price as
distinguished from the list price, plus ten per cent (10%) commission and all
out-of-pocket expenses incurred by the petitioner. The distinction which the
respondents seeks to draw between the cost price and the list price we
consider to be spacious. It is to be observed that the twenty-five per cent
(25%) discount granted by the Starr piano Company to the petitioner is
available only to the latter as the former's exclusive agent in the Philippines.
The respondent could not have secured this discount from the Starr Piano
Company and neither was the petitioner willing to waive that discount in favor
of the respondent. As a matter of fact, no reason is advanced by the
respondent why the petitioner should waive the 25 per cent discount granted
it by the Starr Piano Company in exchange for the 10 percent commission
offered by the respondent. Moreover, the petitioner was not duty bound to
reveal the private arrangement it had with the Starr Piano Company relative
to such discount to its prospective customers, and the respondent was not
even aware of such an arrangement. The respondent, therefore, could not
have offered to pay a 10 per cent commission to the petitioner provided it
was given the benefit of the 25 per cent discount enjoyed by the petitioner. It
is well known that local dealers acting as agents of foreign manufacturers,
aside from obtaining a discount from the home office, sometimes add to the
list price when they resell to local purchasers. It was apparently to guard
against an exhorbitant additional price that the respondent sought to limit it to
10 per cent, and the respondent is estopped from questioning that additional
price. If the respondent later on discovers itself at the short end of a bad
bargain, it alone must bear the blame, and it cannot rescind the contract,
much less compel a reimbursement of the excess price, on that ground
alone. The respondent could not secure equipment and machinery
manufactured by the Starr Piano Company except from the petitioner alone;
it willingly paid the price quoted; it received the equipment and machinery as
represented; and that was the end of the matter as far as the respondent was
concerned. The fact that the petitioner obtained more or less profit than the
respondent calculated before entering into the contract or reducing the price
agreed upon between the petitioner and the respondent. Not every
concealment is fraud; and short of fraud, it were better that, within certain
limits, business acumen permit of the loosening of the sleeves and of the
sharpening of the intellect of men and women in the business world.

The writ of certiorari should be, as it is hereby, granted. The decision of the
appellate court is accordingly reversed and the petitioner is absolved from
the respondent's complaint in G. R. No. 1023, entitled "Arco Amusement
Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo
Puyat & Sons, Inc., defendants-appellee," without pronouncement regarding
costs. So ordered.

EN BANC
G.R. No. L-20871 April 30, 1971
KER & CO., LTD., petitioner,
vs.
JOSE B. LINGAD, as Acting Commissioner of Internal
Revenue, respondent.
Ross, Selph and Carrascoso for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong
and Special Atty. Balbino Gatdula, Jr. for respondent.
FERNANDO, J.:

Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of
Tax Appeals, holding it liable as a commercial broker under Section 194 (t) of
the National Internal Revenue Code. Its plea, notwithstanding the vigorous
effort of its counsel, is not sufficiently persuasive. An obstacle, well-nigh
insuperable stands in the way. The decision under review conforms to and is
in accordance with the controlling doctrine announced in the recent case
of Commissioner of Internal Revenue v. Constantino. 1 The decisive test, as
therein set forth, is the retention of the ownership of the goods delivered to
the possession of the dealer, like herein petitioner, for resale to customers,
the price and terms remaining subject to the control of the firm consigning
such goods. The facts, as found by respondent Court, to which we defer,
unmistakably indicate that such a situation does exist. The juridical
consequences must inevitably follow. We affirm.
It was shown that petitioner was assessed by the then Commissioner of
Internal Revenue Melecio R. Domingo the sum of P20,272.33 as the
commercial broker's percentage tax, surcharge, and compromise penalty for
the period from July 1, 1949 to December 31, 1953. There was a request on
the part of petitioner for the cancellation of such assessment, which request
was turned down. As a result, it filed a petition for review with the Court of
Tax Appeals. In its answer, the then Commissioner Domingo maintained his
stand that petitioner should be taxed in such amount as a commercial broker.
In the decision now under review, promulgated on October 19, 1962, the
Court of Tax Appeals held petitioner taxable except as to the compromise
penalty of P500.00, the amount due from it being fixed at P19,772.33.
Such liability arose from a contract of petitioner with the United States
Rubber International, the former being referred to as the Distributor and the

latter specifically designated as the Company. The contract was to apply to


transactions between the former and petitioner, as Distributor, from July 1,
1948 to continue in force until terminated by either party giving to the other
sixty days' notice. 2 The shipments would cover products "for consumption in
Cebu, Bohol, Leyte, Samar, Jolo, Negros Oriental, and Mindanao except
[the] province of Davao", petitioner, as Distributor, being precluded from
disposing such products elsewhere than in the above places unless written
consent would first be obtained from the Company. 3 Petitioner, as Distributor,
is required to exert every effort to have the shipment of the products in the
maximum quantity and to promote in every way the sale thereof. 4 The prices,
discounts, terms of payment, terms of delivery and other conditions of sale
were subject to change in the discretion of the Company. 5
Then came this crucial stipulation: "The Company shall from time to time
consign to the Distributor and the Distributor will receive, accept and/or hold
upon consignment the products specified under the terms of this agreement
in such quantities as in the judgment of the Company may be necessary for
the successful solicitation and maintenance of business in the territory, and
the Distributor agrees that responsibility for the final sole of all goods
delivered shall rest with him. All goods on consignment shall remain the
property of the Company until sold by the Distributor to the purchaser or
purchasers, but all sales made by the Distributor shall be in his name, in
which the sale price of all goods sold less the discount given to the
Distributor by the Company in accordance with the provision of paragraph 13
of this agreement, whether or not such sale price shall have been collected
by the Distributor from the purchaser or purchasers, shall immediately be
paid and remitted by the Distributor to the Company. It is further agreed that
this agreement does not constitute Distributor the agent or legal
representative 4 of the Company for any purpose whatsoever. Distributor is
not granted any right or authority to assume or to create any obligation or
responsibility, express or implied, in behalf of or in the name of the Company,
or to bind the Company in any manner or thing whatsoever." 6
All specifications for the goods ordered were subject to acceptance by the
Company with petitioner, as Distributor, required to accept such goods
shipped as well as to clear the same through customs and to arrange for
delivery in its warehouse in Cebu City. Moreover, orders are to be filled in
whole or in part from the stocks carried by the Company's neighboring
branches, subsidiaries or other sources of Company's brands. 7 Shipments
were to be invoiced at prices to be agreed upon, with the customs duties
being paid by petitioner, as Distributor, for account of the
Company. 8 Moreover, all resale prices, lists, discounts and general terms
and conditions of local resale were to be subject to the approval of the

Company and to change from time to time in its discretion. 9 The dealer, as
Distributor, is allowed a discount of ten percent on the net amount of sales of
merchandise made under such agreement. 10 On a date to be determined by
the Company, the petitioner, as Distributor, was required to report to it data
showing in detail all sales during the month immediately preceding,
specifying therein the quantities, sizes and types together with such
information as may be required for accounting purposes, with the Company
rendering an invoice on sales as described to be dated as of the date of
inventory and sales report. As Distributor, petitioner had to make payment on
such invoice or invoices on due date with the Company being privileged at its
option to terminate and cancel the agreement forthwith upon the failure to
comply with this obligation. 11 The Company, at its own expense, was to keep
the consigned stock fully insured against loss or damage by fire or as a result
of fire, the policy of such insurance to be payable to it in the event of loss.
Petitioner, as Distributor, assumed full responsibility with reference to the
stock and its safety at all times; and upon request of the Company at any
time, it was to render inventory of the existing stock which could be subject to
change. 12 There was furthermore this equally tell-tale covenant: "Upon the
termination or any cancellation of this agreement all goods held on
consignment shall be held by the Distributor for the account of the Company,
without expense to the Company, until such time as provision can be made
by the Company for disposition." 13
The issue with the Court of Tax Appeals, as with us now, is whether the
relationship thus created is one of vendor and vendee or of broker and
principal. Not that there would have been the slightest doubt were it not for
the categorical denial in the contract that petitioner was not constituted as
"the agent or legal representative of the Company for any purpose
whatsoever." It would be, however, to impart to such an express disclaimer a
meaning it should not possess to ignore what is manifestly the role assigned
to petitioner considering the instrument as a whole. That would be to lose
sight altogether of what has been agreed upon. The Court of Tax Appeals
was not misled in the language of the decision now on appeal: "That the
petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent of U.S.
Rubber International is borne out by the facts that petitioner can dispose of
the products of the Company only to certain persons or entities and within
stipulated limits, unless excepted by the contract or by the Rubber Company
(Par. 2); that it merely receives, accepts and/or holds upon consignment the
products, which remain properties of the latter company (Par. 8); that every
effort shall be made by petitioner to promote in every way the sale of the
products (Par. 3); that sales made by petitioner are subject to approval by the
company (Par. 12); that on dates determined by the rubber company,
petitioner shall render a detailed report showing sales during the month (Par.

14); that the rubber company shall invoice the sales as of the dates of
inventory and sales report (Par. 14); that the rubber company agrees to keep
the consigned goods fully insured under insurance policies payable to it in
case of loss (Par. 15); that upon request of the rubber company at any time,
petitioner shall render an inventory of the existing stock which may be
checked by an authorized representative of the former (Par. 15); and that
upon termination or cancellation of the Agreement, all goods held on
consignment shall be held by petitioner for the account of the rubber
company until their disposition is provided for by the latter (Par. 19). All these
circumstances are irreconcilably antagonistic to the idea of an independent
merchant." 14 Hence its conclusion: "However, upon analysis of the contract,
as a whole, together with the actual conduct of the parties in respect thereto,
we have arrived at the conclusion that the relationship between them is one
of brokerage or agency." 15 We find ourselves in agreement, notwithstanding
the able brief filed on behalf of petitioner by its counsel. As noted at the
outset, we cannot heed petitioner's plea for reversal.
1. According to the National Internal Revenue Code, a commercial broker
"includes all persons, other than importers, manufacturers, producers, or
bona fide employees, who, for compensation or profit, sell or bring about
sales or purchases of merchandise for other persons or bring proposed
buyers and sellers together, or negotiate freights or other business for
owners of vessels or other means of transportation, or for the shippers, or
consignors or consignees of freight carried by vessels or other means of
transportation. The term includes commission merchants." 16 The controlling
decision as to the test to be followed as to who falls within the above
definition of a commercial broker is that of Commissioner of Internal
Revenue v. Constantino. 17 In the language of Justice J. B. L. Reyes, who
penned the opinion: "Since the company retained ownership of the goods,
even as it delivered possession unto the dealer for resale to customers, the
price and terms of which were subject to the company's control, the
relationship between the company and the dealer is one of agency, ... ." 18 An
excerpt from Salisbury v. Brooks 19 cited in support of such a view follows: "
'The difficulty in distinguishing between contracts of sale and the creation of
an agency to sell has led to the establishment of rules by the application of
which this difficulty may be solved. The decisions say the transfer of title or
agreement to transfer it for a price paid or promised is the essence of sale. If
such transfer puts the transferee in the attitude or position of an owner and
makes him liable to the transferor as a debtor for the agreed price, and not
merely as an agent who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency to sell is the delivery to
an agent, not as his property, but as the property of the principal, who
remains the owner and has the right to control sales, fix the price, and terms,

demand and receive the proceeds less the agent's commission upon sales
made.' " 20 The opinion relied on the work of Mechem on Sales as well as
Mechem on Agency. Williston and Tiedman both of whom wrote treatises on
Sales, were likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult to
understand or appreciate the necessity or presence of these mutual
requirements and obligations on any theory other than that of a contract of
agency. Salisbury was to furnish the mill and put the timber owned by him
into a marketable condition in the form of lumber; Brooks was to furnish the
funds necessary for that purpose, sell the manufactured product, and
account therefor to Salisbury upon the specific terms of the agreement, less
the compensation fixed by the parties in lieu of interest on the money
advanced and for services as agent. These requirements and stipulations are
in tent with any other conception of the contract. If it constitutes an
agreement to sell, they are meaningless. But they cannot be ignored. They
were placed there for some purpose, doubtless as the result of definite
antecedent negotiations therefore, consummated by the final written
expression of the agreement." 21 Hence the Constantino opinion could
categorically affirm that the mere disclaimer in a contract that an entity like
petitioner is not "the agent or legal representative for any purpose
whatsoever" does not suffice to yield the conclusion that it is an independent
merchant if the control over the goods for resale of the goods consigned is
pervasive in character. The Court of Tax Appeals decision now under review
pays fealty to such an applicable doctrine.
2. No merit therefore attaches to the first error imputed by petitioner to the
Court of Tax Appeals. Neither did such Court fail to appreciate in its true
significance the act and conduct pursued in the implementation of the
contract by both the United States Rubber International and petitioner, as
was contended in the second assignment of error. Petitioner ought to have
been aware that there was no need for such an inquiry. The terms of the
contract, as noted, speak quite clearly. There is lacking that degree of
ambiguity sufficient to give rise to serious doubt as to what was contemplated
by the parties. A reading thereof discloses that the relationship arising
therefrom was not one of seller and purchaser. If it were thus intended, then
it would not have included covenants which in their totality would negate the
concept of a firm acquiring as vendee goods from another. Instead, the
stipulations were so worded as to lead to no other conclusion than that the
control by the United States Rubber International over the goods in question
is, in the language of the Constantino opinion, "pervasive". The insistence on
a relationship opposed to that apparent from the language employed might
even yield the impression that such a mode of construction was resorted to in

order that the applicability of a taxing statute might be rendered nugatory.


Certainly, such a result is to be avoided.
Nor is it to be lost sight of that on a matter left to the discretion of the Court of
Tax Appeals which has developed an expertise in view of its function being
limited solely to the interpretation of revenue laws, this Court is not prepared
to substitute its own judgment unless a grave abuse of discretion is manifest.
It would be to frustrate the objective for which administrative tribunals are
created if the judiciary, absent such a showing, is to ignore their appraisal on
a matter that forms the staple of their specialized competence. While it is to
be admitted that counsel for petitioner did scrutinize with care the decision
under review with a view to exposing what was considered its flaws, it cannot
be said that there was such a failure to apply what the law commands as to
call for its reversal. Instead, what cannot be denied is that the Court of Tax
Appeals reached a result to which the Court in the recent Constantino
decision gave the imprimatur of its approval.
WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is
affirmed. With costs against petitioner.
[G.R. No. 117356. June 19, 2000]
VICTORIAS MILLING CO., INC., petitioner, vs. COURT OF APPEALS and
CONSOLIDATED SUGAR CORPORATION, respondents.
DECISION
QUISUMBING, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court assailing the decision of the Court of Appeals dated February 24, 1994,
in CA-G.R. CV No. 31717, as well as the respondent court's resolution of
September 30, 1994 modifying said decision. Both decision and resolution
amended the judgment dated February 13, 1991, of the Regional Trial Court
of Makati City, Branch 147, in Civil Case No. 90-118.
The facts of this case as found by both the trial and appellate courts are as
follows:
St. Therese Merchandising (hereafter STM) regularly bought sugar from
petitioner Victorias Milling Co., Inc., (VMC). In the course of their dealings,
petitioner issued several Shipping List/Delivery Receipts (SLDRs) to STM as

proof of purchases. Among these was SLDR No. 1214M, which gave rise to
the instant case. Dated October 16, 1989, SLDR No. 1214M covers 25,000
bags of sugar. Each bag contained 50 kilograms and priced at P638.00 per
bag as "per sales order VMC Marketing No. 042 dated October 16,
1989."[1] The transaction it covered was a "direct sale." [2] The SLDR also
contains an additional note which reads: "subject for (sic) availability of a (sic)
stock at NAWACO (warehouse)."[3]
On October 25, 1989, STM sold to private respondent Consolidated Sugar
Corporation (CSC) its rights in SLDR No. 1214M for P 14,750,000.00. CSC
issued one check dated October 25, 1989 and three checks postdated
November 13, 1989 in payment. That same day, CSC wrote petitioner that it
had been authorized by STM to withdraw the sugar covered by SLDR No.
1214M. Enclosed in the letter were a copy of SLDR No. 1214M and a letter
of authority from STM authorizing CSC "to withdraw for and in our behalf the
refined sugar covered by Shipping List/Delivery Receipt-Refined Sugar
(SDR) No. 1214 dated October 16, 1989 in the total quantity of 25,000
bags."[4]
On October 27, 1989, STM issued 16 checks in the total amount of
P31,900,000.00 with petitioner as payee. The latter, in turn, issued Official
Receipt No. 33743 dated October 27, 1989 acknowledging receipt of the said
checks in payment of 50,000 bags. Aside from SLDR No. 1214M, said
checks also covered SLDR No. 1213.
Private respondent CSC surrendered SLDR No. 1214M to the petitioner's
NAWACO warehouse and was allowed to withdraw sugar. However, after
2,000 bags had been released, petitioner refused to allow further withdrawals
of sugar against SLDR No. 1214M. CSC then sent petitioner a letter dated
January 23, 1990 informing it that SLDR No. 1214M had been "sold and
endorsed" to it but that it had been refused further withdrawals of sugar from
petitioner's warehouse despite the fact that only 2,000 bags had been
withdrawn.[5] CSC thus inquired when it would be allowed to withdraw the
remaining 23,000 bags.
On January 31, 1990, petitioner replied that it could not allow any further
withdrawals of sugar against SLDR No. 1214M because STM had already
dwithdrawn all the sugar covered by the cleared checks. [6]
On March 2, 1990, CSC sent petitioner a letter demanding the release of the
balance of 23,000 bags.

Seven days later, petitioner reiterated that all the sugar corresponding to the
amount of STM's cleared checks had been fully withdrawn and hence, there
would be no more deliveries of the commodity to STM's account. Petitioner
also noted that CSC had represented itself to be STM's agent as it had
withdrawn the 2,000 bags against SLDR No. 1214M "for and in behalf" of
STM.
On April 27, 1990, CSC filed a complaint for specific performance, docketed
as Civil Case No. 90-1118. Defendants were Teresita Ng Sy (doing business
under the name of St. Therese Merchandising) and herein petitioner. Since
the former could not be served with summons, the case proceeded only
against the latter. During the trial, it was discovered that Teresita Ng Go who
testified for CSC was the same Teresita Ng Sy who could not be reached
through summons.[7] CSC, however, did not bother to pursue its case against
her, but instead used her as its witness.
CSC's complaint alleged that STM had fully paid petitioner for the sugar
covered by SLDR No. 1214M. Therefore, the latter had no justification for
refusing delivery of the sugar. CSC prayed that petitioner be ordered to
deliver the 23,000 bags covered by SLDR No. 1214M and sought the award
of P1,104,000.00 in unrealized profits, P3,000,000.00 as exemplary
damages, P2,200,000.00 as attorney's fees and litigation expenses.
Petitioner's primary defense a quo was that it was an unpaid seller for the
23,000 bags.[8] Since STM had already drawn in full all the sugar
corresponding to the amount of its cleared checks, it could no longer
authorize further delivery of sugar to CSC. Petitioner also contended that it
had no privity of contract with CSC.
Petitioner explained that the SLDRs, which it had issued, were not
documents of title, but mere delivery receipts issued pursuant to a series of
transactions entered into between it and STM. The SLDRs prescribed
delivery of the sugar to the party specified therein and did not authorize the
transfer of said party's rights and interests.
Petitioner also alleged that CSC did not pay for the SLDR and was actually
STM's co-conspirator to defraud it through a misrepresentation that CSC was
an innocent purchaser for value and in good faith. Petitioner then prayed that
CSC be ordered to pay it the following sums: P10,000,000.00 as moral
damages; P10,000,000.00 as exemplary damages; and P1,500,000.00 as
attorney's fees. Petitioner also prayed that cross-defendant STM be ordered

to pay it P10,000,000.00 in exemplary damages, and P1,500,000.00 as


attorney's fees.
Since no settlement was reached at pre-trial, the trial court heard the case on
the merits.
As earlier stated, the trial court rendered its judgment favoring private
respondent CSC, as follows:
"WHEREFORE, in view of the foregoing, the Court hereby renders judgment
in favor of the plaintiff and against defendant Victorias Milling Company:
"1) Ordering defendant Victorias Milling Company to deliver to the plaintiff
23,000 bags of refined sugar due under SLDR No. 1214;
"2) Ordering defendant Victorias Milling Company to pay the amount of
P920,000.00 as unrealized profits, the amount of P800,000.00 as exemplary
damages and the amount of P1,357,000.00, which is 10% of the acquisition
value of the undelivered bags of refined sugar in the amount of
P13,570,000.00, as attorney's fees, plus the costs.
"SO ORDERED."[9]
It made the following observations:
"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had fully paid
the purchase price of P15,950,000.00 of the 25,000 bags of sugar bought by
her covered by SLDR No. 1214 as well as the purchase price of
P15,950,000.00 for the 25,000 bags of sugar bought by her covered by
SLDR No. 1213 on the same date, October 16, 1989 (date of the two
SLDRs) is duly supported by Exhibits C to C-15 inclusive which are postdated checks dated October 27, 1989 issued by St. Therese Merchandising
in favor of Victorias Milling Company at the time it purchased the 50,000
bags of sugar covered by SLDR No. 1213 and 1214. Said checks appear to
have been honored and duly credited to the account of Victorias Milling
Company because on October 27, 1989 Victorias Milling Company issued
official receipt no. 34734 in favor of St. Therese Merchandising for the
amount of P31,900,000.00 (Exhibits B and B-1). The testimony of Teresita Ng
Go is further supported by Exhibit F, which is a computer printout of
defendant Victorias Milling Company showing the quantity and value of the
purchases made by St. Therese Merchandising, the SLDR no. issued to
cover the purchase, the official reciept no. and the status of payment. It is

clear in Exhibit 'F' that with respect to the sugar covered by SLDR No. 1214
the same has been fully paid as indicated by the word 'cleared' appearing
under the column of 'status of payment.'
"On the other hand, the claim of defendant Victorias Milling Company that the
purchase price of the 25,000 bags of sugar purchased by St. Therese
Merchandising covered by SLDR No. 1214 has not been fully paid is
supported only by the testimony of Arnulfo Caintic, witness for defendant
Victorias Milling Company. The Court notes that the testimony of Arnulfo
Caintic is merely a sweeping barren assertion that the purchase price has not
been fully paid and is not corroborated by any positive evidence. There is an
insinuation by Arnulfo Caintic in his testimony that the postdated checks
issued by the buyer in payment of the purchased price were dishonored.
However, said witness failed to present in Court any dishonored check or any
replacement check. Said witness likewise failed to present any bank record
showing that the checks issued by the buyer, Teresita Ng Go, in payment of
the purchase price of the sugar covered by SLDR No. 1214 were
dishonored."[10]
Petitioner appealed the trial courts decision to the Court of Appeals.
On appeal, petitioner averred that the dealings between it and STM were part
of a series of transactions involving only one account or one general contract
of sale. Pursuant to this contract, STM or any of its authorized agents could
withdraw bags of sugar only against cleared checks of STM. SLDR No.
21214M was only one of 22 SLDRs issued to STM andsince the latter had
already withdrawn its full quota of sugar under the said SLDR, CSC was
already precluded from seeking delivery of the 23,000 bags of sugar.
Private respondent CSC countered that the sugar purchases involving SLDR
No. 1214M were separate and independent transactions and that the details
of the series of purchases were contained in a single statement with a
consolidated summary of cleared check payments and sugar stock
withdrawals because this a more convenient system than issuing separate
statements for each purchase.
The appellate court considered the following issues: (a) Whether or not the
transaction between petitioner and STM involving SLDR No. 1214M was a
separate, independent, and single transaction; (b) Whether or not CSC had
the capacity to sue on its own on SLDR No. 1214M; and (c) Whether or not
CSC as buyer from STM of the rights to 25,000 bags of sugar covered by

SLDR No. 1214M could compel petitioner to deliver 23,000 bags allegedly
unwithdrawn.
On February 24, 1994, the Court of Appeals rendered its decision modifying
the trial court's judgment, to wit:
"WHEREFORE, the Court hereby MODIFIES the assailed judgment and
orders defendant-appellant to:
"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by SLDR No.
1214M;
" 2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the
undelivered bags of refined sugar, as attorneys fees;
"3) Pay the costs of suit.
"SO ORDERED."[11]
Both parties then seasonably filed separate motions for reconsideration.
In its resolution dated September 30, 1994, the appellate court modified its
decision to read:
"WHEREFORE, the Court hereby modifies the assailed judgment and orders
defendant-appellant to:
"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under SLDR
No. 1214M;
"(2) Pay costs of suit.
"SO ORDERED."[12]
The appellate court explained the rationale for the modification as follows:
"There is merit in plaintiff-appellee's position.
"Exhibit F' We relied upon in fixing the number of bags of sugar which
remained undelivered as 12,586 cannot be made the basis for such a finding.
The rule is explicit that courts should consider the evidence only for the

purpose for which it was offered. (People v. Abalos, et al, 1 CA Rep 783).
The rationale for this is to afford the party against whom the evidence is
presented to object thereto if he deems it necessary. Plaintiff-appellee is,
therefore, correct in its argument that Exhibit F' which was offered to prove
that checks in the total amount of P15,950,000.00 had been cleared. (Formal
Offer of Evidence for Plaintiff, Records p. 58) cannot be used to prove the
proposition that 12,586 bags of sugar remained undelivered.
"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October 1990, p.
33] and Marianito L. Santos [TSN, 17 October 1990, pp. 16, 18, and
36]) presented by plaintiff-appellee was to the effect that it had withdrawn
only 2,000 bags of sugar from SLDR after which it was not allowed to
withdraw anymore. Documentary evidence (Exhibit I, Id., p. 78, Exhibit K, Id.,
p. 80) show that plaintiff-appellee had sent demand letters to defendantappellant asking the latter to allow it to withdraw the remaining 23,000 bags
of sugar from SLDR 1214M. Defendant-appellant, on the other hand, alleged
that sugar delivery to the STM corresponded only to the value of cleared
checks; and that all sugar corresponded to cleared checks had been
withdrawn. Defendant-appellant did not rebut plaintiff-appellee's assertions. It
did not present evidence to show how many bags of sugar had been
withdrawn against SLDR No. 1214M, precisely because of its theory that all
sales in question were a series of one single transaction and withdrawal of
sugar depended on the clearing of checks paid therefor.
"After a second look at the evidence, We see no reason to overturn the
findings of the trial court on this point."[13]
Hence, the instant petition, positing the following errors as grounds for
review:
"1. The Court of Appeals erred in not holding that STM's and private
respondent's specially informing petitioner that respondent was authorized by
buyer STM to withdraw sugar against SLDR No. 1214M "for and in our (STM)
behalf," (emphasis in the original) private respondent's withdrawing 2,000
bags of sugar for STM, and STM's empowering other persons as its agents
to withdraw sugar against the same SLDR No. 1214M, rendered respondent
like the other persons, an agent of STM as held in Rallos v. Felix Go Chan &
Realty Corp., 81 SCRA 252, and precluded it from subsequently claiming and
proving being an assignee of SLDR No. 1214M and from suing by itself for its
enforcement because it was conclusively presumed to be an agent (Sec. 2,
Rule 131, Rules of Court) and estopped from doing so. (Art. 1431, Civil
Code).

" 2. The Court of Appeals erred in manifestly and arbitrarily ignoring and
disregarding certain relevant and undisputed facts which, had they been
considered, would have shown that petitioner was not liable, except for 69
bags of sugar, and which would justify review of its conclusion of facts by this
Honorable Court.
" 3. The Court of Appeals misapplied the law on compensation under Arts.
1279, 1285 and 1626 of the Civil Code when it ruled that compensation
applied only to credits from one SLDR or contract and not to those from two
or more distinct contracts between the same parties; and erred in denying
petitioner's right to setoff all its credits arising prior to notice of assignment
from other sales or SLDRs against private respondent's claim as assignee
under SLDR No. 1214M, so as to extinguish or reduce its liability to 69 bags,
because the law on compensation applies precisely to two or more distinct
contracts between the same parties (emphasis in the original).
"4. The Court of Appeals erred in concluding that the settlement or liquidation
of accounts in Exh. F between petitioner and STM, respondent's admission
of its balance, and STM's acquiescence thereto by silence for almost one
year did not render Exh. `F' an account stated and its balance binding.

(3)....Whether or not the Court of Appeals erred in not ruling that the sale of
sugar under SLDR No. 1214M was a conditional sale or a contract to sell and
hence freed petitioner from further obligations.
(4)....Whether or not the Court of Appeals committed an error of law in not
applying the "clean hands doctrine" to preclude CSC from seeking judicial
relief.
The issues will be discussed in seriatim.
Anent the first issue, we find from the records that petitioner raised this issue
for the first time on appeal. It is settled that an issue which was not raised
during the trial in the court below could not be raised for the first time on
appeal as to do so would be offensive to the basic rules of fair play, justice,
and due process.[15] Nonetheless, the Court of Appeals opted to address this
issue, hence, now a matter for our consideration.
Petitioner heavily relies upon STM's letter of authority allowing CSC to
withdraw sugar against SLDR No. 1214M to show that the latter was STM's
agent. The pertinent portion of said letter reads:

"5. The Court of Appeals erred in not holding that the conditions of the
assigned SLDR No. 1214, namely, (a) its subject matter being generic, and
(b) the sale of sugar being subject to its availability at the Nawaco
warehouse, made the sale conditional and prevented STM or private
respondent from acquiring title to the sugar; and the non-availability of sugar
freed petitioner from further obligation.

"This is to authorize Consolidated Sugar Corporation or its representative to


withdraw for and in our behalf (stress supplied) the refined sugar covered by
Shipping List/Delivery Receipt = Refined Sugar (SDR) No. 1214 dated
October 16, 1989 in the total quantity of 25, 000 bags." [16]

"6. The Court of Appeals erred in not holding that the "clean hands" doctrine
precluded respondent from seeking judicial reliefs (sic) from petitioner, its
only remedy being against its assignor."[14]

"Art. 1868. By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another, with the
consent or authority of the latter."

Simply stated, the issues now to be resolved are:

It is clear from Article 1868 that the basis of agency is representation. [17] On
the part of the principal, there must be an actual intention to appoint [18] or an
intention naturally inferable from his words or actions; [19] and on the part of
the agent, there must be an intention to accept the appointment and act on it,
[20]
and in the absence of such intent, there is generally no agency. [21] One
factor which most clearly distinguishes agency from other legal concepts is
control; one person - the agent - agrees to act under the control or direction
of another - the principal. Indeed, the very word "agency" has come to
connote control by the principal. [22] The control factor, more than any other,
has caused the courts to put contracts between principal and agent in a

(1)....Whether or not the Court of Appeals erred in not ruling that CSC was an
agent of STM and hence, estopped to sue upon SLDR No. 1214M as an
assignee.
(2)....Whether or not the Court of Appeals erred in applying the law on
compensation to the transaction under SLDR No. 1214M so as to preclude
petitioner from offsetting its credits on the other SLDRs.

The Civil Code defines a contract of agency as follows:

separate category.[23] The Court of Appeals, in finding that CSC, was not an
agent of STM, opined:
"This Court has ruled that where the relation of agency is dependent upon
the acts of the parties, the law makes no presumption of agency, and it is
always a fact to be proved, with the burden of proof resting upon the persons
alleging the agency, to show not only the fact of its existence, but also its
nature and extent (Antonio vs. Enriquez[CA], 51 O.G. 3536]. Here,
defendant-appellant failed to sufficiently establish the existence of an agency
relation between plaintiff-appellee and STM. The fact alone that it (STM) had
authorized withdrawal of sugar by plaintiff-appellee "for and in our (STM's)
behalf" should not be eyed as pointing to the existence of an agency
relation ...It should be viewed in the context of all the circumstances
obtaining. Although it would seem STM represented plaintiff-appellee as
being its agent by the use of the phrase "for and in our (STM's) behalf" the
matter was cleared when on 23 January 1990, plaintiff-appellee informed
defendant-appellant that SLDFR No. 1214M had been "sold and endorsed"
to it by STM (Exhibit I, Records, p. 78). Further, plaintiff-appellee has shown
that the 25, 000 bags of sugar covered by the SLDR No. 1214M were sold
and transferred by STM to it ...A conclusion that there was a valid sale and
transfer to plaintiff-appellee may, therefore, be made thus capacitating
plaintiff-appellee to sue in its own name, without need of joining its imputed
principal STM as co-plaintiff."[24]
In the instant case, it appears plain to us that private respondent CSC was a
buyer of the SLDFR form, and not an agent of STM. Private respondent CSC
was not subject to STM's control. The question of whether a contract is one
of sale or agency depends on the intention of the parties as gathered from
the whole scope and effect of the language employed. [25]That the
authorization given to CSC contained the phrase "for and in our
(STM's) behalf" did not establish an agency. Ultimately, what is decisive is
the intention of the parties.[26] That no agency was meant to be established by
the CSC and STM is clearly shown by CSC's communication to petitioner
that SLDR No. 1214M had been "sold and endorsed" to it. [27]The use of the
words "sold and endorsed" means that STM and CSC intended a contract of
sale, and not an agency. Hence, on this score, no error was committed by
the respondent appellate court when it held that CSC was not STM's agent
and could independently sue petitioner.
On the second issue, proceeding from the theory that the transactions
entered into between petitioner and STM are but serial parts of one account,
petitioner insists that its debt has been offset by its claim for STM's unpaid
purchases, pursuant to Article 1279 of the Civil Code. [28] However, the trial

court found, and the Court of Appeals concurred, that the purchase of sugar
covered by SLDR No. 1214M was a separate and independent transaction; it
was not a serial part of a single transaction or of one account contrary to
petitioner's insistence. Evidence on record shows, without being rebutted,
that petitioner had been paid for the sugar purchased under SLDR No.
1214M. Petitioner clearly had the obligation to deliver said commodity to
STM or its assignee. Since said sugar had been fully paid for, petitioner and
CSC, as assignee of STM, were not mutually creditors and debtors of each
other. No reversible error could thereby be imputed to respondent appellate
court when, it refused to apply Article 1279 of the Civil Code to the present
case.
Regarding the third issue, petitioner contends that the sale of sugar under
SLDR No. 1214M is a conditional sale or a contract to sell, with title to the
sugar still remaining with the vendor. Noteworthy, SLDR No. 1214M contains
the following terms and conditions:
"It is understood and agreed that by payment by buyer/trader of refined sugar
and/or receipt of this document by the buyer/trader personally or through a
representative, title to refined sugar is transferred to buyer/trader and
delivery to him/it is deemed effected and completed (stress supplied) and
buyer/trader assumes full responsibility therefore" [29]
The aforequoted terms and conditions clearly show that petitioner transferred
title to the sugar to the buyer or his assignee upon payment of the purchase
price. Said terms clearly establish a contract of sale, not a contract to sell.
Petitioner is now estopped from alleging the contrary. The contract is the law
between the contracting parties.[30] And where the terms and conditions so
stipulated are not contrary to law, morals, good customs, public policy or
public order, the contract is valid and must be upheld.[31] Having transferred
title to the sugar in question, petitioner is now obliged to deliver it to the
purchaser or its assignee.
As to the fourth issue, petitioner submits that STM and private respondent
CSC have entered into a conspiracy to defraud it of its sugar. This conspiracy
is allegedly evidenced by: (a) the fact that STM's selling price to CSC was
below its purchasing price; (b) CSC's refusal to pursue its case against
Teresita Ng Go; and (c) the authority given by the latter to other persons to
withdraw sugar against SLDR No. 1214M after she had sold her rights under
said SLDR to CSC. Petitioner prays that the doctrine of "clean hands" should
be applied to preclude CSC from seeking judicial relief. However, despite
careful scrutiny, we find here the records bare of convincing evidence

whatsoever to support the petitioner's allegations of fraud. We are now


constrained to deem this matter purely speculative, bereft of concrete proof.
WHEREFORE, the instant petition is DENIED for lack of merit. Costs against
petitioner.
SO ORDERED.

advertised the 12 Nagata generators for sale; that the


plaintiff purchased 12 brand new Nagata generators, as
advertised by herein defendant; that through an irrevocable
line of credit, the D. Nagata Co., Ltd., shipped to the plaintiff
12 electric generators, and the latter paid the amount of the
purchase price; that the 12 generators were found to be
factory defective; that the plaintiff informed the defendant
herein that it shall return the 12 generators as in fact three of
the 12 were actually returned to the defendant; that the
plaintiff sued the defendant on the warranty; asking for
rescission of the contract; that the defendant be ordered to
accept the generators and be ordered to pay back the
purchase money; and that the plaintiff asked for damages.
(Record on Appeal, pp. 27-28) [CA Decision, pp. 34; Rollo,
pp. 47-48.]

G.R. No. 75198 October 18, 1988


SCHMID & OBERLY, INC., petitioner,
vs.
RJL MARTINEZ FISHING CORPORATION, respondent.
Sycip Salazar Hernandez & Gatmaitan Law Office for petitioner.
Siguion Reyna, Montecillo & Ongsiako Law Office for respondent.
CORTES, J.:

Petitioner seeks reversal of the decision and the resolution of the Court of
Appeals, ordering Schmid & Oberly Inc. (hereafter to be referred to simply as
"SCHMID") to refund the purchase price paid by RJL Martinez Fishing
Corporation (hereafter to be referred to simply as "RJL MARTINEZ") to D.
Nagata Co., Ltd. of Japan (hereafter to be referred to simply as NAGATA
CO.") for twelve (12) defective "Nagata"-brand generators, plus
consequential damages, and attorneys fees.
The facts as found by the Court of Appeals, are as follows:
The findings of facts by the trial court (Decision, pp. 21-28,
Record on Appeal) shows: that the plaintiff RJL Martinez
Fishing Corporation is engaged in deep-sea fishing, and in
the course of its business, needed electrical generators for
the operation of its business; that the defendant sells
electrical generators with the brand of "Nagata", a Japanese
product; that the supplier is the manufacturer, the D. Nagata
Co. Ltd., of Japan, that the defendant Schmid & Oberly Inc.

On the basis thereof, the Court of Appeals affirmed the decision of the trial
court ordering petitioner to refund to private respondent the purchase price
for the twelve (12) generators and to accept delivery of the same and to pay
s and attorney's fees, with a slight modification as to the amount to be
refunded. In its resolution of the motion for reconsideration, the Court of
Appeals further modified the trial courts decision as to the award of
consequential damages.
Ordinarily, the Court will not disturb the findings of fact of the Court of
Appeals in petitions to review the latter's decisions under Rule 45 of the
Revised Rules of Court, the scope of the Court's inquiry being limited to a
review of the imputed errors of law [Chan v. Court of Appeals, G.R. No. L27488, June 30, 1970, 33 SCRA 77; Tiongco v. De la Merced, G.R. No. L24426, July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No.
62482, April 28, 1983, 121 SCRA 865; Baniqued v. Court of Appeals, G.R.
No.
L-47531, January 30, 1984, 127 SCRA 596.] However, when, as in this case,
it is the petitioner's position that the appealed judgment is premised on a
misapprehension
of
facts, * the Court is compelled to review the Court of Appeal's factual findings
[De la Cruz v. Sosing, 94 Phil. 26 (1953); Castillo v. Court of Appeals, G.R.
No. I,48290, September 29, 1983, 124 SCRA 808.]
Considering the sketchiness of the respondent court's narration of facts,
whether or not the Court of Appeals indeed misapprehended the facts could
not be determined without a thorough review of the records.

Thus, after a careful scrutiny of the records, the Court has found the
appellate court's narration of facts incomplete. It failed to include certain
material facts.
The facts are actually as follows:
RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL
MARTINEZ needed electric generators for some of its boats and SCHMIID
sold electric generators of different brands, negotiations between them for
the acquisition thereof took place. The parties had two separate transactions
over "Nagata"-brand generators.
The first transaction was the sale of three (3) generators. In this transaction,
it is not disputed that SCHMID was the vendor of the generators. The
company supplied the generators from its stockroom; it was also SCHMID
which invoiced the sale.
The second transaction, which gave rise to the present controversy, involves
twelve (12) "Nagata"-brand generators. 'These are the facts surrounding this
particular transaction:
As RJL MARTINEZ was canvassing for generators, SC gave RJL MARTINEZ
its Quotation dated August 19, 1975 [Exhibit 'A"] for twelve (12) "Nagata'brand generators with the following specifications:

Credit for later shipment. The Letter of Credit shall otherwise


be subject to the conditions stated in this memorandum of
contract. [Emphasis supplied.]
Agreeing with the terms of the Quotation, RJL MARTINEZ opened a letter of
credit in favor of NAGATA CO. Accordingly, on November 20,1975, SCHMID
transmitted to NAGATA CO. an order [Exhibit "4"] for the twelve (12)
generators to be shipped directly to RJL MARTINEZ. NAGATA CO. thereafter
sent RJL MARTINEZ the bill of lading and its own invoice (Exhibit "B") and, in
accordance with the order, shipped the generators directly to RJL
MARTINEZ. The invoice states that "one (1) case of 'NAGATA' AC
Generators" consisting of twelve sets wasbought by order and for account
risk of Messrs. RJL Martinez Fishing Corporation.
For its efforts, SCHMID received from NAGATA CO. a commission of
$1,752.00 for the sale of the twelve generators to RJL MARTINEZ. [Exhibits
"9", "9-A", "9-B" and "9-C".]
All fifteen (15) generators subject of the two transactions burned out after
continuous use. RJL MARTINEZ informed SCHMID about this development.
In turn, SCHMID brought the matter to the attention of NAGATA CO. In July
1976, NAGATA CO. sent two technical representatives who made an ocular
inspection and conducted tests on some of the burned out generators, which
by then had been delivered to the premises of SCHMID.

"NAGATA" Single phase AC Alternators, 110/220 V, 60


cycles, 1800 rpm, unity power factor, rectifier type and radio
suppressor,, 5KVA (5KW) $546.75 @

The tests revealed that the generators were overrated. As indicated both in
the quotation and in the invoice, the capacity of a generator was supposed to
be 5 KVA (kilovolt amperes). However, it turned out that the actual capacity
was only 4 KVA.

It was stipulated that payment would be made by confirming an irrevocable


letter of credit in favor of NAGATA CO. Furthermore, among the General
Conditions of Sale appearing on the dorsal side of the Quotation is the
following:

SCHMID replaced the three (3) generators subject of the first sale with
generators of a different brand.

Buyer will, upon request, promptly open irrevocable Letter of


Credit in favor of seller, in the amount stated on the face of
this memorandum, specifying shipment from any Foreign
port to Manila or any safe Philippine port, permitting partial
shipments and providing that in the event the shippers are
unable to ship within the specified period due to strikes, lack
of shipping space or other circumstances beyond their
reasonable control, Buyer agrees to extend the said Letter of

As for the twelve (12) generators subject of the second transaction, the
Japanese technicians advised RJL MARTINEZ to ship three (3) generators to
Japan, which the company did. These three (3) generators were repaired by
NAGATA CO. itself and thereafter returned to RJL MARTINEZ; the remaining
nine (9) were neither repaired nor replaced. NAGATA CO., however, wrote
SCHMID suggesting that the latter check the generators, request for spare
parts for replacement free of charge, and send to NAGATA CO. SCHMID's
warranty claim including the labor cost for repairs [Exhibit "I".] In its reply

letter, SCHMID indicated that it was not agreeable to these terms [Exhibit
"10".]
As not all of the generators were replaced or repaired, RJL MARTINEZ
formally demanded that it be refunded the cost of the generators and paid
damages. SCHMID in its reply maintained that it was not the seller of the
twelve (12) generators and thus refused to refund the purchase price
therefor. Hence, on February 14, 1977, RJL MARTINEZ brought suit against
SCHMID on the theory that the latter was the vendor of the twelve (12)
generators and, as such vendor, was liable under its warranty against hidden
defects.
Both the trial court and the Court of Appeals upheld the contention of RJL
MARTINEZ that SCHMID was the vendor in the second transaction and was
liable under its warranty. Accordingly, the courts a quo rendered judgment in
favor of RJL MARTINEZ. Hence, the instant recourse to this Court.
In this petition for review, SCHMID seeks reversal on the following grounds:
(i) Schmid was merely the indentor in the sale [of the twelve
(12) generators] between Nagata Co., the exporter and RJL
Martinez, the importer;
(ii) as mere indentor, Schmid is not liable for the seller's
implied warranty against hidden defects, Schmid not having
personally assumed any such warranty.
(iii) in any event, conformably with Article 1563 of the Civil
Code, there was no implied warranty against hidden defects
in the sale of these twelve (12) generators because these
were sold under their trade name "Nagata"; and
(iv) Schmid, accordingly, is not liable for the reimbursement
claimed by RJL Martinez nor for the latter's unsubstantiated
claim of PI 10.33 operational losses a day nor for exemplary
damages, attorney's fees and costs. [Petition, p. 6.]
1. As may be expected, the basic issue confronting this Court is whether the
second transaction between the parties was a sale or an indent transaction.
SCHMID maintains that it was the latter; RJL MARTINEZ claims that it was a
sale.

At the outset, it must be understood that a contract is what the law defines it
to be, considering its essential elements, and not what it is caged by the
contracting parties [Quiroga v. Parsons Hardware Co., 38 Phil. 501 (1918).]
The Civil Code defines a contract of sale, thus:
ART. 458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.
It has been said that the essence of the contract of sale is transfer of title or
agreement to transfer it for a price paid or promised [Commissioner of
Internal Revenue v. Constantino, G.R. No. L-25926, February 27, 1970, 31
SCRA 779, 785, citing Salisbury v. Brooks, 94 SE 117,118-19.] "If such
transfer puts the transferee in the attitude or position of an owner and makes
him liable to the transferor as a debtor for the agreed price, and not merely
as an agent who must account for the proceeds of a resale, the transaction
is, a sale." [Ibid.]
On the other hand, there is no statutory definition of "indent" in this
jurisdiction. However, the Rules and Regulations to Implement Presidential
Decree No. 1789 (the Omnibus Investments Code) lumps "indentors"
together with "commercial brokers" and "commission merchants" in this
manner:
... A foreign firm which does business through
the middlemen acting in their own names, such asindentors,
commercial brokers or commission merchants, shall not be
deemed doing business in the Philippines. But such
indentors, commercial brokers or commission merchants
shall be the ones deemed to be doing business in the
Philippines [Part I, Rule I, Section 1, par. g (1).]
Therefore, an indentor is a middlemen in the same class as commercial
brokers and commission merchants. To get an Idea of what an indentor is, a
look at the definition of those in his class may prove helpful.
A broker is generally defined as one who is engaged, for
others, on a commission, negotiating contracts relative to
property with the custody of which he has no concern; the
negotiator between other parties, never acting in his own

name but in the name of those who employed him; he is


strictly a middleman and for some purpose the agent of both
parties. (1 9 Cyc 186; Henderson vs. The State, 50 Ind., 234;
Black's Law Dictionary.) A broker is one whose occupation it
is to bring parties together to bargain, or to bargain for them,
in matters of trade, commerce or navigation. Mechem on
Agency, sec. 13; Wharton on Agency, sec. 695.) Judge
Storey, in his work on Agency, defines a broker as an agent
employed to make bargains and contracts between other
persons, in matters of trade, commerce or navigation, for
compensation commonly called brokerage. (Storey on
Agency, sec. 28.) [Behn Meyer and Co., Ltd. v. Nolting and
Garcia, 35 Phil. 274, 279-80 (1916).]
A commission merchant is one engaged in the purchase or
sale for another of personal property which, for this purpose,
is placed in his possession and at his disposal. He maintains
a relation not only with his principal and the purchasers or
vendors, but also with the property which is subject matter of
the transaction. [Pacific Commercial Co. v. Yatco, 68 Phil.
398, 401 (1939).]
Thus, the chief feature of a commercial broker and a commercial merchant is
that in effecting a sale, they are merely intermediaries or middle-men, and
act in a certain sense as the agent of both parties to the transaction.

In its complaint, RJL MARTINEZ admitted that the generators were


purchased "through indent order" [Record on Appeal, p. 6.] In the same vein,
it admitted in its demand letter previously sent to SCHMID that twelve (12) of
en (15) Nagata-brand generators "were purchased through your company
(SCHMID), by indent order and three (3) by direct purchase." [Exhibit "D".]
The evidence also show that RJL MARTINEZ paid directly NAGATA CO, for
the generators, and that the latter company itself invoiced the sale [Exhibit
"B"], and shipped the generators directly to the former. The only participation
of SCHMID was to act as an intermediary or middleman between NAGATA
CO. and RJL MARTINEZ, by procuring an order from RJL MARTINEZ and
forwarding the same to NAGATA CO. for which the company received a
commission from NAGATA CO. [Exhibits "9", "9-A", "9-B" and "9-C".]
The above transaction is significantly different from the first transaction
wherein SCHMID delivered the goods from its own stock (which it had itself
imported from NAGATA CO.), issued its own invoice, and collected payment
directly from the purchaser.
These facts notwithstanding, RJL MARTINEZ insists that SCHMID was the
vendor of the twelve generators on the following grounds:
First, it is contended that the Quotation and the General Conditions of Sale
on the dorsal side thereof do not necessarily lead to the conclusion that
NAGATA CO., and not SCHMID, was the real seller in the case of the twelve
(12) generators in that:

Webster defines an indent as "a purchase order for goods especially when
sent from a foreign country." [Webster's Ninth New Collegiate Dictionary 612
(1986).] It would appear that there are three parties to an indent transaction,
namely, the buyer, the indentor, and the supplier who is usually a nonresident manufacturer residing in the country where the goods are to be
bought [Commissioner of Internal Revenue v. Cadwallader Pacific Company,
G.R. No. L-20343, September 29, 1976, 73 SCRA 59.] An indentor may
therefore be best described as one who, for compensation, acts as a
middleman in bringing about a purchase and sale of goods between a foreign
supplier and a local purchaser.

(i) the signing of the quotation, which was under SCHMID's


letter-head, perfected the contract of sale (impliedly, as
between the signatories theretoi.e., RJL MARTINEZ and
SCHMID);

Coming now to the case at bar, the admissions of the parties and the facts
appearing on record more than suffice to warrant the conclusion that
SCHMID was not a vendor, but was merely an indentor, in the second
transaction.

Second, it is asserted that the acts of SCHMID after it was informed of the
defect in the generators were indicative of its awareness that it was the
vendor and acknowledgment of its liability as such vendor. Attention is called
to these facts: When RJL MARTINEZ complained to SCHMID that the
generators were defective, SCHMID immediately asked RJL MARTINEZ to

(ii) the qualification that the letter of credit shall be in favor of


NAGATA CO. constituted simply the manner of payment
requested by SCHMID (implying that SCHMID, as seller,
merely chose to waive direct payment, stipulating delivery of
payment instead to NAGATA CO. as supplier);

send the defective generators to its shop to determine what was wrong.
SCHMID likewise informed NAGATA CO. about the complaint of RJL
MARTINEZ. When the Japanese technicians arrived, SCHMID made
available its technicians, its shop and its testing equipment. After the
generators were found to have factory defects, SCHMID facilitated the
shipment of three (3) generators to Japan and, after their repair, back to the
Philippines [Memorandum for the Respondent, p. 8.]
Third, it is argued that the contents of the letter from NAGATA CO. to
SCHMID regarding the repair of the generators indicated that the latter was
"within the purview of a seller." [Ibid.]
Fourth, it is argued that if SCHMID is considered as a mere agent of
NAGATA CO., a foreign corporation not licensed to do business in the
Philippines, then the officers and employees of the former may be penalized
for violation of the old Corporation Law which provided:
Sec. 69 ... Any officer or agent of the corporation or any
person transacting business for any foreign corporation not
having the license prescribed shall be punished by
imprisonment for not less than six months nor more than two
years or by a fine 'of not less than two hundred pesos nor
more than one thousand pesos or both such imprisonment
and fine, in the discretion of the Court.
The facts do not bear out these contentions.
The first contention disregards the circumstances surrounding the second
transaction as distinguished from those surrounding the first transaction, as
noted above.
Neither does the solicitous manner by which SCHMID responded to RJL
MARTINEZ's complaint prove that the former was the seller of the
generators. As aptly stated by counsel, no indentor will just fold its hands
when a client complains about the goods it has bought upon the indentor's
mediation. In its desire to promote the product of the seller and to retain the
goodwill of the buyer, a prudent indentor desirous of maintaining his business
would have to act considerably. towards his clients.
Note that in contrast to its act of replacing the three (3) generators subject of
the first transaction, SCHMID did not replace any of the twelve (12)

generators, but merely rendered assistance to both RJL TINES and NAGATA
CO. so that the latter could repair the defective generators.
The proposal of NAGATA CO. rejected by SCHMID that the latter undertake
the repair of the nine (9) other defective generators, with the former
supplying the replacement parts free of charge and subsequently
reimbursing the latter for labor costs [Exhibit "I"], cannot support the
conclusion that SCHMID is vendor of the generators of the second
transaction or was acting "within the purview of a seller."
Finally, the afore-quoted penal provision in the Corporation Law finds no
application to SCHMID and its officers and employees relative to the
transactions in the instant case. What the law seeks to prevent, through said
provision, is the circumvention by foreign corporations of licensing
requirements through the device of employing local representatives. An
indentor, acting in his own name, is not, however, covered by the abovequoted provision. In fact, the provision of the Rules and Regulations
implementing the Omnibus Investments Code quoted above, which was
copied from the Rules implementing Republic Act No. 5455, recognizes the
distinct role of an indentor, such that when a foreign corporation does
business through such indentor, the foreign corporation is not deemed doing
business in the Philippines.
In view of the above considerations, this Court rules that SCHMID was
merely acting as an indentor in the purchase and sale of the twelve (12)
generators subject of the second transaction. Not being the vendor, SCHMID
cannot be held liable for the implied warranty for hidden defects under the
Civil Code [Art. 1561, et seq.]
2. However, even as SCHMID was merely an indentor, there was nothing to
prevent it from voluntarily warranting that twelve (12) generators subject of
the second transaction are free from any hidden defects. In other words,
SCHMID may be held answerable for some other contractual obligation, if
indeed it had so bound itself. As stated above, an indentor is to some extent
an agent of both the vendor and the vendee. As such agent, therefore, he
may expressly obligate himself to undertake the obligations of his principal
(See Art. 1897, Civil Code.)
The Court's inquiry, therefore, shifts to a determination of whether or not
SCHMID expressly bound itself to warrant that the twelve (12) generators are
free of any hidden defects.

Again, we consider the facts.

Atty. CATRAL:

The Quotation (Exhibit A is in writing. It is the repository of the contract


between RJL MARTINEZ and SCHMID. Notably, nowhere is it stated therein
that SCHMID did bind itself to answer for the defects of the things sold.
There being no allegation nor any proof that the Quotation does not express
the true intent and agreement of the contracting parties, extrinsic parol
evidence of warranty will be to no avail [See Rule 123, Sec. 22.]

I am asking the witness.

The trial court, however, relied on the testimony of Patrocinio Balagtas, the
head of the Electrical Department of RJL MARTINEZ, to support the finding
that SCHMID did warrant the twelve (12) generators against defects.
Upon careful examination of Balagtas' testimony, what is at once apparent is
that Balagtas failed to disclose the nature or terms and conditions of the
warranty allegedly given by SC Was it a warranty that the generators would
be fit for the fishing business of the buyer? Was it a warranty that the
generators to be delivered would meet the specifications indicated in the
Quotation? Considering the different kinds of warranties that may be
contracted, unless the nature or terms and conditions of the warranty are
known, it would not be possible to determine whether there has been a
breach thereof.
Moreover, a closer examination of the statements allegedly made by the
representative of SCHMID reveals that they merely constituted an expression
of opinion which cannot by any means be construed as a warranty [See Art.
1546, Civil Code.]
We quote from Balagtas' testimony:
Atty. CATRAL:
Q Did you not say at the start of your cross
examination, Mr. Balagtas, that the only
participation you had in the acquisition of
those twelve (12) units [of] generators was
your having issued a purchase order to your
own company for the purchase of the units?
ATTY. AQUINO:
Misleading, your Honor.

COURT:
He has the right to ask that question
because he is on cross. Moreover, if I
remember, he mentioned something like
that. Witness may answer.
A Yes, sir. Before I submitted that, we
negotiated with Schmid and Oberly the beat
generators they can recommend because
we are looking for generators. The
representative of Schmid and Oberly said
that Nagata is very good. That is why I
recommended that to the management.
[t.s.n., October 14, 1977, pp. 23-25.]
At any rate, when asked where SCHMID's warranty was contained, Balagtas
testified initially that it was in the receipts covering the sale. (At this point, it
may be stated that the invoice [Exhibit "B-l"] was issued by NAGATA CO. and
nowhere is it stated therein that SCHMID warranted the generators against
defects.) When confronted with a copy of the invoice issued by NAGATA CO.,
he changed his assertion and claimed that what he meant was that the date
of the commencement of the period of SCHMID's warranty would be based
on the date of the invoice. On further examination, he again changed his
mind and asserted that the warranty was given verbally [TSN, October 14,
1977, pp. 19-22.] But then again, as stated earlier, the witness failed to
disclose the nature or terms and conditions of the warranty allegedly given by
SCHMID.
On the other hand, Hernan Adad SCHMID's General Manager, was
categorical that the company does not warrant goods bought on indent and
that the company warrants only the goods bought directly from it, like the
three generators earlier bought by RJL MARTINEZ itself [TSN, December 19,
1977, pp. 63-64.] It must be recalled that SCHMID readily replaced the three
generators from its own stock. In the face of these conflicting testimonies,
this Court is of the view that RJL has failed to prove that SCHMID had given
a warranty on the twelve (12) generators subject of the second transaction.
Even assuming that a warranty was given, there is no way to determine

whether there has been a breach thereof, considering that its nature or terms
and conditions have not been shown.
3. In view of the foregoing, it becomes unnecessary to pass upon the other
issues.
WHEREFORE, finding the Court of Appeals to have committed a reversible
error, the petition is GRANTED and the appealed Decision and Resolution of
the Court of Appeals are REVERSED. The complaint of RJL Martinez Fishing
Corporation is hereby DISMISSED. No costs.
SO ORDERED.
ABACUS SECURITIES G.R. No. 160016
CORPORATION,
Petitioner, Present:
Panganiban, CJ,
Chairman,
Ynares-Santiago,
- versus - Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ
Promulgated:
RUBEN U. AMPIL,
Respondent. February 27, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
DECISION
PANGANIBAN, CJ:
S
tock market transactions affect the general public and the national economy. The
rise and fall of stock market indices reflect to a considerable degree the state of the
economy. Trends in stock prices tend to herald changes in business
conditions. Consequently, securities transactions are impressed with public
interest,
and
are
thus
subject
to public regulation. In particular, the laws and regulations requiring payment
of traded shares within specified periods are meant to protect the economy
from excessive stock market speculations, and are thus mandatory.
In the present case, respondent cannot escape payment of stocks validly
traded by petitioner on his behalf. These transactions took place before both

parties violated the trading law and rules. Hence, they fall outside the
purview of the pari delicto rule.
The Case

In a letter dated August 15, 1997, [petitioner] through counsel


demanded that [respondent] settle his obligation plus the agreed penalty
charges accruing thereon equivalent to the average 90-day Treasury Bill rate
plus 2% per annum (200 basis points).

Before the Court is a Petition for Review [1] under Rule 45 of the Rules
of Court, challenging the March 21, 2003 Decision [2] and the September 19,
2003 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 68273. The
assailed Decision disposed as follows:

In a letter dated August [26], 1997, [respondent] acknowledged


receipt of [petitioners] demand [letter] and admitted his unpaid obligation and
at the same time request[ed] for 60 days to raise funds to pay the same,
which was granted by [petitioner].

UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is


hereby DISMISSED. With costs.[4]

Despite said demand and the lapse of said requested extension,


[respondent] failed and/or refused to pay his accountabilities to [petitioner].

The CA denied reconsideration in its September 19, 2003 Resolution.

The factual antecedents were summarized by the trial court (and


reproduced by the CA in its assailed Decision) in this wise:

For his defense, [respondent] claims that he was induced to trade in


a stock security with [petitioner] because the latter allowed offset settlements
wherein he is not obliged to pay the purchase price. Rather, it waits for the
customer to sell. And if there is a loss, [petitioner] only requires the payment
of the deficiency (i.e., the difference between the higher buying price and the
lower selling price). In addition, it charges a commission for brokering the
sale.

Evidence adduced by the [petitioner] has established the fact that [petitioner]
is engaged in business as a broker and dealer of securities of listed
companies at the Philippine Stock Exchange Center.

However, if the customer sells and there is a profit, [petitioner]


deducts the purchase price and delivers only the surplus after charging its
commission.

Sometime in April 1997, [respondent] opened a cash or regular


account with [petitioner] for the purpose of buying and selling securities as
evidenced by the Account Application Form. The parties business
relationship was governed by the terms and conditions [stated therein] x x x.

[Respondent] further claims that all his trades with [petitioner] were
not paid in full in cash at anytime after purchase or within the T+4 [4 days
subsequent to trading] and none of these trades was cancelled by [petitioner]
as required in Exhibit A-1. Neither did [petitioner] apply with either the
Philippine Stock Exchange or the SEC for an extension of time for the
payment or settlement of his cash purchases. This was not brought to his
attention by his broker and so with the requirement of collaterals in margin
account. Thus, his trade under an offset transaction with [petitioner] is
unlimited subject only to the discretion of the broker. x x x [Had petitioner]
followed the provision under par. 8 of Exh. A-1 which stipulated the
liquidation within the T+3 [3 days subsequent to trading], his net deficit would
only be P1,601,369.59. [Respondent] however affirmed that this is not in
accordance with RSA [Rule 25-1 par. C, which mandates that if you do not
pay for the first] order, you cannot subsequently make any further order
without depositing the cash price in full. So, if RSA Rule 25-1, par. C, was
applied, he was limited only to the first transaction. That [petitioner] did not
comply with the T+4 mandated in cash transaction. When [respondent] failed
to comply with the T+3, [petitioner] did not require him to put up a deposit
before it executed its subsequent orders. [Petitioner] did not likewise apply
for extension of the T+4 rule.Because of the offset transaction, [respondent]
was induced to [take a] risk which resulted [in] the filing of the instant suit

The Facts

Since April 10, 1997, [respondent] actively traded his account, and
as a result of such trading activities, he accumulated an outstanding
obligation in favor of [petitioner] in the principal sum of P6,617,036.22 as
of April 30, 1997.
Despite the lapse of the period within which to pay his account as well as
sufficient time given by [petitioner] for [respondent] to comply with his
proposal to settle his account, the latter failed to do so. Such that [petitioner]
thereafter sold [respondents] securities to set off against his unsettled
obligations.
After the sale of [respondents] securities and application of the proceeds
thereof against his account, [respondents] remaining unsettled obligation to
[petitioner] was P3,364,313.56. [Petitioner] then referred the matter to its
legal counsel for collection purposes.

against him [because of which] he suffered sleepless nights, lost appetite


which if quantified in money, would amount to P500,000.00 moral damages
and P100,000.00 exemplary damages.[5]

applicable jurisprudence considering that respondent was the first one who
violated the terms of the Account Opening Form, [which was the] agreement
between
the
parties.

In its Decision[6] dated June 26, 2000, the Regional Trial Court (RTC) of
Makati City (Branch 57) held that petitioner violated Sections 23 and 25 of
the Revised Securities Act (RSA) and Rule 25-1 of the Rules Implementing
the Act (RSA Rules) when it failed to: 1) require the respondent to pay for his
stock purchases within three (T+3) or four days (T+4) from trading; and 2)
request from the appropriate authority an extension of time for the payment
of respondents cash purchases. The trial court noted that despite
respondents non-payment within the required period, petitioner did not
cancel the purchases of respondent. Neither did it require him to deposit
cash payments before it executed the buy and/or sell orders subsequent to
the first unsettled transaction. According to the RTC, by allowing respondent
to trade his account actively without cash, petitioner effectively induced him
to purchase securities thereby incurring excessive credits.
The trial court also found respondent to be equally at fault, by
incurring excessive credits and waiting to see how his investments turned out
before deciding to invoke the RSA. Thus, the RTC concluded that petitioner
and respondent were in pari delicto and therefore without recourse against
each other.

II.

Ruling of the Court of Appeals


The CA upheld the lower courts finding that the parties were in pari
delicto. It castigated petitioner for allowing respondent to keep on trading
despite the latters failure to pay his outstanding obligations. It explained that
the reason [behind petitioners act] is elemental in its simplicity. And it is not
exactly altruistic.Because whether [respondents] trading transaction would
result in a surplus or deficit, he would still be liable to pay [petitioner] its
commission. [Petitioners] cash register will keep on ringing to the sound of
incoming money, no matter what happened to [respondent]. [7]
The CA debunked petitioners contention that the trial court lacked
jurisdiction to determine violations of the RSA. The court a quo held that
petitioner was estopped from raising the question, because it had actively
and voluntarily participated in the assailed proceedings.
Hence, this Petition.[8]
Issues
Petitioner submits the following issues for our consideration:
I.
Whether or not the Court of Appeals ruling that petitioner and respondent are
in pari delicto which allegedly bars any recovery, is in accord with law and

Whether or not the Court of Appeals ruling that the petitioner and respondent
are in pari delicto is in accord with law and applicable jurisprudence
considering the Account Opening Form is a valid agreement.
III.
Whether or not the Court of Appeals ruling that petitioner cannot recover from
respondent is in accord with law and applicable jurisprudence since the
evidence and admission of respondent proves that he is liable to petitioner
for his outstanding obligations arising from the stock trading through
petitioner.
IV.
Whether or not the Court of Appeals ruling on petitioners alleged violation of
the Revised Securities Act [is] in accord with law and jurisprudence since the
lower court has no jurisdiction over violations of the Revised Securities Act. [9]
Briefly, the issues are (1) whether the pari delicto rule is applicable in
the present case, and (2) whether the trial court had jurisdiction over the
case.
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Applicability of the
Pari Delicto Principle
In the present controversy, the following pertinent facts are undisputed:
(1) on April 8, 1997, respondent opened a cash account with petitioner for his
transactions in securities;[10] (2) respondents purchases were consistently
unpaid from April 10 to 30, 1997; [11] (3) respondent failed to pay in full, or
even just his deficiency,[12] for the transactions on April 10 and 11, 1997; [13] (4)
despite respondents failure to cover his initial deficiency, petitioner
subsequently purchased and sold securities for respondents account on April
25 and 29;[14] (5) petitioner did not cancel or liquidate a substantial amount of
respondents stock transactions until May 6, 1997.[15]
The provisions governing the above transactions are Sections 23
and 25 of the RSA[16] and Rule 25-1 of the RSA Rules, which state as follows:

SEC. 23. Margin Requirements.


xxxxxxxxx
(b)
It shall be unlawful for any member of an exchange or
any broker or dealer, directly or indirectly, to extend or maintain credit or
arrange for the extension or maintenance of credit to or for any customer
(1)
On any security other than an exempted security, in
contravention of the rules and regulations which the Commission shall
prescribe under subsection (a) of this Section;
(2)
Without collateral or on any collateral other than
securities, except (i) to maintain a credit initially extended in conformity with
the rules and regulations of the Commission and (ii) in cases where the
extension or maintenance of credit is not for the purpose of purchasing or
carrying securities or of evading or circumventing the provisions of
subparagraph (1) of this subsection.
xxxxxxxxx
SEC. 25. Enforcement of margin requirements and restrictions on
borrowings. To prevent indirect violations of the margin requirements under
Section 23 hereof, the broker or dealer shall require the customer in
nonmargin transactions to pay the price of the security purchased for his
account within such period as the Commission may prescribe, which shall in
no case exceed three trading days; otherwise, the broker shall sell the
security purchased starting on the next trading day but not beyond ten
trading days following the last day for the customer to pay such purchase
price, unless such sale cannot be effected within said period for justifiable
reasons. The sale shall be without prejudice to the right of the broker or
dealer to recover any deficiency from the customer. x x x.
RSA RULE 25-1
Purchases and Sales in Cash Account
(a) Purchases by a customer in a cash account shall be paid in full
within three (3) business days after the trade date.
(b) If full payment is not received within the required time period, the
broker or dealer shall cancel or otherwise liquidate the transaction, or the
unsettled portion thereof, starting on the next business day but not beyond
ten (10) business days following the last day for the customer to pay, unless
such sale cannot be effected within said period for justifiable reasons.
(c) If a transaction is cancelled or otherwise liquidated as a result of
non-payment by the customer, prior to any subsequent purchase during the

next ninety (90) days, the customer shall be required to deposit sufficient
funds in the account to cover each purchase transaction prior to execution.
xxxxxxxxx
(f) Written application for an extension of the period of time required
for payment under paragraph (a) be made by the broker or dealer to the
Philippine Stock Exchange, in the case of a member of the Exchange, or to
the Commission, in the case of a non-member of the Exchange. Applications
for the extension must be based upon exceptional circumstances and must
be filed and acted upon before the expiration of the original payment period
or the expiration of any subsequent extension.
Section 23(b) above -- the alleged violation of petitioner which provides the
basis for respondents defense -- makes it unlawful for a broker to extend or
maintain credit on any securities other than in conformity with the rules and
regulations issued by Securities and Exchange Commission (SEC). Section
25 lays down the rules to prevent indirect violations of Section 23 by brokers
or dealers. RSA Rule 25-1 prescribes in detail the regulations
governing cash accounts.

The United States, from which our countrys security policies are patterned,
[17]
abound with authorities explaining the main purpose of the above statute
on margin[18] requirements. This purpose is to regulate the volume of credit
flow, by way of speculative transactions, into the securities market and
redirect resources into more productive uses. Specifically, the main objective
of the law on margins is explained in this wise:
The main purpose of these margin provisions xxx is not to increase the
safety of security loans for lenders. Banks and brokers normally require
sufficient collateral to make themselves safe without the help of law. Nor is
the main purpose even protection of the small speculator by making it
impossible for him to spread himself too thinly although such a result will be
achieved as a byproduct of the main purpose.
xxxxxxxxx
The main purpose is to give a [g]overnment credit agency an effective
method of reducing the aggregate amount of the nations credit resources
which can be directed by speculation into the stock market and out of other
more desirable uses of commerce and industry x x x.[19]
A related purpose of the governmental regulation of margins is the
stabilization of the economy.[20] Restrictions on margin percentages are
imposed in order to achieve the objectives of the government with due regard

for the promotion of the economy and prevention of the use of excessive
credit.[21]

[29]

Otherwise stated, the margin requirements set out in the RSA are primarily
intended to achieve a macroeconomic purpose -- the protection of the overall
economy from excessive speculation in securities. Their recognized
secondary purpose is to protect small investors.

Right is one thing; obligation is quite another. A right may not be exercised; it
may even be waived. An obligation, however, must be performed; those who
do not discharge it prudently must necessarily face the consequence of their
dereliction or omission.[30]

The law places the burden of compliance with margin requirements


primarily upon the brokers and dealers.[22] Sections 23 and 25 and Rule 25-1,
otherwise known as the mandatory close-out rule, [23] clearly vest upon
petitioner the obligation, not just the right, to cancel or otherwise liquidate a
customers order, if payment is not received within three days from the date of
purchase. The word shall as opposed to the word may, is imperative and
operates to impose a duty, which may be legally enforced. For
transactions subsequent to an unpaid order, the broker should require its
customer to deposit funds into the account sufficient to cover each purchase
transaction prior to its execution. These duties are imposed upon the broker
to ensure faithful compliance with the margin requirements of the law, which
forbids a broker from extending undue credit to a customer.

Respondent Liable for the First,


But Not for the Subsequent Trades

It will be noted that trading on credit (or margin trading) allows


investors to buy more securities than their cash position would normally
allow.[24]Investors pay only a portion of the purchase price of the securities;
their broker advances for them the balance of the purchase price and keeps
the securities as collateral for the advance or loan. [25] Brokers take these
securities/stocks to their bank and borrow the balance on it, since they have
to pay in full for the traded stock. Hence, increasing margins[26] i.e.,
decreasing the amounts which brokers may lend for the speculative
purchase and carrying of stocks is the most direct and effective method of
discouraging an abnormal attraction of funds into the stock market and
achieving a more balanced use of such resources.
x x x [T]he x x x primary concern is the efficacy of security credit controls in
preventing speculative excesses that produce dangerously large and rapid
securities price rises and accelerated declines in the prices of given
securities issues and in the general price level of securities. Losses to a
given investor resulting from price declines in thinly margined securities are
not of serious significance from a regulatory point of view. When forced sales
occur and put pressures on securities prices, however, they may cause other
forced sales and the resultant snowballing effect may in turn have a general
adverse effect upon the entire market.[27]
The nature of the stock brokerage business enables brokers, not the clients,
to verify, at any time, the status of the clients account. [28] Brokers, therefore,
are in the superior position to prevent the unlawful extension of credit.

Because of this awareness, the law imposes upon them the primary
obligation to enforce the margin requirements.

Nonetheless, these margin requirements are applicable only to transactions


entered into by the present parties subsequent to the initial trades of April 10
and 11, 1997. Thus, we hold that petitioner can still collect from respondent
to the extent of the difference between the latters outstanding obligation as of
April 11, 1997 less the proceeds from the mandatory sell out of the shares
pursuant to the RSA Rules. Petitioners right to collect is justified under the
general law on obligations and contracts.[31]
Article 1236 (second paragraph) of the Civil Code, provides:
Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial to the
debtor. (Emphasis supplied)
Since a brokerage relationship is essentially a contract for the employment of
an agent, principles of contract law also govern the broker-principal
relationship.[32]
The right to collect cannot be denied to petitioner as the initial transactions
were entered pursuant to the instructions of respondent. The obligation of
respondent for stock transactions made and entered into on April 10 and 11,
1997 remains outstanding. These transactions were valid and the obligations
incurred by respondent concerning his stock purchases on these dates
subsist. At
that
time,
there was no violation of the RSA yet. Petitioners fault arose only when it
failed to: 1) liquidate the transactions on the fourth day following the stock
purchases, or on April 14 and 15, 1997; and 2) complete its liquidation no
later than ten days thereafter, applying the proceeds thereof as payment for
respondents outstanding obligation.[33]
Elucidating further, since the buyer was not able to pay for the transactions
that took place on April 10 and 11, that is at T+4, the broker was duty-bound

to advance the payment to the settlement banks without prejudice to the right
of the broker to collect later from the client.[34]
In securities trading, the brokers are essentially the counterparties to the
stock transactions at the Exchange.[35] Since the principals of the broker are
generally undisclosed, the broker is personally liable for the contracts thus
made.[36] Hence, petitioner had to advance the payments for respondents
trades. Brokers
have
a
right to be reimbursed for sums advanced by them with the express or
implied authorization of the principal,[37] in this case, respondent.
It should be clear that Congress imposed the margin requirements to protect
the general economy, not to give the customer a free ride at the expense of
the broker.[38] Not to require respondent to pay for his April 10 and 11 trades
would put a premium on his circumvention of the laws and would enable him
to enrich himself unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to enforce the terms and
conditions of its Agreement with respondent, specifically paragraph 8 thereof,
purportedly acting on the plea[39] of respondent to give him time to raise funds
therefor. These stipulations, in relation to paragraph 4, [40] constituted faithful
compliance with the RSA. By failing to ensure respondents payment of his
first purchase transaction within the period prescribed by law, thereby
allowing him to make subsequent purchases, petitioner effectively converted
respondents cash account into a credit account. However, extension or
maintenance of credits on nonmargin transactions, are specifically prohibited
under Section 23(b). Thus, petitioner was remiss in its duty and cannot be
said to have come to court with clean hands insofar as it intended to collect
on transactions subsequent to the initial trades of April 10 and 11, 1997.
Respondent Equally Guilty
for Subsequent Trades
On the other hand, we find respondent equally guilty in entering into the
transactions in violation of the RSA and RSA Rules. We are not prepared to
accept his self-serving assertions of being an innocent victim in all the
transactions. Clearly, he is not an unsophisticated, small investor merely
prodded by petitioner to speculate on the market with the possibility of large
profits with low -- or no -- capital outlay, as he pictures himself to be. Rather,
he is an experienced and knowledgeable trader who is well versed in the
securities market and who made his own investment decisions. In fact, in the
Account Opening Form (AOF), he indicated that he had excellent knowledge
of stock investments; had experience in stocks trading, considering that he
had similar accounts with other firms. [41]Obviously, he knowingly speculated
on the market, by taking advantage of the no-cash-out arrangement
extended to him by petitioner.

We note that it was respondent who repeatedly asked for some time to pay
his obligations for his stock transactions. Petitioner acceded to his
requests. It is only when sued upon his indebtedness that respondent raised
as a defense the invalidity of the transactions due to alleged violations of the
RSA. It was respondents privilege to gamble or speculate, as he apparently
did so by asking for extensions of time and refraining from giving orders to
his broker to sell, in the hope that the prices would rise. Sustaining his
argument now would amount to relieving him of the risk and consequences
of his own speculation and saddling them on the petitioner after the result
was known to be unfavorable.[42] Such contention finds no legal or even moral
justification and must necessarily be overruled.Respondents conduct is
precisely the behavior of an investor deplored by the law.
In the final analysis, both parties acted in violation of the law and did not
come to court with clean hands with regard to transactions subsequent to the
initial trades made on April 10 and 11, 1997. Thus, the peculiar facts of the
present case bar the application of the pari delicto rule -- expressed in the
maxims Ex dolo malo non oritur action and In pari delicto potior est conditio
defendentis -- to all the transactions entered into by the parties. The pari
delecto rule refuses legal remedy to either party to an illegal agreement and
leaves them where they were.[43] In this case, the pari delicto rule applies only
to transactions entered into after the initial trades made on April 10 and
11, 1997.
Since the initial trades are valid and subsisting obligations, respondent is
liable for them. Justice and good conscience require all persons to satisfy
their debts.Ours are courts of both law and equity; they compel fair dealing;
they do not abet clever attempts to escape just obligations. Ineludibly, this
Court would not hesitate to grant relief in accordance with good faith and
conscience.
Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction
(sold the stocks) on the fourth day following the transaction (T+4) and
completed its liquidation not later than ten days following the last day for the
customer to pay (effectively T+14). Respondents outstanding obligation is
therefore to be determined by using the closing prices of the stocks
purchased at T+14 as basis.
We consider the foregoing formula to be just and fair under the
circumstances. When petitioner tolerated the subsequent purchases of
respondent without performing its obligation to liquidate the first failed
transaction, and without requiring respondent to deposit cash before
embarking on trading stocks any further, petitioner, as the broker, violated the
law at its own peril. Hence, it cannot now complain for failing to obtain the full
amount of its claim for these lattertransactions.

On the other hand, with respect to respondents counterclaim for damages for
having been allegedly induced by petitioner to generate additional purchases
despite his outstanding obligations, we hold that he deserves no legal or
equitable relief consistent with our foregoing finding that he was not an
innocent investor as he presented himself to be.
Second Issue:
Jurisdiction
It is axiomatic that the allegations in the complaint, not the defenses
set up in the answer or in the motion to dismiss determine which court has
jurisdiction over an action.[44] Were we to be governed by the latter rule, the
question of jurisdiction would depend almost entirely upon the defendant. [45]
The instant controversy is an ordinary civil case seeking to enforce
rights arising from the Agreement (AOF) between petitioner and
respondent. It relates to acts committed by the parties in the course of their
business relationship. The purpose of the suit is to collect respondents
alleged outstanding debt to petitioner for stock purchases.
To be sure, the RSA and its Rules are to be read into the Agreement
entered into between petitioner and respondent. Compliance with the terms
of the AOF necessarily means compliance with the laws. Thus, to determine
whether the parties fulfilled their obligations in the AOF, this Court had to
pass upon their compliance with the RSA and its Rules. This, in no way,
deprived the Securities and Exchange Commission (SEC) of its authority to
determine willful violations of the RSA and impose appropriate sanctions
therefor, as provided under Sections 45 and 46 of the Act.
Moreover, we uphold the SEC in its Opinion, thus:
As to the issue of jurisdiction, it is settled that a party cannot invoke the
jurisdiction of a court to secure affirmative relief against his opponent and
after obtaining or failing to obtain such relief, repudiate or question that same
jurisdiction.
Indeed, after voluntarily submitting a cause and encountering an adverse
decision on the merits, it is too late for petitioner to question the jurisdictional
power of the court. It is not right for a party who has affirmed and invoked the
jurisdiction of a court in a particular matter to secure an affirmative relief, to
afterwards deny that same jurisdiction to escape a penalty.[46]
WHEREFORE, the assailed Decision and Resolution of the Court of
Appeals are hereby MODIFIED. Respondent is ordered to pay petitioner the

difference between the formers outstanding obligation as of April 11,


1997 less the proceeds from the mandatory sell out of shares pursuant to the
RSA Rules, with interest thereon at the legal rate until fully paid.
The RTC of Makati, Branch 57 is hereby directed to make a computation of
respondents outstanding obligation using the closing prices of the stocks at
T+14 as basis -- counted from April 11, 1997 and to issue the proper order for
payment if warranted. It may hold trial and hear the parties to be able to
make this determination.
No finding as to costs in this instance.
SO ORDERED.

[G.R. No. 143978. December 3, 2002]


MANUEL B. TAN, GREGG M. TECSON and ALEXANDER
SALDAA, petitioners, vs. EDUARDO R. GULLAS and NORMA S.
GULLAS, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review seeking to set aside the decision [1] of the
Court of Appeals[2] in CA-G.R. CV No. 46539, which reversed and set aside
the decision[3] of the Regional Trial Court of Cebu City, Branch 22 in Civil
Case No. CEB-12740.
The records show that private respondents, Spouses Eduardo R. Gullas
and Norma S. Gullas, were the registered owners of a parcel of land in the
Municipality of Minglanilla, Province of Cebu, measuring 104,114 sq. m., with
Transfer Certificate of Title No. 31465. [4] On June 29, 1992, they executed a
special power of attorney[5] authorizing petitioners Manuel B. Tan, a licensed
real estate broker,[6] and his associates Gregg M. Tecson and Alexander
Saldaa, to negotiate for the sale of the land at Five Hundred Fifty Pesos
(P550.00) per square meter, at a commission of 3% of the gross price. The
power of attorney was non-exclusive and effective for one month from June
29, 1992.[7]

On the same date, petitioner Tan contacted Engineer Edsel Ledesma,


construction manager of the Sisters of Mary of Banneaux, Inc. (hereafter,
Sisters of Mary), a religious organization interested in acquiring a property in
the Minglanilla area.
In the morning of July 1, 1992, petitioner Tan visited the property with
Engineer Ledesma. Thereafter, the two men accompanied Sisters Michaela
Kim and Azucena Gaviola, representing the Sisters of Mary, to see private
respondent Eduardo Gullas in his office at the University of Visayas. The
Sisters, who had already seen and inspected the land, found the same
suitable for their purpose and expressed their desire to buy it. [8] However,
they requested that the selling price be reduced to Five Hundred Thirty
Pesos (P530.00) per square meter instead of Five Hundred Fifty Pesos
(P550.00) per square meter. Private respondent Eduardo Gullas referred the
prospective buyers to his wife.
It was the first time that the buyers came to know that private
respondent Eduardo Gullas was the owner of the property. On July 3, 1992,
private respondents agreed to sell the property to the Sisters of Mary, and
subsequently executed a special power of attorney [9] in favor of Eufemia
Caete, giving her the special authority to sell, transfer and convey the land at
a fixed price of Two Hundred Pesos (P200.00) per square meter.
On July 17, 1992, attorney-in-fact Eufemia Caete executed a deed of
sale in favor of the Sisters of Mary for the price of Twenty Million Eight
Hundred Twenty Two Thousand Eight Hundred Pesos (P20,822,800.00), or
at the rate of Two Hundred Pesos (P200.00) per square meter. [10] The buyers
subsequently paid the corresponding taxes.[11] Thereafter, the Register of
Deeds of Cebu Province issued TCT No. 75981 in the name of the Sisters of
Mary of Banneaux, Inc.[12]
Earlier, on July 3, 1992, in the afternoon, petitioners went to see private
respondent Eduardo Gullas to claim their commission, but the latter told them
that he and his wife have already agreed to sell the property to the Sisters of
Mary. Private respondents refused to pay the brokers fee and alleged that
another group of agents was responsible for the sale of land to the Sisters of
Mary.
On August 28, 1992, petitioners filed a complaint [13] against the
defendants for recovery of their brokers fee in the sum of One Million Six
Hundred Fifty Five Thousand Four Hundred Twelve and 60/100 Pesos
(P1,655,412.60), as well as moral and exemplary damages and attorneys

fees. They alleged that they were the efficient procuring cause in bringing
about the sale of the property to the Sisters of Mary, but that their efforts in
consummating the sale were frustrated by the private respondents who, in
evident bad faith, malice and in order to evade payment of brokers fee, dealt
directly with the buyer whom petitioners introduced to them. They further
pointed out that the deed of sale was undervalued obviously to evade
payment of the correct amount of capital gains tax, documentary stamps and
other internal revenue taxes.
In their answer, private respondents countered that, contrary to
petitioners claim, they were not the efficient procuring cause in bringing
about the consummation of the sale because another broker, Roberto
Pacana, introduced the property to the Sisters of Mary ahead of the
petitioners.[14] Private respondents maintained that when petitioners
introduced the buyers to private respondent Eduardo Gullas, the former were
already decided in buying the property through Pacana, who had been paid
his commission. Private respondent Eduardo Gullas admitted that petitioners
were in his office on July 3, 1992, but only to ask for the reimbursement of
their cellular phone expenses.
In their reply and answer to counterclaim, [15] petitioners alleged that
although the Sisters of Mary knew that the subject land was for sale through
various agents, it was petitioners who introduced them to the owners thereof.
After trial, the lower court rendered judgment in favor of petitioners, the
dispositive portion of which reads:
WHEREFORE, UPON THE AEGIS OF THE FOREGOING, judgment is
hereby rendered for the plaintiffs and against the defendants. By virtue
hereof, defendants Eduardo and Norma Gullas are hereby ordered to pay
jointly and severally plaintiffs Manuel Tan, Gregg Tecson and Alexander
Saldaa;
1) The sum of SIX HUNDRED TWENTY FOUR THOUSAND AND SIX
HUNDRED EIGHTY FOUR PESOS (P624,684.00) as brokers fee with legal
interest at the rate of 6% per annum from the date of filing of the complaint;
and
2) The sum of FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees
and costs of litigation.
For lack of merit, defendants counterclaim is hereby DISMISSED.

IT IS SO ORDERED.[16]
Both parties appealed to the Court of Appeals. Private respondents
argued that the lower court committed errors of fact and law in holding that it
was petitioners efforts which brought about the sale of the property and
disregarding the previous negotiations between private respondent Norma
Gullas and the Sisters of Mary and Pacana. They further alleged that the
lower court had no basis for awarding brokers fee, attorneys fees and the
costs of litigation to petitioners.[17]

The records show that petitioner Manuel B. Tan is a licensed real estate
broker, and petitioners Gregg M. Tecson and Alexander Saldaa are his
associates. In Schmid and Oberly v. RJL Martinez Fishing Corporation, [20] we
defined a broker as one who is engaged, for others, on a commission,
negotiating contracts relative to property with the custody of which he has no
concern; the negotiator between other parties, never acting in his own name
but in the name of those who employed him. x x x a broker is one whose
occupation is to bring the parties together, in matters of trade, commerce or
navigation. (Emphasis supplied)

Petitioners, for their part, assailed the lower courts basis of the award of
brokers fee given to them. They contended that their 3% commission for the
sale of the property should be based on the price of P55,180,420.00, or at
P530.00 per square meter as agreed upon and not on the alleged actual
selling price of P20,822,800.00 or at P200.00 per square meter, since the
actual purchase price was undervalued for taxation purposes. They also
claimed that the lower court erred in not awarding moral and exemplary
damages in spite of its finding of bad faith; and that the amount of
P50,000.00 as attorneys fees awarded to them is insufficient. Finally,
petitioners argued that the legal interest imposed on their claim should have
been pegged at 12% per annum instead of the 6% fixed by the court. [18]

During the trial, it was established that petitioners, as brokers, were


authorized by private respondents to negotiate for the sale of their land within
a period of one month reckoned from June 29, 1992. The authority given to
petitioners was non-exclusive, which meant that private respondents were
not precluded from granting the same authority to other agents with respect
to the sale of the same property. In fact, private respondent authorized
another agent in the person of Mr. Bobby Pacana to sell the same property.
There was nothing illegal or amiss in this arrangement, per se, considering
the non-exclusivity of petitioners authority to sell. The problem arose when it
eventually turned out that these agents were entertaining one and the same
buyer, the Sisters of Mary.

The Court of Appeals reversed and set aside the lower courts decision
and rendered another judgment dismissing the complaint. [19]

As correctly observed by the trial court, the argument of the private


respondents that Pacana was the one entitled to the stipulated 3%
commission is untenable, considering that it was the petitioners who were
responsible for the introduction of the representatives of the Sisters of Mary
to private respondent Eduardo Gullas. Private respondents, however,
maintain that they were not aware that their respective agents were
negotiating to sell said property to the same buyer.

Hence, this appeal.


Petitioners raise following issues for resolution:
I.
THE APPELLATE COURT GROSSLY ERRED IN THEIR FINDING THAT
THE PETITIONERS ARE NOT ENTITLED TO THE BROKERAGE
COMMISSION.
II.
IN DISMISSING THE COMPLAINT, THE APPELLATE COURT HAS
DEPRIVED THE PETITIONERS OF MORAL AND EXEMPLARY DAMAGES,
ATTORNEYS FEES AND INTEREST IN THE FOREBEARANCE OF
MONEY.
The petition is impressed with merit.

Private respondents failed to prove their contention that Pacana began


negotiations with private respondent Norma Gullas way ahead of petitioners.
They failed to present witnesses to substantiate this claim. It is curious that
Mrs. Gullas herself was not presented in court to testify about her dealings
with Pacana. Neither was Atty. Nachura who was supposedly the one
actively negotiating on behalf of the Sisters of Mary, ever presented in court.
Private respondents contention that Pacana was the one responsible for
the sale of the land is also unsubstantiated. There was nothing on record
which established the existence of a previous negotiation among Pacana,
Mrs. Gullas and the Sisters of Mary. The only piece of evidence that the
private respondents were able to present is an undated and unnotarized
Special Power of Attorney in favor of Pacana. While the lack of a date and an

oath do not necessarily render said Special Power of Attorney invalid, it


should be borne in mind that the contract involves a considerable amount of
money. Hence, it is inconsistent with sound business practice that the
authority to sell is contained in an undated and unnotarized Special Power of
Attorney. Petitioners, on the other hand, were given the written authority to
sell by the private respondents.
The trial courts evaluation of the witnesses is accorded great respect
and finality in the absence of any indication that it overlooked certain facts or
circumstances of weight and influence, which if reconsidered, would alter the
result of the case.[21]

WHEREFORE, in view of the foregoing, the petition is GRANTED. The


May 29, 2000 decision of the Court of Appeals is REVERSED and SET
ASIDE. The decision of the Regional Trial Court of Cebu City, Branch 22, in
Civil Case No. CEB-12740 ordering private respondents Eduardo Gullas and
Norma S. Gullas to pay jointly and severally petitioners Manuel B. Tan,
Gregg Tecson and Alexander Saldaa the sum of Six Hundred Twenty-Four
Thousand and Six Hundred Eighty-Four Pesos (P624,684.00) as brokers fee
with legal interest at the rate of 6% per annum from the filing of the
complaint; and the sum of Fifty Thousand Pesos (P50,000.00) as attorneys
fees and costs of litigation, is REINSTATED.
SO ORDERED.

Indeed, it is readily apparent that private respondents are trying to


evade payment of the commission which rightfully belong to petitioners as
brokers with respect to the sale. There was no dispute as to the role that
petitioners played in the transaction. At the very least, petitioners set the sale
in motion. They were not able to participate in its consummation only
because they were prevented from doing so by the acts of the private
respondents. In the case of Alfred Hahn v. Court of Appeals and Bayerische
Motoren Werke Aktiengesellschaft (BMW)[22] we ruled that, An agent receives
a commission upon the successful conclusion of a sale. On the other hand,
a broker earns his pay merely by bringing the buyer and the seller together,
even if no sale is eventually made. (Underscoring ours). Clearly, therefore,
petitioners, as brokers, should be entitled to the commission whether or not
the sale of the property subject matter of the contract was concluded through
their efforts.
Having ruled that petitioners are entitled to the brokers commission, we
should now resolve how much commission are petitioners entitled to?
Following the stipulation in the Special Power of Attorney, petitioners are
entitled to 3% commission for the sale of the land in question. Petitioners
maintain that their commission should be based on the price at which the
land was offered for sale, i.e., P530.00 per square meter. However, the
actual purchase price for which the land was sold was only P200.00 per
square meter. Therefore, equity considerations dictate that petitioners
commission must be based on this price. To rule otherwise would constitute
unjust enrichment on the part of petitioners as brokers.
In the matter of attorneys fees and expenses of litigation, we affirm the
amount of P50,000.00 awarded by the trial court to the petitioners.

PHILIPPINE HEALTH-CARE PROVIDERS, INC.


(MAXICARE),
Petitioner,
- versus CARMELA ESTRADA/CARA HEALTH SERVICES,
Respondent.
DECISION
NACHURA, J.:
This petition for review on certiorari assails the Decision[1] dated June 16,
2005 of the Court of Appeals (CA) in CA-G.R. CV No. 66040 which
affirmed in toto the Decision[2]dated October 8, 1999 of the Regional Trial
Court (RTC), Branch 135, of Makati City in an action for breach of contract
and damages filed by respondent Carmela Estrada, sole proprietor of Cara
Health Services, against Philippine Health-Care Providers, Inc. (Maxicare).
The facts, as found by the CA and adopted by Maxicare in its petition, follow:
[Maxicare] is a domestic corporation engaged in selling
health insurance plans whose Chairman Dr. Roberto K.
Macasaet, Chief Operating Officer Virgilio del Valle, and
Sales/Marketing Manager Josephine Cabrera were
impleaded as defendants-appellants.
On September 15, 1990, [Maxicare] allegedly engaged the
services of Carmela Estrada who was doing business under
the name of CARA HEALTH [SERVICES] to promote and
sell the prepaid group practice health care delivery program
called MAXICARE Plan with the position of Independent
Account Executive. [Maxicare] formally appointed [Estrada]
as its General Agent, evidenced by a letter-agreement
dated February 16, 1991. The letter agreement provided for
plaintiff-appellees [Estradas] compensation in the form of
commission, viz.:
Commission
In consideration of the performance of your
functions and duties as specified in this

letter-agreement, [Maxicare] shall pay you a


commission equivalent to 15 to 18% from
individual, family, group accounts; 2.5 to
10% on tailored fit plans; and 10% on
standard plans of commissionable amount
on corporate accounts from all membership
dues collected and remitted by you to
[Maxicare].

[Maxicare] alleged that it followed a franchising system in


dealing with its agents whereby an agent had to first secure
permission from [Maxicare] to list a prospective company as
client.[Estrada] alleged that it did apply with [Maxicare] for
the MERALCO account and other accounts, and in fact, its
franchise to solicit corporate accounts, MERALCO account
included, was renewed on February 11, 1991.
Plaintiff-appellee [Estrada] submitted proposals and made
representations to the officers of MERALCO regarding the
MAXICARE Plan but when MERALCO decided to subscribe
to the MAXICARE Plan, [Maxicare] directly negotiated with
MERALCO regarding the terms and conditions of the
agreement and left plaintiff-appellee [Estrada] out of the
discussions on the terms and conditions.
On November 28, 1991, MERALCO eventually subscribed to
the MAXICARE Plan and signed a Service Agreement
directly with [Maxicare] for medical coverage of its qualified
members,i.e.: 1) the enrolled dependent/s of regular
MERALCO executives; 2) retired executives and their
dependents who have opted to enroll and/or continue their
MAXICARE membership up to age 65; and 3) regular
MERALCO female executives (exclusively for maternity
benefits). Its duration was for one (1) year from December 1,
1991 to November 30, 1992. The contract was renewed
twice for a term of three (3) years each, the first started
on December 1, 1992 while the second took effect
on December 1, 1995.
The premium amounts paid by MERALCO to [Maxicare]
were alleged to be the following: a) P215,788.00 in
December
1991;
b) P3,450,564.00
in
1992;
c) P4,223,710.00 in 1993; d)P4,782,873.00 in 1994;
e) P5,102,108.00 in 1995; and P2,394,292.00 in May
1996. As of May 1996, the total amount of premium paid by
MERALCO to [Maxicare] was P20,169,335.00.

On March 24, 1992, plaintiff-appellee [Estrada], through


counsel, demanded from [Maxicare] that it be paid
commissions for the MERALCO account and nine (9) other
accounts. In reply, [Maxicare], through counsel, denied
[Estradas] claims for commission for the MERALCO and
other accounts because [Maxicare] directly negotiated with
MERALCO and the other accounts(,) and that no agent was
given the go signal to intervene in the negotiations for the
terms and conditions and the signing of the service
agreement with MERALCO and the other accounts so that if
ever [Maxicare] was indebted to [Estrada], it was only
for P1,555.00 and P43.l2 as commissions on the accounts of
Overseas Freighters Co. and Mr. Enrique Acosta,
respectively.
[Estrada] filed a complaint on March 18, 1993 against
[Maxicare] and its officers with the Regional Trial Court
(RTC) of Makati City, docketed as Civil Case No. 93-935,
raffled to Branch 135.
Defendants-appellants [Maxicare] and its officers filed their
Answer with Counterclaim on September 13, 1993 and their
Amended Answer with Counterclaim on September 28,
1993, alleging that: plaintiff-appellee [Estrada] had no cause
of action; the cause of action, if any, should be is against
[Maxicare] only and not against its officers; CARA HEALTHs
appointment as agent under the February 16, 1991 letteragreement to promote the MAXICARE Plan was for a period
of one (1) year only; said agency was not renewed after the
expiration of the one (1) year period; [Estrada] did not
intervene in the negotiations of the contract with MERALCO
which was directly negotiated by MERALCO with [Maxicare];
and [Estradas] alleged other clients/accounts were not
accredited with [Maxicare] as required, since the agency
contract on the MAXICARE health plans were not
renewed. By way of counterclaim, defendants-appellants
[Maxicare] and its officers claimed P100,000.00 in moral
damages for each of the officers of [Maxicare] impleaded as
defendant, P100,000.00
in
exemplary
damages, P100,000.00 in attorneys fees, and P10,000.00 in
litigation expenses.[3]
After trial, the RTC found Maxicare liable for breach of contract and ordered it
to pay Estrada actual damages in the amount equivalent to 10%
of P20,169,335.00, representing her commission for the total premiums paid
by Meralco to Maxicare from the year 1991 to 1996, plus legal interest

computed from the filing of the complaint on March 18, 1993, and attorneys
fees in the amount of P100,000.00.
On appeal, the CA affirmed in toto the RTCs decision. In ruling for Estrada,
both the trial and appellate courts held that Estrada was the efficient
procuring cause in the execution of the service agreement between Meralco
and Maxicare consistent with our ruling in Manotok Brothers, Inc. v. Court of
Appeals.[4]
Undaunted, Maxicare comes to this Court and insists on the reversal of the
RTC Decision as affirmed by the CA, raising the following issues, to wit:
1. Whether the Court of Appeals committed serious error in
affirming Estradas entitlement to commissions for the
execution of the service agreement between Meralco and
Maxicare.
2. Corollarily, whether Estrada is entitled to commissions for
the two (2) consecutive renewals of the service agreement
effective on December 1, 1992[5] and December 1, 1995.[6]
We are in complete accord with the trial and appellate courts ruling. Estrada
is entitled to commissions for the premiums paid under the service
agreement between Meralco and Maxicare from 1991 to 1996.
Well-entrenched in jurisprudence is the rule that factual findings of
the trial court, especially when affirmed by the appellate court, are accorded
the highest degree of respect and are considered conclusive between the
parties.[7] A review of such findings by this Court is not warranted except
upon a showing of highly meritorious circumstances, such as: (1) when the
findings of a trial court are grounded entirely on speculation, surmises or
conjectures; (2) when a lower courts inference from its factual findings is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the findings of the appellate
court go beyond the issues of the case, or fail to notice certain relevant facts
which, if properly considered, will justify a different conclusion; (5) when there
is a misappreciation of facts; (6) when the findings of fact are conclusions
without mention of the specific evidence on which they are based, are
premised on the absence of evidence, or are contradicted by evidence on
record.[8] None of the foregoing exceptions which would warrant a reversal of
the assailed decision obtains in this instance.
Maxicare urges us that both the RTC and CA failed to take into
account the stipulations contained in the February 19, 1991 letter agreement
authorizing the payment of commissions only upon satisfaction of twin
conditions, i.e., collection and contemporaneous remittance of premium dues
by Estrada to Maxicare. Allegedly, the lower courts disregarded Estradas
admission that the negotiations with Meralco failed. Thus, the flawed
application of the efficient procuring cause doctrine enunciated in Manotok

Brothers, Inc. v. Court of Appeals,[9] and the erroneous conclusion upholding


Estradas entitlement to commissions on contracts completed without her
participation.
We are not persuaded.
Contrary to Maxicares assertion, the trial and the appellate courts
carefully considered the factual backdrop of the case as borne out by the
records. Both courts were one in the conclusion that Maxicare successfully
landed the Meralco account for the sale of healthcare plans only by virtue of
Estradas involvement and participation in the negotiations. The assailed
Decision aptly states:
There is no dispute as to the role that plaintiff-appellee
[Estrada] played in selling [Maxicares] health insurance plan
to Meralco. Plaintiff-appellee [Estradas] efforts consisted in
being the first to offer the Maxicare plan to Meralco, using
her connections with some of Meralco Executives, inviting
said executives to dinner meetings, making submissions and
representations regarding the health plan, sending follow-up
letters, etc.
These efforts were recognized by Meralco as shown by the
certification issued by its Manpower Planning and Research
Staff Head Ruben A. Sapitula on September 5, 1991, to wit:
This is to certify that Ms. Carmela Estrada
has initiated talks with us since November
1990 with regards (sic) to the HMO
requirements of both our rank and file
employees, managers and executives, and
that it was favorably recommended and the
same be approved by the Meralco
Management Committee.
xxxx
This Court finds that plaintiff-appellee [Estradas] efforts were
instrumental in introducing the Meralco account to [Maxicare]
in regard to the latters Maxicare health insurance plans.
Plaintiff-appellee [Estrada] was the efficient intervening
cause in bringing about the service agreement with Meralco.
As pointed out by the trial court in its October 8,
1999 Decision, to wit:
xxx Had not [Estrada] introduced Maxicare
Plans to her bosom friends, Messrs. Lopez
and Guingona of Meralco, PHPI would still
be an anonymity. xxx[10]

Under the foregoing circumstances, we are hard pressed to disturb the


findings of the RTC, which the CA affirmed.
We cannot overemphasize the principle that in petitions for review
on certiorari under Rules 45 of the Rules of Court, only questions of law may
be put into issue. Questions of fact are not cognizable by this Court. The
finding of efficient procuring cause by the CA is a question of fact which we
desist from passing upon as it would entail delving into factual matters on
which such finding was based. To reiterate, the rule is that factual findings of
the trial court, especially those affirmed by the CA, are conclusive on this
Court when supported by the evidence on record.[11]
The jettisoning of the petition is inevitable even upon a close perusal of the
merits of the case.
First. Maxicares contention that Estrada may only claim commissions from
membership dues which she has collected and remitted to Maxicare as
expressly provided for in the letter-agreement does not convince us. It is
readily apparent that Maxicare is attempting to evade payment of the
commission which rightfully belongs to Estrada as the broker who brought
the parties together. In fact, Maxicares former Chairman Roberto K.
Macasaet testified that Maxicare had been trying to land the Meralco account
for two (2) years prior to Estradas entry in 1990. [12] Even without that
admission, we note that Meralcos Assistant Vice-President, Donatila San
Juan, in a letter[13] dated January 21, 1992 to then Maxicare President Pedro
R. Sen, categorically acknowledged Estradas efforts relative to the sale of
Maxicare health plans to Meralco, thus:
Sometime in 1989, Meralco received a proposal from
Philippine Health-Care Providers, Inc. (Maxicare) through
the initiative and efforts of Ms. Carmela Estrada, who
introduced Maxicare to Meralco. Prior to this time, we did not
know that Maxicare is a major health care provider in the
country. We have since negotiated and signed up with
Maxicare to provide a health maintenance plan for
dependents of Meralco executives, effective December 1,
1991 to November 30, 1992.
At the very least, Estrada penetrated the Meralco market, initially closed to
Maxicare, and laid the groundwork for a business relationship. The only
reason Estrada was not able to participate in the collection and remittance of
premium dues to Maxicare was because she was prevented from doing so
by the acts of Maxicare, its officers, and employees.
In Tan v. Gullas,[14] we had occasion to define a broker and
distinguish it from an agent, thus:
[O]ne who is engaged, for others, on a commission,
negotiating contracts relative to property with the custody of

which he has no concern; the negotiator between the other


parties, never acting in his own name but in the name of
those who employed him. [A] broker is one whose
occupation is to bring the parties together, in matter of trade,
commerce or navigation.[15]
An agent receives a commission upon the successful
conclusion of a sale. On the other hand, a broker earns his
pay merely by bringing the buyer and the seller together,
even if no sale is eventually made.[16]
In relation thereto, we have held that the term procuring cause in describing
a brokers activity, refers to a cause originating a series of events which,
without break in their continuity, result in the accomplishment of the prime
objective of the employment of the brokerproducing a purchaser ready,
willing and able to buy on the owners terms. [17] To be regarded as the
procuring cause of a sale as to be entitled to a commission, a brokers efforts
must have been the foundation on which the negotiations resulting in a sale
began.[18] Verily, Estrada was instrumental in the sale of the Maxicare health
plans to Meralco. Without her intervention, no sale could have been
consummated.
Second. Maxicare next contends that Estrada herself admitted that her
negotiations with Meralco failed as shown in Annex F of the Complaint.
The chicanery and disingenuousness of Maxicares counsel is not
lost on this Court. We observe that this Annex F is, in fact, Maxicares
counsels letter dated April 10, 1992addressed to Estrada. The letter contains
a unilateral declaration by Maxicare that the efforts initiated and negotiations
undertaken by Estrada failed, such that the service agreement with Meralco
was supposedly directly negotiated by Maxicare. Thus, the latter effectively
declares that Estrada is not the efficient procuring cause of the sale, and as
such, is not entitled to commissions.
Our holding in Atillo III v. Court of Appeals,[19] ironically the case cited
by Maxicare to bolster its position that the statement in Annex F amounted to
an admission, provides a contrary answer to Maxicares ridiculous contention.
We intoned therein that in spite of the presence of judicial admissions in a
partys pleading, the trial court is still given leeway to consider other evidence
presented.[20] We ruled, thus:
As provided for in Section 4 of Rule 129 of the Rules of
Court, the general rule that a judicial admission is conclusive
upon the party making it and does not require proof admits
of two exceptions: 1) when it is shown that the admission
was made through palpable mistake, and 2) when it is
shown that no such admission was in fact made. The latter

exception allows one to contradict an admission by denying


that he made such an admission.
For instance, if a party invokes an admission
by an adverse party, but cites the admission
out of context, then the one making the
admission may show that he made no such
admission, or that his admission was taken
out of context. This may be interpreted as to
mean not in the sense in which the
admission is made to appear. That is the
reason for the modifier such.[21]
In this case, the letter, although part of Estradas Complaint, is
not, ipso facto, an admission of the statements contained therein, especially
since the bone of contention relates to Estradas entitlement to commissions
for the sale of health plans she claims to have brokered. It is more than
obvious from the entirety of the records that Estrada has unequivocally and
consistently declared that her involvement as broker is the proximate cause
which consummated the sale between Meralco and Maxicare.
Moreover, Section 34,[22] Rule 132 of the Rules of Court requires the
purpose for which the evidence is offered to be specified. Undeniably, the
letter was attached to the Complaint, and offered in evidence, to demonstrate
Maxicares bad faith and ill will towards Estrada.[23]
Even a cursory reading of the Complaint and all the pleadings filed
thereafter before the RTC, CA, and this Court, readily show that Estrada
does not concede, at any point, that her negotiations with Meralco failed.
Clearly, Maxicares assertion that Estrada herself does not pretend to be the
efficient procuring cause in the execution of the service agreement between
Meralco and Maxicare is baseless and an outright falsehood.
After muddling the issues and representing that Estrada made an
admission that her negotiations with Meralco failed, Maxicares counsel then
proceeds to cite a case which does not, by any stretch of the imagination,
bolster the flawed contention.
We, therefore, ADMONISH Maxicares counsel, and, in turn, remind
every member of the Bar that the practice of law carries with it
responsibilities which are not to be trifled with. Maxicares counsel ought to be
reacquainted with Canon 10[24] of the Code of Professional Responsibility,
specifically, Rule 10.02, to wit:
Rule 10.02 A lawyer shall not knowingly misquote or
misrepresent the contents of a paper, the language or the
argument of opposing counsel, or the text of a decision or
authority, or knowingly cite as law a provision already

rendered inoperative by repeal or amendment, or assert as a


fact that which has not been proved.
Third. Finally, we likewise affirm the uniform ruling of the RTC and CA that
Estrada is entitled to 10% of the total amount of premiums paid [25] by Meralco
to Maxicare as of May 1996. Maxicares argument that assuming Estrada is
entitled to commissions, such entitlement only covers the initial year of the
service agreement and should not include the premiums paid for the
succeeding renewals thereof, fails to impress. Considering that we have
sustained the lower courts factual finding of Estradas close, proximate and
causal connection to the sale of health plans, we are not wont to disturb
Estradas complete entitlement to commission for the total premiums paid
until May 1996 in the amount ofP20,169,335.00.
WHEREFORE, premises considered and finding no reversible error
committed by the Court of Appeals, the petition is hereby DENIED. Costs
against the petitioner.
SO ORDERED.

WHEREAS, the ASSIGNOR has agreed to transfer and consequently record


said transfer of the said BMW trademark and device in favor of the
ASSIGNEE herein with the Philippines Patent Office;

[G.R. No. 113074. January 22, 1997]


ALFRED HAHN, petitioner, vs. COURT OF APPEALS and BAYERISCHE
MOTOREN WERKE AKTIENGESELLSCHAFT (BMW), respondents.
DECISION
MENDOZA, J.:
This is a petition for review of the decision [1] of the Court of Appeals
dismissing a complaint for specific performance which petitioner had filed
against private respondent on the ground that the Regional Trial Court of
Quezon City did not acquire jurisdiction over private respondent, a
nonresident foreign corporation, and of the appellate court's order denying
petitioner's motion for reconsideration.
The following are the facts:
Petitioner Alfred Hahn is a Filipino citizen doing business under the name
and style "Hahn-Manila." On the other hand, private respondent Bayerische
Motoren Werke Aktiengesellschaft (BMW) is a nonresident foreign
corporation existing under the laws of the former Federal Republic of
Germany, with principal office at Munich, Germany.
On March 7, 1967, petitioner executed in favor of private respondent a
"Deed of Assignment with Special Power of Attorney," which reads in full as
follows:
WHEREAS, the ASSIGNOR is the present owner and holder of the BMW
trademark and device in the Philippines which ASSIGNOR uses and has
been using on the products manufactured by ASSIGNEE, and for which
ASSIGNOR is the authorized exclusive Dealer of the ASSIGNEE in the
Philippines, the same being evidenced by certificate of registration issued by
the Director of Patents on 12 December 1963 and is referred to as
Trademark No. 10625;

NOW THEREFORE, in view of the foregoing and in consideration of the


stipulations hereunder stated, the ASSIGNOR hereby affirms the said
assignment and transfer in favor of the ASSIGNEE under the following terms
and conditions:
1. The ASSIGNEE shall take appropriate steps against any user other than
ASSIGNOR or infringer of the BMW trademark in the Philippines, for such
purpose, the ASSIGNOR shall inform the ASSIGNEE immediately of any
such use or infringement of the said trademark which comes to his
knowledge and upon such information the ASSIGNOR shall automatically act
as Attorney-In-Fact of the ASSIGNEE for such case, with full power, authority
and responsibility to prosecute unilaterally or in concert with ASSIGNEE, any
such infringer of the subject mark and for purposes hereof the ASSIGNOR is
hereby named and constituted as ASSIGNEE's Attorney-In-Fact, but any
such suit without ASSIGNEE's consent will exclusively be the responsibility
and for the account of the ASSIGNOR,
2. That the ASSIGNOR and the ASSIGNEE shall continue business relations
as has been usual in the past without a formal contract, and for that purpose,
the dealership of ASSIGNOR shall cover the ASSIGNEE's complete
production program with the only limitation that, for the present, in view of
ASSIGNEE's limited production, the latter shall not be able to supply
automobiles to ASSIGNOR.
Per the agreement, the parties "continue[d] business relations as has
been usual in the past without a formal contract." But on February 16, 1993,
in a meeting with a BMW representative and the president of Columbia
Motors Corporation (CMC), Jose Alvarez, petitioner was informed that BMW
was arranging to grant the exclusive dealership of BMW cars and products to
CMC, which had expressed interest in acquiring the same. On February 24,
1993, petitioner received confirmation of the information from BMW which, in
a letter, expressed dissatisfaction with various aspects of petitioner's
business, mentioning among other things, decline in sales, deteriorating
services, and inadequate showroom and warehouse facilities, and
petitioner's alleged failure to comply with the standards for an exclusive BMW
dealer.[2] Nonetheless, BMW expressed willingness to continue business
relations with the petitioner on the basis of a "standard BMW importer"
contract, otherwise, it said, if this was not acceptable to petitioner, BMW

would have no alternative but to terminate petitioner's exclusive dealership


effective June 30, 1993.
Petitioner protested, claiming that the termination of his exclusive
dealership would be a breach of the Deed of Assignment. [3] Hahn insisted
that as long as the assignment of its trademark and device subsisted, he
remained BMW's exclusive dealer in the Philippines because the assignment
was made in consideration of the exclusive dealership. In the same letter
petitioner explained that the decline in sales was due to lower prices offered
for BMW cars in the United States and the fact that few customers returned
for repairs and servicing because of the durability of BMW parts and the
efficiency of petitioner's service.
Because of Hahn's insistence on the former business relation, BMW
withdrew on March 26, 1993 its offer of a "standard importer contract" and
terminated the exclusive dealer relationship effective June 30, 1993. [4] At a
conference of BMW Regional Importers held on April 26, 1993 in Singapore,
Hahn was surprised to find Alvarez among those invited from the Asian
region. On April 29, 1993, BMW proposed that Hahn and CMC jointly import
and distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he filed a
complaint for specific performance and damages against BMW to compel it
to continue the exclusive dealership. Later he filed an amended complaint to
include an application for temporary restraining order and for writs of
preliminary, mandatory and prohibitory injunction to enjoin BMW from
terminating his exclusive dealership. Hahn's amended complaint alleged in
pertinent parts:
2. Defendant [BMW] is a foreign corporation doing business in the
Philippines with principal offices at Munich, Germany. It may be served with
summons and other court processes through the Secretary of the
Department of Trade and Industry of the Philippines. . . ..
5. On March 7, 1967, Plaintiff executed in favor of defendant BMW a Deed of
Assignment with Special Power of Attorney covering the trademark and in
consideration thereof, under its first whereas clause, Plaintiff was duly
acknowledged as the "exclusive Dealer of the Assignee in the
Philippines" . . . .
8. From the time the trademark "BMW & DEVICE" was first used by the
Plaintiff in the Philippines up to the present, Plaintiff, through its firm name

"HAHN MANILA" and without any monetary contribution from defendant


BMW, established BMW's goodwill and market presence in the Philippines.
Pursuant thereto, Plaintiff has invested a lot of money and resources in order
to single-handedly compete against other motorcycle and car companies ....
Moreover, Plaintiff has built buildings and other infrastructures such as
service centers and showrooms to maintain and promote the car and
products of defendant BMW.
10. In a letter dated February 24, 1993, defendant BMW advised Plaintiff that
it was willing to maintain with Plaintiff a relationship but only "on the basis of
a standard BMW importer contract as adjusted to reflect the particular
situation in the Philippines" subject to certain conditions, otherwise,
defendant BMW would terminate Plaintiff's exclusive dealership and any
relationship for cause effective June 30, 1993. . . .
15. The actuations of defendant BMW are in breach of the assignment
agreement between itself and plaintiff since the consideration for the
assignment of the BMW trademark is the continuance of the exclusive
dealership agreement. It thus, follows that the exclusive dealership should
continue for so long as defendant BMW enjoys the use and ownership of the
trademark assigned to it by Plaintiff.
The case was docketed as Civil Case No. Q-93-15933 and raffled to
Branch 104 of the Quezon City Regional Trial Court, which on June 14, 1993
issued a temporary restraining order. Summons and copies of the complaint
and amended complaint were thereafter served on the private respondent
through the Department of Trade and Industry, pursuant to Rule 14, 14 of the
Rules of Court. The order, summons and copies of the complaint and
amended complaint were later sent by the DTI to BMW via registered mail on
June 15, 1993[5] and received by the latter on June 24, 1993.
On June 17, 1993, without proof of service on BMW, the hearing on the
application for the writ of preliminary injunction proceeded ex parte, with
petitioner Hahn testifying. On June 30, 1993, the trial court issued an order
granting the writ of preliminary injunction upon the filing of a bond
of P100,000.00. On July 13, 1993, following the posting of the required bond,
a writ of preliminary injunction was issued.
On July 1, 1993, BMW moved to dismiss the case, contending that the
trial court did not acquire jurisdiction over it through the service of summons
on the Department of Trade and Industry, because it (BMW) was a foreign
corporation and it was not doing business in the Philippines. It contended

that the execution of the Deed of Assignment was an isolated transaction;


that Hahn was not its agent because the latter undertook to assemble and
sell BMW cars and products without the participation of BMW and sold other
products; and that Hahn was an indentor or middleman transacting business
in his own name and for his own account.
Petitioner Alfred Hahn opposed the motion. He argued that BMW was
doing business in the Philippines through him as its agent, as shown by the
fact that BMW invoices and order forms were used to document his
transactions; that he gave warranties as exclusive BMW dealer; that BMW
officials periodically inspected standards of service rendered by him; and that
he was described in service booklets and international publications of BMW
as a "BMW Importer" or "BMW Trading Company" in the Philippines.
The trial court[6] deferred resolution of the Motion to dismiss until after
trial on the merits for the reason that the grounds advanced by BMW in its
motion did not seem to be indubitable.
Without seeking reconsideration of the aforementioned order, BMW filed
a petition for certiorari with the Court of Appeals alleging that:
I. THE RESPONDENT JUDGE ACTED WITH UNDUE HASTE OR
OTHERWISE INJUDICIOUSLY IN PROCEEDINGS LEADING
TOWARD THE ISSUANCE OF THE WRIT OF PRELIMINARY
INJUNCTION, AND IN PRESCRIBING THE TERMS FOR THE
ISSUANCE THEREOF.
II. THE RESPONDENT JUDGE PATENTLY ERRED IN DEFERRING
RESOLUTION OF THE MOTION TO DISMISS ON THE GROUND
OF LACK OF JURISDICTION, AND THEREBY FAILING TO
IMMEDIATELY DISMISS THE CASE A QUO.
BMW asked for the immediate issuance of a temporary restraining order and,
after hearing, for a writ of preliminary injunction, to enjoin the trial court from
proceeding further in Civil Case No. Q-93-15933. Private respondent pointed
out that, unless the trial court's order was set aside, it would be forced to
submit to the jurisdiction of the court by filing its answer or to accept
judgment in default, when the very question was whether the court had
jurisdiction over it.
The Court of Appeals enjoined the trial court from hearing petitioner's
complaint. On December 20, 1993, it rendered judgment finding the trial

court guilty of grave abuse of discretion in deferring resolution of the motion


to dismiss. It stated:
Going by the pleadings already filed with the respondent court before it came
out with its questioned order of July 26, 1993, we rule and so hold that
petitioner's (BMW) motion to dismiss could be resolved then and there, and
that the respondent judge's deferment of his action thereon until after trial on
the merit constitutes, to our mind, grave abuse of discretion.. . . .
. . . [T]here is not much appreciable disagreement as regards the factual
matters relating, to the motion to dismiss. What truly divide (sic) the parties
and to which they greatly differ is the legal conclusions they respectively
draw from such facts, (sic) with Hahn maintaining that on the basis thereof,
BMW is doing business in the Philippines while the latter asserts that it is not.
Then, after stating that any ruling which the trial court might make on the
motion to dismiss would anyway be elevated to it on appeal, the Court of
Appeals itself resolved the motion. It ruled that BMW was not doing business
in the country and, therefore, jurisdiction over it could not be acquired
through service of summons on the DTI pursuant to Rule 14, Section 14. The
court upheld private respondent's contention that Hahn acted in his own
name and for his own account and independently of BMW, based on Alfred
Hahn's allegations that he had invested his own money and resources in
establishing BMW's goodwill in the Philippines and on BMW's claim that
Hahn sold products other than those of BMW. It held that petitioner was a
mere indentor or broker and not an agent through whom private respondent
BMW transacted business in the Philippines. Consequently, the Court of
Appeals dismissed petitioner's complaint against BMW.
Hence, this appeal. Petitioner contends that the Court of Appeals erred
(1) in finding that the trial court gravely abused its discretion in deferring
action on the motion to dismiss and (2) in finding that private respondent
BMW is not doing business in the Philippines and, for this reason, dismissing
petitioner's case.
Petitioner's appeal is well taken. Rule 14, 14 provides:
14. Service upon foreign corporations. If the defendant is a foreign
corporation, or a nonresident joint stock company or association, doing
business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose, or, if there be no such

agent, on the government official designated by law to that effect, or on any


of its officers or agents within the Philippines. (Emphasis added)
What acts are considered "doing business in the Philippines" are
enumerated in 3(d) of the Foreign Investments Act of 1991 (R.A. No. 7042)
as follows:[7]
d) the phrase "doing business" shall include soliciting orders, service
contracts, opening offices, whether called "liaison" offices or
branches, appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the country for a
period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines; and any other
act or acts that imply a continuity of commercial dealings or
arrangements and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or
of the purpose and object of the business organization: Provided,
however, That the phrase "doing business" shall not be deemed to
include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having, a nominee director or
officer to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own
account. (Emphasis supplied)
Thus, the phrase includes "appointing representatives or distributors in
the Philippines" but not when the representative or distributor "transacts
business in its name and for its own account." In addition, Section 1(f)(1) of
the Rules and Regulations implementing (IRR) the Omnibus Investment
Code of 1987 (E.O. No. 226) provided:
(f) "Doing business" shall be any act or combination of acts, enumerated in
Article 44 of the Code. In particular, "doing business" includes:
(1).... A foreign firm which does business through middlemen acting in their
own names, such as indentors, commercial brokers or commission
merchants, shall not be deemed doing business in the Philippines. But such
indentors, commercial brokers or commission merchants shall be the ones
deemed to be doing business in the Philippines.

The question is whether petitioner Alfred Hahn is the agent or distributor


in the Philippines of private respondent BMW. If he is, BMW may be
considered doing business in the Philippines and the trial court acquired
jurisdiction over it (BMW) by virtue of the service of summons on the
Department of Trade and Industry. Otherwise, if Hahn is not the agent of
BMW but an independent dealer, albeit of BMW cars and products, BMW, a
foreign corporation, is not considered doing business in the Philippines within
the meaning of the Foreign Investments Act of 1991 and the IRR, and the
trial court did not acquire jurisdiction over it (BMW).
The Court of Appeals held that petitioner Alfred Hahn acted in his own
name and for his own account and not as agent or distributor in the
Philippines of BMW on the ground that "he alone had contacts with
individuals or entities interested in acquiring BMW vehicles. Independence
characterizes Hahn's undertakings, for which reason he is to be considered,
under governing statutes, as doing business." (p. 13) In support of this
conclusion, the appellate court cited the following allegations in Hahn's
amended complaint:
8. From the time the trademark "BMW & DEVICE" was first used by the
Plaintiff in the Philippines up to the present, Plaintiff, through its firm name
"HAHN MANILA" and without any monetary contributions from defendant
BMW; established BMW's goodwill and market presence in the Philippines.
Pursuant thereto, Plaintiff invested a lot of money and resources in order to
single-handedly compete against other motorcycle and car companies....
Moreover, Plaintiff has built buildings and other infrastructures such as
service centers and showrooms to maintain and promote the car and
products of defendant BMW.
As the above quoted allegations of the amended complaint show,
however, there is nothing to support the appellate court's finding that Hahn
solicited orders alone and for his own account and without "interference from,
let alone direction of, BMW." (p. 13) To the contrary, Hahn claimed he took
orders for BMW cars and transmitted them to BMW. Upon receipt of the
orders, BMW fixed the down payment and pricing charges, notified Hahn of
the scheduled production month for the orders, and reconfirmed the orders
by signing and returning to Hahn the acceptance sheets. Payment was made
by the buyer directly to BMW. Title to cars purchased passed directly to the
buyer and Hahn never paid for the purchase price of BMW cars sold in the
Philippines. Hahn was credited with a commission equal to 14% of the
purchase price upon the invoicing of a vehicle order by BMW. Upon
confirmation in writing that the vehicles had been registered in the Philippines
and serviced by him, Hahn received an additional 3% of the full purchase

price. Hahn performed after-sale services, including, warranty services, for


which he received reimbursement from BMW. All orders were on invoices
and forms of BMW.[8]
These allegations were substantially admitted by BMW which, in its
petition for certiorari before the Court of Appeals, stated:[9]
9.4. As soon as the vehicles are fully manufactured and full payment of the
purchase prices are made, the vehicles are shipped to the Philippines. (The
payments may be made by the purchasers or third-persons or even by
Hahn.) The bills of lading are made up in the name of the purchasers, but
Hahn-Manila is therein indicated as the person to be notified.
9.5. It is Hahn who picks up the vehicles from the Philippine ports, for
purposes of conducting pre-delivery inspections. Thereafter, he delivers the
vehicles to the purchasers.
9.6. As soon as BMW invoices the vehicle ordered, Hahn is credited with a
commission of fourteen percent (14%) of the full purchase price thereof, and
as soon as he confirms in writing, that the vehicles have been registered in
the Philippines and have been serviced by him, he will receive an additional
three percent (3%) of the full purchase prices as commission.
Contrary to the appellate court's conclusion, this arrangement shows an
agency. An agent receives a commission upon the successful conclusion of a
sale. On the other hand, a broker earns his pay merely by bringing the buyer
and the seller together, even if no sale is eventually made.
As to the service centers and showrooms which he said he had put up
at his own expense, Hahn said that he had to follow BMW specifications as
exclusive dealer of BMW in the Philippines. According to Hahn, BMW
periodically inspected the service centers to see to it that BMW standards
were maintained. Indeed, it would seem from BMW's letter to Hahn that it
was for Hahn's alleged failure to maintain BMW standards that BMW was
terminating Hahn's dealership.
The fact that Hahn invested his own money to put up these service
centers and showrooms does not necessarily prove that he is not an agent of
BMW. For as already noted, there are facts in the record which suggest that
BMW exercised control over Hahn's activities as a dealer and made regular
inspections of Hahn's premises to enforce compliance with BMW standards

and specifications.[10] For example, in its letter to Hahn dated February 23,
1996, BMW stated:
In the last years we have pointed out to you in several discussions and
letters that we have to tackle the Philippine market more professionally
and that we are through your present activities not adequately prepared
to cope with the forthcoming challenges.[11]
In effect, BMW was holding Hahn accountable to it under the 1967
Agreement.
This case fits into the mould of Communications Materials, Inc. v. Court
of Appeals,[12] in which the foreign corporation entered into a "Representative
Agreement" and a "Licensing Agreement" with a domestic corporation, by
virtue of which the latter was appointed "exclusive representative" in the
Philippines for a stipulated commission. Pursuant to these contracts, the
domestic corporation sold products exported by the foreign corporation and
put up a service center for the products sold locally. This Court held that
these acts constituted doing business in the Philippines. The arrangement
showed that the foreign corporation's purpose was to penetrate the Philippine
market and establish its presence in the Philippines.
In addition, BMW held out private respondent Hahn as its exclusive
distributor in the Philippines, even as it announced in the Asian region that
Hahn was the "official BMW agent" in the Philippines. [13]
The Court of Appeals also found that petitioner Alfred Hahn dealt in
other products, and not exclusively in BMW products, and, on this basis,
ruled that Hahn was not an agent of BMW. (p. 14) This finding is based
entirely on allegations of BMW in its motion to dismiss filed in the trial court
and in its petition for certiorari before the Court of Appeals.[14] But this
allegation was denied by Hahn [15] and therefore the Court of Appeals should
not have cited it as if it were the fact.
Indeed this is not the only factual issue raised, which should have
indicated to the Court of Appeals the necessity of affirming the trial court's
order deferring resolution of BMW's motion to dismiss. Petitioner alleged that
whether or not he is considered an agent of BMW, the fact is that BMW did
business in the Philippines because it sold cars directly to Philippine
buyers. [16]This was denied by BMW, which claimed that Hahn was not its
agent and that, while it was true that it had sold cars to Philippine buyers, this
was done without solicitation on its part.[17]

It is not true then that the question whether BMW is doing business
could have been resolved simply by considering the parties' pleadings. There
are genuine issues of facts which can only be determined on the basis of
evidence duly presented. BMW cannot short circuit the process on the plea
that to compel it to go to trial would be to deny its right not to submit to the
jurisdiction of the trial court which precisely it denies. Rule 16, 3 authorizes
courts to defer the resolution of a motion to dismiss until after the trial if the
ground on which the motion is based does not appear to be indubitable. Here
the record of the case bristles with factual issues and it is not at all clear
whether some allegations correspond to the proof.
Anyway, private respondent need not apprehend that by responding to
the summons it would be waiving its objection to the trial court's jurisdiction. It
is now settled that. for purposes of having summons served on a foreign
corporation in accordance with Rule 14, 14, it is sufficient that it be alleged in
the complaint that the foreign corporation is doing business in the
Philippines. The court need not go beyond the allegations of the complaint in
order to determine whether it has jurisdiction. [18] A determination that the
foreign corporation is doing business is only tentative and is made only for
the purpose of enabling the local court to acquire jurisdiction over the foreign
corporation through service of summons pursuant to Rule 14, 14. Such
determination does not foreclose a contrary finding should evidence later
show that it is not transacting business in the country. As this Court has
explained:
This is not to say, however, that the petitioner's right to question the
jurisdiction of the court over its person is now to be deemed a foreclosed
matter. If it is true, as Signetics claims, that its only involvement in the
Philippines was through a passive investment in Sigfil, which it even later
disposed of, and that TEAM Pacific is not its agent, then it cannot really be
said to be doing business in the Philippines. It is a defense, however, that
requires the contravention of the allegations of the complaint, as well as a full
ventilation, in effect, of the main merits of the case, which should not thus be
within the province of a mere motion to dismiss. So, also, the issue posed by
the petitioner as to whether a foreign corporation which has done business in
the country, but which has ceased to do business at the time of the filing, of a
complaint, can still be made to answer for a cause of action which accrued
while it was doing, business, is another matter that would yet have to await
the reception and admission of evidence. Since these points have
seasonably been raised by the petitioner, there should be no real cause for
what may understandably be its apprehension, i.e., that by its participation
during the trial on the merits, it may, absent an invocation of separate or

independent reliefs of its own, be considered to have voluntarily submitted


itself to the court's jurisdiction.[19]
Far from committing an abuse of discretion, the trial court properly
deferred resolution of the motion to dismiss and thus avoided prematurely
deciding a question which requires a factual basis, with the same result if it
had denied the motion and conditionally assumed jurisdiction. It is the Court
of Appeals which, by ruling that BMW is not doing business on the basis
merely of uncertain allegations in the pleadings, disposed of the whole case
with finality and thereby deprived petitioner of his right to be heard on his
cause of action. Nor was there justification for nullifying the writ of preliminary
injunction issued by the trial court. Although the injunction was issued ex
parte, the fact is that BMW was subsequently heard on its defense by filing a
motion to dismiss.
WHEREFORE, the decision of the Court of Appeals is REVERSED and
the case is REMANDED to the trial court for further proceedings.
SO ORDERED.

[G.R. No. 66541. November 20, 1990.]


GUARDEX ENTERPRISES and/or MARCELINA A.
ESCANDOR, Petitioners, v. NATIONAL LABOR RELATIONS
COMMISSION and JUMBEE ORBETA, Respondents.
Rogelio B. De Guzman, for Petitioners.
Vicente R. Guzman for Private Respondent.
SYLLABUS
1. REMEDIAL LAW; CRIMINAL PROCEDURE; SEARCH WARRANT;
PROBABLE CAUSE; DEFINITION AND REQUISITES THEREOF. The
right against unreasonable searches and seizures is guaranteed under
Article III (Bill of Rights), Section 2 of the 1987 Constitution of the Philippines.
Under this provision, the issuance of a search warrant is justified only upon a
finding of probable cause. Probable cause for a search has been defined as
such facts and circumstances which would lead a reasonably discreet and
prudent man to believe that an offense has been committed and that the
objects sought in connection with the offense are in the place sought to be
searched (Burgos, Sr. v. Chief of Staff, G.R. No. 64261, Dec. 26, 1984, 133
SCRA 800). In determining the existence of probable cause, it is required
that: 1) the judge (or) officer must examine the . . witnesses personally; 2)
the examination must be under oath; and (3) the examination must be
reduced to writing in the form of searching questions and answers (Marinas
v. Sioco, 104 SCRA 403, Ponsica v. Ignalaga, G.R. No. 72301, July 31, 1987,
152 SCRA 647). These requirements are provided under Section 4, Rule 126
of
the
New
Rules
of
Criminal
Procedure.
2. ID.; ID.; ID.; ID.; FINDING OR OPINION THEREOF BY THE EXAMINING
JUDGE, MUST BE SUPPORTED BY THE RECORD; NOT OBSERVED IN
THE CASE AT BAR. It has been ruled that the existence of probable
cause depends to a large degree upon the finding or opinion of the judge
conducting the examination (Luna v. Plaza, G.R. No. L-27511, Nov. 29,

1968), however, the opinion or finding of probable cause must, to a certain


degree, be substantiated or supported by the record. In this case, We find
that the requirement mandated by the law and the rules that the judge must
personally examine the applicant and his witnesses in the form of searching
questions and answers before issuing the warrant, was not sufficiently
complied with. The applicant himself was not asked any searching question
by Judge Magallanes. The records disclose that the only part played by the
applicant, Lieutenant Rojas was to subscribe the application before Judge
Magallanes. The application contained pre-typed questions, none of which
stated that applicant had personal knowledge of a robbery or a theft and that
the proceeds thereof are in the possession and control of the person against
whom the search warrant was sought to be issued. In the case of Roan v.
Gonzales, G.R. No. 71410, Nov. 25, 1986, 145 SCRA 687, citing the case of
Mata v. Bayona, G.R. No. 50720, March 26, 1984, 128 SCRA 388, where the
applicant himself was not subjected to an interrogation but was questioned
only "to ascertain, among others, if he knew and understood (his affidavit)
and only because the application was not yet subscribed and sworn to," We
held that: "It is axiomatic that the examination must be probing and
exhaustive, not merely routinary or pro forma, if the claimed probable cause
is to be established. The examining magistrate must not simply rehash the
contents of the affidavit but must make his own inquiry on the intent and
justification
of
the
application."cralaw
virtua1aw
library
3. ID.; ID.; ID.; ARTICLES SOUGHT TO BE SEIZED, MUST BE DESCRIBED
WITH PARTICULARITY. Another infirmity of Search Warrant No. 181 is its
generality. The law requires that the articles sought to be seized must be
described with particularity. The items listed in the warrant, to wit:
"NAPOCOR Galvanized bolts, grounding motor drive assembly, aluminum
wires and other NAPOCOR Towers parts and line accessories" are so
general that the searching team can practically take half of the business of
Kener Trading, the premises searched. Kener Trading, as alleged in
petitioners petition before respondent Court of Appeals and which has not
been denied by respondent, is engaged in the business of buying and selling
scrap metals, second hand spare parts and accessories and empty bottles.
Far more important is that the items described in the application do not fall
under the list of personal property which may be seized under Section 2,
Rule 126 of the Rules on Criminal Procedure because neither the application
nor the joint deposition alleged that the item/s sought to be seized were: a)
the subject of an offense; b) stolen or embezzled property and other
proceeds or fruits of an offense; and c) used or intended to be used as a
means
of
committing
an
offense.
4. ID.; ID.; ID.;SEIZURE OF INCRIMINATING ARTICLES, CANNOT
VALIDATE AN INVALID WARRANT. No matter how incriminating the
articles taken from the petitioner may be, their seizure cannot validate an
invalid warrant. Again, in the case of Mata v. Bayona, G.R. No. 50720, March

26, 1984, 128 SCRA 388: ". . . that nothing can justify the issuance of the
search warrant but the fulfillment of the legal requisites. It might be well to
point out what has been said in Asian Surety & Insurance Co., Inc. v.
Herrera: It has been said that of all the rights of a citizen, few are of greater
importance or more essential to his peace and happiness than the right of
personal security, and that involves the exemption of his private affairs,
books and papers from inspection and scrutiny of others. While the power to
search and seize is necessary to the public welfare, still it must be exercised
and the law enforced without transgressing the constitutional rights of the
citizens, for the enforcement of no statute is of sufficient importance to justify
indifference to the basic principles of government." "Thus, in issuing a search
warrant the Judge must strictly comply with the requirements of the
Constitution and the statutory provisions. A liberal construction should be
given in favor of the individual to prevent stealthy encroachment upon, or
gradual depreciation of the rights secured by the Constitution. No
presumption of regularity are to be invoked in aid of the process when an
officer undertakes to justify it."
DECISION
NARVASA, J.:
A claim for alleged unpaid commissions of an agent is what is basically
involved in the action at bar. Somehow, it twice escaped outright rejection for
lack of jurisdiction in the Department of Labor where the case was resolved
at the first instance and on appeal. Both the Labor Arbiter and the National
Labor Relations Commission appeared unaware of the utter lack of laborrelated issues in the parties conflicting contentions as to the existence of
agency relations between them, and proceeded to decide the case. Neither
of them of course had competence to do so. Be that as it may, the instant
petition for certiorari will be decided on its merits to the end that the
controversy may now be laid to rest without further proceedings.chanrobles
virtual lawlibrary
The protagonists in this case are:chanrob1es virtual 1aw library
1) Marcelina A. Escandor engaged, under the name and style of Guardex
Enterprises, in (a) the manufacture and sale of fire-fighting equipment such
as fire extinguishers, fire hose cabinets and related products, and (b)
occasionally, the building or fabrication of fire trucks; and
2) Jumbee Orbeta a "freelance" salesman. 1
It appears that Orbeta somehow learned that Escandor had offered to
fabricate a fire truck for Rubberworld (Phil.) Inc. He wrote to Escandor
inquiring about the amount of commission for the sale of a fire truck.

Escandor wrote back on the same day to advise that it was P15,000.00 per
unit. Four days later, Orbeta offered to look after (follow-up) Escandors
pending proposal to sell a fire truck to Rubberworld, and asked for P250.00
as representation expenses. Escandor agreed and gave him the money.

Manager.

When no word was received by Escandor from Orbeta after three days, she
herself inquired in writing from Rubberworld about her offer of sale of a fire
truck. Having apparently received an encouraging response, Escandor sent
Rubberworld a revised price quotation some ten days later.

Escandor denies that she had ever given Orbeta any such verbal authority.
Indeed, months prior to Orbetas approaching Escandor, the latter had
already made a written offer of a fire truck to Rubberworld. All that she
consented to was for Orbeta to "follow up" that pending offer. In truth, it does
not even appear that on the strength of this "arrangement" vague as it was
Orbeta undertook the promised follow-up at all. He reported nothing of his
efforts or their fruits to Escandor. It was Escandor who, in the months that
followed her initial meeting with Orbeta, determinedly pushed the
Rubberworld deal. Orbeta was simply nowhere to be found. Furthermore, it
seems fairly evident that the "representation allowance" of P250 was meant
to cover the expenses for the "follow-up" offered by Orbeta an ambiguous
fact which does not of itself suggest the creation of an agency and is not at
all inconsistent with the theory of its absence in this case.

In the meantime, Orbeta sold to other individuals some of Escandors fire


extinguishers, receiving traveling expenses in connection therewith as well
as the corresponding commissions. He then dropped out of sight.
About seven months afterwards, Escandor herself finally concluded a
contract with Rubberworld for the latters purchase of a fire truck. The
transaction was consummated with the delivery of the truck and full payment
thereof by Rubberworld.
At this point, Orbeta suddenly reappeared and asked for his commission for
the sale of the fire truck to Rubberworld. Escandor refused, saying that he
had had nothing to do with the offer, negotiation and consummation of the
sale.
Insisting that he was entitled to the commission, Orbeta filed a complaint
against Escandor with the Ministry of Labor. The Labor Arbiter agreed with
him and rendered judgment in his favor, on August 26, 1982. That judgment
was affirmed by the National Labor Relations Commission on December 29,
1983, on appeal taken by Escandor. 2 Hence, this petition for certiorari, to
annul those judgments as having been rendered with grave abuse of
discretion if not indeed without or in excess of jurisdiction.
It is claimed that an implied agency had been created between Escandor and
Orbeta on the basis of the following circumstances:chanrobles virtual
lawlibrary
1) the alleged verbal authority given to him to offer a fire truck to
Rubberworld;
2) the alleged written authority to sell the truck contained in a letter of
Escandors dated August 14, 1978;
3) Escandors having given Orbeta P250.00 as representation expenses; and
4) Orbetas submission of a price quotation to Rubberworld and his having
arranged a meeting between Escandor and Rubberworlds Purchasing

The circumstances have not been correctly read by Orbeta and his corespondents.

Even a finding that under these circumstances, an agency had indeed been
constituted will not save the day for Orbeta, because nothing in the record
tends to prove that he succeeded in carrying out its terms or even as much
as attempted to do so. The evidence in fact clearly indicates otherwise. The
terms of Escandors letter of August 14, 1978 assuming that it was indeed
an "authority to sell," as Orbeta insists are to the effect that entitlement to
the P15,000 commission is contingent on the purchase by a customer of a
fire truck, the implicit condition being that the agent would earn the
commission if he was instrumental in bringing the sale about. Orbeta
certainly had nothing to do with the sale of the fire truck, and is not therefore
entitled to any commission at all.
Furthermore, even if Orbeta is considered to have been Escandors agent for
the time he was supposed to "follow up" the offer to sell, such agency would
have been deemed revoked upon the resumption of direct negotiations
between Escandor and Rubberworld, Orbeta having in the meantime
abandoned all efforts (if indeed any were exerted) to secure the deal in
Escandors behalf.chanrobles law library : red
It has of course already been stated at the outset that, given the sole issue
raised by the parties concededly from the cases inception (i.e., whether or
not Orbeta is Escandors agent as regards the sale of a fire truck to
Rubberworld), the competence to resolve the controversy did not pertain to
either the Labor Arbiter or the NLRC. The jurisdiction vested in them by the
Labor Code extends, generally speaking, only to cases arising from
employer-employee relationships.3 What has all along been at issue here, as
advanced by the parties themselves and as is evident from the facts, is the

existence of a contract of agency 4 not employment or lease of services. It


is indeed a puzzle how the fundamental differences between the two 5
altogether escaped not only the parties counsel in this case but also the
tribunals before which it had been brought. Nevertheless, since no one has
thought to question their authority even up to this late stage, as in fact all the
parties appear to have completely accepted the validity of their exercise of
jurisdiction over the case, the Court has opted, as already stated, to render
judgment on its merits and end the controversy once and for all. 6
WHEREFORE, the petition for certiorari is GRANTED, and the judgment of
the National Labor Relations Commission dated December 29, 1983, and
that of the Labor Arbiter dated August 26, 1982, are hereby REVERSED and
SET ASIDE and another one rendered dismissing respondent Jumbee
Orbetas claim for unpaid commissions.chanrobles virtual lawlibrary
SO ORDERED.

G.R. No. 82040 August 27, 1991


BA FINANCE CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS, Hon. Presiding Judge of Regional Trial
Court of Manila, Branch 43, MANUEL CUADY and LILIA
CUADY, respondents.
Valera, Urmeneta & Associates for petitioner.
Pompeyo L. Bautista for private respondents.

PARAS, J.:p
This is a petition for review on certiorari which seeks to reverse and set aside
(1) the decision of the Court of Appeals dated July 21, 1987 in CA-G.R. No.
CV-06522 entitled "B.A. Finance Corporation, Plaintiff-Appellant, vs. Manuel
Cuady and Lilia Cuady, Defendants-Appellees," affirming the decision of the
Regional Trial Court of Manila, Branch 43, which dismissed the complaint in
Civil Case No. 82-10478, and (2) the resolution dated February 9, 1988
denying petitioner's motion for reconsideration.
As gathered from the records, the facts are as follows:
On July 15, 1977, private respondents Manuel Cuady and Lilia Cuady
obtained from Supercars, Inc. a credit of P39,574.80, which amount covered
the cost of one unit of Ford Escort 1300, four-door sedan. Said obligation
was evidenced by a promissory note executed by private respondents in
favor of Supercars, Inc., obligating themselves to pay the latter or order the
sum of P39,574.80, inclusive of interest at 14% per annum, payable on
monthly installments of P1,098.00 starting August 16, 1977, and on the 16th
day of the next 35 months from September 16, 1977 until full payment

thereof. There was also stipulated a penalty of P10.00 for every month of late
installment payment. To secure the faithful and prompt compliance of the
obligation under the said promissory note, the Cuady spouses constituted a
chattel mortage on the aforementioned motor vehicle. On July 25, 1977,
Supercars, Inc. assigned the promissory note, together with the chattel
mortgage, to B.A. Finance Corporation. The Cuadys paid a total of
P36,730.15 to the B.A. Finance Corporation, thus leaving an unpaid balance
of P2,344.65 as of July 18, 1980. In addition thereto, the Cuadys owe B.A.
Finance Corporation P460.00 representing penalties or surcharges for tardy
monthly installments (Rollo, pp. 27-29).

petitioner, filed a motion for postponement, the reason being that the
"handling" counsel, Atty. Ferdinand Macibay was temporarily assigned in
Cebu City and would not be back until after August 15, 1984. Said motion
was, however, denied by the trial court on August 10, 1984. On August 15,
1984, the date of hearing, the trial court allowed private respondents to
adduce evidence ex-parte in the form of an affidavit to be sworn to before
any authorized officer. B.A. Finance Corporation filed a motion for
reconsideration of the order of the trial court denying its motion for
postponement. Said motion was granted in an order dated September 26,
1984, thus:

Parenthetically, the B.A. Finance Corporation, as the assignee of the


mortgage lien obtained the renewal of the insurance coverage over the
aforementioned motor vehicle for the year 1980 with Zenith Insurance
Corporation, when the Cuadys failed to renew said insurance coverage
themselves. Under the terms and conditions of the said insurance coverage,
any loss under the policy shall be payable to the B.A. Finance Corporation
(Memorandum for Private Respondents, pp. 3-4).

The Court grants plaintiff's motion for reconsideration dated


August 22, 1984, in the sense that plaintiff is allowed to
adduce evidence in the form of counter-affidavits of its
witnesses, to be sworn to before any person authorized to
administer oaths, within ten days from notice hereof. (Ibid.,
pp. 1-2).

On April 18, 1980, the aforementioned motor vehicle figured in an accident


and was badly damaged. The unfortunate happening was reported to the
B.A. Finance Corporation and to the insurer, Zenith Insurance Corporation.
The Cuadys asked the B.A. Finance Corporation to consider the same as a
total loss, and to claim from the insurer the face value of the car insurance
policy and apply the same to the payment of their remaining account and
give them the surplus thereof, if any. But instead of heeding the request of
the Cuadys, B.A. Finance Corporation prevailed upon the former to just have
the car repaired. Not long thereafter, however, the car bogged down. The
Cuadys wrote B.A. Finance Corporation requesting the latter to pursue their
prior instruction of enforcing the total loss provision in the insurance
coverage. When B.A. Finance Corporation did not respond favorably to their
request, the Cuadys stopped paying their monthly installments on the
promissory note (Ibid., pp. 45).
On June 29, 1982, in view of the failure of the Cuadys to pay the remaining
installments on the note, B.A. Finance Corporation sued them in the
Regional Trial Court of Manila, Branch 43, for the recovery of the said
remaining installments (Memorandum for the Petitioner, p. 1).
After the termination of the pre-trial conference, the case was set for trial on
the merits on April 25, 1984. B.A. Finance Corporation's evidence was
presented on even date and the presentation of Cuady's evidence was set on
August 15, 1984. On August 7,1984, Atty. Noel Ebarle, counsel for the

B.A. Finance Corporation, however, never complied with the abovementioned order, paving the way for the trial court to render its decision on
January 18, 1985, the dispositive portion of which reads as follows:
IN VIEW WHEREOF, the Court DISMISSES the complaint
without costs.
SO ORDERED. (Rollo, p. 143)
On appeal, the respondent appellate court * affirmed the decision of the trial
court. The decretal portion of the said decision reads as follows:
WHEREFORE, after consultation among the undersigned
members of this Division, in compliance with the provision of
Section 13, Article VIII of the Constitution; and finding no
reversible error in the judgment appealed from, the same is
hereby AFFIRMED, without any pronouncement as to costs.
(Ibid., p. 33)
B.A. Finance Corporation moved for the reconsideration of the above
decision, but the motion was denied by the respondent appellate court in a
resolution dated February 9, 1988 (Ibid., p. 38).
Hence, this present recourse.

On July 11, 1990, this Court gave due course to the petition and required the
parties to submit their respective memoranda. The parties having complied
with the submission of their memoranda, the case was submitted for
decision.
The real issue to be resolved in the case at bar is whether or not B.A.
Finance Corporation has waived its right to collect the unpaid balance of the
Cuady spouses on the promissory note for failure of the former to enforce the
total loss provision in the insurance coverage of the motor vehicle subject of
the chattel mortgage.
It is the contention of B.A. Finance Corporation that even if it failed to enforce
the total loss provision in the insurance policy of the motor vehicle subject of
the chattel mortgage, said failure does not operate to extinguish the unpaid
balance on the promissory note, considering that the circumstances
obtaining in the case at bar do not fall under Article 1231 of the Civil Code
relative to the modes of extinguishment of obligations (Memorandum for the
Petitioner, p. 11).
On the other hand, the Cuadys insist that owing to its failure to enforce the
total loss provision in the insurance policy, B.A. Finance Corporation lost not
only its opportunity to collect the insurance proceeds on the mortgaged motor
vehicle in its capacity as the assignee of the said insurance proceeds
pursuant to the memorandum in the insurance policy which states that the
"LOSS: IF ANY, under this policy shall be payable to BA FINANCE CORP., as
their respective rights and interest may appear" (Rollo, p. 91) but also the
remaining balance on the promissory note (Memorandum for the
Respondents, pp. 16-17).
The petition is devoid of merit.
B.A. Finance Corporation was deemed subrogated to the rights and
obligations of Supercars, Inc. when the latter assigned the promissory note,
together with the chattel mortgage constituted on the motor vehicle in
question in favor of the former. Consequently, B.A. Finance Corporation is
bound by the terms and conditions of the chattel mortgage executed between
the Cuadys and Supercars, Inc. Under the deed of chattel mortgage, B.A.
Finance Corporation was constituted attorney-in-fact with full power and
authority to file, follow-up, prosecute, compromise or settle insurance claims;
to sign execute and deliver the corresponding papers, receipts and
documents to the Insurance Company as may be necessary to prove the
claim, and to collect from the latter the proceeds of insurance to the extent of

its interests, in the event that the mortgaged car suffers any loss or damage
(Rollo, p. 89). In granting B.A. Finance Corporation the aforementioned
powers and prerogatives, the Cuady spouses created in the former's favor an
agency. Thus, under Article 1884 of the Civil Code of the Philippines, B.A.
Finance Corporation is bound by its acceptance to carry out the agency, and
is liable for damages which, through its non-performance, the Cuadys, the
principal in the case at bar, may suffer.
Unquestionably, the Cuadys suffered pecuniary loss in the form of salvage
value of the motor vehicle in question, not to mention the amount equivalent
to the unpaid balance on the promissory note, when B.A. Finance
Corporation steadfastly refused and refrained from proceeding against the
insurer for the payment of a clearly valid insurance claim, and continued to
ignore the yearning of the Cuadys to enforce the total loss provision in the
insurance policy, despite the undeniable fact that Rea Auto Center, the auto
repair shop chosen by the insurer itself to repair the aforementioned motor
vehicle, misrepaired and rendered it completely useless and unserviceable
(Ibid., p. 31).
Accordingly, there is no reason to depart from the ruling set down by the
respondent appellate court. In this connection, the Court of Appeals said:
... Under the established facts and circumstances, it is
unjust, unfair and inequitable to require the chattel
mortgagors, appellees herein, to still pay the unpaid balance
of their mortgage debt on the said car, the non-payment of
which account was due to the stubborn refusal and failure of
appellant mortgagee to avail of the insurance money which
became due and demandable after the insured motor vehicle
was badly damaged in a vehicular accident covered by the
insurance risk. ... (Ibid.)
On the allegation that the respondent court's findings that B.A. Finance
Corporation failed to claim for the damage to the car was not supported by
evidence, the records show that instead of acting on the instruction of the
Cuadys to enforce the total loss provision in the insurance policy, the
petitioner insisted on just having the motor vehicle repaired, to which private
respondents reluctantly acceded. As heretofore mentioned, the repair shop
chosen was not able to restore the aforementioned motor vehicle to its
condition prior to the accident. Thus, the said vehicle bogged down shortly
thereafter. The subsequent request of the Cuadys for the B.A. Finance
Corporation to file a claim for total loss with the insurer fell on deaf ears,

prompting the Cuadys to stop paying the remaining balance on the


promissory note (Memorandum for the Respondents, pp. 4-5).
Moreover, B.A. Finance Corporation would have this Court review and
reverse the factual findings of the respondent appellate court. This, of
course, the Court cannot and will not generally do. It is axiomatic that the
judgment of the Court of Appeals is conclusive as to the facts and may not
ordinarily be reviewed by the Supreme Court. The doctrine is, to be sure,
subject to certain specific exceptions none of which, however, obtains in the
instant case (Luzon Brokerage Corporation v. Court of Appeals, 176 SCRA
483 [1989]).
Finally, B.A. Finance Corporation contends that respondent trial court
committed grave abuses of discretion in two instances: First, when it denied
the petitioner's motion for reconsideration praying that the counsel be
allowed to cross-examine the affiant, and; second, when it seriously
considered the evidence adduced ex-parte by the Cuadys, and heavily relied
thereon, when in truth and in fact, the same was not formally admitted as part
of the evidence for the private respondents (Memorandum for the Petitioner,
p. 10). This Court does not have to unduly dwell on this issue which was only
raised by B.A. Finance Corporation for the first time on appeal. A review of
the records of the case shows that B.A. Finance Corporation failed to directly
raise or ventilate in the trial court nor in the respondent appellate court the
validity of the evidence adduced ex-parte by private respondents. It was only
when the petitioner filed the instant petition with this Court that it later raised
the aforementioned issue. As ruled by this Court in a long line of cases,
issues not raised and/or ventilated in the trial court, let alone in the Court of
Appeals, cannot be raised for the first time on appeal as it would be offensive
to the basic rules of fair play, justice and due process (Galicia v. Polo, 179
SCRA 375 [1989]; Ramos v. Intermediate Appellate Court, 175 SCRA 70
[1989]; Dulos Realty & Development Corporation v. Court of Appeals, 157
SCRA 425 [1988]; Dihiansan, et al. v. Court of Appeals, et al., 153 SCRA 712
[1987]; De la Santa v. Court of Appeals, et al., 140 SCRA 44 [1985]).
PREMISES CONSIDERED, the instant petition is DENIED, and the decision
appealed from is AFFIRMED.
SO ORDERED.

EN BANC
G.R. No. L-20567
July 30, 1965
PHILIPPINE NATIONAL BANK, petitioner,
vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF
APPEALS (Second Division), respondents.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.

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

The Philippine National Bank petitions for the review and reversal of the
decision rendered by the Court of Appeals (Second Division), in its case CAG.R. No. 24232-R, dismissing the Bank's complaint against respondent
Manila Surety & Fidelity Co., Inc., and modifying the judgment of the Court of
First Instance of Manila in its Civil Case No. 11263.
The material facts of the case, as found by the appellate Court, are as
follows:
The Philippine National Bank had opened a letter of credit and advanced
thereon $120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt.
Of this amount, 2,000 tons worth P279,000.00 were released and delivered
to Adams & Taguba Corporation (known as ATACO) under a trust receipt
guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00.
To pay for the asphalt, ATACO constituted the Bank its assignee and
attorney-in-fact to receive and collect from the Bureau of Public Works the
amount aforesaid out of funds payable to the assignor under Purchase Order
No. 71947. This assignment (Exhibit "A") stipulated that:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit
accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed as our
Attorney-in-Fact for us and in our name, place and stead, to collect
and to receive the payments to be made by virtue of the aforesaid
Purchase Order, with full power and authority to execute and deliver
on our behalf, receipt for all payments made to it; to endorse for
deposit or encashment checks, money order and treasury warrants
which said Bank may receive, and to apply said payments to the
settlement of said credit accommodation.
This power of attorney shall also remain irrevocable until our total
indebtedness to the said Bank have been fully liquidated. (Exhibit E)
ATACO delivered to the Bureau of Public Works, and the latter accepted,
asphalt to the total value of P431,466.52. Of this amount the Bank regularly
collected, from April 21, 1948 to November 18, 1948, P106,382.01.
Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952
its investigators found that more moneys were payable to ATACO from the
Public Works office, because the latter had allowed mother creditor to collect

funds due to ATACO under the same purchase order to a total of


P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the
Bank sued both in the Court of First Instance of Manila to recover the
balance of P158,563.18 as of February 15, 1950, plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc., to pay plaintiff, Philippines National Bank,
the sum of P174,462.34 as of February 24, 1956, minus the amount
of P8,000 which defendant, Manila Surety Co., Inc. paid from March,
1956 to October, 1956 with interest at the rate of 5% per annum from
February 25, 1956, until fully paid provided that the total amount that
should be paid by defendant Manila Surety Co., Inc., on account of
this case shall not exceed P75,000.00, and to pay the costs;
2. Orderinq cross-defendant, Adams & Taguba Corporation, and
third-party defendant, Pedro A. Taguba, jointly and severally, to pay
cross and third-party plaintiff, Manila Surety & Fidelity Co., Inc.,
whatever amount the latter has paid or shall pay under this
judgment;
3. Dismissing the complaint insofar as the claim for 17% special tax
is concerned; and
4. Dismissing the counterclaim of defendants Adams & Taguba
Corporation and Manila Surety & Fidelity Co., Inc.
From said decision, only the defendant Surety Company has duly perfected
its appeal. The Central Bank of the Philippines did not appeal, while
defendant ATACO failed to perfect its appeal.
The Bank recoursed to the Court of Appeals, which rendered an adverse
decision and modified the judgment of the court of origin as to the surety's
liability. Its motions for reconsideration having proved unavailing, the Bank
appealed to this Court.

The Court of Appeals found the Bank to have been negligent in having
stopped collecting from the Bureau of Public Works the moneys falling due in
favor of the principal debtor, ATACO, from and after November 18, 1948,
before the debt was fully collected, thereby allowing such funds to be taken
and exhausted by other creditors to the prejudice of the surety, and held that
the Bank's negligence resulted in exoneration of respondent Manila Surety &
Fidelity Company.
This holding is now assailed by the Bank. It contends the power of attorney
obtained from ATACO was merely in additional security in its favor, and that it
was the duty of the surety, and not that of the creditor, owed see to it that the
obligor fulfills his obligation, and that the creditor owed the surety no duty of
active diligence to collect any, sum from the principal debtor, citing Judge
Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.
This argument of appellant Bank misses the point. The Court of Appeals did
not hold the Bank answerable for negligence in failing to collect from the
principal debtor but for its neglect in collecting the sums due to the debtor
from the Bureau of Public Works, contrary to its duty as holder of an
exclusive and irrevocable power of attorney to make such collections, since
an agent is required to act with the care of a good father of a family (Civ.
Code, Art. 1887) and becomes liable for the damages which the principal
may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the
Bank could not expect that the Bank would diligently perform its duty under
its power of attorney, but because they could not have collected from the
Bureau even if they had attempted to do so. It must not be forgotten that the
Bank's power to collect was expressly made irrevocable, so that the Bureau
of Public Works could very well refuse to make payments to the principal
debtor itself, and a fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the principal debtor were
considered as mere additional security still, by allowing the assigned funds to
be exhausted without notifying the surety, the Bank deprived the former of
any possibility of recoursing against that security. The Bank thereby
exonerated the surety, pursuant to Article 2080 of the Civil Code:
ART. 2080. The guarantors, even though they be solidary, are
released from their obligation whenever by come act of the creditor
they cannot be subrogated to the rights, mortgages and preferences
of the latter. (Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", addressed to the
Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit "G",
informing the debtor that as of its date, October 31, 1949, its outstanding
balance was P156,374.83. Said Exhibit "G" has no bearing on the issue
whether the Bank has exercised due diligence in collecting from the Bureau
of Public Works, since the letter was addressed to ATACO, and the funds
were to come from elsewhere. As to the letter of demand on the Public
Works office, it does not appear that any reply thereto was made; nor that the
demand was pressed, nor that the debtor or the surety were ever apprised
that payment was not being made. The fact remains that because of the
Bank's inactivity the other creditors were enabled to collect P173,870.31,
when the balance due to appellant Bank was only P158,563.18. The finding
of negligence made by the Court of Appeals is thus not only conclusive on us
but fully supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in
support of the decision now under appeal, because the rules on application
of payments, giving preference to secured obligations are only operative in
cases where there are several distinct debts, and not where there is only one
that is partially secured, the error is of no importance, since the principal
reason based on the Bank's negligence furnishes adequate support to the
decision of the Court of Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against
appellant Philippine National Bank.

EN BANC
G.R. No. L-21237

March 22, 1924

JAMES D. BARTON, plaintiff-appellee,


vs.
LEYTE ASPHALT & MINERAL OIL CO., LTD., defendant-appellant.
Block, Johnston & Greenbaum and Ross, Lawrence & Selph for appellant.
Frank B. Ingersoll for appellee.
STREET, J.:
This action was instituted in the Court of First Instance of the City of Manila
by James D. Barton, to recover of the Leyte Asphalt & Mineral Oil Co., Ltd.,
as damages for breach of contract, the sum of $318,563.30, United States
currency, and further to secure a judicial pronouncement to the effect that the
plaintiff is entitled to an extension of the terms of the sales agencies specified
in the contract Exhibit A. The defendant answered with a general denial, and
the cause was heard upon the proof, both documentary and oral, after which
the trial judge entered a judgment absolving the defendant corporation from
four of the six causes of action set forth in the complaint and giving judgment
for the plaintiff to recover of said defendant, upon the first and fourth causes
of action, the sum of $202,500, United States currency, equivalent to
$405,000, Philippine currency, with legal interest from June 2, 1921, and with
costs. From this judgment the defendant company appealed.
The plaintiff is a citizen of the United States, resident in the City of Manila,
while the defendant is a corporation organized under the law of the Philippine
Islands with its principal office in the City of Cebu, Province of Cebu,
Philippine Islands. Said company appears to be the owner by a valuable
deposit of bituminous limestone and other asphalt products, located on the
Island of Leyte and known as the Lucio mine. On April 21, 1920, one William
Anderson, as president and general manager of the defendant company,
addressed a letter Exhibit B, to the plaintiff Barton, authorizing the latter to
sell the products of the Lucio mine in the Commonwealth of Australia and
New Zealand upon a scale of prices indicated in said letter.
In the third cause of action stated in the complaint the plaintiff alleges that
during the life of the agency indicated in Exhibit B, he rendered services to
the defendant company in the way of advertising and demonstrating the
products of the defendant and expended large sums of money in visiting
various parts of the world for the purpose of carrying on said advertising and

demonstrations, in shipping to various parts of the world samples of the


products of the defendant, and in otherwise carrying on advertising work. For
these services and expenditures the plaintiff sought, in said third cause of
action, to recover the sum of $16,563.80, United States currency. The court,
however, absolved the defendant from all liability on this cause of action and
the plaintiff did not appeal, with the result that we are not now concerned with
this phase of the case. Besides, the authority contained in said Exhibit B was
admittedly superseded by the authority expressed in a later letter, Exhibit A,
dated October 1, 1920. This document bears the approval of the board of
directors of the defendant company and was formally accepted by the
plaintiff. As it supplies the principal basis of the action, it will be quoted in its
entirety.
(Exhibit A)
CEBU, CEBU, P. I.
October 1, 1920.
JAMES D. BARTON, Esq.,
Cebu Hotel City.
DEAR SIR: You are hereby given the sole and exclusive sales agency for
our bituminous limestone and other asphalt products of the Leyte Asphalt
and Mineral Oil Company, Ltd., May first, 1922, in the following territory:
Australia

Saigon

Java

New Zealand

India

China

Tasmania

Sumatra

Hongkong

Siam and the Straits Settlements, also in the United States of America until
May 1, 1921.
As regard bituminous limestone mined from the Lucio property. No orders for
less than one thousand (1,000) tons will be accepted except under special
agreement with us. All orders for said products are to be billed to you as
follows:
Per ton
In 1,000 ton lots ...........................................
In 2,000 ton lots ...........................................
In 5,000 ton lots ...........................................
In 10,000 ton lots ..........................................

P15
14
12
10

with the understanding, however that, should the sales in the above territory
equal or exceed ten thousand (10,000) tons in the year ending October 1,
1921, then in that event the price of all shipments made during the above
period shall be ten pesos (P10) per ton, and any sum charged to any of your
customers or buyers in the aforesaid territory in excess of ten pesos (P10)
per ton, shall be rebated to you. Said rebate to be due and payable when the
gross sales have equalled or exceeded ten thousand (10,000) tons in the
twelve months period as hereinbefore described. Rebates on lesser sales to
apply as per above price list.

Should your sales equal exceed ten thousand (10,000) tons in the year
ending October 1, 1921, or twenty thousand (20,000) tons by May 1, 1922,
then this contract is to be continued automatically for an additional three
years ending April 30, 1925, under the same terms and conditions as above
stipulated.

You are to have full authority to sell said product of the Lucio mine for any
sum see fit in excess of the prices quoted above and such excess in price
shall be your extra and additional profit and commission. Should we make
any collection in excess of the prices quoted, we agree to remit same to your
within ten (10) days of the date of such collections or payments.

LEYTE ASPHALT & MINERAL OIL CO., LTD.


By (Sgd.) WM. ANDERSON
President

All contracts taken with municipal governments will be subject to inspector


before shipping, by any authorized representative of such governments at
whatever price may be contracted for by you and we agree to accept such
contracts subject to draft attached to bill of lading in full payment of such
shipment.
It is understood that the purchasers of the products of the Lucio mine are to
pay freight from the mine carriers to destination and are to be responsible for
all freight, insurance and other charges, providing said shipment has been
accepted by their inspectors.
All contracts taken with responsible firms are to be under the same
conditions as with municipal governments.
All contracts will be subject to delays caused by the acts of God, over which
the parties hereto have no control.
It is understood and agreed that we agree to load all ships, steamers, boats
or other carriers prompty and without delay and load not less than 1,000 tons
each twenty-four hours after March 1, 1921, unless we so notify you
specifically prior to that date we are prepared to load at that rate, and it is
also stipulated that we shall not be required to ship orders of 5,000 tons
except on 30 days notice and 10,000 tons except on 60 days notice.
If your sales in the United States reach five thousand tons on or before May
1, 1921, you are to have sole rights for this territory also for one year
additional and should your sales in the second year reach or exceed ten
thousand tons you are to have the option to renew the agreement for this
territory on the same terms for an additional two years.

The products of the other mines can be sold by you in the aforesaid
territories under the same terms and conditions as the products of
the Lucio mine; scale of prices to be mutually agreed upon between us.

(Sgd.) W. C. A. PALMER
Secretary
Approved by Board of Directors,
October 1, 1920.
(Sgd.) WM. ANDERSON
President
Accepted.
(Sgd.) JAMES D. BARTON
Witness D. G. MCVEAN
Upon careful perusal of the fourth paragraph from the end of this letter it is
apparent that some negative word has been inadvertently omitted before
"prepared," so that the full expression should be "unless we should notify you
specifically prior to that date that we are unprepared to load at that rate," or
"not prepared to load at that rate."
Very soon after the aforesaid contract became effective, the plaintiff
requested the defendant company to give him a similar selling agency for
Japan. To this request the defendant company, through its president, Wm.
Anderson, replied, under date of November 27, 1920, as follows:
In re your request for Japanese agency, will say, that we are willing
to give you, the same commission on all sales made by you in
Japan, on the same basis as your Australian sales, but we do not
feel like giving you a regular agency for Japan until you can make
some large sized sales there, because some other people have
given us assurances that they can handle our Japanese sales,
therefore we have decided to leave this agency open for a time.

Meanwhile the plaintiff had embarked for San Francisco and upon arriving at
that port he entered into an agreement with Ludvigsen & McCurdy, of that
city, whereby said firm was constituted a subagent and given the sole selling
rights for the bituminous limestone products of the defendant company for
the period of one year from November 11, 1920, on terms stated in the letter
Exhibit K. The territory assigned to Ludvigsen & McCurdy included San
Francisco and all territory in California north of said city. Upon an earlier
voyage during the same year to Australia, the plaintiff had already made an
agreement with Frank B. Smith, of Sydney, whereby the latter was to act as
the plaintiff's sales agent for bituminous limestone mined at the defendant's
quarry in Leyte, until February 12, 1921. Later the same agreement was
extended for the period of one year from January 1, 1921. (Exhibit Q.)
On February 5, 1921, Ludvigsen & McCurdy, of San Francisco, addressed a
letter to the plaintiff, then in San Francisco, advising hi that he might enter an
order for six thousand tons of bituminous limestone to be loaded at Leyte not
later than May 5, 1921, upon terms stated in the letter Exhibit G. Upon this
letter the plaintiff immediately indorsed his acceptance.
The plaintiff then returned to Manila; and on March 2, 1921, Anderson wrote
to him from Cebu, to the effect that the company was behind with
construction and was not then able to handle big contracts. (Exhibit FF.) On
March 12, Anderson was in Manila and the two had an interview in the
Manila Hotel, in the course of which the plaintiff informed Anderson of the
San Francisco order. Anderson thereupon said that, owing to lack of capital,
adequate facilities had not been provided by the company for filling large
orders and suggested that the plaintiff had better hold up in the matter of
taking orders. The plaintiff expressed surprise at this and told Anderson that
he had not only the San Francisco order (which he says he exhibited to
Anderson) but other orders for large quantities of bituminous limestone to be
shipped to Australia and Shanghai. In another interview on the same
Anderson definitely informed the plaintiff that the contracts which be claimed
to have procured would not be filled.

person through whom this contract had been made, and it was stated that
the consignee would be named later, no destination for the shipment being
given. The plaintiff explains that the name White, as used in this letter, was
based on an inference which he had erroneously drawn from the cable sent
by Frank B. Smith, and his intention was to have the second shipment
consigned to Australia in response to Smith's order.
It will be noted in connection with this letter of the plaintiff, of March 15, 1921,
that no mention was made of the names of the person, or firm, for whom the
shipments were really intended. The obvious explanation that occurs in
connection with this is that the plaintiff did not then care to reveal the fact that
the two orders had originated from his own subagents in San Francisco and
Sydney.
To the plaintiff's letter of March 15, the assistant manager of the defendant
company replied on March, 25, 1921, acknowledging the receipt of an order
for five thousand tons of bituminous limestone to be consigned to John
Chapman Co., of San Francisco, and the further amount of five thousand
tons of the same material to be consigned to Henry E. White, and it was
stated that "no orders can be entertained unless cash has been actually
deposited with either the International Banking Corporation or the Chartered
Bank of India, Australia and China, Cebu." (Exhibit Z.)
To this letter the plaintiff in turn replied from Manila, under date of March,
1921, questioning the right of the defendant to insist upon a cash deposit in
Cebu prior to the filling of the orders. In conclusion the plaintiff gave orders
for shipment to Australia of five thousand tons, or more, about May 22, 1921,
and ten thousand tons, or more, about June 1, 1921. In conclusion the
plaintiff said "I have arranged for deposits to be made on these additional
shipments if you will signify your ability to fulfill these orders on the dates
mentioned." No name was mentioned as the purchaser, or purchases, of
these intended Australian consignments.

Three days later the plaintiff addressed a letter (Exhibit Y) to the defendant
company in Cebu, in which he notified the company to be prepared to ship
five thousand tons of bituminous limestone to John Chapman Co., San
Francisco, loading to commence on May 1, and to proceed at the rate of one
thousand tons per day of each twenty-four hours, weather permitting.

Soon after writing the letter last above-mentioned, the plaintiff embarked for
China and Japan. With his activities in China we are not here concerned, but
we note that in Tokio, Japan, he came in contact with one H. Hiwatari, who
appears to have been a suitable person for handling bituminous limestone for
construction work in Japan. In the letter Exhibit X, Hiwatari speaks of himself
as if he had been appointed exclusive sales agent for the plaintiff in Japan,
but no document expressly appointing him such is in evidence.

On March 5, 1921, Frank B. Smith, of Sydney, had cabled the plaintiff an


order for five thousand tons of bituminous limestone; and in his letter of
March 15 to the defendant, the plaintiff advised the defendant company to be
prepared to ship another five thousand tons of bituminous limestone, on or
about May 6, 1921, in addition to the intended consignment for San
Francisco. The name Henry E. White was indicated as the name of the

While the plaintiff was in Tokio he procured the letter Exhibit W, addressed to
himself, to be signed by Hiwatari. This letter, endited by the plaintiff himself,
contains an order for one thousand tons of bituminous limestone from the
quarries of the defendant company, to be delivered as soon after July 1,

1921, as possible. In this letter Hiwatari states, "on receipt of the cable from
you, notifying me of date you will be ready to ship, and also tonnage rate, I
will agree to transfer through the Bank of Taiwan, of Tokio, to the Asia
Banking Corporation, of Manila, P. I., the entire payment of $16,000 gold, to
be subject to our order on delivery of documents covering bill of lading of
shipments, the customs report of weight, and prepaid export tax receipt. I will
arrange in advance a confirmed or irrevocable letter of credit for the above
amounts so that payment can be ordered by cable, in reply to your cable
advising shipping date."

acceptance by plaintiff of an order from Hiwatari, of Tokio, approved by the


Bank of Taiwan, for a minimum of ten thousand annually for a period of five
years, first shipment of a thousand tons to be as early after July 1 as
possible. In the letter Exhibit H the plaintiff gives notice of an "additional" (?)
order from H. E. White, Sydney, for two lots of bituminous limestone of five
thousand tons each, one for shipment not later than June 30, 1921, and the
other by July 20, 1921. In the same letter thousand tons from F. B. Smith, to
be shipped to Brisbane, Australia, by June 30, and a similar amount within
thirty days later.

In a letter, Exhibit X, of May 16, 1921, Hiwatari informs the plaintiff that he
had shown the contract, signed by himself, to the submanager of the Taiwan
Bank who had given it as his opinion that he would be able to issue, upon
request of Hiwatari, a credit note for the contracted amount, but he added
that the submanager was not personally able to place his approval on the
contract as that was a matter beyond his authority. Accordingly Hiwatari
advised that he was intending to make further arrangements when the
manager of the bank should return from Formosa.

After the suit was brought, the plaintiff filed an amendment to his complaint in
which he set out, in tabulated form, the orders which he claims to have
received and upon which his letters of notification to the defendant company
were based. In this amended answer the name of Ludvigsen & McCurdy
appears for the first time; and the name of Frank B. Smith, of Sydney, is used
for the first time as the source of the intended consignments of the letters,
Exhibits G, L, M, and W, containing the orders from Ludvigen & McCurdy,
Frank B. Smith and H. Hiwatari were at no time submitted for inspection to
any officer of the defendant company, except possibly the Exhibit G, which
the plaintiff claims to have shown to Anderson in Manila on March, 12, 1921.

In the letter of May 5, 1921, containing Hiwatari's order for one thousand tons
of bituminous limestone, it was stated that if the material should prove
satisfactory after being thoroughly tested by the Paving Department of the
City of Tokio, he would contract with the plaintiff for a minimum quantity of ten
thousand additional tons, to be used within a year from September 1, 1921,
and that in this event the contract was to be automatically extended for an
additional four years. The contents of the letter of May 5 seems to have been
conveyed, though imperfectly, by the plaintiff to his attorney, Mr. Frank B.
Ingersoll, of Manila; and on May 17, 1921, Ingersoll addressed a note to the
defendant company in Cebu in which he stated that he had been requested
by the plaintiff to notify the defendant that the plaintiff had accepted an order
from Hiwatari, of Tokio, approved by the Bank of Taiwan, for a minimum order
of ten thousand tons of the stone annually for a period of five years, the first
shipment of one thousand tons to be made as early after July 1 as possible.
It will be noted that this communication did not truly reflect the contents of
Hiwatari's letter, which called unconditionally for only one thousand tons, the
taking of the remainder being contingent upon future eventualities.
It will be noted that the only written communications between the plaintiff and
the defendant company in which the former gave notice of having any orders
for the sale of bituminous limestone are the four letters Exhibit Y, AA, BB, and
II. In the first of these letters, dated March 15, 1921, the plaintiff advises the
defendant company to be prepared to ship five thousand tons of bituminous
limestone, to be consigned to John Chapman, Co., of San Francisco, to be
loaded by March 5, and a further consignment of five thousand tons, through
a contract with Henry E. White, consignees to be named later. In the letter
Exhibit BB dated May 17, 1921, the plaintiff's attorney gives notice of the

The different items conspiring the award which the trial judge gave in favor of
the plaintiff are all based upon the orders given by Ludvigsen & McCurdy
(Exhibit G), by Frank B. Smith (Exhibit L and M), and by Hiwatari in Exhibit
W; and the appealed does not involve an order which came from Shanghai,
China. We therefore now address ourselves to the question whether or not
the orders contained in Exhibit G, L, M, and W, in connection with the
subsequent notification thereof given by the plaintiff to the defendant, are
sufficient to support the judgment rendered by the trial court.
The transaction indicated in the orders from Ludvigsen, & McCurdy and from
Frank B. Smith must, in our opinion, be at once excluded from consideration
as emanating from persons who had been constituted mere agents of the
plaintiff. The San Francisco order and the Australian orders are the same in
legal effect as if they were orders signed by the plaintiff and drawn upon
himself; and it cannot be pretended that those orders represent sales to bona
fide purchasers found by the plaintiff. The original contract by which the
plaintiff was appointed sales agent for a limited period of time in Australia and
the United States contemplated that he should find reliable and solvent
buyers who should be prepared to obligate themselves to take the quantity of
bituminous limestone contracted for upon terms consistent with the contract.
These conditions were not met by the taking of these orders from the
plaintiff's own subagents, which was as if the plaintiff had bought for himself
the commodity which he was authorized to sell to others. Article 267 of the
Code of Commerce declares that no agent shall purchase for himself or for
another that which he has been ordered to sell. The law has placed its ban

upon a broker's purchasing from his principal unless the latter with full
knowledge of all the facts and circumstances acquiesces in such course; and
even then the broker's action must be characterized by the utmost good faith.
A sale made by a broker to himself without the consent of the principal is
ineffectual whether the broker has been guilty of fraudulent conduct or not. (4
R. C. L., 276-277.) We think, therefore, that the position of the defendant
company is indubitably sound in so far as it rest upon the contention that the
plaintiff has not in fact found any bona fidepurchasers ready and able to take
the commodity contracted for upon terms compatible with the contract which
is the basis of the action.
It will be observed that the contract set out at the beginning of this opinion
contains provisions under which the period of the contract might be
extended. That privilege was probably considered a highly important incident
of the contract and it will be seen that the sale of five thousand tons which
the plaintiff reported for shipment to San Francisco was precisely adjusted to
the purpose of the extension of the contract for the United States for the
period of an additional year; and the sales reported for shipment to Australia
were likewise adjusted to the requirements for the extention of the contract in
that territory. Given the circumstances surrounding these contracts as they
were reported to the defendant company and the concealment by the plaintiff
of the names of the authors of the orders, -- who after all were merely the
plaintiff's subagents, the officers of the defendant company might justly
have entertained the suspicion that the real and only person behind those
contracts was the plaintiff himself. Such at least turns out to have been the
case.
Much energy has been expended in the briefs upon his appeal over the
contention whether the defendant was justified in laying down the condition
mentioned in the letter of March 26, 1921, to the effect that no order would
be entertained unless cash should be deposited with either the International
Banking Corporation of the Chartered Bank of India, Australia and China, in
Cebu. In this connection the plaintiff points to the stipulation of the contract
which provides that contracts with responsible parties are to be accepted
"subject to draft attached to bill of lading in full payment of such shipment."
What passed between the parties upon this point appears to have the
character of mere diplomatic parrying, as the plaintiff had no contract from
any responsible purchaser other than his own subagents and the defendant
company could no probably have filled the contracts even if they had been
backed by the Bank of England.
Upon inspection of the plaintiff's letters (Exhibit Y and AA), there will be found
ample assurance that deposits for the amount of each shipment would be
made with a bank in Manila provided the defendant would indicated its ability
to fill the orders; but these assurance rested upon no other basis than the

financial responsibility of the plaintiff himself, and this circumstance doubtless


did not escape the discernment of the defendant's officers.
With respect to the order from H. Hiwatari, we observe that while he
intimates that he had been promised the exclusive agency under the plaintiff
for Japan, nevertheless it does not affirmatively appear that he had been in
fact appointed to be such at the time he signed to order Exhibit W at the
request of the plaintiff. It may be assumed, therefore, that he was at that time
a stranger to the contract of agency. It clearly appears, however, that he did
not expect to purchase the thousand tons of bituminous limestone referred to
in his order without banking assistance; and although the submanager of the
Bank of Taiwan had said something encouraging in respect to the matter,
nevertheless that official had refrained from giving his approval to the order
Exhibit W. It is therefore not shown affirmatively that this order proceeds from
a responsible source.
The first assignment of error in the appellant's brief is directed to the action of
the trial judge in refusing to admit Exhibit 2, 7, 8, 9 and 10, offered by the
defendant, and in admitting Exhibit E, offered by the plaintiff. The Exhibit 2 is
a letter dated June 25, 1921, or more than three weeks after the action was
instituted, in which the defendant's assistant general manager undertakes to
reply to the plaintiff's letter of March 29 proceeding. It was evidently intended
as an argumentative presentation of the plaintiff's point of view in the
litigation then pending, and its probative value is so slight, even if admissible
at all, that there was no error on the part of the trial court in excluding it.
Exhibit 7, 8, 9 and 10 comprise correspondence which passed between the
parties by mail or telegraph during the first part of the year 1921. The
subject-matter of this correspondence relates to efforts that were being made
by Anderson to dispose of the controlling in the defendant corporation, and
Exhibit 9 in particular contains an offer from the plaintiff, representing certain
associates, to but out Anderson's interest for a fixed sum. While these
exhibits perhaps shed some light upon the relations of the parties during the
time this controversy was brewing, the bearing of the matter upon the
litigation before us is too remote to exert any definitive influence on the case.
The trial court was not in error in our opinion in excluding these documents.
Exhibit E is a letter from Anderson to the plaintiff, dated April 21, 1920, in
which information is given concerning the property of the defendant
company. It is stated in this letter that the output of the Lucio (quarry) during
the coming year would probably be at the rate of about five tons for twentyfour hours, with the equipment then on hand, but that with the installation of a
model cableway which was under contemplation, the company would be able
to handle two thousand tons in twenty-four hours. We see no legitimate
reason for rejecting this document, although of slight probative value; and her
error imputed to the court in admitting the same was not committed.

Exhibit 14, which was offered in evidence by the defendant, consists of a


carbon copy of a letter dated June 13, 1921, written by the plaintiff to his
attorney, Frank B. Ingersoll, Esq., of Manila, and in which plaintiff states,
among other things, that his profit from the San Francisco contract would
have been at the rate of eigthy-five cents (gold) per ton. The authenticity of
this city document is admitted, and when it was offered in evidence by the
attorney for the defendant the counsel for the plaintiff announced that he had
no objection to the introduction of this carbon copy in evidence if counsel for
the defendant would explain where this copy was secured. Upon this the
attorney for the defendant informed the court that he received the letter from
the former attorneys of the defendant without explanation of the manner in
which the document had come into their possession. Upon this the attorney
for the plaintiff made this announcement: "We hereby give notice at this time
that unless such an explanation is made, explaining fully how this carbon
copy came into the possession of the defendant company, or any one
representing it, we propose to object to its admission on the ground that it is
a confidential communication between client and lawyer." No further
information was then given by the attorney for the defendant as to the
manner in which the letter had come to his hands and the trial judge
thereupon excluded the document, on the ground that it was a privileged
communication between client and attorney.
We are of the opinion that this ruling was erroneous; for even supposing that
the letter was within the privilege which protects communications between
attorney and client, this privilege was lost when the letter came to the hands
of the adverse party. And it makes no difference how the adversary acquired
possession. The law protects the client from the effect of disclosures made
by him to his attorney in the confidence of the legal relation, but when such a
document, containing admissions of the client, comes to the hand of a third
party, and reaches the adversary, it is admissible in evidence. In this
connection Mr. Wigmore says:
The law provides subjective freedom for the client by assuring him of
exemption from its processes of disclosure against himself or the
attorney or their agents of communication. This much, but not a whit
more, is necessary for the maintenance of the privilege. Since the
means of preserving secrecy of communication are entirely in the
client's hands, and since the privilege is a derogation from the
general testimonial duty and should be strictly construed, it would be
improper to extend its prohibition to third persons who obtain
knowledge of the communications. One who overhears the
communication, whether with or without the client's knowledge, is not
within the protection of the privilege. The same rule ought to apply to
one who surreptitiously reads or obtains possession of a document
in original or copy. (5 Wigmore on Evidence, 2d ed., sec. 2326.)

Although the precedents are somewhat confusing, the better doctrine is to


the effect that when papers are offered in evidence a court will take no notice
of how they were obtained, whether legally or illegally, properly or improperly;
nor will it form a collateral issue to try that question. (10 R. C. L., 931; 1
Greenl. Evid., sec. 254a; State vs. Mathers, 15 L. R. A., 268; Gross vs. State,
33 L. R. A., [N. S.], 477, note.)
Our conclusion upon the entire record is that the judgment appealed from
must be reversed; and the defendant will be absolved from the complaint. It
is so ordered, without special pronouncement as to costs of either instance.
Araullo, C.J., Johnson, Avancea, Ostrand, Johns and Romualdez, JJ.,
concur.
Separate Opinions
MALCOLM, J., dissenting:
An intensive scrutiny of every phase of this case leads me to the conclusion
that the trial judge was correct in his findings of fact and in his decision.
Without encumbering the case with a long and tedious dissent, I shall
endeavor to explain my point of view as briefly and clearly as possible.
A decision must be reached on the record as it is and not on a record as we
would like to have it. The plaintiff and the defendant deliberately entered into
a contract, the basis of this action. The plaintiff, proceeding pursuant to this
contract, spent considerable effort and used considerable money to advance
the interests of the defendant and to secure orders for its products. These
orders were submitted to the president of the defendant company personally
and later formally by writing. Prior to the institution of the suit, the only
objection of the defendant was that the money should be deposited with
either the International Banking Corporation or the Chartered Bank of India,
Australia and China at Cebu, a stipulation not found in the contract.
A reasonable deduction, therefore, is that the plaintiff presented orders under
circumstances which were a substantial compliance with the terms of the
contract with the defendant, and which insured to the defendant payment for
its deliveries according to the price agreed upon, and that as the defendant
has breached its contract, it must respond in damages.
The current running through the majority opinion is that the order emanated
from subagents of the plaintiff, and that no bona fide purchasers were ready
and able to take the commodity contracted for upon terms compatible with
the contract. The answer is, in the first place, that the contract nowhere
prohibits the plaintiff to secure subagents. The answer is, in the second
place, that the orders were so phrased as to make the persons making them

personally responsible. The Ludvigsen & McCurdy order from San Francisco
begins: "You can enter our order for 6,000 tons of bituminous limestone as
per sample submitted, at $10 gold per ton, f. o. b., island of Leyte, subject to
the following terms and conditions:
* * * "(Exhibit G). The Smith order from Australia contains the following: "It is
therefore with great pleasure I confirm the booking of the following orders, to
be shipped at least within a week of respective dates: . . ." (Exhibit L). The
Japan order starts with the following sentence: "You can enter my order for
1,000 tons of 1,000 kilos each of bituminous limestone from the quarries of
the Leyte Asphalt and Mineral Oil Co. . . ." (Exhibit W.)
But the main point of the plaintiff which the majority decision misses entirely
centers on the proposition that the orders were communicated by the plaintiff
to the defendant, and that the only objection the defendant had related to the
manner of payment. To emphasize this thought again, let me quote the reply
of the defendant to the plaintiff when the defendant acknowledge receipts of
the orders placed by the plaintiff. The letter reads: "In reply to same we have
to advice you that no orders can be entertained unless cash has been
actually deposited with either the International Banking Corporation or the
Chartered Bank of India, Australia and China, Cebu." (Exhibit Y.) Prior to the
filing of suit, the defendant company never at any time raised any questioned
as to whether the customers secured by plaintiff were "responsible firms"
within the meaning of the contract, and never secured any information
whatsoever as to their financial standing. Consequently, defendant is now
estopped by its conduct from raising new objections for rejection of the
orders. (Mechem on Agency, section 2441.)
The majority decision incidentally takes up for consideration assignments of
error 1 and 2 having to do with either the admission or the rejection by the
trial court of certain exhibits. Having in mind that the Court reverses the
courta quo on the facts, what is said relative to these two assignments is
absolutely unnecessary for a judgment, and even as obiter dicta, contains
unfortunate expressions. Exhibit 14, for example, is a letter addressed by the
plaintiff to his lawyer and probably merely shown to the counsel of the
defendant during negotiations to seek a compromise. Whether that exhibit be
considered improperly rejected or not would not change the result one iota.
The rule now announced by the Court that it makes no difference how the
adversary acquired possession of the document, and that a court will take no
notice of how it was obtained, is destructive of the attorney's privilege and
constitutes and obstacle to attempts at friendly compromise. In the case
of Uy Chico vs. Union Life Assurance Society ([1915], 29 Phil., 163), it was
held that communications made by a client to his attorney for the purpose of
being communicated to others are not privileged if they have been so
communicated. But here, there is no intimation that Exhibit 14 was sent by

the client to the lawyer for the purpose of being communicated to others. The
Supreme Court of Georgia in the case of Southern Railway Co. vs.
White ([1899], 108 Ga., 201), held that statements in a letter to a party's
attorney handed by the latter to the opponent's attorney, are confidential
communications and must be excluded.
Briefly, the decision of the majority appears to me to be defective in the
following particulars: (1) It sets aside without good reason the fair findings of
fact as made by the trial court and substitutes therefor other findings not
warranted by the proof; (2) it fails to stress plaintiff's main argument, and (3)
it lay downs uncalled for rules which undermine the inviolability of a client's
communications to his attorney.
Accordingly, I dissent and vote for an affirmance of the judgment.

G.R. No. 158907


February 12, 2007
EDUARDO B. OLAGUER, Petitioner,
vs.
EMILIO PURUGGANAN, JR. AND RAUL LOCSIN, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari, under Rule 45 of the Rules of
Court, assailing the Decision,1 dated 30 June 2003, promulgated by the
Court of Appeals, affirming the Decision of the Regional Trial Court, dated 26
July 1995, dismissing the petitioners suit.
The parties presented conflicting accounts of the facts.
EDUARDO B. OLAGUERS VERSION
Petitioner Eduardo B. Olaguer alleges that he was the owner of 60,000
shares of stock of Businessday Corporation (Businessday) with a total par
value of P600,000.00, with Certificates of Stock No. 005, No. 028, No. 034,
No. 070, and No. 100.2 At the time he was employed with the corporation as
Executive Vice-President of Businessday, and President of Businessday
Information Systems and Services and of Businessday Marketing
Corporation, petitioner, together with respondent Raul Locsin (Locsin) and
Enrique Joaquin (Joaquin), was active in the political opposition against the
Marcos dictatorship.3 Anticipating the possibility that petitioner would be
arrested and detained by the Marcos military, Locsin, Joaquin, and Hector
Holifea had an unwritten agreement that, in the event that petitioner was
arrested, they would support the petitioners family by the continued payment
of his salary.4 Petitioner also executed a Special Power of Attorney (SPA), on
26 May 1979, appointing as his attorneys-in-fact Locsin, Joaquin and
Hofilea for the purpose of selling or transferring petitioners shares of stock
with Businessday. During the trial, petitioner testified that he agreed to
execute the SPA in order to cancel his shares of stock, even before they are
sold, for the purpose of concealing that he was a stockholder of Businessday,
in the event of a military crackdown against the opposition. 5 The parties
acknowledged the SPA before respondent Emilio Purugganan, Jr., who was
then the Corporate Secretary of Businessday, and at the same time, a notary
public for Quezon City.6

On 24 December 1979, petitioner was arrested by the Marcos military by


virtue of an Arrest, Search and Seizure Order and detained for allegedly
committing arson. During the petitioners detention, respondent Locsin
ordered fellow respondent Purugganan to cancel the petitioners shares in
the books of the corporation and to transfer them to respondent Locsins
name.7
As part of his scheme to defraud the petitioner, respondent Locsin sent
Rebecca Fernando, an employee of Businessday, to Camp Crame where the
petitioner was detained, to pretend to borrow Certificate of Stock No. 100 for
the purpose of using it as additional collateral for Businessdays then
outstanding loan with the National Investment and Development Corporation.
When Fernando returned the borrowed stock certificate, the word "cancelled"
was already written therein. When the petitioner became upset, Fernando
explained that this was merely a mistake committed by respondent Locsins
secretary.8
During the trial, petitioner also agreed to stipulate that from 1980 to 1982,
Businessday made regular deposits, each amounting to P10,000.00, to the
Metropolitan Bank and Trust Company accounts of Manuel and Genaro
Pantig, petitioners in-laws. The deposits were made on every 15th and 30th
of the month.9 Petitioner alleged that these funds consisted of his monthly
salary, which Businessday agreed to continue paying after his arrest for the
financial support of his family.10 After receiving a total of P600,000.00, the
payments stopped. Thereafter, respondent Locsin and Fernando went to ask
petitioner to endorse and deliver the rest of his stock certificates to
respondent Locsin, but petitioner refused. 11
On 16 January 1986, petitioner was finally released from detention. He then
discovered that he was no longer registered as stockholder of Businessday
in its corporate books. He also learned that Purugganan, as the Corporate
Secretary of Businessday, had already recorded the transfer of shares in
favor of respondent Locsin, while petitioner was detained. When petitioner
demanded that respondents restore to him full ownership of his shares of
stock, they refused to do so. On 29 July 1986, petitioner filed a Complaint
before the trial court against respondents Purugganan and Locsin to declare
as illegal the sale of the shares of stock, to restore to the petitioner full
ownership of the shares, and payment of damages. 12
RESPONDENT RAUL LOCSINS VERSION

In his version of the facts, respondent Locsin contended that petitioner


approached him and requested him to sell, and, if necessary, buy petitioners
shares of stock in Businessday, to assure support for petitioners family in the
event that something should happen to him, particularly if he was jailed,
exiled or forced to go underground. 13 At the time petitioner was employed
with Businessday, respondent Locsin was unaware that petitioner was part of
a group, Light-a-Fire Movement, which actively sought the overthrow of the
Marcos government through an armed struggle. 14 He denied that he made
any arrangements to continue paying the petitioners salary in the event of
the latters imprisonment.15
When petitioner was detained, respondent Locsin tried to sell petitioners
shares, but nobody wanted to buy them. Petitioners reputation as an
oppositionist resulted in the poor financial condition of Businessday and
discouraged any buyers for the shares of stock. 16 In view of petitioners
previous instructions, respondent Locsin decided to buy the shares
himself.1awphi1.net Although the capital deficiency suffered by Businessday
caused the book value of the shares to plummet below par value, respondent
Locsin, nevertheless, bought the shares at par value. 17 However, he had to
borrow from Businessday the funds he used in purchasing the shares from
petitioner, and had to pay the petitioner in installments of P10,000.00 every
15th and 30th of each month.18
The trial court in its Decision, dated 26 July 1995, dismissed the Complaint
filed by the petitioner. It ruled that the sale of shares between petitioner and
respondent Locsin was valid. The trial court concluded that petitioner had
intended to sell the shares of stock to anyone, including respondent Locsin,
in order to provide for the needs of his family should he be jailed or forced to
go underground; and that the SPA drafted by the petitioner empowered
respondent Locsin, and two other agents, to sell the shares for such price
and under such terms and conditions that the agents may deem proper. It
further found that petitioner consented to have respondent Locsin buy the
shares himself. It also ruled that petitioner, through his wife, received from
respondent Locsin the amount ofP600,000.00 as payment for the shares of
stock.19 The dispositive part of the trial courts Decision reads:
WHEREFORE, for failure of the [herein petitioner] to prove by
preponderance of evidence, his causes of action and of the facts alleged in
his complaint, the instant suit is hereby ordered DISMISSED, without
pronouncement as to costs.
[Herein respondents] counterclaims, however, are hereby DISMISSED,
likewise, for dearth of substantial evidentiary support. 20

On appeal, the Court of Appeals affirmed the Decision of the trial court that
there was a perfected contract of sale. 21 It further ruled that granting that
there was no perfected contract of sale, petitioner, nevertheless, ratified the
sale to respondent Locsin by his receipt of the purchase price, and his failure
to raise any protest over the said sale. 22 The Court of Appeals refused to
credit the petitioners allegation that the money his wife received constituted
his salary from Businessday since the amount he received as his
salary, P24,000.00 per month, did not correspond to the amount he received
during his detention, P20,000.00 per month (deposits of P10,000.00 on every
15th and 30th of each month in the accounts of the petitioners in-laws). On
the other hand, the total amount received, P600,000.00, corresponds to the
aggregate par value of petitioners shares in Businessday. Moreover, the
financial condition of Businessday prevented it from granting any form of
financial assistance in favor of the petitioner, who was placed in an indefinite
leave of absence, and, therefore, not entitled to any salary.23
The Court of Appeals also ruled that although the manner of the cancellation
of the petitioners certificates of stock and the subsequent issuance of the
new certificate of stock in favor of respondent Locsin was irregular, this
irregularity will not relieve petitioner of the consequences of a consummated
sale.24
Finally, the Court of Appeals affirmed the Decision of the trial court
disallowing respondent Locsins claims for moral and exemplary damages
due to lack of supporting evidence.25
Hence, the present petition, where the following issues were raised:
I.
THE APPELLATE COURT ERRED IN RULING THAT THERE WAS A
PERFECTED CONTRACT OF SALE BETWEEN PETITIONER AND MR.
LOCSIN OVER THE SHARES;
II.
THE APPELLATE COURT ERRED IN RULING THAT PETITIONER
CONSENTED TO THE ALLEGED SALE OF THE SHARES TO MR. LOCSIN;
III.
THE APPELLATE COURT ERRED IN RULING THAT THE AMOUNTS
RECEIVED BY PETITIONERS IN LAWS WERE NOT PETITIONERS
SALARY FROM THE CORPORATION BUT INSTALLMENT PAYMENTS
FOR THE SHARES;
IV.

THE APPELLATE COURT ERRED IN RULING THAT MR. LOCSIN WAS


THE PARTY TO THE ALLEGED SALE OF THE SHARES AND NOT THE
CORPORATION; AND
V.
THE APPELLATE COURT ERRED IN RULING THAT THE ALLEGED SALE
OF THE SHARES WAS VALID ALTHOUGH THE CANCELLATION OF THE
SHARES WAS IRREGULAR.26

The petition is without merit.


The first issue that the petitioner raised is that there was no valid sale since
respondent Locsin exceeded his authority under the SPA27 issued in his,
Joaquin and Holifenas favor. He alleged that the authority of the aforenamed agents to sell the shares of stock was limited to the following
conditions: (1) in the event of the petitioners absence and incapacity; and (2)
for the limited purpose of applying the proceeds of the sale to the satisfaction
of petitioners subsisting obligations with the companies adverted to in the
SPA.28
Petitioner sought to impose a strict construction of the SPA by limiting the
definition of the word "absence" to a condition wherein "a person disappears
from his domicile, his whereabouts being unknown, without leaving an agent
to administer his property,"29 citing Article 381 of the Civil Code, the entire
provision hereunder quoted:
ART 381. When a person disappears from his domicile, his whereabouts
being unknown, and without leaving an agent to administer his property, the
judge, at the instance of an interested party, a relative, or a friend, may
appoint a person to represent him in all that may be necessary.
This same rule shall be observed when under similar circumstances the
power conferred by the absentee has expired.
Petitioner also puts forward that the word "incapacity" would be limited to
mean "minority, insanity, imbecility, the state of being deaf-mute, prodigality
and civil interdiction."30 He cites Article 38 of the Civil Code, in support of this
definition, which is hereunder quoted:
ART. 38 Minority, insanity or imbecility, the state of being a deaf-mute,
prodigality and civil interdiction are mere restrictions on capacity to act, and

do not exempt the incapacitated person, from certain obligations, as when


the latter arise from his acts or from property relations, such as easements.
Petitioner, thus, claims that his arrest and subsequent detention are not
among the instances covered by the terms "absence or incapacity," as
provided under the SPA he executed in favor of respondent Locsin.
Petitioners arguments are unpersuasive. It is a general rule that a power of
attorney must be strictly construed; the instrument will be held to grant only
those powers that are specified, and the agent may neither go beyond nor
deviate from the power of attorney. However, the rule is not absolute and
should not be applied to the extent of destroying the very purpose of the
power. If the language will permit, the construction that should be adopted is
that which will carry out instead of defeat the purpose of the appointment.
Clauses in a power of attorney that are repugnant to each other should be
reconciled so as to give effect to the instrument in accordance with its
general intent or predominant purpose. Furthermore, the instrument should
always be deemed to give such powers as essential or usual in effectuating
the express powers.31
In the present case, limiting the definitions of "absence" to that provided
under Article 381 of the Civil Code and of "incapacity" under Article 38 of the
same Code negates the effect of the power of attorney by creating absurd, if
not impossible, legal situations. Article 381 provides the necessarily stringent
standards that would justify the appointment of a representative by a judge.
Among the standards the said article enumerates is that no agent has been
appointed to administer the property. In the present case, petitioner himself
had already authorized agents to do specific acts of administration and thus,
no longer necessitated the appointment of one by the court. Likewise, limiting
the construction of "incapacity" to "minority, insanity, imbecility, the state of
being a deaf-mute, prodigality and civil interdiction," as provided under Article
38, would render the SPA ineffective. Article 1919(3) of the Civil Code
provides that the death, civil interdiction, insanity or insolvency of the
principal or of the agent extinguishes the agency. It would be equally
incongruous, if not outright impossible, for the petitioner to require himself to
qualify as a minor, an imbecile, a deaf-mute, or a prodigal before the SPA
becomes operative. In such cases, not only would he be prevented from
appointing an agent, he himself would be unable to administer his property.
On the other hand, defining the terms "absence" and "incapacity" by their
everyday usage makes for a reasonable construction, that is, "the state of not
being present" and the "inability to act," given the context that the SPA
authorizes the agents to attend stockholders meetings and vote in behalf of

petitioner, to sell the shares of stock, and other related acts. This
construction covers the situation wherein petitioner was arrested and
detained. This much is admitted by petitioner in his testimony.32
Petitioners contention that the shares may only be sold for the sole purpose
of applying the proceeds of the sale to the satisfaction of petitioners
subsisting obligations to the company is far-fetched. The construction, which
will carry out the purpose, is that which should be applied. Petitioner had not
submitted evidence that he was in debt with Businessday at the time he had
executed the SPA. Nor could he have considered incurring any debts since
he admitted that, at the time of its execution, he was concerned about his
possible arrest, death and disappearance. The language of the SPA clearly
enumerates, as among those acts that the agents were authorized to do, the
act of applying the proceeds of the sale of the shares to any obligations
petitioner might have against the Businessday group of companies. This
interpretation is supported by the use of the word "and" in enumerating the
authorized acts, instead of phrases such as "only for," "for the purpose of,"
"in order to" or any similar terms to indicate that the petitioner intended that
the SPA be used only for a limited purpose, that of paying any liabilities with
the Businessday group of companies.
Secondly, petitioner argued that the records failed to show that he gave his
consent to the sale of the shares to respondent Locsin for the price
of P600,000.00. This argument is unsustainable. Petitioner received from
respondent Locsin, through his wife and in-laws, the installment payments for
a total of P600,000.00 from 1980 to 1982, without any protest or complaint. It
was only four years after 1982 when petitioner demanded the return of the
shares. The petitioners claim that he did not instruct respondent Locsin to
deposit the money to the bank accounts of his in-laws fails to prove that
petitioner did not give his consent to the sale since respondent Locsin was
authorized, under the SPA, to negotiate the terms and conditions of the sale
including the manner of payment. Moreover, had respondent Locsin given
the proceeds directly to the petitioner, as the latter suggested in this petition,
the proceeds were likely to have been included among petitioners properties
which were confiscated by the military. Instead, respondent Locsin deposited
the money in the bank accounts of petitioners in-laws, and consequently,
assured that the petitioners wife received these amounts. Article 1882 of the
Civil Code provides that the limits of an agents authority shall not be
considered exceeded should it have been performed in a manner more
advantageous to the principal than that specified by him.
In addition, petitioner made two inconsistent statements when he alleged that
(1) respondent Locsin had not asked the petitioner to endorse and deliver the

shares of stock, and (2) when Rebecca Fernando asked the petitioner to
endorse and deliver the certificates of stock, but petitioner refused and even
became upset.33 In either case, both statements only prove that petitioner
refused to honor his part as seller of the shares, even after receiving
payments from the buyer. Had the petitioner not known of or given his
consent to the sale, he would have given back the payments as soon as
Fernando asked him to endorse and deliver the certificates of stock, an
incident which unequivocally confirmed that the funds he received, through
his wife and his in-laws, were intended as payment for his shares of stocks.
Instead, petitioner held on to the proceeds of the sale after it had been made
clear to him that respondent Locsin had considered the P600,000.00 as
payment for the shares, and asked petitioner, through Fernando, to endorse
and deliver the stock certificates for cancellation.
As regards the third issue, petitioners allegation that the installment
payments he was adjudged to have received for the shares were actually
salaries which Businessday promised to pay him during his detention is
unsupported and implausible. Petitioner received P20,000.00 per month
through his in-laws; this amount does not correspond to his monthly salary
at P24,000.00.34 Nor does the amount received correspond to the amount
which Businessday was supposed to be obliged to pay petitioner, which was
only P45,000.00 to P60,000.00 per annum.35 Secondly, the petitioners wife
did not receive funds from respondent Locsin or Businessday for the entire
duration of petitioners detention. Instead, when the total amount received by
the petitioner reached the aggregate amount of his shares at par value
-- P600,000.00 -- the payments stopped. Petitioner even testified that when
respondent Locsin denied knowing the petitioner soon after his arrest, he
believed respondent Locsins commitment to pay his salaries during his
detention to be nothing more than lip-service.36
Granting that petitioner was able to prove his allegations, such an act of
gratuity, on the part of Businessday in favor of petitioner, would be void. An
arrangement whereby petitioner will receive "salaries" for work he will not
perform, which is not a demandable debt since petitioner was on an
extended leave of absence, constitutes a donation under Article 726 37 of the
Civil Code. Under Article 748 of the Civil Code, if the value of the personal
property donated exceeds P5,000.00, the donation and the acceptance shall
have to be made in writing. Otherwise, the donation will be void. In the
present case, petitioner admitted in his testimony38 that such arrangement
was not made in writing and, hence, is void.
The fact that some of the deposit slips and communications made to
petitioners wife contain the phrase "household expenses" does not disprove

the sale of the shares. The money was being deposited to the bank accounts
of the petitioners in-laws, and not to the account of the petitioner or his wife,
precisely because some of his property had already been confiscated by the
military. Had they used the phrase "sale of shares," it would have defeated
the purpose of not using their own bank accounts, which was to conceal from
the military any transaction involving the petitioners property.
Petitioner raised as his fourth issue that granting that there was a sale,
Businessday, and not respondent Locsin, was the party to the transaction.
The curious facts that the payments were received on the 15th and 30th of
each month and that the payor named in the checks was Businessday, were
adequately explained by respondent Locsin. Respondent Locsin had
obtained cash advances from the company, paid to him on the 15th and 30th
of the month, so that he can pay petitioner for the shares. To support his
claim, he presented Businessdays financial records and the testimony of Leo
Atienza, the Companys Accounting Manager. When asked why the term
"shares of stock" was used for the entries, instead of "cash advances,"
Atienza explained that the term "shares of stock" was more specific rather
than the broader phrase "cash advances."39 More to the point, had the entries
been for "shares of stock," the issuance of shares should have been
reflected in the stock and transfer books of Businessday, which the petitioner
presented as evidence. Instead the stock and transfer books reveal that the
increase in respondent Locsins shares was a result of the cancellation and
transfer of petitioners shares in favor of respondent Locsin.
Petitioner alleges that the purported sale between himself and respondent
Locsin of the disputed shares of stock is void since it contravenes Article
1491 of the Civil Code, which provides that:
ART. 1491. The following persons cannot acquire by purchase, even at a
public or judicial auction, either in person or through the mediation of
another:
xxxx
(2) Agents, the property whose administration or sale may have been
entrusted to them, unless the consent of the principal has been given; x x x.
It is, indeed, a familiar and universally recognized doctrine that a person who
undertakes to act as agent for another cannot be permitted to deal in the
agency matter on his own account and for his own benefit without the
consent of his principal, freely given, with full knowledge of every detail

known to the agent which might affect the transaction. 40 The prohibition
against agents purchasing property in their hands for sale or management is,
however, clearly, not absolute. It does not apply where the principal consents
to the sale of the property in the hands of the agent or administrator.>41
In the present case, the parties have conflicting allegations. While
respondent Locsin averred that petitioner had permitted him to purchase
petitioners shares, petitioner vehemently denies having known of the
transaction. However, records show that petitioners position is less credible
than that taken by respondent Locsin given petitioners contemporaneous
and subsequent acts.42 In 1980, when Fernando returned a stock certificate
she borrowed from the petitioner, it was marked "cancelled." Although the
petitioner alleged that he was furious when he saw the word cancelled, he
had not demanded the issuance of a new certificate in his name. Instead of
having been put on his guard, petitioner remained silent over this obvious red
flag and continued receiving, through his wife, payments which totalled to the
aggregate amount of the shares of stock valued at par. When the payments
stopped, no demand was made by either petitioner or his wife for further
payments.
From the foregoing, it is clear that petitioner knew of the transaction, agreed
to the purchase price of P600,000.00 for the shares of stock, and had in fact
facilitated the implementation of the terms of the payment by providing
respondent Locsin, through petitioners wife, with the information on the bank
accounts of his in-laws. Petitioners wife and his son even provided receipts
for the payments that were made to them by respondent Locsin, 43 a practice that
bespeaks of an onerous transaction and not an act of gratuity.

Lastly, petitioner claims that the cancellation of the shares and the
subsequent transfer thereof were fraudulent, and, therefore, illegal. In the
present case, the shares were transferred in the name of the buyer,
respondent Locsin, without the petitioner delivering to the buyer his
certificates of stock. Section 63 of the Corporation Code provides that:
Sec.63. Certificate of stock and transfer of shares. xxx Shares of stock so
issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and the
number of shares transferred. (Emphasis provided.)

The aforequoted provision furnishes the procedure for the transfer of shares
the delivery of the endorsed certificates, in order to prevent the fraudulent
transfer of shares of stock. However, this rule cannot be applied in the
present case without causing the injustice sought to be avoided. As had been
amply demonstrated, there was a valid sale of stocks. Petitioners failure to
deliver the shares to their rightful buyer is a breach of his duty as a seller,
which he cannot use to unjustly profit himself by denying the validity of such
sale. Thus, while the manner of the cancellation of petitioners certificates of
stock and the issuance of the new certificates in favor of respondent Locsin
was highly irregular, we must, nonetheless, declare the validity of the sale
between the parties. Neither does this irregularity prove that the transfer was
fraudulent. In his testimony, petitioner admitted that they had intended to
conceal his being a stockholder of Businessday.44 The cancellation of his
name from the stock and transfer book, even before the shares were actually
sold, had been done with his consent. As earlier explained, even the
subsequent sale of the shares in favor of Locsin had been done with his
consent.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court
AFFIRMS the assailed Decision of the Court of Appeals, promulgated on 30
June 2003, affirming the validity of the sale of the shares of stock in favor of
respondent Locsin. No costs.
SO ORDERED.

EN BANC
G.R. No. L-23181

March 16, 1925

THE BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,


vs.
GABRIELA ANDREA DE COSTER Y ROXAS, ET AL., defendants.
LA ORDEN DE DOMINICOS or PP. PREDICADORES DE LA PROVINCIA
DEL SANTISIMO ROSARIO,defendants-appellees;
GABRIELA ANDREA DE COSTER Y ROXAS, defendant-appellant.
Antonio M. Opisso for appellant.
Araneta and Zaragoza for the bank as appellee.
Perfecto Gabriel for the Dominican Corporation as appellee.
STATEMENT
March 10, 1924, the plaintiff filed a complaint in which it was alleged that it
was a domestic banking corporation with its principal office and place of
business in the City of Manila; that the defendant Gabriela Andrea de Coster
y Roxas was the wife of the defendant Jean M. Poizat, both of whom were
residents of the City of Manila; that the defendant J. M. Poizat and Co. was a
duly registered partnership with its principal office and place of business in
the City of Manila; that the defendant La Orden de Dominicos or PP.
Predicadores de la Provincia del Santisimo Rosario was a religious
corporation duly organized and existing under the laws of the Philippine
Islands with its principal office and place of business in the City of Manila;
that on December 29, 1921, for value, the defendant Gabriela Andrea de
Coster y Roxas, having the consent and permission of her husband, and he
acting as her agent, said defendants made to the plaintiff a certain
promissory note for P292,000, payable one year after date, with interest of 9
per cent per annum, payable monthly, in which, among other things, it is
provided that in the event of a suit or action, the defendants should pay the
further sum of P10,000, as attorney's fees; that the note in question was a
joint and several note; that to secure the payment thereof, the defendants
Jean M. Poizat and J. M. Poizat and Co. executed a chattel mortgage to the
plaintiff on the steamers Roger Poizat and Gabrielle Poizat, with the
machinery and materials belonging to the Poizat Vegetable Oil Mills and
certain merchandise; that at the same time and for the same purpose, the
defendant Gabriela Andrea de Coster y Roxas, having the consent and
permission of her husband, and he acting as her agent, they acknowledged
and delivered to this plaintiff a mortgage on certain real property lying and
being situated in the City of Manila, which is specifically described in the
mortgage; that the real property was subject to a prior mortgage in favor of
La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo
Rosario, hence it is made a party defendant; that the note in question is long
past due and owing. The plaintiff having brought action against the

defendants on the note in the Court of First Instance of the City of Manila,
civil case No. 25218; that in such case the court rendered judgment against
the defendants Gabriela Andrea de Coster y Roxas, Jean M. Poizat and J. M.
Poizat and Co. jointly and severally for P292,000, with interest at the rate of 9
per cent per annum from the 31st of August, 1923, P10,000 as attorney's
fees, and P2,500 for and in account of insurance upon the steamer Gabrielle
Poizat, with interest on that amount from February 9, 1924, at the rate of 9
per cent per annum, and costs; that the said defendants have not paid the
judgment or any part thereof, and that the full amount of the debt secured by
the mortgaged on the property described in the complaint is now due and
owing. Wherefore, plaintiff prays for an order of the court to direct the sheriff
of the City of Manila to take immediate possession of the property described
in the chattel mortgage and sell the same according to the Chattel Mortgage
Law; that the property described in the real mortgage or so much thereof as
may be required to pay the amount due the plaintiff be sold according to law;
that out of such sales plaintiff shall be paid the amount due and owing it; and
that such defendants be adjudged to pay any remaining deficiency.
Copies of the chattel and real mortgage are attached to, and made a part of,
the complaint and marked, respectively, Exhibits A and B.
On April 24, 1924, the La Orden de Dominicos or PP. Predicadores de la
Provincia del Santisimo Rosario appeared in the suit and filed the following
plea:
The defendant corporation, La Orden de Dominicos or PP.
Predicadores de la Provincia del Santisimo Rosario, for answer to
the complaint, shows:
I. That the encumbrance above-mentioned, but not determined in
paragraph V of the complaint, consisting of a first mortgage in favor
of the aforesaid religious corporation on the property described in
paragraph IV of the same complaint is P125,000 with interest of 10
per cent per annum;
II. That the mortgagors Jean M. Poizat and Gabriela Andrea de
Coster y Roxas, have not paid the principal or the interest stipulated
and agreed upon from the 16th of December, 1921 up to the present
date;
III. The interest due up to the 30th of April of the present year 1924
amounts to a total sum of P27,925.34.

Wherefore, it is prayed that the credit above-mentioned be taken into


account when the second mortgage is foreclosed.
May 3, 1924, on motion of the plaintiff, for failure to appear or answer, the
defendants Gabriela Andrea de Coster y Roxas and Jean M. Poizat and J.M.
Poizat & Co. were declared in default.
Without giving any notice of the defendants Jean M. Poizat, J.M. Poizat &
Co. and Gabriela Andrea de Coster y Roxas, and after the introduction of
evidence on the part of the plaintiff and the defendant Dominican Fathers, on
June 24, 1924, the court rendered an opinion in substance and to the effect
that the plaintiff should have judgment as prayed for in its complaint, and that
the Dominican Fathers should have judgment for the amount of their claim,
and that the property should be sold and the proceeds applied to satisfy the
respective judgments.
About August 26, although her attorney, the defendant Gabriela Andrea de
Coster y Roxas filed a motion in which she recites that she is the legitimate
wife of the defendant Jean M. Poizat; that she had been absent from the
Philippine Islands and residing in the City of Paris from the year 1908 to April
30, 1924, when she returned to Manila; that at that time of the filing of the
complaint and the issuance of the summons, she was absent from the
Philippine Islands; that the summons was delivered by the sheriff of the City
of Manila to her husband, and that through his malicious negligence, default
was taken and judgment entered for the respective amounts; that she never
had any knowledge of the actual facts until the latter part of July, 1924, when,
through the local newspapers, she learned that a default judgment had been
rendered against her on July 28, 1924; that when she first knew of that fact,
she was unable to obtain the rendition of accounts, because her husband
had left the Philippine Islands two days previous and gone to Hongkong; that
she then went to Hongkong and learned that her husband had left there
under a false name and had gone to the port of Singapore from whence he
went to other places unknown to thus defendant; that she then returned to
Manila, and that in August, 1924, she came into possession of documents
showing the illegally of the notes and mortgage in question; that she has a
good and legal defense to the action, which involves the validity of the order
of the Dominican Fathers in this, that their mortgage does not guarantee any
loan made to this defendant; that it is a security only given for a credit of a
third person; that the mortgage was executed without the marital consent of
the wife; and that he did not have nay authority to make her liable as surety
on the debt of a third person; that as regards the notes to the plaintiff: First, it
does not represent any money paid to the defendant by the bank; second,
that it is exclusively the personal debt of the defendants Jean M. Poizat and

J.M. Poizat & Co., third, that it was executed by her husband, because the
bank desired more security for the payment of her husband's debt to the
bank; fourth, that it was executed by her husband in excess of the powers
given to him under his power of attorney; fifth, that it was executed as the
result of collusion between the bank and the defendant liable for the
obligation of a third person. That as to the mortgage: First, it was executed to
secure a void obligation; second, it does not guarantee any loan made to this
defendant; third, it was executed to secure a void litigation; second, it does
not guarantee any loan made to third defendant; third, it was executed
without the express marital consent which the law requires; fourth, it was
executed through collusion. That if the judgment is not set aside, the
defendant will suffer irreparable injury; that through surprise and negligence,
for which she was not responsible, this defendant was prevented from
defending herself in this action; that this is a case which comes under section
113 of the Code of Civil Procedure. She prays that the judgment annulled
and set aside and the case be reopened, and that she be permitted to file an
answer, and that the case be tried on its merits, and that a final judgment be
rendered, absolving her from all liability.
The motion was based upon, and supported by, the affidavit of the defendant
wife, to which was attached a large number of exhibits all of which tended to
support the motion.
After counter showings by the bank and the Dominican Fathers and the
arguments of respective counsel, the motion to set aside and vacate the
judgment was denied. A motion for a reconsideration was then made, and the
motion of the defendant to file an answer and make a defense was again
denied. The defendant Gabriela Andrea de Coster y Roxas appeals,
assigning the following errors;
PART
AS TO THE JURISDICTION

I. The lower court erred in holding that it had acquired jurisdiction on


the defendant Gabriela Andrea de Coster y Roxas,
(1) There having been no service of the summons on her in
the manner required by section 396 of the Code of Civil
Procedure, she being absent from the Philippine Islands at
the time of the filing of the complaint and of the issuance of
the summons in this case, and a resident of Paris, France,

where she had lived permanently and continuously for fifteen


years prior thereof, and
(2) There having been no se rive by publication in the
manner required by section 398 of the Code of Civil
Procedure.
II. The lower court erred in considering that in a case where the wife
is the only necessary party, service of the summons on the husband,
at a place which is not "the usual place of residence" of the wife and
where the wife has never lived or resided, is sufficient to give the
court jurisdiction on the person and property of the wife and to render
judgment by default against her.
III. The court erred in admitting and considering evidence, outside of
the sheriff's return, of the fact that the husband of the defendant
Gabriela Andrea de Coster y Roxas was her attorney in fact with
power to appear for the defendant in court.
IV. The court erred in holding that the non-appearance of an agent of
the defendant when service of the summons has been made on him
not as the agent of the defendant but in other capacity, will entitle the
plaintiff who has misstated the material jurisdictional facts of the
complaint to a judgment by default against the principal.
V. The lower court erred in refusing to vacate a judgment by default
against the defendant Gabriela Andrea de Coster y Roxas rendered
on a defective summons, served in a manner not provided for by the
law, and in a case where the complaint shows that plaintiff has no
right of action.
PART II
AS TO THE MERITS OF THE DEFENSE
I. The lower court erred, with abuse of discretion, in holding that the
negligence, if any, of J.M. Poizat in not appearing on behalf of the
defendant Gabriela Andrea de Coster y Roxas, can be imputed to
this defendant, without redress, and to the advantage of the plaintiff
bank who in collusion with said J.M. Poizat caused the latter to
contract beyond the scope of his powers as agent of this defendant
the obligation which is the subject matter of this case.

II. The lower court erred in holding that the relief on the part of J.M.
Poizat that there was no defense against the claim of the plaintiff on
an obligation contracted by said J.M. Poizat apparently as agent of
the defendant Gabriela Andrea de Coster y Roxas, but in truth
beyond the scope of his authority, and with knowledge on the part of
the plaintiff bank that he was so acting beyond his powers, was such
an error was can be imputed to this defendant, and against which
she can obtain no redress.
III. The lower court erred in not holding that a principal is not liable for
an obligation contracted by his agent beyond his power even when
both the creditor and the agent believed that the latter was acting
within the scope of his powers.
IV. The lower court erred in holding that because the agent of the
defendant Gabriela Andrea de Coster y Roxas had power to appear
for her in court, his non-appearance could render this defendant
liable to a judgment by default, when the record shows that there
was no service of the summons in accordance with any of the forms
of service provided by law.
V. The lower court erred in holding that J.M. Poizat was summoned
as agent of hi wife, the defendant Gabriela Andrea de Coster y
Roxas, and was, in that capacity, notified of all the decisions
rendered in this case, there being nothing in the record to support
the truth of such finding.
VI. The lower court erred in holding that in contracting the obligations
in favor of the plaintiff Bank of the Philippine Islands and of the
defendant Orden de PP. Predicadores de la Provincia del Santisimo
Rosario, the agent of the defendant Gabriela Andrea de Coster y
Roxas acted within the scope of his powers.
VII. The lower court erred in not holding that the plaintiff Bank of the
Philippine Islands and the defendant Orden de PP. Predicadores de
la Provincia del Santisimo Rosario had knowledge of the fact that
J.M. Poizat in contracting the respective obligations in their favor,
pretending to act as agent of the defendant Gabriela Andrea de
Coster y Roxas, was acting beyond the scope of his powers as such
agent.
VIII. The lower court erred in making the following statement:

"It is however alleged, by the petitioner, that these loans


were obtained to pay debts, of strangers. Even so, this would
not render the loan obtained by the attorney in fact null and
void. The circumstance that the agent used the money,
borrowed by him within the scope of his powers, to purposes
for which he was not authorized by his principal, may entitle
the latter to demand from him the corresponding liability for
the damages suffered, but it cannot prejudice the creditor
and cause the nullity of the loan. But, even admitting that the
money borrowed was used by Poizat to pay debts which did
not belong to his principal, even then, he would have acted
within his powers, since his principal, together with the power
to borrow money, had given her agent power to loan any
amount of money, and the payment of the debts of a
stranger would amount to a loan made by the agent on
behalf of his principal to the person or entity whose debt was
paid with the money obtained from the creditors."
IX. The lower court erred in applying to this case the principle
involved in the case of Palanca vs. Smith, Bell and Co., 9 Phil., 131.
X. The court erred in supplying from its own imagination facts which
did not take place, of which there is no evidence in the record, and
which the parties never claimed to have existed, and then draw the
conclusion that if under those hypothetical facts the transaction
between J.M. Poizat and the Bank of the Philippine Islands might
have been legal, then the transaction as it actually took place was
also legal.
XI. The lower court erred in holding that defendant has not alleged
any of the grounds enumerated in section 113 of the Code of Civil
Procedure.
XII. The lower court erred in holding that this defendant-appellant has
no meritorious defense against the Dominican Order and the Bank of
the Philippine Islands.
XIII. The lower court erred in taking into consideration Exhibit A
appearing at pages 156-165 of the bill of exceptions.
XIV. The lower court erred in denying the motion filed by this
defendant-appellant.

XV. The lower court has acted throughout these proceedings with a
clear abuse of discretion.

JOHNS, J.:
We will decide the case of the bank first
The petition of the appellant states under oath:
II. That this defendant has been absent from the Philippine Islands
and residing in the City of Paris, France, since the year 1908 (1909),
up to April 30, 1924, on which date she arrived in this City of Manila,
Philippine Islands.
III. That at the time when the complaint in this case was filed and the
summons issued, she was still absent from the Philippine Islands
and had no knowledge either of the filing of this action or of the facts
which led to it.
Under oath the plaintiff, through its acting president, says:
I-II. That it admits the allegations contained in paragraphs I and II of
the aforesaid motion.
III. That it admits the first part of this paragraph, to wit: That at the
time that the complaint in the above entitled case was filed, the
defendant Gabriela Andrea de Coster y Roxas was absent from the
Philippine Islands.
Paragraph 6 of section 396 of the Code of Civil Procedure provides:
In all other cases, to the defendant personally, or by leaving a copy
at his usual place of residence, in the hands of some person resident
therein of sufficient discretion to receive the same. But service upon
a corporation, as provided in subsections one and two, may be made
by leaving the copy at the office of the proper officer thereof if such
officer cannot be found.
The return of the sheriff as to the service is as follows:

On this date I have served a copy of the within summons, and of the
complaint attached, upon Jean M. Poizat, personally, and the copies
corresponding to J.M. Poizat and Co., a company duly organized
under the laws of the Philippine Islands, by delivering said copies to
its President Mr. Jean M. Poizat, personally, and the copies
corresponding to Gabriela Andrea de Coster y Roxas, by leaving the
same in the place of her usual residence in the City of Manila and in
the hands of her husband, Mr. J.M. Poizat, a person residing therein
and of sufficient discretion to receive it, personally.
Done at Manila, P.I., this 13th day of March, 1924.
RICARDO SUMMERS
Sheriff of Manila
By GREGORIO GARCIA
I hereby certify that on this date I have delivered a copy of this
summons and of the complaint corresponding to the "La Orden de
Dominicos or PP. Predicadores de la Provincia del Santisimo
Rosario," through Father Pedro Pratt, Procurador General of said
Orden de Dominicos or PP. Predicadores de la Provincia del
Santisimo Rosario, personally.
Manila, P.I., April 1, 1924.
RICARDO SUMMERS
Sheriff of Manila
By SIMEON D. SERDEA
It will be noted that the service of summons and complaint was made on this
defendant on the 13th day of March, 1924, and that it is a stipulated fact that
since the year 1908 and up to April 30, 1924, she was "residing in the City of
Paris, France." Even so, it is contended that the service was valid by reason
of the fact that it was made at the usual place of residence and abode of the
defendant husband, and that legally the residence of the wife is that of the
husband. That contention is in direct conflict with the admission of the plaintiff
that since the year 1908 and up to April 30, 1924, the wife was residing in the
City of Paris. The residence of the wife in the City of Paris covered a period
of sixteen years.
It may be that where in the ordinary course of business the wife is absent
from the residence of husband on a pleasure trip or for business reasons or

to visit friends or relatives that, in the nature of such things, the residence of
the wife would continue and remain to be that of the husband. That is not this
case. For sixteen years the residence of the husband was in the City of
Manila, and the residence of the wife was in the City of Paris.
Upon the admitted facts, we are clearly of the opinion that the residence of
the husband was not the usual place of residence of the wife. Giving full
force and effect to the legal presumption that the usual place of residence of
the wife is that of her husband, that presumption is overcome by the admitted
fact that the wife was "residing in the City of Paris, France, since the year
1908 up to April 30, 1924."
Without placing a limitation upon the length of time sufficient to overcome the
legal presumption, suffice it to say that sixteen years is amply sufficient.
It follows that the substituted service attempted to be made under the
provisions of section 396 of the Code of Civil Procedure is null and void, and
that by such service the court never acquired jurisdiction of the person of the
defendant wife. In that event the plaintiff contends that under his power of
attorney, the husband was the general agent of the wife with authority to
accept service of process for her and in her name, and that by reason of the
fact that the husband was duly served and that he failed or neglected to
appear or answer, his actions and conduct were binding on the defendant
wife. Be that as it may, there is nothing in the record tending to show that the
husband accepted service of any process for or on account of his wife or as
her agent, or that he was acting for or representing her in his failure and
neglect to appear or answer.
The first appearance in court of the defendant wife was made when she filed
the motion of August 26, 1924, in which she prays in legal effect that the
judgment against her be annulled and set aside and the case reopened, and
that she be permitted to file an answer and to have the case tried on its
merits. That was a general appearance as distinguished from a special
appearance. When she filed that motion asking to be relieved from the legal
force and effect of the judgment, she submitted herself to the jurisdiction of
the court. If, in the first instance, she had made a special appearance to
question only the jurisdiction of the court, and had not appeared for any other
or different purpose, another and a different question would have been
presented. Having made a general appearance for one purpose, she is now
in court for all purposes.

It is an elementary rule of law that as a condition precedent, to entitle a party


to relief from a judgment "taken against him through his mistake,
inadvertence, surprise or excusable neglect," that, among other things, he
must show to the court that he has a meritorious defense. Based upon that
legal principle the bank contends that no such a showing has been made by
the defendant wife. That involves the legal construction of the power of
attorney which, it is admitted, the wife gave to her husband on August 25,
1903, which, among other things material to this opinion, recites that she
gave to him:
Such full and ample power as required or necessary, to the end that
he may perform on my behalf, and in my name and availing himself
of all my rights and actions, the following acts:
5. Loan or borrow any sums of money or fungible things at the rate of
interest and for the time and under the conditions which he might
deem convenient, collecting or paying the capital or the interest on
their respective due dates; executing and signing the corresponding
public or private documents related thereto, and making all these
transactions with or without mortgages, pledges or personal
guaranty.
6. Enter into any kind of contracts whether civil or mercantile, giving
due form thereof either by private documents or public deeds with all
clauses and requisites provided by law for their validity and effect,
having due regard to the nature of each contract.
7. Draw, endorse, accept, issue and negotiate any drafts, bills of
exchange, letters of credit, letters of payment, bills, vales, promissory
notes and all kinds of documents representative of value; paying or
collecting the value thereof on their respective due dates, or
protesting them for non-acceptance or non-payment, utilizing in this
case the rights granted by the Code of Commerce now in force, in
order to collect the value thereof, interests, expenses and damages
against whomsoever should be liable therefor.
8. Institute before the competent courts the corresponding action in
justification of the possession which I have or might have over any
real estate, filing the necessary pleadings, evidencing them by
means of documentary or oral testimony admissible by law;
accepting notices and summons, and instituting all necessary
proceedings for the termination thereof and the consequent

inscription of said action in the corresponding office of the Register of


Deeds, in the same manner in which I might do if personally present
and acting.
9. Represent me in all cases before the municipal courts, justice of
the peace courts, courts of first instance, supreme court and all other
courts of regular or any other special jurisdiction, appearing before
them in any civil or criminal proceedings, instituting and filing criminal
and ordinary civil actions, claims in intestate and testamentary
proceedings, insolvencies and other actions provided by law; filing
complaints, answers, counterclaims, cross complaints, criminal
complaints and such other pleadings as might be necessary; filing
demurrers, taking and offering judicial admissions, documentary,
expert, oral evidence, and others provided by law, objecting to and
opposing whatever contrary actions are taken, offered and
presented; accepting notices, citations and summons and
acknowledging their receipt to the proper judicial officials.
10. For to the end stated above and the incidents related thereto, I
confer on him ample and complete power, binding myself in the most
solemn manner as required by law to recognize as existing and valid
all that he might do by virtue hereof.
It is admitted that on December 29, 1921, the defendant husband signed the
name of the defendant wife to the promissory note in question, and that to
secure the payment of the note, upon the same date and as attorney in fact
for his wife, the husband signed the real mortgage in question in favor of the
bank, and that the mortgage was duly executed.
Based upon such admissions, the bank vigorously contends that the
defendant wife has not shown a meritorious defense. In fact that it appears
from her own showing that she does not have a legal defense. It must be
admitted that upon the face of the instruments, that fact appears to be true.
To meet that contention, the defendant wife points out, first, that the note in
question is a joint and several note, and, second, that it appears from the
evidence, which she submitted, that she is nothing more than an
accommodation maker of the note. She also submits evidence which tends
to show:
First. That prior to July 25, 1921, Jean M. Poizat was personally
indebted to the Bank of the Philippine Islands in the sum of
P290,050.02 (Exhibit H, page 66, bill of exceptions);

Second. That on July 25, 1921, the personal indebtedness of Jean


M. Poizat was converted into six promissory notes aggregating the
sum of P308,458.58 of which P16,180 were paid, leaving an
outstanding balance of P292,278.58 (Exhibits D, E, F, G, H and I,
pages 75-80, bill of exceptions);
Third. That on December 29, 1921, the above promissory notes were
cancelled and substituted by a joint and several note signed by Jean
M. Poizat in his personal capacity and as agent of Gabriela Andrea
de Coster y Roxas and as member of the firm J.M. Poizat and Co.
In other words, that under the power of attorney, the husband had no
authority for and on behalf of the wife to execute a joint and several note or
to make her liable as an accommodation maker. That the debt in question
was a preexisting debt of her husband and of the firm of J.M. Poizat and Co.,
to which she was not a party, and for which she was under no legal obligation
to pay. That she never borrowed any money from the bank, and that previous
to the signing of the note, she never had any dealings with the bank and was
not indebted to the bank in any amount. That the old, original debts of her
husband and J.M. Poizat and Co. to the bank, to which she was not a party,
were all taken up and merged in the new note of December 29, 1921, in
question, and that at the time the note was signed, she did not borrow any
money, and that no money was loaned by the bank to the makers of the note.
Assuming such facts to be true, it would be a valid defense by the defendant
wife to the payment of the note. There is no claim or pretense that the bank
was misled or deceived. If it had made an actual loan of P292,000 at the time
the note was executed, another and a different question would be presented.
In the ordinary course of its business, the bank knew that not a dollar was
loaned or borrowed on the strength of the note. It was given at the urgent
and pressing demand of the bank to obtain security for the six different notes
which it held against J.M. Poizat and Co. and Jean M. Poizat of date July 25,
1921, aggregating about P292,000, and at the time it was given, those notes
were taken up and merged in the note of December 29, 1921, now in
question. Upon the record before us, there is no evidence that the defendant
wife was a party to the notes of July 25, 1921, or that she was under any
legal liability to pay them.
The note and mortgage in question show upon their face that at the time they
were executed, the husband was attorney in fact for the defendant wife, and
the bank knew or should have known the nature and extent of his authority
and the limitations upon his power.

You will search the terms and provisions of the power of attorney in vain to
find any authority for the husband to make his wife liable as a surety for the
payment of the preexisting debt of a third person.

The fact that an agent failed and neglected to perform his duties and to
represent the interests of his principal is not a bar to the principal obtaining
legal relief for the negligence of her agent, provided that the application for
such a relief is duly and properly made under the provisions of section 113.

Paragraph 5 of the power of attorney above quoted authorizes the husband


for in the name of his wife to "loan or borrow any sums of money or fungible
things, etc." This should be construed to mean that the husband had power
only to loan his wife's money and to borrow money for or on account of his
wife as her agent and attorney in fact. That does not carry with it or imply that
he had the legal right to make his wife liable as a surety for the preexisting
debt of a third person.

It is very apparent from the face of the instrument that the whole purpose and
intent of the power of attorney was to empower and authorize the husband to
look after and protect the interests of the wife and for her and in her name to
transact any and all of her business. But nowhere does it provide or
authorize him to make her liable as a surety for the payment of the
preexisting debt of a third person.

Paragraph 6 authorizes him to "enter into any kind of contracts whether civil
or mercantile, giving due form thereof either by private documents or public
deeds, etc."

Hence, it follows that the husband was not authorized or empowered to sign
the note in question for and on behalf of the wife as her act and deed, and
that as to her the note is void for want of power of her husband to execute it.

Paragraph 7 authorizes him to "draw, endorse, accept, issue and negotiate


any drafts, bills of exchange, letters of credit, letters of payment, bills, vales,
promissory notes, etc."

The same thing is true as to the real mortgage to the bank. It was given to
secure the note in question and was not given for any other purpose. The
real property described in the mortgage to the bank was and is the property
of the wife. The note being void as to her, it follows that as to her the real
mortgage to the bank is also void for want of power to execute it.

The foregoing are the clauses in the power of attorney upon which the bank
relies for the authority of the husband to execute promissory notes for and on
behalf of his wife and as her agent.
It will be noted that there is no provision in either of them which authorizes or
empowers him to sign anything or to do anything which would make his wife
liable as a surety for a preexisting debt.
It is fundamental rule of construction that where in an instrument powers and
duties are specified and defined, that all of such powers and duties are
limited and confined to those which are specified and defined, and that all
other powers and duties are excluded.
Paragraph 8 of the power of attorney authorizes the husband to institute,
prosecute and defend all actions or proceedings in a court of justice,
including "accepting notices and summons."
There is nothing in the record tending to show that the husband accepted the
service of any notice or summons in the action on behalf of the bank, and
even so, if he had, it would not be a defense to open up and vacate a
judgment under section 113 of the Code of Civil Procedure. The same thing
is true as to paragraph 9 of the power of attorney.

It appears that before the motion in question was filed, there were certain
negotiations between the bank and the attorney for the wife with a view of a
compromise or settlement of the bank's claim against her, and that during
such negotiations, there was some evidence or admissions on the part of her
attorney that she was liable for the bank's claim. It now contends that as a
result of such negotiations and admissions, the wife is estopped to deny her
liability. but it also appears that during such negotiations, both the wife and
her attorney did not have any knowledge of the actual facts, and that she
was then ignorant of the defense upon which she now relies. Be that as it
may, such negotiations were more or less in the nature of a compromise
which was rejected by the bank, and it appears that in any event both the
wife and her attorney did not have any knowledge of the facts upon which
they now rely as a defense.
There is no claim or pretense that the debt in question was contracted for or
on account of the "usual daily expenses of the family, incurred by the wife or
by her order, with the tacit consent of the husband," as provided for in article
1362 of the Civil Code. Neither is there any evidence tending to show that
the wife was legally liable for any portion of the original debt evidence by the
note in question.

This decision as to the bank on this motion is based on the assumption that
the facts are true as set forth and alleged in the petition to set aside and
vacate the judgment as to the wife, but we are not making any finding as to
the actual truth of such facts. That remains for the defendant wife to prove
such alleged facts when the case is tried on its merits.
It follows that the opinion of the lower court in refusing to set aside and
vacate the judgment of the plaintiff bank against the defendant wife is
reversed, and that judgment is vacated and set aside, and as to the bank the
case is remanded to the lower court, with leave for the wife to file an answer
to plaintiff's cause of action, and to have the case tried on its merits and for
any further proceedings not inconsistent with this opinion.
As to the judgment in favor of the Dominican Fathers, it appears that their
plea above quoted in the statement of facts was filed on April 24, 1924. In
that plea they say that they have a first mortgage on the property described
in paragraph IV of the complaint for P125,000 with interest at 10 per cent per
annum. That the mortgagors Jean M. Poizat and Gabriela Andrea de Coster
y Roxas have not paid the principal or the stipulated interest from December
16, 1921, to date, which up to the 30th day of April, 1924, amounts to
P27,925.34. Wherefore, it is prayed that the credit above-mentioned be taken
into account when the second mortgage is foreclosed.
No other plea of any kind, nature or description was filed by it. The record
shows that a copy of this alleged plea was served upon the attorneys for the
plaintiff bank. There is nothing in the record which shows or tends to show
that a copy of it was ever served on either one of the defendants. Neither is
there any evidence that either of the defendants ever appeared in the original
action. In fact, judgment was rendered against them by default.
Under such a state of facts, the judgment in favor of the Dominican Fathers
cannot be sustained. In the first place, the plea above quoted filed on April
24, 1924, would not be sufficient to sustain a judgment. It does not even ask
for a judgment of the foreclosure of its mortgage. In the second place, no
copy of the plea was ever served upon either of the defendants, who were
the real parties in interest, and against whom a judgment was rendered for
the full amount of the note and the foreclosure of the mortgage. Such a
proceeding cannot be sustained on any legal principle.
Unless waived, a defendant has a legal right to service of process, to his day
in court and to be heard in his defense.

From what has been said, it follows that, if the transaction between the
Dominican Fathers and Jean M. Poizat as attorney in fact for his wife was an
original one and the P125,000 was actually loaned at the time the note and
mortgage were executed and the money was in good faith delivered to the
husband as the agent and attorney in fact of the wife, it would then be a valid
exercise of the power given to the husband, regardless of the question as to
what he may have done with the money.
Paragraph 5 of the power of attorney specifically authorizes him to borrow
money for and on account of his wife and her name, "and making all these
transactions with or without mortgages, pledges or personal guaranty."
It follows that the judgment of the lower court in favor of La Orden de
Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario is
reversed, without prejudice to its right to either file an original suit to foreclose
its mortgage or to file a good and sufficient plea as intervenor in the instant
suit, setting forth the facts upon which it relies for a judgment on its note and
the foreclosure of its mortgage, copies of which should be served upon the
defendants.
Neither party to recover costs. So ordered.

The antecedents as disclosed in the decisions of both the trial court and the
Court of Appeals, as well as in the pleadings of petitioner Toyota Shaw, Inc.
(hereinafter Toyota) and respondent Luna L. Sosa (hereinafter Sosa) are as
follows. Sometime in June of 1989, Luna L. Sosa wanted to purchase a
Toyota Lite Ace. It was then a seller's market and Sosa had difficulty finding a
dealer with an available unit for sale. But upon contacting Toyota Shaw, Inc.,
he was told that there was an available unit. So on 14 June 1989, Sosa and
his son, Gilbert, went to the Toyota office at Shaw Boulevard, Pasig, Metro
Manila. There they met Popong Bernardo, a sales representative of Toyota.

G.R. No. L-116650 May 23, 1995


TOYOTA SHAW, INC., petitioner,
vs.
COURT OF APPEALS and LUNA L. SOSA, respondents.
DAVIDE, JR., J.:
At the heart of the present controversy is the document marked Exhibit
"A" 1 for the private respondent, which was signed by a sales representative
of Toyota Shaw, Inc. named Popong Bernardo. The document reads as
follows:
4 June 1989
AGREEMENTS
&
POPONG
SHAW, INC.

BETWEEN
BERNARDO

MR.
OF

SOSA
TOYOTA

1. all necessary documents will be submitted to TOYOTA


SHAW, INC. (POPONG BERNARDO) a week after, upon
arrival of Mr. Sosa from the Province (Marinduque) where
the unit will be used on the 19th of June.
2. the downpayment of P100,000.00 will be paid by Mr. Sosa
on June 15, 1989.
3. the TOYOTA SHAW, INC. LITE ACE yellow, will be pick-up
[sic] and released by TOYOTA SHAW, INC. on the 17th of
June at 10 a.m.

Sosa emphasized to Bernardo that he needed the Lite Ace not later than 17
June 1989 because he, his family, and abalikbayan guest would use it on 18
June 1989 to go to Marinduque, his home province, where he would
celebrate his birthday on the 19th of June. He added that if he does not
arrive in his hometown with the new car, he would become a "laughing
stock." Bernardo assured Sosa that a unit would be ready for pick up at
10:00 a.m. on 17 June 1989. Bernardo then signed the aforequoted
"Agreements Between Mr. Sosa & Popong Bernardo of Toyota Shaw, Inc." It
was also agreed upon by the parties that the balance of the purchase price
would be paid by credit financing through B.A. Finance, and for this Gilbert,
on behalf of his father, signed the documents of Toyota and B.A. Finance
pertaining to the application for financing.
The next day, 15 June 1989, Sosa and Gilbert went to Toyota to deliver the
downpayment of P100,000.00. They met Bernardo who then accomplished a
printed Vehicle Sales Proposal (VSP) No. 928, 2 on which Gilbert signed
under the subheading CONFORME. This document shows that the
customer's name is "MR. LUNA SOSA" with home address at No. 2316 Guijo
Street, United Paraaque II; that the model series of the vehicle is a "Lite Ace
1500" described as "4 Dr minibus"; that payment is by "installment," to be
financed by "B.A.," 3 with the initial cash outlay of P100,000.00 broken down
as follows:

a)

downpayment

P 53,148.00

b)

insurance

P 13,970.00

c)

BLT registration fee

P 1,067.00

Very truly yours,


(Sgd.) POPONG BERNARDO.
Was this document, executed and signed by the petitioner's sales
representative, a perfected contract of sale, binding upon the petitioner,
breach of which would entitle the private respondent to damages and
attorney's fees? The trial court and the Court of Appeals took the affirmative
view. The petitioner disagrees. Hence, this petition for review oncertiorari.

CHMO fee

P 2,715.00

service fee

P 500.00

accessories

P 29,000.00

and that the "BALANCE TO BE FINANCED" is "P274,137.00." The spaces


provided for "Delivery Terms" were not filled-up. It also contains the following
pertinent provisions:
CONDITIONS OF SALES
1. This sale is subject to availability of unit.
2. Stated Price is subject to change without prior notice,
Price prevailing and in effect at time of selling will apply. . . .
Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and approved
the VSP.
On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert to inform him
that the vehicle would not be ready for pick up at 10:00 a.m. as previously
agreed upon but at 2:00 p.m. that same day. At 2:00 p.m., Sosa and Gilbert
met Bernardo at the latter's office. According to Sosa, Bernardo informed
them that the Lite Ace was being readied for delivery. After waiting for about
an hour, Bernardo told them that the car could not be delivered because
"nasulot ang unit ng ibang malakas."
Toyota contends, however, that the Lite Ace was not delivered to Sosa
because of the disapproval by B.A. Finance of the credit financing application
of Sosa. It further alleged that a particular unit had already been reserved
and earmarked for Sosa but could not be released due to the uncertainty of
payment of the balance of the purchase price. Toyota then gave Sosa the
option to purchase the unit by paying the full purchase price in cash but Sosa
refused.
After it became clear that the Lite Ace would not be delivered to him, Sosa
asked that his downpayment be refunded. Toyota did so on the very same
day by issuing a Far East Bank check for the full amount of

P100,000.00, 4 the receipt of which was shown by a check voucher of


Toyota, 5 which Sosa signed with the reservation, "without prejudice to our
future claims for damages."
Thereafter, Sosa sent two letters to Toyota. In the first letter, dated 27 June
1989 and signed by him, he demanded the refund, within five days from
receipt, of the downpayment of P100,000.00 plus interest from the time he
paid it and the payment of damages with a warning that in case of Toyota's
failure to do so he would be constrained to take legal action. 6 The second,
dated 4 November 1989 and signed by M. O. Caballes, Sosa's counsel,
demanded one million pesos representing interest and damages, again, with
a warning that legal action would be taken if payment was not made within
three days. 7 Toyota's counsel answered through a letter dated 27 November
1989 8 refusing to accede to the demands of Sosa. But even before this
answer was made and received by Sosa, the latter filed on 20 November
1989 with Branch 38 of the Regional Trial Court (RTC) of Marinduque a
complaint against Toyota for damages under Articles 19 and 21 of the Civil
Code in the total amount of P1,230,000.00. 9 He alleges, inter alia, that:
9. As a result of defendant's failure and/or refusal to deliver
the vehicle to plaintiff, plaintiff suffered embarrassment,
humiliation, ridicule, mental anguish and sleepless nights
because: (i) he and his family were constrained to take the
public transportation from Manila to Lucena City on their way
to Marinduque; (ii) his balikbayan-guest canceled his
scheduled first visit to Marinduque in order to avoid the
inconvenience of taking public transportation; and (iii) his
relatives, friends, neighbors and other provincemates,
continuously irked him about "his Brand-New Toyota Lite Ace
that never was." Under the circumstances, defendant
should be made liable to the plaintiff for moral damages in
the amount of One Million Pesos (P1,000,000.00). 10
In its answer to the complaint, Toyota alleged that no sale was entered into
between it and Sosa, that Bernardo had no authority to sign Exhibit "A" for
and in its behalf, and that Bernardo signed Exhibit "A" in his personal
capacity. As special and affirmative defenses, it alleged that: the VSP did not
state date of delivery; Sosa had not completed the documents required by
the financing company, and as a matter of policy, the vehicle could not and
would not be released prior to full compliance with financing requirements,
submission of all documents, and execution of the sales agreement/invoice;
the P100,000.00 was returned to and received by Sosa; the venue was
improperly laid; and Sosa did not have a sufficient cause of action against it.
It also interposed compulsory counterclaims.

After trial on the issues agreed upon during the pre-trial session, 11 the trial
court rendered on 18 February 1992 a decision in favor of Sosa. 12 It ruled
that Exhibit "A," the "AGREEMENTS BETWEEN MR. SOSA AND POPONG
BERNARDO," was a valid perfected contract of sale between Sosa and
Toyota which bound Toyota to deliver the vehicle to Sosa, and further agreed
with Sosa that Toyota acted in bad faith in selling to another the unit already
reserved for him.
As to Toyota's contention that Bernardo had no authority to bind it through
Exhibit "A," the trial court held that the extent of Bernardo's authority "was not
made known to plaintiff," for as testified to by Quirante, "they do not volunteer
any information as to the company's sales policy and guidelines because
they are internal matters." 13 Moreover, "[f]rom the beginning of the
transaction up to its consummation when the downpayment was made by the
plaintiff, the defendants had made known to the plaintiff the impression that
Popong Bernardo is an authorized sales executive as it permitted the latter to
do acts within the scope of an apparent authority holding him out to the
public as possessing power to do these acts." 14 Bernardo then "was an
agent of the defendant Toyota Shaw, Inc. and hence bound the
defendants." 15
The court further declared that "Luna Sosa proved his social standing in the
community and suffered besmirched reputation, wounded feelings and
sleepless nights for which he ought to be compensated." 16 Accordingly, it
disposed as follows:
WHEREFORE, viewed from the above findings, judgment is hereby
rendered in favor of the plaintiff and against the defendant:
1. ordering the defendant to pay to the plaintiff the sum of
P75,000.00 for moral damages;
2. ordering the defendant to pay the plaintiff the sum of
P10,000.00 for exemplary damages;
3. ordering the defendant to pay the sum of P30,000.00
attorney's fees plus P2,000.00 lawyer's transportation fare
per trip in attending to the hearing of this case;
4. ordering the defendant to pay the plaintiff the sum of
P2,000.00 transportation fare per trip of the plaintiff in
attending the hearing of this case; and
5. ordering the defendant to pay the cost of suit.

SO ORDERED.
Dissatisfied with the trial court's judgment, Toyota appealed to the Court of
Appeals. The case was docketed as CA-G.R. CV No. 40043. In its decision
promulgated on 29 July 1994, 17 the Court of Appeals affirmed in toto the
appealed decision.
Toyota now comes before this Court via this petition and raises the core
issue stated at the beginning of the ponenciaand also the following related
issues: (a) whether or not the standard VSP was the true and documented
understanding of the parties which would have led to the ultimate contract of
sale, (b) whether or not Sosa has any legal and demandable right to the
delivery of the vehicle despite the non-payment of the consideration and the
non-approval of his credit application by B.A. Finance, (c) whether or not
Toyota acted in good faith when it did not release the vehicle to Sosa, and (d)
whether or not Toyota may be held liable for damages.
We find merit in the petition.
Neither logic nor recourse to one's imagination can lead to the conclusion
that Exhibit "A" is a perfected contract of sale.
Article 1458 of the Civil Code defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
and Article 1475 specifically provides when it is deemed perfected:
Art. 1475. The contract of sale is perfected at the moment
there is a meeting of minds upon the thing which is the
object of the contract and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing
the form of contracts.
What is clear from Exhibit "A" is not what the trial court and the Court of
Appeals appear to see. It is not a contract of sale. No obligation on the part
of Toyota to transfer ownership of a determinate thing to Sosa and no

correlative obligation on the part of the latter to pay therefor a price certain
appears therein. The provision on the downpayment of P100,000.00 made
no specific reference to a sale of a vehicle. If it was intended for a contract of
sale, it could only refer to a sale on installment basis, as the VSP executed
the following day confirmed. But nothing was mentioned about the full
purchase price and the manner the installments were to be paid.
This Court had already ruled that a definite agreement on the manner of
payment of the price is an essential element in the formation of a binding and
enforceable contract of sale. 18 This is so because the agreement as to the
manner of payment goes into the price such that a disagreement on the
manner of payment is tantamount to a failure to agree on the price.
Definiteness as to the price is an essential element of a binding agreement to
sell personal property. 19
Moreover, Exhibit "A" shows the absence of a meeting of minds between
Toyota and Sosa. For one thing, Sosa did not even sign it. For another, Sosa
was well aware from its title, written in bold letters, viz.,
AGREEMENTS BETWEEN MR. SOSA &
POPONG BERNARDO OF TOYOTA SHAW,
INC.
that he was not dealing with Toyota but with Popong Bernardo and that the
latter did not misrepresent that he had the authority to sell any Toyota
vehicle. He knew that Bernardo was only a sales representative of Toyota
and hence a mere agent of the latter. It was incumbent upon Sosa to act with
ordinary prudence and reasonable diligence to know the extent of Bernardo's
authority
as
an
agent 20 in respect of contracts to sell Toyota's vehicles. A person dealing with
an agent is put upon inquiry and must discover upon his peril the authority of
the agent. 21
At the most, Exhibit "A" may be considered as part of the initial phase of the
generation or negotiation stage of a contract of sale. There are three stages
in the contract of sale, namely:
(a) preparation, conception, or generation, which is the
period of negotiation and bargaining, ending at the moment
of agreement of the parties;
(b) perfection or birth of the contract, which is the moment
when the parties come to agree on the terms of the contract;
and

(c) consummation or death, which is the fulfillment or


performance of the terms agreed upon in the contract. 22
The second phase of the generation or negotiation stage in this case was the
execution of the VSP. It must be emphasized that thereunder, the
downpayment of the purchase price was P53,148.00 while the balance to be
paid on installment should be financed by B.A. Finance Corporation. It is, of
course, to be assumed that B.A. Finance Corp. was acceptable to Toyota,
otherwise it should not have mentioned B.A. Finance in the VSP.
Financing companies are defined in Section 3(a) of R.A. No. 5980, as
amended by P.D. No. 1454 and P.D. No. 1793, as "corporations or
partnerships, except those regulated by the Central Bank of the Philippines,
the Insurance Commission and the Cooperatives Administration Office, which
are primarily organized for the purpose of extending credit facilities to
consumers and to industrial, commercial, or agricultural enterprises, either by
discounting or factoring commercial papers or accounts receivables, or by
buying and selling contracts, leases, chattel mortgages, or other evidence of
indebtedness, or by leasing of motor vehicles, heavy equipment and
industrial machinery, business and office machines and equipment,
appliances and other movable property." 23
Accordingly, in a sale on installment basis which is financed by a financing
company, three parties are thus involved: the buyer who executes a note or
notes for the unpaid balance of the price of the thing purchased on
installment, the seller who assigns the notes or discounts them with a
financing company, and the financing company which is subrogated in the
place of the seller, as the creditor of the installment buyer. 24 Since B.A.
Finance did not approve Sosa's application, there was then no meeting of
minds on the sale on installment basis.
We are inclined to believe Toyota's version that B.A. Finance disapproved
Sosa's application for which reason it suggested to Sosa that he pay the full
purchase price. When the latter refused, Toyota cancelled the VSP and
returned to him his P100,000.00. Sosa's version that the VSP was cancelled
because, according to Bernardo, the vehicle was delivered to another who
was "mas malakas" does not inspire belief and was obviously a delayed
afterthought. It is claimed that Bernardo said, "Pasensiya kayo, nasulot ang
unit ng ibang malakas," while the Sosas had already been waiting for an hour
for the delivery of the vehicle in the afternoon of 17 June 1989. However, in
paragraph 7 of his complaint, Sosa solemnly states:
On June 17, 1989 at around 9:30 o'clock in the morning,
defendant's sales representative, Mr. Popong Bernardo,
called plaintiff's house and informed the plaintiff's son that

the vehicle will not be ready for pick-up at 10:00 a.m. of June
17, 1989 but at 2:00 p.m. of that day instead. Plaintiff and his
son went to defendant's office on June 17 1989 at 2:00 p.m.
in order to pick-up the vehicle but the defendant for reasons
known only to its representatives, refused and/or failed to
release the vehicle to the plaintiff. Plaintiff demanded for an
explanation, but nothing was given; . . . (Emphasis
supplied). 25
The VSP was a mere proposal which was aborted in lieu of subsequent
events. It follows that the VSP created no demandable right in favor of Sosa
for the delivery of the vehicle to him, and its non-delivery did not cause any
legally indemnifiable injury.
The award then of moral and exemplary damages and attorney's fees and
costs of suit is without legal basis. Besides, the only ground upon which Sosa
claimed moral damages is that since it was known to his friends, townmates,
and relatives that he was buying a Toyota Lite Ace which they expected to
see on his birthday, he suffered humiliation, shame, and sleepless nights
when the van was not delivered. The van became the subject matter of talks
during his celebration that he may not have paid for it, and this created an
impression against his business standing and reputation. At the bottom of
this claim is nothing but misplaced pride and ego. He should not have
announced his plan to buy a Toyota Lite Ace knowing that he might not be
able to pay the full purchase price. It was he who brought embarrassment
upon himself by bragging about a thing which he did not own yet.
Since Sosa is not entitled to moral damages and there being no award for
temperate, liquidated, or compensatory damages, he is likewise not entitled
to exemplary damages. Under Article 2229 of the Civil Code, exemplary or
corrective damages are imposed by way of example or correction for the
public good, in addition to moral, temperate, liquidated, or compensatory
damages.
Also, it is settled that for attorney's fees to be granted, the court must
explicitly state in the body of the decision, and not only in the dispositive
portion thereof, the legal reason for the award of attorney's fees. 26 No such
explicit determination thereon was made in the body of the decision of the
trial court. No reason thus exists for such an award.
WHEREFORE, the instant petition is GRANTED. The challenged decision of
the Court of Appeals in CA-G.R. CV NO. 40043 as well as that of Branch 38
of the Regional Trial Court of Marinduque in Civil Case No. 89-14 are
REVERSED and SET ASIDE and the complaint in Civil Case No. 89-14 is
DISMISSED. The counterclaim therein is likewise DISMISSED.

No pronouncement as to costs.
SO ORDERED.

Tagunicar who represented herself to be an agent of defendant


Tourist World Services, Inc. (TWSI). The destination[s] are
Hongkong, Tokyo, San Francisco, U.S.A., for the amount of
P25,000.00 per computation of said defendant Claudia Tagunicar
(Exhs. C & C-1). The purpose of this trip is to go to Fairfield, New
Jersey, U.S.A. to buy two (2) lines of infrared heating system
processing textured plastic article (Exh. K).
"On said date, only the passage from Manila to Hongkong, then to
Tokyo, were confirmed. [PAA] Flight 002 from Tokyo to San
Francisco was on "RQ" status, meaning "on request". Per instruction
of defendant Claudia Tagunicar, plaintiffs returned after a few days
for the confirmation of the Tokyo-San Francisco segment of the trip.
After calling up Canilao of TWSI, defendant Tagunicar told plaintiffs
that their flight is now confirmed all the way. Thereafter, she attached
the confirmation stickers on the plane tickets (Exhs. A & B).

[G.R. No. 123560. March 27, 2000]


SPOUSES YU ENG CHO and FRANCISCO TAO YU, petitioners, vs. PAN
AMERICAN WORLD AIRWAYS, INC., TOURIST WORLD SERVICES, INC.,
JULIETA CANILAO and CLAUDIA TAGUNICAR, respondents.
DECISION
PUNO, J.:
This petition for review seeks a reversal of the 31 August 1995
Decision[1] and 11 January 1998 Resolution [2] of the Court of Appeals holding
private respondent Claudia Tagunicar solely liable for moral and exemplary
damages and attorneys fees, and deleting the trial courts award for actual
damages.
The facts as found by the trial court are as follows: Kycalr
"Plaintiff Yu Eng Cho is the owner of Young Hardware Co. and
Achilles Marketing. In connection with [this] business, he travels from
time to time to Malaysia, Taipei and Hongkong. On July 10, 1976,
plaintiffs bought plane tickets (Exhs. A & B) from defendant Claudia

"A few days before the scheduled flight of plaintiffs, their son, Adrian
Yu, called the Pan Am office to verify the status of the flight.
According to said Adrian Yu, a personnel of defendant Pan Am told
him over the phone that plaintiffs booking[s] are confirmed.
"On July 23, 1978, plaintiffs left for Hongkong and stayed there for
five (5) days. They left Hongkong for Tokyo on July 28, 1978. Upon
their arrival in Tokyo, they called up Pan-Am office for reconfirmation
of their flight to San Francisco. Said office, however, informed them
that their names are not in the manifest. Since plaintiffs were
supposed to leave on the 29th of July, 1978, and could not remain in
Japan for more than 72 hours, they were constrained to agree to
accept airline tickets for Taipei instead, per advise of JAL officials.
This is the only option left to them because Northwest Airlines was
then on strike, hence, there was no chance for the plaintiffs to obtain
airline seats to the United States within 72 hours. Plaintiffs paid for
these tickets.
"Upon reaching Taipei, there were no flight[s] available for plaintiffs,
thus, they were forced to return back to Manila on August 3, 1978,
instead of proceeding to the United States. [Japan] Air Lines (JAL)
refunded the plaintiffs the difference of the price for Tokyo-Taipei
[and] Tokyo-San Francisco (Exhs. I & J) in the total amount of
P2,602.00.

"In view of their failure to reach Fairfield, New Jersey, Radiant Heat
Enterprises, Inc. cancelled Yu Eng Chos option to buy the two lines
of infra-red heating system (Exh. K). The agreement was for him to
inspect the equipment and make final arrangement[s] with the said
company not later than August 7, 1978. From this business
transaction, plaintiff Yu Eng Cho expected to realize a profit of
P300,000.00 to P400,000.00."

below the printed word "status" for the flights from Tokyo to San
Francisco which means "under request," (Exh. 3-A, 4-A Pan-Am).
Before the date of the scheduled departure, defendant Tagunicar
received several calls from the plaintiffs inquiring about the status of
their bookings. Tagunicar in turn called up TWSI/Canilao to verify;
and if Canilao would answer that the bookings are not yet confirmed,
she would relate that to the plaintiffs. Calrky

"[A] scrutiny of defendants respective evidence reveals the following:

"Defendant Tagunicar claims that on July 13, 1978, a few days


before the scheduled flight, plaintiff Yu Eng Cho personally went to
her office, pressing her about their flight. She called up defendant
Julieta Canilao, and the latter told her "o sige Claudia, confirm na."
She even noted this in her index card (Exh. L), that it was Julieta
who confirmed the booking (Exh. L-1). It was then that she allegedly
attached the confirmation stickers (Exhs. 2, 2-B TWSI) to the tickets.
These stickers came from TWSI.

"Plaintiffs, who were intending to go to the United States, were


referred to defendant Claudia Tagunicar, an independent travel
solicitor, for the purchase of their plane tickets. As such travel
solicitor, she helps in the processing of travel papers like passport,
plane tickets, booking of passengers and some assistance at the
airport. She is known to defendants Pan-Am, TWSI/Julieta Canilao,
because she has been dealing with them in the past years.
Defendant Tagunicar advised plaintiffs to take Pan-Am because
Northwest Airlines was then on strike and plaintiffs are passing
Hongkong, Tokyo, then San Francisco and Pan-Am has a flight from
Tokyo to San Francisco. After verifying from defendant TWSI, thru
Julieta Canilao, she informed plaintiffs that the fare would be
P25,093.93 giving them a discount of P738.95 (Exhs. C, C-1).
Plaintiffs, however, gave her a check in the amount of P25,000.00
only for the two round trip tickets. Out of this transaction, Tagunicar
received a 7% commission and 1% commission for defendant TWSI.
Defendant Claudia Tagunicar purchased the two round-trip Pan-Am
tickets from defendant Julieta Canilao with the following schedules:
Origin Destination Airline Date Time/Travel
Manila Hongkong CX900 7-23-78 1135/1325hrs
Hongkong Tokyo CS500 7-28-78 1615/2115hrs
Tokyo San Francisco PA002 7-29-78 1930/1640hrs
The use of another airline, like in this case it is Cathay Pacific out of
Manila, is allowed, although the tickets issued are Pan-Am tickets, as
long as it is in connection with a Pan-Am flight. When the two (2)
tickets (Exhs. A & B) were issued to plaintiffs, the letter "RQ" appears

Defendant Tagunicar alleges that it was only in the first week of


August, 1978 that she learned from Adrian Yu, son of plaintiffs, that
the latter were not able to take the flight from Tokyo to San
Francisco, U.S.A. After a few days, said Adrian Yu came over with a
gentleman and a lady, who turned out to be a lawyer and his
secretary. Defendant Tagunicar claims that plaintiffs were asking for
her help so that they could file an action against Pan-Am. Because of
plaintiffs promise she will not be involved, she agreed to sign the
affidavit (Exh. M) prepared by the lawyer. Mesm
Defendants TWSI/Canilao denied having confirmed the Tokyo-San
Francisco segment of plaintiffs flight because flights then were really
tight because of the on-going strike at Northwest Airlines. Defendant
Claudia Tagunicar is very much aware that [said] particular segment
was not confirmed, because on the very day of plaintiffs departure,
Tagunicar called up TWSI from the airport; defendant Canilao asked
her why she attached stickers on the tickets when in fact that portion
of the flight was not yet confirmed. Neither TWSI nor Pan-Am
confirmed the flight and never authorized defendant Tagunicar to
attach the confirmation stickers. In fact, the confirmation stickers
used by defendant Tagunicar are stickers exclusively for use of PanAm only. Furthermore, if it is the travel agency that confirms the
booking, the IATA number of said agency should appear on the
validation or confirmation stickers. The IATA number that appears on
the stickers attached to plaintiffs tickets (Exhs. A & B) is 2-82-0770

(Exhs. 1, 1-A TWSI), when in fact TWSIs IATA number is 2-83-0770


(Exhs. 5, 5-A TWSI)."[3]

The award of actual damages is hereby DELETED.


SO ORDERED."

A complaint for damages was filed by petitioners against private respondents


Pan American World Airways, Inc.(Pan Am), Tourist World Services, Inc.
(TWSI), Julieta Canilao (Canilao), and Claudia Tagunicar (Tagunicar) for
expenses allegedly incurred such as costs of tickets and hotel
accommodations when petitioners were compelled to stay in Hongkong and
then in Tokyo by reason of the non-confirmation of their booking with PanAm. In a Decision dated November 14, 1991, the Regional Trial Court of
Manila, Branch 3, held the defendants jointly and severally liable, except
defendant Julieta Canilao, thus: Scslx
"WHEREFORE, judgment is hereby rendered for the plaintiffs and
ordering defendants Pan American World Airways, Inc., Tourist World
Services, Inc. and Claudia Tagunicar, jointly and severally, to pay
plaintiffs the sum of P200,000.00 as actual damages, minus
P2,602.00 already refunded to the plaintiffs; P200,000.00 as moral
damages; P100,000.00 as exemplary damages; an amount
equivalent to 20% of the award for and as attorneys fees, plus the
sum of P30,000.00 as litigation expenses.
Defendants counterclaims are hereby dismissed for lack of merit.
SO ORDERED."
Only respondents Pan Am and Tagunicar appealed to the Court of Appeals.
On 11 August 1995, the appellate court rendered judgment modifying the
amount of damages awarded, holding private respondent Tagunicar solely
liable therefor, and absolving respondents Pan Am and TWSI from any and
all liability, thus: Slxs c
"PREMISES CONSIDERED, the decision of the Regional Trial Court
is hereby SET ASIDE and a new one entered declaring appellant
Tagunicar solely liable for:

In so ruling, respondent court found that Tagunicar is an independent travel


solicitor and is not a duly authorized agent or representative of either Pan Am
or TWSI. It held that their business transactions are not sufficient to consider
Pan Am as the principal, and Tagunicar and TWSI as its agent and subagent, respectively. It further held that Tagunicar was not authorized to
confirm the bookings of, nor issue validation stickers to, herein petitioners
and hence, Pan Am and TWSI cannot be held responsible for her actions.
Finally, it deleted the award for actual damages for lack of proof.
Hence this petition based on the following assignment of errors: slx mis
1. the Court of Appeals, in reversing the decision of the trial court,
misapplied the ruling in Nicos Industrial Corporation vs. Court of
Appeals, et. al. [206 SCRA 127]; and
2. the findings of the Court of Appeals that petitioners ticket
reservations in question were not confirmed and that there is no
agency relationship among PAN-AM, TWSI and Tagunicar are
contrary to the judicial admissions of PAN-AM, TWSI and Tagunicar
and likewise contrary to the findings of fact of the trial court.
We affirm.
I. The first issue deserves scant consideration. Petitioners contend that
contrary to the ruling of the Court of Appeals, the decision of the trial court
conforms to the standards of an ideal decision set in Nicos Industrial
Corporation, et. al. vs. Court of Appeals, et. al., [4] as "that which, with
welcome economy of words, arrives at the factual findings, reaches the legal
conclusions, renders its ruling and, having done so, ends." It is averred that
the trial courts decision contains a detailed statement of the relevant facts
and evidence adduced by the parties which thereafter became the bases for
the courts conclusions.

1) Moral damages in the amount of P50,000.00;


2) Exemplary damages in the amount of P25,000.00; and
3) Attorneys fees in the amount of P10,000.00 plus costs of suit.

A careful scrutiny of the decision rendered by the trial court will show that
after narrating the evidence of the parties, it proceeded to dispose of the
case with a one-paragraph generalization, to wit: Missdaa

"On the basis of the foregoing facts, the Court is constrained to


conclude that defendant Pan-Am is the principal, and defendants
TWSI and Tagunicar, its authorized agent and sub-agent,
respectively. Consequently, defendants Pan-Am, TWSI and Claudia
Tagunicar should be held jointly and severally liable to plaintiffs for
damages. Defendant Julieta Canilao, who acted in her official
capacity as Office Manager of defendant TWSI should not be held
personally liable."[5]
The trial courts finding of facts is but a summary of the testimonies of the
witnesses and the documentary evidence presented by the parties. It did not
distinctly and clearly set forth, nor substantiate, the factual and legal bases
for holding respondents TWSI, Pan Am and Tagunicar jointly and severally
liable. In Del Mundo vs. CA, et al.[6] where the trial court, after summarizing
the conflicting asseverations of the parties, disposed of the kernel issue in
just two (2) paragraphs, we held: Sda adsc
"It is understandable that courts, with their heavy dockets and time
constraints, often find themselves with little to spare in the
preparation of decisions to the extent most desirable. We have thus
pointed out that judges might learn to synthesize and to simplify their
pronouncements. Nevertheless, concisely written such as they may
be, decisions must still distinctly and clearly express, at least in
minimum essence, its factual and legal bases."
For failing to explain clearly and well the factual and legal bases of its award
of moral damages, we set it aside in said case. Once more, we stress that
nothing less than Section 14 of Article VIII of the Constitution requires that
"no decision shall be rendered by any court without expressing therein clearly
and distinctly the facts and the law on which it is based." This is demanded
by the due process clause of the Constitution. In the case at bar, the decision
of the trial court leaves much to be desired both in form and substance. Even
while said decision infringes the Constitution, we will not belabor this infirmity
and rather examine the sufficiency of the evidence submitted by the
petitioners. Rtc spped
II. Petitioners assert that Tagunicar is a sub-agent of TWSI while TWSI is a
duly authorized ticketing agent of Pan Am. Proceeding from this premise,
they contend that TWSI and Pan Am should be held liable as principals for
the acts of Tagunicar. Petitioners stubbornly insist that the existence of the
agency relationship has been established by the judicial admissions allegedly
made by respondents herein, to wit: (1) the admission made by Pan Am in its
Answer that TWSI is its authorized ticket agent; (2) the affidavit executed by

Tagunicar where she admitted that she is a duly authorized agent of TWSI;
and (3) the admission made by Canilao that TWSI received commissions
from ticket sales made by Tagunicar. Korte
We do not agree. By the contract of agency, a person binds himself to render
some service or to do something in representation or on behalf of another,
with the consent or authority of the latter.[7] The elements of agency are: (1)
consent, express or implied, of the parties to establish the relationship; (2)
the object is the execution of a juridical act in relation to a third person; (3)
the agent acts as a representative and not for himself; (4) the agent acts
within the scope of his authority.[8] It is a settled rule that persons dealing with
an assumed agent are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and extent
of authority, and in case either is controverted, the burden of proof is upon
them to establish it.[9]
In the case at bar, petitioners rely on the affidavit of respondent Tagunicar
where she stated that she is an authorized agent of TWSI. This affidavit,
however, has weak probative value in light of respondent Tagunicars
testimony in court to the contrary. Affidavits, being taken ex parte, are almost
always incomplete and often inaccurate, sometimes from partial suggestion,
or for want of suggestion and inquiries. Their infirmity as a species of
evidence is a matter of judicial experience and are thus considered inferior to
the testimony given in court. [10] Further, affidavits are not complete
reproductions of what the declarant has in mind because they are generally
prepared by the administering officer and the affiant simply signs them after
the same have been read to her.[11] Respondent Tagunicar testified that her
affidavit was prepared and typewritten by the secretary of petitioners lawyer,
Atty. Acebedo, who both came with Adrian Yu, son of petitioners, when the
latter went to see her at her office. This was confirmed by Adrian Yu who
testified that Atty. Acebedo brought his notarial seal and notarized the
affidavit of the same day.[12] The circumstances under which said affidavit was
prepared put in doubt petitioners claim that it was executed voluntarily by
respondent Tagunicar. It appears that the affidavit was prepared and was
based on the answers which respondent Tagunicar gave to the questions
propounded to her by Atty. Acebedo.[13] They never told her that the affidavit
would be used in a case to be filed against her.[14] They even assured her that
she would not be included as defendant if she agreed to execute the
affidavit.[15] Respondent Tagunicar was prevailed upon by petitioners son and
their lawyer to sign the affidavit despite her objection to the statement therein
that she was an agent of TWSI. They assured her that "it is immaterial" [16] and
that "if we file a suit against you we cannot get anything from you." [17] This
purported admission of respondent Tagunicar cannot be used by petitioners

to prove their agency relationship. At any rate, even if such affidavit is to be


given any probative value, the existence of the agency relationship cannot be
established on its sole basis. The declarations of the agent alone are
generally insufficient to establish the fact or extent of his authority.[18] In
addition, as between the negative allegation of respondents Canilao and
Tagunicar that neither is an agent nor principal of the other, and the
affirmative allegation of petitioners that an agency relationship exists, it is the
latter who have the burden of evidence to prove their allegation, [19] failing in
which, their claim must necessarily fail. Sclaw
We stress that respondent Tagunicar categorically denied in open court that
she is a duly authorized agent of TWSI, and declared that she is an
independent travel agent.[20] We have consistently ruled that in case of
conflict between statements in the affidavit and testimonial declarations, the
latter command greater weight.[21]

respondent Tagunicars testimony that she was persuaded to execute an


affidavit implicating respondents because petitioners knew they would not be
able to get anything of value from her. In the past, we have warned that this
Court will not tolerate an abuse of the judicial process by passengers in order
to pry on international airlines for damage awards, like "trophies in a
safari."[27]
This meritless suit against Pan Am becomes more glaring with petitioners
inaction after they were bumped off in Tokyo. If petitioners were of the honest
belief that Pan Am was responsible for the misfortune which beset them,
there is no evidence to show that they lodged a protest with Pan Ams Tokyo
office immediately after they were refused passage for the flight to San
Francisco, or even upon their arrival in Manila. The testimony of petitioner Yu
Eng Cho in this regard is of little value, viz.:
"Atty. Jalandoni: x x x

As further proofs of agency, petitioners call our attention to TWSIs Exhibits


"7", "7-A", and "8" which show that Tagunicar and TWSI received sales
commissions from Pan Am. Exhibit "7"[22]is the Ticket Sales Report submitted
by TWSI to Pan Am reflecting the commissions received by TWSI as an
agent of Pan Am. Exhibit "7-A" [23] is a listing of the routes taken by
passengers who were audited to TWSIs sales report. Exhibit "8" [24] is a
receipt issued by TWSI covering the payment made by Tagunicar for the
tickets she bought from TWSI. These documents cannot justify the deduction
that Tagunicar was paid a commission either by TWSI or Pan Am. On the
contrary, Tagunicar testified that when she pays TWSI, she already deducts
in advance her commission and merely gives the net amount to TWSI.
[25]
From all sides of the legal prism, the transaction is simply a contract of
sale wherein Tagunicar buys airline tickets from TWSI and then sells it at a
premium to her clients. Sc lex
III. Petitioners included respondent Pan Am in the complaint on the
supposition that since TWSI is its duly authorized agent, and respondent
Tagunicar is an agent of TWSI, then Pan Am should also be held responsible
for the acts of respondent Tagunicar. Our disquisitions above show that this
contention lacks factual and legal bases. Indeed, there is nothing in the
records to show that respondent Tagunicar has been employed by Pan Am
as its agent, except the bare allegation of petitioners. The real motive of
petitioners in suing Pan Am appears in its Amended Complaint that
"[d]efendants TWSI, Canilao and Tagunicar may not be financially capable of
paying plaintiffs the amounts herein sought to be recovered, and in such
event, defendant Pan Am, being their ultimate principal, is primarily and/or
subsidiarily liable to pay said amounts to plaintiffs." [26] This lends credence to

q Upon arrival at the Tokyo airport, what did you do if any in


connection with your schedule[d] trip?
a I went to the Hotel, Holiday Inn and from there I immediately called
up Pan Am office in Tokyo to reconfirm my flight, but they told me
that our names were not listed in the manifest, so next morning, very
early in the morning I went to the airport, Pan Am office in the airport
to verify and they told me the same and we were not allowed to
leave.
q You were scheduled to be in Tokyo for how long Mr. Yu?
a We have to leave the next day 29th.
q In other words, what was your status as a passenger?
a Transient passengers. We cannot stay there for more than 72
hours.
xxxxxxxxx
q As a consequence of the fact that you claimed that the Pan Am
office in Tokyo told you that your names were not in the manifest,
what did you do, if any?

a I ask[ed] them if I can go anywhere in the States? They told me I


can go to LA via Japan Airlines and I accepted it.
q Do you have the tickets with you that they issued for Los Angeles?
a It was taken by the Japanese Airlines instead they issue[d] me a
ticket to Taipei.
xxxxxxxxx
q Were you able to take the trip to Los Angeles via Pan Am tickets
that was issued to you in lieu of the tickets to San Francisco?
a No, sir.
q Why not?
a The Japanese Airlines said that there were no more available
seats.
q And as a consequence of that, what did you do, if any?
a I am so much scared and worried, so the Japanese Airlines
advised us to go to Taipei and I accepted it.
xxxxxxxxx
q Why did you accept the Japan Airlines offer for you to go to Taipei?
a Because there is no chance for us to go to the United States within
72 hours because during that time Northwest Airlines [was] on strike
so the seats are very scarce. So they advised me better left (sic)
before the 72 hours otherwise you will have trouble with the
Japanese immigration.
q As a consequence of that you were force[d] to take the trip to
Taipei?
a Yes, sir."[28] (emphasis supplied)

It grinds against the grain of human experience that petitioners did not insist
that they be allowed to board, considering that it was then doubly difficult to
get seats because of the ongoing Northwest Airlines strike. It is also
perplexing that petitioners readily accepted whatever the Tokyo office had to
offer as an alternative. Inexplicably too, no demand letter was sent to
respondents TWSI and Canilao.[29] Nor was a demand letter sent to
respondent Pan Am. To say the least, the motive of petitioners in suing Pan
Am is suspect. x law
We hasten to add that it is not sufficient to prove that Pan Am did not allow
petitioners to board to justify petitioners claim for damages. Mere refusal to
accede to the passengers wishes does not necessarily translate into
damages in the absence of bad faith. [30] The settled rule is that the law
presumes good faith such that any person who seeks to be awarded
damages due to acts of another has the burden of proving that the latter
acted in bad faith or with ill motive. [31] In the case at bar, we find the evidence
presented by petitioners insufficient to overcome the presumption of good
faith. They have failed to show any wanton, malevolent or reckless
misconduct imputable to respondent Pan Am in its refusal to accommodate
petitioners in its Tokyo-San Francisco flight. Pan Am could not have acted in
bad faith because petitioners did not have confirmed tickets and more
importantly, they were not in the passenger manifest. Sc
In not a few cases, this Court did not hesitable to hold an airline liable for
damages for having acted in bad faith in refusing to accommodate a
passenger who had a confirmed ticket and whose name appeared in the
passenger manifest. In Ortigas Jr. v. Lufthansa German Airlines Inc. [32] we
ruled that there was a valid and binding contract between the airline and its
passenger after finding that validating sticker on the passengers ticket had
the letters "O.K." appearing in the Res. Status box which means "space
confirmed" and that the ticket is confirmed or validated. In Pan American
World Airways Inc. v. IAC, et al. [33] where a would-be-passenger had the
necessary ticket, baggage claim and clearance from immigration all clearly
showing that she was a confirmed passenger and included in the passenger
manifest and yet was denied accommodation in said flight, we awarded
damages. In Armovit, et al. v. CA, et al., [34] we upheld the award of damages
made against an airline for gross negligence committed in the issuance of
tickets with erroneous entries as to the time of flight. In Alitalia Airways v. CA,
et al.,[35] we held that when airline issues a ticket to a passenger confirmed on
a particular flight, on a certain date, a contract of carriage arises, and the
passenger has every right to expect that he would fly on that flight and on
that date. If he does not, then the carrier opens itself to a suit for breach of
contract of carriage. And finally, an award of damages was held proper in the

case of Zalamea, et al. v. CA, et al.,[36] where a confirmed passenger included


in the manifest was denied accommodation in such flight. Scmis
On the other hand, the respondent airline in Sarreal, Sr. v. Japan Airlines
Co., Ltd.,[37] was held not liable for damages where the passenger was not
allowed to board the plane because his ticket had not been confirmed. We
ruled that "[t]he stub that the lady employee put on the petitioners ticket
showed among other coded items, under the column "status" the letters "RQ"
which was understood to mean "Request." Clearly, this does not mean a
confirmation but only a request. JAL Traffic Supervisor explained that it would
have been different if what was written on the stub were the letter "ok" in
which case the petitioner would have been assured of a seat on said flight.
But in this case, the petitioner was more of a wait-listed passenger than a
regularly booked passenger." Mis sc
In the case at bar, petitioners ticket were on "RQ" status. They were not
confirmed passengers and their names were not listed in the passenger
manifest. In other words, this is not a case where Pan Am bound itself to
transport petitioners and thereafter reneged on its obligation. Hence,
respondent airline cannot be held liable for damages. Mis spped
IV. We hold that respondent Court of Appeals correctly ruled that the tickets
were never confirmed for good reasons: (1) The persistent calls made by
respondent Tagunicar to Canilao, and those made by petitioners at the
Manila, Hongkong and Tokyo offices of Pan Am, are eloquent indications that
petitioners knew that their tickets have not been confirmed. For, as correctly
observed by Pan Am, why would one continually try to have ones ticket
confirmed if it had already been confirmed? (2) The validation stickers which
respondent Tagunicar attached to petitioners tickets were those intended for
the exclusive use of airline companies. She had no authority to use them.
Hence, said validation stickers, wherein the word "OK" appears in the status
box, are not valid and binding. (3) The names of petitioners do not appear in
the passenger manifest. (4) Respondent Tagunicars "Exhibit 1" [38] shows that
the status of the San Francisco-New York segment was "Ok", meaning it was
confirmed, but that the status of the Tokyo-San Francisco segment was still
"on request". (5) Respondent Canilao testified that on the day that petitioners
were to depart for Hongkong, respondent Tagunicar called her from the
airport asking for confirmation of the Tokyo-San Francisco flight, and that
when she told respondent Tagunicar that she should not have allowed
petitioners to leave because their tickets have not been confirmed,
respondent Tagunicar merely said "Bahala na." [39] This was never
controverted nor refuted by respondent Tagunicar. (6) To prove that it really
did not confirm the bookings of petitioners, respondent Canilao pointed out

that the validation stickers which respondent Tagunicar attached to the


tickets of petitioners had IATA No. 2-82-0770 stamped on it, whereas the
IATA number of TWSI is 28-30770.[40]
Undoubtedly, respondent Tagunicar should be liable for having acted in bad
faith in misrepresenting to petitioners that their tickets have been confirmed.
Her culpability, however, was properly mitigated. Petitioner Yu Eng Cho
testified that he repeatedly tried to follow up on the confirmation of their
tickets with Pan Am because he doubted the confirmation made by
respondent Tagunicar.[41] This is clear proof that petitioners knew that they
might be bumped off at Tokyo when they decided to proceed with the trip.
Aware of this risk, petitioners exerted efforts to confirm their tickets in Manila,
then in Hongkong, and finally in Tokyo. Resultantly, we find the modification
as to the amount of damages awarded just and equitable under the
circumstances. Spped
WHEREFORE, the decision appealed from is hereby AFFIRMED. Cost
against petitioners. Jo spped
SO ORDERED.

G.R. No. 98275 November 13, 1992


BA FINANCE CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS, REGIONAL TRIAL COURT OF ANGELES
CITY, BRANCH LVI, CARLOS OCAMPO, INOCENCIO TURLA, SPOUSES
MOISES AGAPITO and SOCORRO M. AGAPITO and NICOLAS
CRUZ, respondents.
MELO, J.:
The question of petitioner's responsibility for damages when on March 6,
1983, an accident occurred involving petitioner's Isuzu ten-wheeler truck then
driven by an employee of Lino Castro is the thrust of the petition for review
on certiorari now before Us considering that neither the driver nor Lino
Castro appears to be connected with petitioner.

On October 13, 1988, the disputed decision in the suit below was rendered
by the court of origin in this manner:
1. Ordering Rock B.A. and Rogelio Villar y Amare jointly and
severally to pay the plaintiffs as follows:
a) To the plaintiff Carlos Ocampo P121,650.00;
b) To the plaintiff Moises Ocampo P298,500.00
c) To the plaintiff Nicolas Cruz P154,740.00
d) To the plaintiff Inocencio Turla, Sr. 48,000.00
2. Dismissing the case against Lino Castro
3. Dismissing the third-party complaint against STRONGHOLD
4. Dismissing all the counterclaim of the defendants and third-party
defendants.
5. Ordering ROCK to reimburse B.A. the total amount of
P622,890.00 which the latter is adjudged to pay to the plaintiffs. (p.
46, Rollo)

Respondent Court of Appeals affirmed the appealed disposition in


toto through Justice Rasul, with Justices De Pano, Jr. and Imperial
concurring, on practically the same grounds arrived at by the court a quo (p.
28, Rollo). Efforts exerted towards re-evaluation of the adverse were futile (p.
37, Rollo). Hence, the instant petition.
The lower court ascertained after due trial that Rogelio Villar y Amare, the
driver of the Isuzu truck, was at fault when the mishap occurred in as much
as he was found guilty beyond reasonable doubt of reckless imprudence
resulting in triple homicide with multiple physical injuries with damage to
property in a decision rendered on February 16, 1984 by the Presiding Judge
of Branch 6 of the Regional Trial Court stationed at Malolos, Bulacan.
Petitioner was adjudged liable for damages in as much as the truck was
registered in its name during the incident in question, following the doctrine
laid down by this Court in Perez vs. Gutierrez (53 SCRA 149 [1973])
and Erezo, et al. vs. Jepte (102 Phil. 103 [1957]). In the same breadth, Rock
Component Philippines, Inc. was ordered to reimburse petitioner for any
amount that the latter may be adjudged liable to pay herein private
respondents as expressly stipulated in the contract of lease between
petitioner and Rock Component Philippines, Inc. Moreover, the trial court
applied Article 2194 of the new Civil Code on solidary accountability of join
tortfeasors insofar as the liability of the driver, herein petitioner and Rock
Component Philippines was concerned (pp. 6-7, Decision; pp. 44-45, Rollo).

To the question of whether petitioner can be held responsible to the victim


albeit the truck was leased to Rock Component Philippines when the incident
occurred, the appellate court answered in the affirmative on the basis of the
jurisprudential dogmas which, as aforesaid, were relied upon by the trial
court although respondent court was quick to add the caveat embodied in the
lease covenant between petitioner and Rock Component Philippines relative
to the latter's duty to reimburse any amount which may be adjudged against
petitioner (pp. 32-33, Rollo).
Petitioner asseverates that it should not have been haled to court and
ordered to respond for the damage in the manner arrived at by both the trial
and appellate courts since paragraph 5 of the complaint lodged by the
plaintiffs below would indicate that petitioner was not the employer of the
negligent driver who was under the control an supervision of Lino Castro at
the time of the accident, apart from the fact that the Isuzu truck was in the
physical possession of Rock Component Philippines by virtue of the lease
agreement.
Aside from casting clouds of doubt on the propriety of invoking
the Perez and Erezo doctrines, petitioner continue to persist with the idea
that the pronouncements of this Court in Duavit vs. Court of Appeals (173
SCRA 490 [1989]) and Duquillo vs. Bayot (67 Phil 131 [1939]) dovetail with
the factual and legal scenario of the case at hand. Furthermore, petitioner
assumes, given the so-called hiatus on the basis for the award of damages
as decreed by the lower and appellate courts, that Article 2180 of the new
Civil Code on vicarious liability will divest petitioner of any responsibility
absent as there is any employer-employee relationship between petitioner
and the driver.
Contrary to petitioner's expectations, the recourse instituted from the rebuffs
it encountered may not constitute a sufficient foundation for reversal of the
impugned judgment of respondent court. Petitioner is of the impression that
the Perez and Erezo cases are inapplicable due to the variance of the
generative facts in said cases as against those obtaining in the controversy
at bar. A contrario, the lesson imparted by Justice Labrador in Erezo is still
good law, thus:
. . . In previous decisions, We already have held that the registered
owner of a certificate of public convenience is liable to the public for
the injuries or damages suffered by passengers or third persons
caused by the operation of said vehicle, even though the same had
been transferred to a third person. (Montoya vs. Ignacio, 94 Phil.,
182 50 Off. Gaz., 108; Roque vs. Malibay Transit, Inc., G.R. No. L-

8561, November 18, 1955; Vda. de Medina vs. Cresencia, 99 Phil.,


506, 52 Off. Gaz., [10], 4606.) The principle upon which this doctrine
is based is that in dealing with vehicles registered under the Public
Service Law, the public has the right to assume or presumed that the
registered owner is the actual owner thereof, for it would be difficult
with the public to enforce the actions that they may have for injuries
caused to them by the vehicles being negligently operated if the
public should be required to prove who actual the owner is. How
would the public or third persons know against whom to enforce their
rights in case of subsequent transfer of the vehicles? We do not
imply by this doctrine, however, that the registered owner may not
recover whatever amount he had paid by virtue of his liability to third
persons from the person to whom he had actually sold, assigned or
conveyed the vehicle.
Under the same principle the registered owner of any vehicle, even if
not used for a public service, should primarily responsible to the
public or to the third persons for injuries caused the latter while the
vehicle is being driven on the highways or streets. The members of
the Court are in agreement that the defendant-appellant should be
held liable to plaintiff-appellee for the injuries occasioned to the latter
because of the negligence of the driver, even if the defendantappellant was no longer an owner of the vehicle at the time of the
damage because he had previously sold it to another. What is the
legal basis for his (defendants-appellant's) liability?
There is a presumption that the owner of the guilty vehicle is the
defendant-appellant as he is the registered owner in the Motor
Vehicle Office. Should he not be allowed to prove the truth, that he
had sold it to another and thus shift the responsibility for the injury to
the real and the actual owner? The defendants hold the affirmative of
this proposition; the trial court hold the negative.
The Revised Motor Vehicle Law (Act No. 3992, as amended)
provides that the vehicle may be used or operated upon any public
highway unless the same is properly registered. It has been stated
that the system of licensing and the requirement that each machine
must carry a registration number, conspicuously displayed, is one of
the precautions taken to reduce the danger of injury of pedestrians
and other travelers from the careless management of automobiles,
and to furnish a means of ascertaining the identity of persons
violating the laws and ordinances, regulating the speed and
operation of machines upon the highways (2 R. C. L. 1176). Not only

are vehicles to be registered and that no motor vehicles are to be


used or operated without being properly registered from the current
year, furnish the Motor Vehicle Office a report showing the name and
address of each purchaser of motor vehicle during the previous
month and the manufacturer's serial number and motor number.
(Section 5[c], Act No. 3992, as amended.)
Registration is required not to make said registration the operative
act by which ownership in vehicles is transferred, as in land
registration cases, because the administrative proceeding of
registration does not bear any essential relation to the contract of
sale between the parties (Chinchilla vs. Rafael and Verdaguer, 39
Phil. 888), but to permit the use and operation of the vehicle upon
any public highway (section 5[a], Act No. 3992, as amended). the
main aim of motor vehicle registration is to identify the owner so that
if any accident happens, or that any damage or injury is caused by
the vehicle on the public highways, responsibility therefor can be
fixed on a definite individual, the registered owner. Instances are
numerous where vehicles running on public highways caused
accidents or injuries to pedestrians or other vehicles without positive
identification of the owner or drivers, or with very scant means of
identification. It is to forestall these circumstances, so inconvenient
or prejudicial to the public, that the motor vehicle registration is
primarily obtained, in the interest of the determinations of persons
responsible for damages or injuries caused on public highways.
One of the principle purposes of motor vehicles legislation is
identification of the vehicle and of the operator, in case of accident;
and another is that the knowledge that means of detection are
always available my act as a deterrent from lax observance of the
law and of the rules of conservative and safe operation. Whatever
purpose there may be in these statutes, it is subordinate at the last
to the primary purpose of rendering it certain that the violator of the
law or of the rules of safety shall not escape because of lack of
means to discover him. The purpose of the statute is thwarted, and
the displayed number becomes a "share and delusion," if courts
would entertain such defenses as that put forward by appellee in
this case. No responsible person or corporation could be held liable
for the most outrageous acts of negligence, if they should be
allowed to pace a "middleman" between them and the public, and
escape liability by the manner in which they recompense their
servants. (King vs. Breham Automobile Co., Inc. 145 S. W. 278,
279.)

With the above policy in mind, the question that defendant-appellant


poses is: should not the registered owner be allowed at the trial to
prove who the actual and real owner is, and in accordance with such
proof escape or evade responsibility and lay the same on the person
actually owning the vehicle? We hold with the trial court that the law
does not allow him to do so; the law, with its aim and policy in mind,
does not relieve him directly of the responsibility that the law fixes
and places upon him as an incident or consequence of registration.
Were a registered owner allowed to evade responsibility by proving
who the supposed transferee or owner is, it would be easy for him,
by collusion with others or otherwise, to escape said responsibility
and transfer the same to an indefinite person, or to one who
possesses no property with which to respond financially for the
damage or injury done. A victim of recklessness on the public
highways is usually without means to discover or Identify the person
actually causing the injury or damage. He has no means other then
by a recourse to the registration in the Motor Vehicles Office to
determine who is the owner. The protection that the law aims to
extend to him would become illusory were the registered owner
given the opportunity to escape liability by disproving his ownership.
If the policy of the law is to be enforced and carried out, the
registered owner should not be allowed to prove the contrary to the
prejudice of the person injured, that is, to prove that a third person or
another has become the owner, so that he may thereby be relieved
of the responsibility to the injured person.
The above policy and application of the law may appear quite harsh
and would seem to conflict with truth and justice. We do not think it is
so. A registered owner who has already sold or transferred a vehicle
has the recourse to a third-party complaint, in the same action
brought against him to recover for the damage or injury done,
against the vendee or transferee of the vehicle. The inconvenience of
the suit is no justification for relieving him of liability; said
inconvenience is the price he pays for failure to comply with the
registration that the law demands and requires.
In synthesis, we hold that the registered owner, the defendantappellant herein, is primarily responsible for the damage caused to
the vehicle of the plaintiff-appellee, but he (defendant-appellant) has
a right to be indemnified by the real or actual owner of the amount
that he may be required to pay as damage for the injury caused to
the plaintiff-appellant.

If the foregoing words of wisdom were applied in solving the circumstance


whereof the vehicle had been alienated or sold to another, there certainly can
be no serious exception against utilizing the same rationale to the
antecedents of this case where the subject vehicle was merely leased by
petitioner to Rock Component Philippines, Inc., with petitioner retaining
ownership over the vehicle.
Petitioner's reliance on the ruling of this Court in Duavit vs. Court of
Appeals and in Duquillo vs. Bayot (supra) is legally unpalatable for the
purpose of the present discourse. The vehicles adverted to in the two cases
shared a common thread, so to speak, in that the jeep and the truck were
driven in reckless fashion without the consent or knowledge of the respective
owners. Cognizant of the inculpatory testimony spewed by defendant
Sabiniano when he admitted that he took the jeep from the garage of
defendant Dauvit without the consent or authority of the latter, Justice
Gutierrez, Jr. in Duavit remarked;
. . . Herein petitioner does not deny ownership of the vehicle involved in the
mishap but completely denies having employed the driver Sabiniano or even
having authorized the latter to drive his jeep. The jeep was virtually stolen
from the petitioner's garage. To hold, therefore, the petitioner liable for the
accident caused by the negligence of Sabiniano who was neither his driver
nor employee would be absurd as it would be like holding liable the owner of
a stolen vehicle for an accident caused by the person who stole such
vehicle. In this regard, we cannot ignore the many cases of vehicles forcibly
taken from their owners at gunpoint or stolen from garages and parking
areas and the instances of service station attendants or mechanics of auto
repair shops using, without the owner's consent, vehicles entrusted to them
for servicing or repair.(at p. 496.)
In the Duquillo case, the defendant therein cannot, according to Justice
Diaz, be held liable for anything because of circumstances which indicated
that the truck was driven without the consent or knowledge of the owner
thereof.
Consequently, there is no need for Us to discuss the matter of imputed
negligence because petitioner merely presumed, erroneously, however, that
judgment was rendered against it on the basis of such doctrine embodied
under Article 2180 of the new Civil Code.
WHEREFORE, the petition is hereby DISMISSED and decision under review
AFFIRMED without special pronouncement as to costs.

SO ORDERED.

the damages it suffered when it was forced to acquire coconut oil at a higher
price. IVO failed to make the prescribed marginal deposits on the eight
contracts, in the aggregate amount of US$391,593.62, despite written
demand therefor.

[G.R. No. 126751. March 28, 2001]


SAFIC ALCAN & CIE, petitioner, vs. IMPERIAL VEGETABLE OIL CO.,
INC., respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Safic Alcan & Cie (hereinafter, Safic) is a French corporation
engaged in the international purchase, sale and trading of coconut oil. It filed
with the Regional Trial Court of Manila, Branch XXV, a complaint dated
February 26, 1987 against private respondent Imperial Vegetable Oil Co.,
Inc. (hereinafter, IVO), docketed as Civil Case No. 87-39597. Petitioner Safic
alleged that on July 1, 1986 and September 25, 1986, it placed purchase
orders with IVO for 2,000 long tons of crude coconut oil, valued at
US$222.50 per ton, covered by Purchase Contract Nos. A601446 and
A601655, respectively, to be delivered within the month of January
1987. Private respondent, however, failed to deliver the said coconut oil and,
instead, offered a wash out settlement, whereby the coconut oil subject of the
purchase contracts were to be sold back to IVO at the prevailing price in the
international market at the time of wash out. Thus, IVO bound itself to pay to
Safic the difference between the said prevailing price and the contract price
of the 2,000 long tons of crude coconut oil, which amounted to
US$293,500.00. IVO failed to pay this amount despite repeated oral and
written demands.
Under its second cause of action, Safic alleged that on eight occasions
between April 24, 1986 and October 31, 1986, it placed purchase orders with
IVO for a total of 4,750 tons of crude coconut oil, covered by Purchase
Contract Nos. A601297A/B, A601384, A601385, A601391, A601415,
A601681, A601683 and A601770A/B/C/. When IVO failed to honor its
obligation under the wash out settlement narrated above, Safic demanded
that IVO make marginal deposits within forty-eight hours on the eight
purchase contracts in amounts equivalent to the difference between the
contract price and the market price of the coconut oil, to compensate it for

The demand for marginal deposits was based on the customs of the
trade, as governed by the provisions of the standard N.I.O.P. Contract and
the FOSFA Contract, to wit:
N.I.O.P. Contract, Rule 54 If the financial condition of either party to a
contract subject to these rules becomes so impaired as to create a
reasonable doubt as to the ability of such party to perform its obligations
under the contract, the other party may from time to time demand marginal
deposits to be made within forty-eight (48) hours after receipt of such
demand, such deposits not to exceed the difference between the contract
price and the market price of the goods covered by the contract on the day
upon which such demand is made, such deposit to bear interest at the prime
rate plus one percent (1%) per annum. Failure to make such deposit within
the time specified shall constitute a breach of contract by the party upon
whom demand for deposit is made, and all losses and expenses resulting
from such breach shall be for the account of the party upon whom such
demand is made. (Underscoring ours.)[1]
FOSFA Contract, Rule 54 BANKRUPTCY/INSOLVENCY: If before the
fulfillment of this contract either party shall suspend payment, commit an act
of bankruptcy, notify any of his creditors that he is unable to meet his debts
or that he has suspended payment or that he is about to suspend payment of
his debts, convene, call or hold a meeting either of his creditors or to pass a
resolution to go into liquidation (except for a voluntary winding up of a solvent
company for the purpose of reconstruction or amalgamation) or shall apply
for an official moratorium, have a petition presented for winding up or shall
have a Receiver appointed, the contract shall forthwith be closed, either at
the market price then current for similar goods or, at the option of the other
party at a price to be ascertained by repurchase or resale and the difference
between the contract price and such closing-out price shall be the amount
which the other party shall be entitled to claim shall be liable to account for
under this contract (sic). Should either party be dissatisfied with the price, the
matter shall be referred to arbitration. Where no such resale or repurchase
takes place, the closing-out price shall be fixed by a Price Settlement
Committee appointed by the Federation. (Underscoring ours.)[2]
Hence, Safic prayed that IVO be ordered to pay the sums of
US$293,500.00 and US$391,593.62, plus attorneys fees and litigation

expenses. The complaint also included an application for a writ of preliminary


attachment against the properties of IVO.
Upon Safics posting of the requisite bond, the trial court issued a writ of
preliminary attachment. Subsequently, the trial court ordered that the assets
of IVO be placed under receivership, in order to ensure the preservation of
the same.
In its answer, IVO raised the following special affirmative
defenses: Safic had no legal capacity to sue because it was doing business
in the Philippines without the requisite license or authority; the subject
contracts were speculative contracts entered into by IVOs then President,
Dominador Monteverde, in contravention of the prohibition by the Board of
Directors against engaging in speculative paper trading, and despite IVOs
lack of the necessary license from Central Bank to engage in such kind of
trading activity; and that under Article 2018 of the Civil Code, if a contract
which purports to be for the delivery of goods, securities or shares of stock is
entered into with the intention that the difference between the price stipulated
and the exchange or market price at the time of the pretended delivery shall
be paid by the loser to the winner, the transaction is null and void.
IVO set up counterclaims anchored on harassment, paralyzation of
business, financial losses, rumor-mongering and oppressive action. Later,
IVO filed a supplemental counterclaim alleging that it was unable to operate
its business normally because of the arrest of most of its physical assets; that
its suppliers were driven away; and that its major creditors have inundated it
with claims for immediate payment of its debts, and China Banking
Corporation had foreclosed its chattel and real estate mortgages.
During the trial, the lower court found that in 1985, prior to the date of
the contracts sued upon, the parties had entered into and consummated a
number of contracts for the sale of crude coconut oil. In those transactions,
Safic placed several orders and IVO faithfully filled up those orders by
shipping out the required crude coconut oil to Safic, totalling 3,500 metric
tons. Anent the 1986 contracts being sued upon, the trial court refused to
declare the same as gambling transactions, as defined in Article 2018 of the
Civil Code, although they involved some degree of speculation. After all, the
court noted, every business enterprise carries with it a certain measure of
speculation or risk. However, the contracts performed in 1985, on one hand,
and the 1986 contracts subject of this case, on the other hand, differed in
that under the 1985 contracts, deliveries were to be made within two
months. This, as alleged by Safic, was the time needed for milling and
building up oil inventory. Meanwhile, the 1986 contracts stipulated that the

coconut oil were to be delivered within period ranging from eight months to
eleven to twelve months after the placing of orders. The coconuts that were
supposed to be milled were in all likelihood not yet growing when Dominador
Monteverde sold the crude coconut oil. As such, the 1986 contracts
constituted trading in futures or in mere expectations.
The lower court further held that the subject contracts were ultra
vires and were entered into by Dominador Monteverde without authority from
the Board of Directors. It distinguished between the 1985 contracts, where
Safic likewise dealt with Dominador Monteverde, who was presumably
authorized to bind IVO, and the 1986 contracts, which were highly
speculative in character. Moreover, the 1985 contracts were covered by
letters of credit, while the 1986 contracts were payable by telegraphic
transfers, which were nothing more than mere promises to pay once the
shipments became ready. For these reasons, the lower court held that Safic
cannot invoke the 1985 contracts as an implied corporate sanction for the
high-risk 1986 contracts, which were evidently entered into by Monteverde
for his personal benefit.
The trial court ruled that Safic failed to substantiate its claim for actual
damages. Likewise, it rejected IVOs counterclaim and supplemental
counterclaim.
Thus, on August 28, 1992, the trial court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered dismissing the complaint of
plaintiff Safic Alcan & Cie, without prejudice to any action it might
subsequently institute against Dominador Monteverde, the former President
of Imperial Vegetable Oil Co., Inc., arising from the subject matter of this
case. The counterclaim and supplemental counterclaim of the latter
defendant are likewise hereby dismissed for lack of merit. No pronouncement
as to costs.
The writ of preliminary attachment issued in this case as well as the order
placing Imperial Vegetable Oil Co., Inc. under receivership are hereby
dissolved and set aside.[3]
Both IVO and Safic appealed to the Court of Appeals, jointly docketed
as CA-G.R. CV No. 40820.
IVO raised only one assignment of error, viz:

THE TRIAL COURT ERRED IN HOLDING THAT THE ISSUANCE OF THE


WRIT OF PRELIMINARY ATTACHMENT WAS NOT THE MAIN CAUSE OF
THE DAMAGES SUFFERED BY DEFENDANT AND IN NOT AWARDING
DEFENDANT-APPELLANT SUCH DAMAGES.
For its part, Safic argued that:
THE TRIAL COURT ERRED IN HOLDING THAT IVOS PRESIDENT,
DOMINADOR MONTEVERDE, ENTERED INTO CONTRACTS WHICH
WERE ULTRA VIRES AND WHICH DID NOT BIND OR MAKE IVO LIABLE.
THE TRIAL COURT ERRED IN HOLDING THAT SAFIC WAS UNABLE TO
PROVE THE DAMAGES SUFFERED BY IT AND IN NOT AWARDING SUCH
DAMAGES.
THE TRIAL COURT ERRED IN NOT HOLDING THAT IVO IS LIABLE
UNDER THE WASH OUT CONTRACTS.

found that the 1986 forward contracts were not gambling; (iii) it relied on the
testimony of Mr. Rodrigo Monteverde in concluding that the IVO Board of
Directors did not authorize its President, Dominador Monteverde, to enter
into the 1986 forward contracts; and (iv) it did not find IVO, in any case,
estopped from denying responsibility for, and liability under, the 1986 forward
contracts because IVO had recognized itself bound to similar forward
contracts which Dominador Monteverde entered into (for and on behalf of
IVO) with Safic in 1985 notwithstanding that Dominador Monteverde was
(like in the 1986 forward contracts) not expressly authorized by the IVO
Board of Directors to enter into such forward contracts;
b. it declared that Safic was not able to prove damages suffered by it, despite
the fact that Safic had presented not only testimonial, but also documentary,
evidence which proved the higher amount it had to pay for crude coconut oil
(vis--vis the contract price it was to pay to IVO) when IVO refused to deliver
the crude coconut oil bought by Safic under the 1986 forward contracts; and

On September 12, 1996, the Court of Appeals rendered the assailed


Decision dismissing the appeals and affirming the judgment appealed from in
toto.[4]

c. it failed to resolve the issue of whether or not IVO is liable to Safic under
the wash out contracts involving Contracts Nos. A601446 and A60155 (sic),
despite the fact that Safic had properly raised the issue on its appeal, and the
evidence and the law support Safics position that IVO is so liable to Safic.

Hence, Safic filed the instant petition for review with this Court,
substantially reiterating the errors it raised before the Court of Appeals and
maintaining that the Court of Appeals grievously erred when:

In fine, Safic insists that the appellate court grievously erred when it did
not declare that IVOs President, Dominador Monteverde, validly entered into
the 1986 contracts for and on behalf of IVO.

a. it declared that the 1986 forward contracts (i.e., Contracts Nos. A601446
and A60155 (sic) involving 2,000 long tons of crude coconut oil, and
Contracts Nos. A601297A/B, A601385, A601391, A601415, A601681.
A601683 and A601770A/B/C involving 4,500 tons of crude coconut oil) were
unauthorized acts of Dominador Monteverde which do not bind IVO in whose
name they were entered into. In this connection, the Court of Appeals erred
when (i) it ignored its own finding that (a) Dominador Monteverde, as IVOs
President, had an implied authority to make any contract necessary or
appropriate to the contract of the ordinary business of the company; and (b)
Dominador Monteverde had validly entered into similar forward contracts for
and on behalf of IVO in 1985; (ii) it distinguished between the 1986 forward
contracts despite the fact that the Manila RTC has struck down IVOs
objection to the 1986 forward contracts (i.e. that they were highly speculative
paper trading which the IVO Board of Directors had prohibited Dominador
Monteverde from engaging in because it is a form of gambling where the
parties do not intend actual delivery of the coconut oil sold) and instead

We disagree.
Article III, Section 3 [g] of the By-Laws [5] of IVO provides, among others,
that
Section 3. Powers and Duties of the President. The President shall be
elected by the Board of Directors from their own number.
He shall have the following duties:
xxxxxxxxx
[g] Have direct and active management of the business and operation of the
corporation, conducting the same according to the orders, resolutions and
instruction of the Board of Directors and according to his own discretion

whenever and wherever the same is not expressly limited by such orders,
resolutions and instructions.
It can be clearly seen from the foregoing provision of IVOs By-laws that
Monteverde had no blanket authority to bind IVO to any contract. He must
act according to the instructions of the Board of Directors. Even in instances
when he was authorized to act according to his discretion, that discretion
must not conflict with prior Board orders, resolutions and instructions. The
evidence shows that the IVO Board knew nothing of the 1986 contracts [6] and
that it did not authorize Monteverde to enter into speculative contracts. [7] In
fact, Monteverde had earlier proposed that the company engage in such
transactions but the IVO Board rejected his proposal. [8] Since the 1986
contracts marked a sharp departure from past IVO transactions, Safic should
have obtained from Monteverde the prior authorization of the IVO
Board. Safic can not rely on the doctrine of implied agency because before
the controversial 1986 contracts, IVO did not enter into identical contracts
with Safic. The basis for agency is representation and a person dealing with
an agent is put upon inquiry and must discover upon his peril the authority of
the agent.[9] In the case of Bacaltos Coal Mines v. Court of Appeals,[10] we
elucidated the rule on dealing with an agent thus:
Every person dealing with an agent is put upon inquiry and must discover
upon his peril the authority of the agent. If he does not make such inquiry, he
is chargeable with knowledge of the agents authority, and his ignorance of
that authority will not be any excuse. Persons dealing with an assumed
agent, whether the assumed agency be a general or special one, are bound
at their peril, if they would hold the principal, to ascertain not only the fact of
the agency but also the nature and extent of the authority, and in case either
is controverted, the burden of proof is upon them to establish it. [11]
The most prudent thing petitioner should have done was to ascertain the
extent of the authority of Dominador Monteverde. Being remiss in this regard,
petitioner can not seek relief on the basis of a supposed agency.
Under Article 1898[12] of the Civil Code, the acts of an agent beyond the
scope of his authority do not bind the principal unless the latter ratifies the
same expressly or impliedly. It also bears emphasizing that when the third
person knows that the agent was acting beyond his power or authority, the
principal can not be held liable for the acts of the agent. If the said third
person is aware of such limits of authority, he is to blame, and is not entitled
to recover damages from the agent, unless the latter undertook to secure the
principals ratification.[13]

There was no such ratification in this case. When Monteverde entered


into the speculative contracts with Safic, he did not secure the Boards
approval.[14] He also did not submit the contracts to the Board after their
consummation so there was, in fact, no occasion at all for ratification. The
contracts were not reported in IVOs export sales book and turn-out book.
[15]
Neither were they reflected in other books and records of the corporation.
[16]
It must be pointed out that the Board of Directors, not Monteverde,
exercises corporate power.[17] Clearly, Monteverdes speculative contracts
with Safic never bound IVO and Safic can not therefore enforce those
contracts against IVO.
To bolster its cause, Safic raises the novel point that the IVO Board of
Directors did not set limitations on the extent of Monteverdes authority to sell
coconut oil. It must be borne in mind in this regard that a question that was
never raised in the courts below can not be allowed to be raised for the first
time on appeal without offending basic rules of fair play, justice and due
process.[18] Such an issue was not brought to the fore either in the trial court
or the appellate court, and would have been disregarded by the latter tribunal
for the reasons previously stated. With more reason, the same does not
deserve consideration by this Court.
Be that as it may, Safics belated contention that the IVO Board of
Directors did not set limitations on Monteverdes authority to sell coconut oil is
belied by what appears on the record. Rodrigo Monteverde, who succeeded
Dominador Monteverde as IVO President, testified that the IVO Board had
set down the policy of engaging in purely physical trading thus:
Q. Now you said that IVO is engaged in trading. With whom does it
usually trade its oil?
A. I am not too familiar with trading because as of March 1987, I was not
yet an officer of the corporation, although I was at the time already a
stockholder, I think IVO is engaged in trading oil.
Q. As far as you know, what kind of trading was IVO engaged with?
A. It was purely on physical trading.
Q. How did you know this?
A. As a stockholder, rather as member of [the] Board of Directors, I
frequently visited the plant and from my observation, as I have to
supervise and monitor purchases of copras and also the sale of the
same, I observed that the policy of the corporation is for the
company to engaged (sic) or to purely engaged (sic)in physical
trading.
Q. What do you mean by physical trading?

A. Physical Trading means we buy and sell copras that are only available
to us. We only have to sell the available stocks in our inventory.
Q. And what is the other form of trading?
Atty. Fernando
No basis, your Honor.
Atty. Abad
Well, the witness said they are engaged in physical trading and what I am
saying [is] if there are any other kind or form of trading.
Court
Witness may answer if he knows.
Witness
A. Trading future[s] contracts wherein the trader commits a price and to
deliver coconut oil in the future in which he is yet to acquire the
stocks in the future.
Atty. Abad
Q. Who established the so-called physical trading in IVO?
A. The Board of Directors, sir.
Atty. Abad.
Q. How did you know that?
A. There was a meeting held in the office at the factory and it was brought
out and suggested by our former president, Dominador Monteverde,
that the company should engaged (sic) in future[s] contract[s] but it
was rejected by the Board of Directors. It was only Ador Monteverde
who then wanted to engaged (sic) in this future[s] contract[s].
Q. Do you know where this meeting took place?
A. As far as I know it was sometime in 1985.
Q. Do you know why the Board of Directors rejected the proposal of
Dominador Monteverde that the company should engaged (sic) in
future[s] contracts?
Atty. Fernando
Objection, your Honor, no basis.
Court
Why dont you lay the basis?
Atty. Abad
Q. Were you a member of the board at the time?
A. In 1975, I am already a stockholder and a member.
Q. Then would [you] now answer my question?
Atty. Fernando
No basis, your Honor. What we are talking is about 1985.
Atty. Abad
Q. When you mentioned about the meeting in 1985 wherein the Board of
Directors rejected the future[s] contract[s], were you already a
member of the Board of Directors at that time?
A. Yes, sir.

Q. Do you know the reason why the said proposal of Mr. Dominador
Monteverde to engage in future[s] contract[s] was rejected by the
Board of Directors?
A. Because this future[s] contract is too risky and it partakes of gambling.
Q. Do you keep records of the Board meetings of the company?
A. Yes, sir.
Q. Do you have a copy of the minutes of your meeting in 1985?
A. Incidentally our Secretary of the Board of Directors, Mr. Elfren Sarte,
died in 1987 or 1988, and despite [the] request of our office for us to
be furnished a copy he was not able to furnish us a copy.[19]
xxxxxxxxx
Atty. Abad
Q. You said the Board of Directors were against the company engaging in
future[s] contracts. As far as you know, has this policy of the Board of
Directors been observed or followed?
Witness
A. Yes, sir.
Q. How far has this Dominador Monteverde been using the name of I.V.O.
in selling future contracts without the proper authority and consent of
the companys Board of Directors?
A. Dominador Monteverde never records those transactions he entered
into in connection with these future[s] contracts in the companys
books of accounts.
Atty. Abad
Q. What do you mean by that the future[s] contracts were not entered into
the books of accounts of the company?
Witness
A. Those were not recorded at all in the books of accounts of the
company, sir.[20]
xxxxxxxxx
Q. What did you do when you discovered these transactions?
A. There was again a meeting by the Board of Directors of the corporation
and that we agreed to remove the president and then I was made to
replace him as president.
Q. What else?
A. And a resolution was passed disowning the illegal activities of the
former president.[21]
Petitioner next argues that there was actually no difference between the
1985 physical contracts and the 1986 futures contracts.

The contention is unpersuasive for, as aptly pointed out by the trial court
and sustained by the appellate court
Rejecting IVOs position, SAFIC claims that there is no distinction between
the 1985 and 1986 contracts, both of which groups of contracts were signed
or authorized by IVOs President, Dominador Monteverde. The 1986
contracts, SAFIC would bewail, were similarly with their 1985 predecessors,
forward sales contracts in which IVO had undertaken to deliver the crude
coconut oil months after such contracts were entered into. The lead time
between the closing of the deal and the delivery of the oil supposedly allowed
the seller to accumulate enough copra to mill and to build up its inventory
and so meet its delivery commitment to its foreign buyers. SAFIC concludes
that the 1986 contracts were equally binding, as the 1985 contracts were, on
IVO.
Subjecting the evidence on both sides to close scrutiny, the Court has found
some remarkable distinctions between the 1985 and 1986 contracts. x x x
1. The 1985 contracts were performed within an average of two months from
the date of the sale. On the other hand, the 1986 contracts were to be
performed within an average of eight and a half months from the dates of the
sale. All the supposed performances fell in 1987. Indeed, the contract
covered by Exhibit J was to be performed 11 to 12 months from the
execution of the contract. These pattern (sic) belies plaintiffs contention that
the lead time merely allowed for milling and building up of oil inventory. It is
evident that the 1986 contracts constituted trading in futures or in mere
expectations. In all likelihood, the coconuts that were supposed to be milled
for oil were not yet on their trees when Dominador Monteverde sold the
crude oil to SAFIC.
2. The mode of payment agreed on by the parties in their 1985 contracts was
uniformly thru the opening of a letter of credit LC by SAFIC in favor of
IVO. Since the buyers letter of credit guarantees payment to the seller as
soon as the latter is able to present the shipping documents covering the
cargo, its opening usually mark[s] the fact that the transaction would be
consummated. On the other hand, seven out of the ten 1986 contracts were
to be paid by telegraphic transfer upon presentation of the shipping
documents. Unlike the letter of credit, a mere promise to pay by telegraphic
transfer gives no assurance of [the] buyers compliance with its
contracts. This fact lends an uncertain element in the 1986 contracts.

3. Apart from the above, it is not disputed that with respect to the 1985
contracts, IVO faithfully complied with Central Bank Circular No. 151 dated
April 1, 1963, requiring a coconut oil exporter to submit a Report of Foreign
Sales within twenty-four (24) hours after the closing of the relative sales
contract with a foreign buyer of coconut oil. But with respect to the disputed
1986 contracts, the parties stipulated during the hearing that none of these
contracts were ever reported to the Central Bank, in violation of its above
requirement. (See Stipulation of Facts dated June 13, 1990). The 1986 sales
were, therefore suspect.
4. It is not disputed that, unlike the 1985 contacts, the 1986 contracts were
never recorded either in the 1986 accounting books of IVO or in its annual
financial statement for 1986, a document that was prepared prior to the
controversy. (Exhibits 6 to 6-0 and 7 to 7-I). Emelita Ortega, formerly an
assistant of Dominador Monteverde, testified that they were strange goingson about the 1986 contract. They were neither recorded in the books nor
reported to the Central Bank. What is more, in those unreported cases where
profits were made, such profits were ordered remitted to unknown accounts
in California, U.S.A., by Dominador Monteverde.
xxxxxxxxx
Evidently, Dominador Monteverde made business for himself, using the
name of IVO but concealing from it his speculative transactions.
Petitioner further contends that both the trial and appellate courts erred
in concluding that Safic was not able to prove its claim for
damages. Petitioner first points out that its wash out agreements with
Monteverde where IVO allegedly agreed to pay US$293,500.00 for some of
the failed contracts was proof enough and, second, that it presented
purchases of coconut oil it made from others during the period of IVOs
default.
We remain unconvinced. The so-called wash out agreements are
clearly ultra vires and not binding on IVO. Furthermore, such agreements did
not prove Safics actual losses in the transactions in question.The fact is that
Safic did not pay for the coconut oil that it supposedly ordered from IVO
through Monteverede. Safic only claims that, since it was ready to pay when
IVO was not ready to deliver, Safic suffered damages to the extent that they
had to buy the same commodity from others at higher prices.

The foregoing claim of petitioner is not, however, substantiated by the


evidence and only raises several questions, to wit: 1.] Did Safic commit to
deliver the quantity of oil covered by the 1986 contracts to its own
buyers? Who were these buyers? What were the terms of those contracts
with respect to quantity, price and date of delivery? 2.] Did Safic pay
damages to its buyers? Where were the receipts? Did Safic have to procure
the equivalent oil from other sources? If so, who were these sources? Where
were their contracts and what were the terms of these contracts as to
quantity, price and date of delivery?
The records disclose that during the course of the proceedings in the
trial court, IVO filed an amended motion [22] for production and inspection of
the following documents: a.] contracts of resale of coconut oil that Safic
bought from IVO; b.] the records of the pooling and sales contracts covering
the oil from such pooling, if the coconut oil has been pooled and sold as
general oil; c.] the contracts of the purchase of oil that, according to Safic, it
had to resort to in order to fill up alleged undelivered commitments of IVO; d.]
all other contracts, confirmations, invoices, wash out agreements and other
documents of sale related to (a), (b) and (c). This amended motion was
opposed by Safic.[23] The trial court, however, in its September 16, 1988
Order,[24] ruled that:
From the analysis of the parties respective positions, conclusion can easily
be drawn therefrom that there is materiality in the defendants move: firstly,
plaintiff seeks to recover damages from the defendant and these are
intimately related to plaintiffs alleged losses which it attributes to the default
of the defendant in its contractual commitments; secondly, the documents
are specified in the amended motion. As such, plaintiff would entertain no
confusion as to what, which documents to locate and produce considering
plaintiff to be (without doubt) a reputable going concern in the management
of the affairs which is serviced by competent, industrious, hardworking and
diligent personnel; thirdly, the desired production and inspection of the
documents was precipitated by the testimony of plaintiffs witness (Donald
OMeara) who admitted, in open court, that they are available. If the said
witness represented that the documents, as generally described, are
available, reason there would be none for the same witness to say later that
they could not be produced, even after they have been clearly described.
Besides, if the Court may additionally dwell on the issue of damages, the
production and inspection of the desired documents would be of tremendous
help in the ultimate resolution thereof. Plaintiff claims for the award of
liquidated or actual damages to the tune of US$391,593.62 which, certainly,
is a huge amount in terms of pesos, and which defendant disputes. As the

defendant cannot be precluded in taking exceptions to the correctness and


validity of such claim which plaintiffs witness (Donald OMeara) testified to,
and as, by this nature of the plaintiffs claim for damages, proof thereof is a
must which can be better served, if not amply ascertained by examining the
records of the related sales admitted to be in plaintiffs possession, the
amended motion for production and inspection of the defendant is in order.
The interest of justice will be served best, if there would be a full disclosure
by the parties on both sides of all documents related to the transactions in
litigation.
Notwithstanding the foregoing ruling of the trial court, Safic did not
produce the required documents, prompting the court a quo to assume that if
produced, the documents would have been adverse to Safics cause. In its
efforts to bolster its claim for damages it purportedly sustained, Safic
suggests a substitute mode of computing its damages by getting the average
price it paid for certain quantities of coconut oil that it allegedly bought in
1987 and deducting this from the average price of the 1986 contracts. But
this mode of computation if flawed because: 1.] it is conjectural since it rests
on average prices not on actual prices multiplied by the actual volume of
coconut oil per contract; and 2.] it is based on the unproven assumption that
the 1987 contracts of purchase provided the coconut oil needed to make up
for the failed 1986 contracts. There is also no evidence that Safic had
contracted to supply third parties with coconut oil from the 1986 contracts
and that Safic had to buy such oil from others to meet the requirement.
Along the same vein, it is worthy to note that the quantities of oil
covered by its 1987 contracts with third parties do not match the quantities of
oil provided under the 1986 contracts. Had Safic produced the documents
that the trial court required, a substantially correct determination of its actual
damages would have been possible. This, unfortunately, was not the
case. Suffice it to state in this regard that [T]he power of the courts to grant
damages and attorneys fees demands factual, legal and equitable
justification; its basis cannot be left to speculation and conjecture. [25]
WHEREFORE, in view of all the foregoing, the petition is DENIED for
lack of merit.
SO ORDERED.

G.R. No. 114091 June 29, 1995


BACALTOS COAL MINES and GERMAN A. BACALTOS, petitioners,
vs.
HON. COURT OF APPEALS and SAN MIGUEL
CORPORATION, respondents.
DAVIDE, JR., J.:
Petitioners seek the reversal of the decision of 30 September 1993 of the
Court of Appeals in CA-G.R. CV No. 35180, 1 entitled "San Miguel
Corporation vs. Bacaltos Coal Mines, German A. Bacaltos and Rene R.
Savellon," which affirmed the decision of 19 August 1991 of the Regional
Trial Court (RTC) of Cebu, Branch 9, in Civil Case No. CEB-8187 2holding
petitioners Bacaltos Coal Mines and German A. Bacaltos and their codefendant Rene R. Savellon jointly and severally liable to private respondent
San Miguel Corporation under a Trip Charter Party.
The paramount issue raised is whether Savellon was duly authorized by the
petitioners to enter into the Trip Charter Party (Exhibit "A") 3 under and by
virtue of an Authorization (Exhibit "C" and Exhibit "1"), 4 dated 1 March 1988,
the pertinent portions of which read as follows:

I. GERMAN A. BACALTOS, of legal age, Filipino, widower, and


residing at second street, Espina Village, Cebu City, province of
Cebu, Philippines, do hereby authorize RENE R. SAVELLON, of
legal age, Filipino and residing at 376-R Osmea Blvd., Cebu City,
Province of Cebu, Philippines, to use the coal operating contract of
BACALTOS COAL MINES of which I am the proprietor, for any
legitimate purpose that it may serve. Namely, but not by way of
limitation, as follows:
(1) To acquire purchase orders for and in behalf of
BACALTOS COAL MINES;
(2) To engage in trading under the style of BACALTOS COAL
MINES/RENE SAVELLON;
(3) To collect all receivables due or in arrears from people or
companies having dealings under BACALTOS COAL
MINES/RENE SAVELLON;
(4) To extend to any person or company by substitution the
same extent of authority that is granted to Rene Savellon;
(5) In connection with the preceeding paragraphs to execute
and sign documents, contracts, and other pertinent papers.
Further, I hereby give and grant to RENE SAVELLON full authority to
do and perform all and every lawful act requisite or necessary to
carry into effect the foregoing stipulations as fully to all intents and
purposes as I might or would lawfully do if personally present, with
full power of substitution and revocation.
The Trip Charter Party was executed on 19 October 1988 "by and between
BACALTOS COAL MINES, represented by its Chief Operating Officer, RENE
ROSEL SAVELLON" and private respondent San Miguel Corporation
(hereinafter SMC), represented by Francisco B. Manzon, Jr., its "SAVP and
Director, Plant Operations-Mandaue" Thereunder, Savellon claims that
Bacaltos Coal Mines is the owner of the vessel M/V Premship II and that for
P650,000.00 to be paid within seven days after the execution of the contract,
it "lets, demises" the vessel to charterer SMC "for three round trips to
Davao."

As payment of the aforesaid consideration, SMC issued a check (Exhibit


"B") 5 payable to "RENE SAVELLON IN TRUST FOR BACALTOS COAL
MINES" for which Savellon issued a receipt under the heading of BACALTOS
COAL MINES with the address at No 376-R Osmea Blvd., Cebu City
(Exhibit "B-1"). 6
The vessel was able to make only one trip. Its demands to comply with the
contract having been unheeded, SMC filed against the petitioners and Rene
Savellon the complaint in Civil Case No. CEB-8187 for specific performance
and damages. In their Answer, 7 the petitioners alleged that Savellon was not
their Chief Operating Officer and that the powers granted to him are only
those clearly expressed in the Authorization which do not include the power
to enter into any contract with SMC. They further claimed that if it is true that
SMC entered into a contract with them, it should have issued the check in
their favor. They setup counterclaims for moral and exemplary damages and
attorney's fees.
Savellon did not file his Answer and was declared in default on 17 July
1990. 8
At the pre-trial conference on 1 February 1991, the petitioners and SMC
agreed to submit the following issues for resolution:
Plaintiff
1. Whether or not defendants are jointly liable to plaintiff for damages
on account of breach of contract;
2. Whether or not the defendants acted in good faith in its
representations to the plaintiff;
3. Whether or not defendant Bacaltos was duly enriched on the
payment made by the plaintiff for the use of the vessel;
4. Whether or not defendant Bacaltos is estopped to deny the
authorization given to defendant Savellon;
Defendants
1. Whether or not the plaintiff should have first investigated the
ownership of vessel M/V PREM [SHIP] II before entering into any
contract with defendant Savellon;
2. Whether or not defendant Savellon was authorized to enter into a
shipping contract with the [plaintiff] corporation;
3. Whether or not the plaintiff was correct and not mistaken in issuing
the checks in payment of the contract in the name of defendant
Savellon and not in the name of defendant Bacaltos Coal Mines;
4. Whether or not the plaintiff is liable on defendants'
counterclaim. 9

After trial, the lower court rendered the assailed decision in favor of SMC and
against the petitioners and Savellon as follows:
WHEREFORE, by preponderance of evidence, the Court hereby
renders judgment in favor of plaintiff and against defendants,
ordering defendants Rene Savellon, Bacaltos Coal Mines and
German A. Bacaltos, jointly and severally, to pay to plaintiff:
1. The amount of P433,000.00 by way of reimbursement of the
consideration paid by plaintiff, plus 12% interest to start from date of
written demand, which is June 14, 1989;
2. The amount of P20,000.00 by way of exemplary damages;
3. The amount of P20,000.00 as attorney's fees and P5,000.00 as
Litigation expenses. Plus costs. 10

It ruled that the Authorization given by German Bacaltos to Savellon


necessarily included the power to enter into the Trip Charter Party. It did not
give credence to the petitioners' claim that the authorization refers only to
coal or coal mining and not to shipping because, according to it, "the
business of coal mining may also involve the shipping of products" and "a
company such as a coal mining company is not prohibited to engage in
entering into a Trip Charter Party contract." It further reasoned out that even
assuming that the petitioners did not intend to authorize Savellon to enter
into the Trip Charter Party, they are still liable because: (a) SMC appears to
be an innocent party which has no knowledge of the real intent of the parties
to the Authorization and has reason to rely on the written Authorization
submitted by Savellon pursuant to Articles 1900 and 1902 of the Civil Code;
(b) Savellon issued an official receipt of Bacaltos Coal Mines (Exhibit "B-1")
for the consideration of the Trip Charter Party, and the petitioners denial that
they caused the printing of such official receipt is "lame" because they
submitted only a cash voucher and not their official receipt; (c) the "Notice of
Readiness" (Exhibit "A-1") is written on a paper with the letterhead "Bacaltos
Coal Mines" and the logo therein is the same as that appearing in their
voucher; (d) the petitioners were benefited by the payment because the real
payee in the check is actually Bacaltos Coal Mines and since in the
Authorization they authorized Savellon to collect receivables due or in
arrears, the check was then properly delivered to Savellon; and, (e) if indeed
Savellon had not been authorized or if indeed he exceeded his authority or if
the Trip Charter Party was personal to him and the petitioners have nothing
to do with it, then Savellon should have "bother[ed] to answer" the complaint
and the petitioners should have filed "a cross-claim" against him.

In their appeal to the Court of Appeals in CA-G.R. CV No. 35180, the


petitioners asserted that the trial court erred in: (a) not holding that SMC was
negligent in (1) not verifying the credentials of Savellon and the ownership of
the vessel, (2) issuing the check in the name of Savellon in trust for Bacaltos
Coal Mines thereby allowing Savellon to encash the check, and, (3) making
full payment of P650,000.00 after the vessel made only one trip and before it
completed three trips as required in the Trip Charter Party; (b) holding that
under the authority given to him Savellon was authorized to enter into the
Trip Charter Party; and, (c) holding German Bacaltos jointly and severally
liable with Savellon and Bacaltos Coal Mines. 11
As stated at the beginning, the Court of Appeals affirmed in toto the judgment
of the trial court. It held that: (a) the credentials of Savellon is not an issue
since the petitioners impliedly admitted the agency while the ownership of the
vessel was warranted on the face of the Trip Charter Party; (b) SMC was not
negligent when it issued the check in the name of Savellon in trust for
Bacaltos Coal Mines since the Authorization clearly provides that collectibles
of the petitioners can be coursed through Savellon as the agent; (c) the
Authorization includes the power to enter into the Trip Charter Party because
the "five prerogatives" enumerated in the former is prefaced by the phrase
"but not by way of limitation"; (d) the petitioners' statement that the check
should have been issued in the name of Bacaltos Coal Mines is another
implicit admission that the Trip Charter Party is part and parcel of the
petitioners' business notwithstanding German Bacaltos's contrary
interpretation when he testified, and in any event, the construction of obscure
words should not favor him since he prepared the Authorization in favor of
Savellon; and, (e) German Bacaltos admitted in the Answer that he is the
proprietor of Bacaltos Coal Mines and he likewise represented himself to be
so in the Authorization itself, hence he should not now be permitted to
disavow what he initially stated to be true and to interpose the defense that
Bacaltos Coal Mines has a distinct legal personality.
Their motion for a reconsideration of the above decision having been denied,
the petitioners filed the instant petition wherein they raise the following errors:
I. THE RESPONDENT COURT ERRED IN HOLDING THAT RENE
SAVELLON WAS AUTHORIZED TO ENTER INTO A TRIP
CHARTER PARTY CONTRACT WITH PRIVATE RESPONDENT
INSPITE OF ITS FINDING THAT SUCH AUTHORITY CANNOT BE
FOUND IN THE FOUR CORNERS OF THE AUTHORIZATION;
II. THE RESPONDENT COURT ERRED IN NOT HOLDING THAT
BY ISSUING THE CHECK IN THE NAME OF RENE SAVELLON IN

TRUST FOR BACALTOS COAL MINES, THE PRIVATE


RESPONDENT WAS THE AUTHOR OF ITS OWN DAMAGE; AND

Or, as stated in Harry E. Keller Electric Co. vs. Rodriguez, 15 quoting Mechem
on Agency:

III. THE RESPONDENT COURT ERRED IN HOLDING PETITIONER


GERMAN BACALTOS JOINTLY AND SEVERALLY LIABLE WITH
RENE SAVELLON AND CO-PETITIONER BACALTOS COAL
MINES IN SPITE OF THE FINDING OF THE COURT A QUO THAT
PETITIONER BACALTOS COAL MINES AND PETITIONER
BACALTOS ARE TWO DISTINCT AND SEPARATE LEGAL
PERSONALITIES. 12

The person dealing with the agent must also act with ordinary
prudence and reasonable diligence. Obviously, if he knows or has
good reason to believe that the agent is exceeding his authority, he
cannot claim protection. So if the suggestions of probable limitations
be of such a clear and reasonable quality, or if the character
assumed by the agent is of such a suspicious or unreasonable
nature, or if the authority which he seeks to exercise is of such an
unusual or improbable character, as would suffice to put an ordinarily
prudent man upon his guard, the party dealing with him may not shut
his eyes to the real estate of the case, but should either refuse to
deal with the agent at all, or should ascertain from the principal the
true condition of affairs. [emphasis supplied].

After due deliberations on the allegations, issues raised, and arguments


adduced in the petition, and the comment thereto and reply to the comment,
the Court resolved to give due course to the petition.
Every person dealing with an agent is put upon inquiry and must discover
upon his peril the authority of the agent. If he does not make such inquiry, he
is chargeable with knowledge of the agent's authority, and his ignorance of
that authority will not be any excuse. Persons dealing with an assumed
agent, whether the assumed agency be a general or special one, are bound
at their peril, if they would hold the principal, to ascertain not only the fact of
the agency but also the nature and extent of the authority, and in case either
is controverted, the burden of proof is upon them to establish it. 13 American
jurisprudence 14 summarizes the rule in dealing with an agent as follows:
A third person dealing with a known agent may not act negligently
with regard to the extent of the agent's authority or blindly trust the
agent's statements in such respect. Rather, he must use reasonable
diligence and prudence to ascertain whether the agent is acting and
dealing with him within the scope of his powers. The mere opinion of
an agent as to the extent of his powers, or his mere assumption of
authority without foundation, will not bind the principal; and a third
person dealing with a known agent must bear the burden of
determining for himself, by the exercise of reasonable diligence and
prudence, the existence or nonexistence of the agent's authority to
act in the premises. In other words, whether the agency is general or
special, the third person is bound to ascertain not only the fact of
agency, but the nature and extent of the authority. The principal, on
the other hand, may act on the presumption that third persons
dealing with his agent will not be negligent in failing to ascertain the
extent of his authority as well as the existence of his agency.

In the instant case, since the agency of Savellon is based on a written


document, the Authorization of 1 March 1988 (Exhibits "C" and "1"), the
extent and scope of his powers must be determined on the basis thereof.
The language of the Authorization is clear. It pertinently states as follows:
I. GERMAN A. BACALTOS do hereby authorize RENE R. SAVELLON . . . to
use the coal operating contract of BACALTOS COAL MINES, of which I am
the proprietor, for any legitimate purpose that it may serve. Namely, but not
by way of limitation, as follows . . . [emphasis supplied].
There is only one express power granted to Savellon, viz., to use the
coal operating contract for anylegitimate purpose it may serve. The
enumerated "five prerogatives" to employ the term used by the
Court of Appeals are nothing but the specific prerogatives
subsumed under or classified as part of or as examples of the power
to use the coal operating contract. The clause "but not by way of
limitation" which precedes the enumeration could only refer to or
contemplate other prerogatives which must exclusively pertain or
relate or be germane to the power to use the coal operating contract.
The conclusion then of the Court of Appeals that the Authorization
includes the power to enter into the Trip Chapter Party because the
"five prerogatives" are prefaced by such clause, is seriously flawed. It
fails to note that the broadest scope of Savellon's authority is limited
to the use of the coal operating contract and the clause cannot
contemplate any other power not included in the enumeration or
which are unrelated either to the power to use the coal operating
contract or to those already enumerated. In short, while the clause

allows some room for flexibility, it can comprehend only additional


prerogatives falling within the primary power and within the same
class as those enumerated. The trial court, however, went further by
hastily making a sweeping conclusion that "a company such as a
coal mining company is not prohibited to engage in entering into a
Trip Charter Party contract." 16 But what the trial court failed to
consider was that there is no evidence at all that Bacaltos Coal
Mines as a coal mining company owns and operates vessels, and
even if it owned any such vessels, that it was allowed to charter or
lease them. The trial court also failed to note that the Authorization
is not a general power of attorney. It is a special power of
attorney for it refers to a clear mandate specifically authorizing the
performance of a specific power and of express acts subsumed
therein. 17 In short, both courts below unreasonably expanded the
express terms of or otherwise gave unrestricted meaning to a clause
which was precisely intended to prevent unwarranted and unlimited
expansion of the powers entrusted to Savellon. The suggestion of
the Court of Appeals that there is obscurity in the Authorization which
must be construed against German Bacaltos because he prepared
the Authorization has no leg to stand on inasmuch as there is no
obscurity or ambiguity in the instrument. If any obscurity or ambiguity
indeed existed, then there will be more reason to place SMC on
guard and for it to exercise due diligence in seeking clarification or
enlightenment thereon, for that was part of its duty to discover upon
its peril the nature and extent of Savellon's written agency.
Unfortunately, it did not.
Howsoever viewed, the foregoing conclusions of the Court of Appeals and
the trial court are tenuous and farfetched, bringing to unreasonable limits the
clear parameters of the powers granted in the Authorization.
Furthermore, had SMC exercised due diligence and prudence, it should have
known in no time that there is absolutely nothing on the face of the
Authorization that confers upon Savellon the authority to enter into any Trip
Charter Party. Its conclusion to the contrary is based solely on the second
prerogative under the Authorization, to wit:
(2) To engage in trading under the style of BACALTOS COAL
MINES/RENE SAVELLON;
unmindful that such is but a part of the primary authority to use the
coal operating contract which it did not even require Savellon to

produce. Its principal witness, Mr. Valdescona, expressly so admitted


on cross-examination, thus:
Atty. Zosa (to witness ON CROSS)
Q You said that in your office Mr. Rene Savellon presented to
you this authorization marked Exhibit "C" and Exhibit "1" for
the defendant?
A Yes, sir.
Q Did you read in the first part[y] of this authorization Mr.
Valdescona that Mr. Rene Savellon was authorized as the
coal operating contract of Bacaltos Coal Mines?
A Yes, sir.
Q Did it not occur to you that you should have examined
further the authorization of Mr. Rene Savellon, whether or
not this coal operating contract allows Mr. Savellon to enter
into a trip charter party?
A Yes, sir. We discussed about the extent of his authorization
and he referred us to the number 2 provision of this
authorization which is to engage in trading under the style of
Bacaltos Coal Mines/Rene Savellon, which we followed up
to the check preparation because it is part of the authority.
Q In other words, you examined this and you found out that
Mr. Savellon is authorized to use the coal operating contract
of Bacaltos Coal Mines?
A Yes, sir.
Q You doubted his authority but you found out in paragraph
2 that he is authorized that's why you agreed and entered
into that trip charter party?
A We did not doubt his authority but we were questioning as
to the extent of his operating contract.
Q Did you not require Mr. Savellon to produce that coal
operating contract of Bacaltos Coal Mines?
A No sir. We did not. 18

Since the principal subject of the Authorization is the coal operating contract,
SMC should have required its presentation to determine what it is and how it
may be used by Savellon. Such a determination is indispensable to an
inquiry into the extent or scope of his authority. For this reason, we now
deem it necessary to examine the nature of a coal operating contract.

A coal operating contract is governed by P.D. No. 972 (The Coal


Development Act of 1976), as amended by P.D. No. 1174. It is one of the
authorized ways of active exploration, development, and production of coal
resources 19in a specified contract area. 20 Section 9 of the decree prescribes
the obligation of the contractor, thus:
Sec. 9. Obligations of Operator in Coal Operating Contract. The
operator under a coal operating contract shall undertake, manage
and execute the coal operations which shall include:
(a) The examination and investigation of lands supposed to contain
coal, by detailed surface geologic mapping, core drilling, trenching,
test pitting and other appropriate means, for the purpose of probing
the presence of coal deposits and the extent thereof;
(b) Steps necessary to reach the coal deposit so that it can be
mined, including but not limited to shaft sinking and tunneling; and
(c) The extraction and utilization of coal deposits.
The Government shall oversee the management of the operation
contemplated in a coal operating contract and in this connection,
shall require the operator to:

(f) Maintain detailed


expenditures;

technical

records

and

account

of

its

(g) Conform to regulations regarding, among others, safety


demarcation of agreement acreage and work areas, non-interference
with the rights of the other petroleum, mineral and natural resources
operators;
(h) Maintain all necessary equipment in good order and allow access
to these as well as to the exploration, development and production
sites and operations to inspectors authorized by the Energy
Development Board;
(i) Allow representatives authorized by the Energy Development
Board full access to their accounts, books and records for tax and
other fiscal purposes.
Section 11 thereof provides for the minimum terms and conditions of a coal
operating contract.
From the foregoing, it is obvious that a scrutiny of the coal operating contract
of Bacaltos Coal Mines would have provided SMC knowledge of the activities
which are germane, related, or incident to the power to use it. But it did not
even require Savellon to produce the same.

(a) Provide all the necessary service and technology;


(b) Provide the requisite financing;
(c) Perform the work obligations and program prescribed in the coal
operating contract which shall not be less than those prescribed in
this Decree;
(d) Operate the area on behalf of the Government in accordance with
good coal mining practices using modern methods appropriate for
the geological conditions of the area to enable maximum economic
production of coal, avoiding hazards to life, health and property,
avoiding pollution of air, lands and waters, and pursuant to an
efficient and economic program of operation;
(e) Furnish the Energy Development Board promptly with all
information, data and reports which it may require;.

SMC's negligence was further compounded by its failure to verify if Bacaltos


Coal Mines owned a vessel. A party desiring to charter a vessel must satisfy
itself that the other party is the owner of the vessel or is at least entitled to its
possession with power to lease or charter the vessel. In the instant case,
SMC made no such attempt. It merely satisfied itself with the claim of
Savellon that the vessel it was leasing is owned by Bacaltos Coal Mines and
relied on the presentation of the Authorization as well as its test on the sea
worthiness of the vessel. Valdescona thus declared on direct examination as
follows:
A In October, a certain Rene Savellon called our office offering us
shipping services. So I told him to give us a formal proposal and also
for him to come to our office so that we can go over his proposal and
formally discuss his offer.
Q Did Mr. Rene Savellon go to your office?
A Few days later he came to our office and gave us his proposal
verbally offering a vessel for us to use for our cargo.

Q Did he mention the owner of that vessel?


A Yes, sir. That it is Bacaltos.
Q Did he present a document to you?
A Yes, sir. He presented to us the authorization.
Q When Mr. Rene Savellon presented to you the authorization what
did you do?.
A On the strength of that authorization we initially asked him for us to
check the vessel to see its sea worthiness, and we assigned our inhouse surveyor to check the sea worthiness of the vessel which was
on dry dock that time in Danao.
Q What was the result of your inspection?
A We found out the vessel's sea worthiness to be our cargo carrier.
Q After that what did you do?
A After that we were discussing the condition of the contract.
Q Were you able to execute that contract?
A Yes, sir . 21
He further declared as follows:
Q When you entered into a trip charter contract did you check the
ownership of M/V Premship?
A The representation made by Mr. Rene Savellon was that Bacaltos
Coal Mines operates the vessel and on the strength of the
authorization he showed us we were made to believe that it was
Bacaltos Coal Mines that owned it.
COURT: (to witness)
Q In other words, you just believed Rene Savellon?
A Yes, sir.
COURT: (to witness)
Q You did not check with Bacaltos Coal Mines?
A That is the representation he made.
Q Did he show you document regarding this M/V Premship II?
A No document shown. 22

The Authorization itself does not state that Bacaltos Coal Mines owns any
vessel, and since it is clear therefrom that it is not engaged in shipping but in
coal mining or in coal business, SMC should have required the presentation
of pertinent documentary proof of ownership of the vessel to be chartered. Its
in-house surveyor who saw the vessel while drydocked in Danao and
thereafter conducted a sea worthiness test could not have failed to ascertain
the registered owner of the vessel. The petitioners themselves declared in
open court that they have not leased any vessel for they do not need it in
their coal operations 23 thereby implying that they do not even own one.

The Court of Appeals' asseveration that there was no need to verify the
ownership of the vessel because such ownership is warranted on the face of
the trip charter party begs the question since Savellon's authority to enter into
that contract is the very heart of the controversy.
We are not prepared to accept SMC's contention that the petitioners' claim
that they are not engaged in shipping and do not own any ship is belied by
the fact that they maintained a pre-printed business form known as a "Notice
of Readiness" (Exhibit "A-1"). 24 This paper is only a photocopy and, despite
its reservation to present the original for purposes of comparison at the next
hearing, 25 SMC failed to produce the latter. This "Notice of Readiness" is not,
therefore, the best evidence, hence inadmissible under Section 3, Rule 130
of the Rules of Court. It is true that when SMC made a formal offer of its
exhibits, the petitioners did not object to the admission of Exhibit "A-1," the
"Notice of Readiness," under the best evidence rule but on the ground that
Savellon was not authorized to enter into the Trip Charter Party and that the
party who signed it, one Elmer Baliquig, is not the petitioners' employee but
of Premier Shipping Lines, the owner of the vessel in question. 26 The
petitioners raised the issue of inadmissibility under the best evidence rule
only belatedly in this petition. But although Exhibit "A-1" remains admissible
for not having been timely objected to, it has no probative value as to the
ownership of the vessel.
There is likewise no proof that the petitioners received the consideration of
the Trip Charter Party. The petitioners denied having received it. 27 The
evidence for SMC established beyond doubt that it was Savellon who
requested in writing on 19 October 1988 that the check in payment therefor
be drawn in favor of BACALTOS COAL MINES/RENE SAVELLON (Exhibit
"B-3") and that SMC drew the check in favor of RENE SAVELLON IN TRUST
FOR BACALTOS COALMINES (Exhibit "B") and delivered it to Savellon who
there upon issued a receipt (Exhibit "B-1"). We agree with the petitioners that
SMC committed negligence in drawing the check in the manner aforestated.
It even disregarded the request of Savellon that it be drawn in favor of
BACALTOS COAL MINES/RENE SAVELLON. Furthermore, assuming that
the transaction was permitted in the Authorization, the check should still have
been drawn in favor of the principal. SMC then made possible the wrong
done. There is an equitable maxim that between two innocent parties, the
one who made it possible for the wrong to be done should be the one to bear
the resulting loss. 28 For this rule to apply, the condition precedent is that both
parties must be innocent. In the present case, however, SMC is guilty of not
ascertaining the extent and limits of the authority of Savellon. In not doing so,
SMC dealt with Savellon at its own peril.

Having thus found that SMC was the author of its own damage and that the
petitioners are, therefore, free from any liability, it has become unnecessary
to discuss the issue of whether Bacaltos Coal Mines is a corporation with a
personality distinct and separate from German Bacaltos.
WHEREFORE, the instant petition is GRANTED and the challenged decision
of 30 September 1993 of the Court of Appeals in CA-G.R. CV No. 35180 is
hereby REVERSED and SET ASIDE and another judgment is hereby
rendered MODIFYING the judgment of the Regional Trial Court of Cebu,
Branch 9, in Civil Case No. CEB-8187 by setting aside the declaration of
solidary liability, holding defendant RENE R. SAVELLON solely liable for the
amounts adjudged, and ordering the dismissal of the case as against herein
petitioners.
SO ORDERED.

[G.R. No. 121824. January 29, 1998]


BRITISH AIRWAYS, petitioner, vs. COURT OF APPEALS, GOP MAHTANI,
and PHILIPPINE AIRLINES, respondents.
DECISION
ROMERO, J.:
In this appeal by certiorari, petitioner British Airways (BA) seeks to set
aside the decision of respondent Court of Appeals [1] promulgated on
September 7, 1995, which affirmed the award of damages and attorneys fees
made by the Regional Trial Court of Cebu, 7th Judicial Region, Branch 17, in
favor of private respondent GOP Mahtani as well as the dismissal of its thirdparty complaint against Philippine Airlines (PAL).[2]
The material and relevant facts are as follows:
On April 16, 1989, Mahtani decided to visit his relatives in Bombay, India. In
anticipation of his visit, he obtained the services of a certain Mr. Gumar to
prepare his travel plans. The latter, in turn, purchased a ticket from BA where
the following itinerary was indicated:[3]

CARRIER FLIGHT DATE TIME STATUS


MANILA MNL PR 310Y 16 APR 1730 OK
HONGKONG HKG BA 20 M 16 APR 2100 OK
BOMBAY BOM BA 19 M 23 APR 0840 OK
MANILA MNL"
Since BA had no direct flights from Manila to Bombay, Mahtani had to
take a flight to Hongkong via PAL, and upon arrival in Hongkong he had to
take a connecting flight to Bombay on board BA.
Prior to his departure, Mahtani checked in at the PAL counter in Manila
his two pieces of luggage containing his clothings and personal effects,
confident that upon reaching Hongkong, the same would be transferred to
the BA flight bound for Bombay.
Unfortunately, when Mahtani arrived in Bombay he discovered that his
luggage was missing and that upon inquiry from the BA representatives, he
was told that the same might have been diverted to London. After patiently
waiting for his luggage for one week, BA finally advised him to file a claim by
accomplishing the Property Irregularity Report.[4]
Back in the Philippines, specifically on June 11, 1990, Mahtani filed his
complaint for damages and attorneys fees [5] against BA and Mr. Gumar
before the trial court, docketed as Civil Case No. CEB-9076.
On September 4, 1990, BA filed its answer with counter claim [6] to the
complaint raising, as special and affirmative defenses, that Mahtani did not
have a cause of action against it.Likewise, on November 9, 1990, BA filed a
third-party complaint[7] against PAL alleging that the reason for the nontransfer of the luggage was due to the latters late arrival in Hongkong, thus
leaving hardly any time for the proper transfer of Mahtanis luggage to the BA
aircraft bound for Bombay.
On February 25, 1991, PAL filed its answer to the third-party complaint,
wherein it disclaimed any liability, arguing that there was, in fact, adequate
time to transfer the luggage to BA facilities in Hongkong. Furthermore, the
transfer of the luggage to Hongkong authorities should be considered as
transfer to BA.[8]

After appropriate proceedings and trial, on March 4, 1993, the trial court
rendered its decision in favor of Mahtani,[9] the dispositive portion of which
reads as follows:
WHEREFORE, premises considered, judgment is rendered for the
plaintiff and against the defendant for which defendant is ordered to
pay plaintiff the sum of Seven Thousand (P7,000.00) Pesos for the
value of the two (2) suit cases; Four Hundred U.S. ($400.00)
Dollars representing the value of the contents of plaintiffs luggage;
Fifty Thousand (P50,000.00) Pesos for moral and actual damages
and twenty percent (20%) of the total amount imposed against the
defendant for attorneys fees and costs of this action.
The Third-Party Complaint against third-party defendant Philippine
Airlines is DISMISSED for lack of cause of action.
SO ORDERED.
Dissatisfied, BA appealed to the Court of Appeals, which however,
affirmed the trial courts findings. Thus:
WHEREFORE, in view of all the foregoing considerations, finding
the Decision appealed from to be in accordance with law and
evidence, the same is hereby AFFIRMED in toto, with costs against
defendant-appellant.
SO ORDERED.[10]
BA is now before us seeking the reversal of the Court of Appeals
decision.

1. personal belonging - - - - - - - - - - - - - - P10,000.00


2. gifts for his parents and relatives - - - - - $5,000.00
Moreover, he failed to declare a higher valuation with respect to his
luggage, a condition provided for in the ticket, which reads: [13]
Liability for loss, delay, or damage to baggage is limited unless a
higher value is declared in advance and additional charges are
paid:
1. For most international travel (including domestic corporations of
international journeys) the liability limit is approximately U.S. $9.07
per pound (U.S. $20.00) per kilo for checked baggage and U.S.
$400 per passenger for unchecked baggage.
Before we resolve the issues raised by BA, it is needful to state that the
nature of an airlines contract of carriage partakes of two types, namely: a
contract to deliver a cargo or merchandise to its destination and a contract to
transport passengers to their destination. A business intended to serve the
travelling public primarily, it is imbued with public interest, hence, the law
governing common carriers imposes an exacting standard. [14] Neglect or
malfeasance by the carriers employees could predictably furnish bases for
an action for damages.[15]
In the instant case, it is apparent that the contract of carriage was
between Mahtani and BA. Moreover, it is indubitable that his luggage never
arrived in Bombay on time. Therefore, as in a number of cases [16] we have
assessed the airlines culpability in the form of damages for breach of
contract involving misplaced luggage.

In essence, BA assails the award of compensatory damages and


attorneys fees, as well as the dismissal of its third-party complaint against
PAL.[11]

In determining the amount of compensatory damages in this kind of


cases, it is vital that the claimant satisfactorily prove during the trial the
existence of the factual basis of the damages and its causal connection to
defendants acts.[17]

Regarding the first assigned issue, BA asserts that the award of


compensatory damages in the separate sum of P7,000.00 for the loss of
Mahtanis two pieces of luggage was without basis since Mahtani in his
complaint[12] stated the following as the value of his personal belongings:

In this regard, the trial court granted the following award as


compensatory damages:

8. On said travel, plaintiff took with him the following items and its
corresponding value, to wit:

Since plaintiff did not declare the value of the contents in his
luggage and even failed to show receipts of the alleged gifts for the
members of his family in Bombay, the most that can be expected for

compensation of his lost luggage (2 suit cases) is Twenty U.S.


Dollars ($20.00) per kilo, or a combined value of Four Hundred
($400.00) U.S. Dollars for Twenty kilos representing the contents
plus Seven Thousand (P7,000.00) Pesos representing the
purchase price of the two (2) suit cases.
However, as earlier stated, it is the position of BA that there should have
been no separate award for the luggage and the contents thereof since
Mahtani failed to declare a separate higher valuation for the luggage, [18] and
therefore, its liability is limited, at most, only to the amount stated in the
ticket.
Considering the facts of the case, we cannot assent to such specious
argument.
Admittedly, in a contract of air carriage a declaration by the passenger
of a higher value is needed to recover a greater amount. Article 22(1) of the
Warsaw Convention,[19] provides as follows:
xxxxxxxxx
(2) In the transportation of checked baggage and goods, the liability
of the carrier shall be limited to a sum of 250 francs per kilogram,
unless the consignor has made, at the time the package was
handed over to the carrier, a special declaration of the value at
delivery and has paid a supplementary sum if the case so
requires. In that case the carrier will be liable to pay a sum not
exceeding the declared sum, unless he proves that the sum is
greater than the actual value to the consignor at delivery.
American jurisprudence provides that an air carrier is not liable for the
loss of baggage in an amount in excess of the limits specified in the tariff
which was filed with the proper authorities, such tariff being binding on the
passenger regardless of the passengers lack of knowledge thereof or assent
thereto.[20] This doctrine is recognized in this jurisdiction.[21]
Notwithstanding the foregoing, we have, nevertheless, ruled against
blind reliance on adhesion contracts where the facts and circumstances
justify that they should be disregarded.[22]
In addition, we have held that benefits of limited liability are subject to
waiver such as when the air carrier failed to raise timely objections during the

trial when questions and answers regarding the actual claims and damages
sustained by the passenger were asked.[23]
Given the foregoing postulates, the inescapable conclusion is that BA
had waived the defense of limited liability when it allowed Mahtani to testify
as to the actual damages he incurred due to the misplacement of his
luggage, without any objection. In this regard, we quote the pertinent
transcript of stenographic notes of Mahtanis direct testimony: [24]
Q - How much are you going to ask from this court?
A - P100,000.00.
Q - What else?
A - Exemplary damages.
Q - How much?
A - P100,000.00.
Q - What else?
A - The things I lost, $5,000.00 for the gifts I lost and my
personal belongings, P10,000.00.
Q - What about the filing of this case?
A - The court expenses and attorneys fees is 30%.
Indeed, it is a well-settled doctrine that where the proponent offers
evidence deemed by counsel of the adverse party to be inadmissible for any
reason, the latter has the right to object.However, such right is a mere
privilege which can be waived. Necessarily, the objection must be made at
the earliest opportunity, lest silence when there is opportunity to speak may
operate as a waiver of objections.[25] BA has precisely failed in this regard.
To compound matters for BA, its counsel failed, not only to interpose a
timely objection, but even conducted his own cross-examination as well. [26] In
the early case of Abrenica v. Gonda,[27] we ruled that:

x x x (I)t has been repeatedly laid down as a rule of evidence that a


protest or objection against the admission of any evidence must be
made at the proper time, and that if not so made it will be
understood to have been waived. The proper time to make a protest
or objection is when, from the question addressed to the witness, or
from the answer thereto, or from the presentation of proof, the
inadmissibility of evidence is, or may be inferred.
Needless to say, factual findings of the trial court, as affirmed by the
Court of Appeals, are entitled to great respect. [28] Since the actual value of the
luggage involved appreciation of evidence, a task within the competence of
the Court of Appeals, its ruling regarding the amount is assuredly a question
of fact, thus, a finding not reviewable by this Court. [29]
As to the issue of the dismissal of BAs third-party complaint against
PAL, the Court of Appeals justified its ruling in this wise, and we quote: [30]
Lastly, we sustain the trial courts ruling dismissing appellants thirdparty complaint against PAL.
The contract of air transportation in this case pursuant to the ticket
issued by appellant to plaintiff-appellee was exclusively between
the plaintiff Mahtani and defendant-appellant BA. When plaintiff
boarded the PAL plane from Manila to Hongkong, PAL was merely
acting as a subcontractor or agent of BA. This is shown by the fact
that in the ticket issued by appellant to plaintiff-appellee, it is
specifically provided on the Conditions of Contract, paragraph 4
thereof that:
4. x x x carriage to be performed hereunder by several
successive carriers is regarded as a single operation.
The rule that carriage by plane although performed by successive
carriers is regarded as a single operation and that the carrier
issuing the passengers ticket is considered the principal party and
the other carrier merely subcontractors or agent, is a settled issue.
We cannot agree with the dismissal of the third-complaint.

[31]

In Firestone Tire and Rubber Company of the Philippines v. Tempengko,


we expounded on the nature of a third-party complaint thus:

The third-party complaint is, therefore, a procedural device whereby


a third party who is neither a party nor privy to the act or deed
complained of by the plaintiff, may be brought into the case with
leave of court, by the defendant, who acts as third-party plaintiff to
enforce against such third-party defendant a right for contribution,
indemnity, subrogation or any other relief, in respect of the plaintiffs
claim. The third-party complaint is actually independent of and
separate and distinct from the plaintiffs complaint. Were it not for
this provision of the Rules of Court, it would have to be filed
independently and separately from the original complaint by the
defendant against the third-party. But the Rules permit defendant to
bring in a third-party defendant or so to speak, to litigate his
separate cause of action in respect of plaintiffs claim against a thirdparty in the original and principal case with the object of avoiding
circuitry of action and unnecessary proliferation of law suits and of
disposing expeditiously in one litigation the entire subject matter
arising from one particular set of facts.
Undeniably, for the loss of his luggage, Mahtani is entitled to damages
from BA, in view of their contract of carriage. Yet, BA adamantly disclaimed
its liability and instead imputed it to PAL which the latter naturally denies. In
other words, BA and PAL are blaming each other for the incident.
In resolving this issue, it is worth observing that the contract of air
transportation was exclusively between Mahtani and BA, the latter merely
endorsing the Manila to Hongkong leg of the formers journey to PAL, as its
subcontractor or agent. In fact, the fourth paragraph of the Conditions of
Contracts of the ticket[32] issued by BA to Mahtani confirms that the contract
was one of continuous air transportation from Manila to Bombay.
4. x x x carriage to be performed hereunder by several successive
carriers is regarded as a single operation.
Prescinding from the above discussion, it is undisputed that PAL, in
transporting Mahtani from Manila to Hongkong acted as the agent of BA.
Parenthetically, the Court of Appeals should have been cognizant of the
well-settled rule that an agent is also responsible for any negligence in the
performance of its function[33] and is liable for damages which the principal
may suffer by reason of its negligent act. [34] Hence, the Court of Appeals
erred when it opined that BA, being the principal, had no cause of action
against PAL, its agent or sub-contractor.

Also, it is worth mentioning that both BA and PAL are members of the
International Air Transport Association (IATA), wherein member airlines are
regarded as agents of each other in the issuance of the tickets and other
matters pertaining to their relationship. [35] Therefore, in the instant case, the
contractual relationship between BA and PAL is one of agency, the former
being the principal, since it was the one which issued the confirmed ticket,
and the latter the agent.
Our pronouncement that BA is the principal is consistent with our ruling
in Lufthansa German Airlines v. Court of Appeals.[36] In that case, Lufthansa
issued a confirmed ticket to Tirso Antiporda covering five-leg trip aboard
different airlines. Unfortunately, Air Kenya, one of the airlines which was to
carry Antiporda to a specific destination bumped him off.
An action for damages was filed against Lufthansa which, however,
denied any liability, contending that its responsibility towards its passenger is
limited to the occurrence of a mishap on its own line. Consequently, when
Antiporda transferred to Air Kenya, its obligation as a principal in the contract
of carriage ceased; from there on, it merely acted as a ticketing agent for Air
Kenya.

proceeding is in accord with the doctrine against multiplicity of cases which


would entail receiving the same or similar evidence for both cases and
enforcing separate judgments therefor. It must be borne in mind that the
purpose of a third-party complaint is precisely to avoid delay and circuity of
action and to enable the controversy to be disposed of in one suit.[38] It is but
logical, fair and equitable to allow BA to sue PAL for indemnification, if it is
proven that the latters negligence was the proximate cause of Mahtanis
unfortunate experience, instead of totally absolving PAL from any liability.
WHEREFORE, in view of the foregoing, the decision of the Court of
Appeals in CA-G.R. CV No. 43309 dated September 7, 1995 is hereby
MODIFIED, reinstating the third-party complaint filed by British Airways dated
November 9, 1990 against Philippine Airlines. No costs.
SO ORDERED.

In rejecting Lufthansas argument, we ruled:


In the very nature of their contract, Lufthansa is clearly the principal
in the contract of carriage with Antiporda and remains to be so,
regardless of those instances when actual carriage was to be
performed by various carriers. The issuance of confirmed Lufthansa
ticket in favor of Antiporda covering his entire five-leg trip
aboard successive carriers concretely attest to this.
Since the instant petition was based on breach of contract of carriage,
Mahtani can only sue BA alone, and not PAL, since the latter was not a party
to the contract. However, this is not to say that PAL is relieved from any
liability due to any of its negligent acts. In China Air Lines, Ltd. v. Court of
Appeals,[37] while not exactly in point, the case, however, illustrates the
principle which governs this particular situation. In that case, we recognized
that a carrier (PAL), acting as an agent of another carrier, is also liable for its
own negligent acts or omission in the performance of its duties.
Accordingly, to deny BA the procedural remedy of filing a third-party
complaint against PAL for the purpose of ultimately determining who was
primarily at fault as between them, is without legal basis. After all, such

EN BANC

G.R. No. L-15862

July 31, 1961

PAULO ANG and SALLY C. ANG, plaintiffs-appellees,


vs.
FULTON FIRE INSURANCE CO., ET AL., defendants.
FULTON FIRE INSURANCE CO., defendant-appellant.
Santiago Ranada for plaintiffs-appellees.
Benjamin S. Valte for defendant-appellant.
LABRADOR, J.:
The present action was instituted by the spouses Paulo Ang and Sally C. Ang
against the Fulton Fire Insurance Company and the Paramount Surety and
Insurance Company, Inc. to recover from them the face value of a fire
insurance policy issued in plaintiffs' favor covering a store owned and
operated by them in Laoag, Ilocos Norte. From a judgment of the court
ordering the defendant Fulton Fire Insurance Co. to pay the plaintiffs the sum
of P10,000.00, with interest, and an additional sum of P2,000.00 as
attorney's fees, and costs, the defendants have appealed directly to this
Court.
On September 9, 1953, defendant Fulton Fire Insurance Company issued a
policy No. F-4730340, in favor of P. & S Department Store (Sally C. Ang)
over stocks of general merchandise, consisting principally of dry goods,
contained in a building occupied by the plaintiffs at Laoag, Ilocos Norte. The
premium is P500.00 annually. The insurance was issued for one year, but the
same was renewed for another year on September 31, 1954. On December
17, 1954, the store containing the goods insured was destroyed by fire. On
December 30, following, plaintiffs executed the first claim form. The claim
together with all the necessary papers relating thereto, were forwarded to he
Manila Adjustment Company, the defendants' adjusters and received by the
latter on Jane 8, 1955. On January 12, 1955, the Manila Adjustment
Company accepted receipt of the claim and requested the submission of the
books of accounts of the insured for the year 1953-1954 and a clearance
from the Philippine Constabulary and the police. On April 6, 1956, the Fulton
Fire Insurance Company wrote the plaintiffs that their claim was denied. This
denial of the claim was received by the plaintiffs on April 19, 1956. On
January 13, 1955, plaintiff Paulo Ang and ten others were charged for arson
in Criminal Case No. 1429 in the Justice of the Peace Court of Laoag, Ilocos
Norte. The case was remanded for trial to the Court of First Instance of Ilocos
Norte and there docketed as Criminal Case No. 2017. The said court in a

decision dated December 9, 1957, acquitted plaintiff Paulo Ang of the crime
of arson.
The present action was instituted on May 5, 1958. The action was originally
instituted against both the Fulton Fire Insurance Company and the
Paramount Surety and Insurance Company, Inc., but on June 16, 1958, upon
motion of the Paramount Surety, the latter was dropped from the complaint.
On May 26, 1958, the defendant Fulton Fire Insurance Company filed an
answer to the complaint, admitting the existence of the contract of insurance,
its renewal and the loss by fire of the department store and the merchandise
contained therein, but denying that the loss by the fire was accidental,
alleging that it was occasioned by the willful act of the plaintiff Paulo Ang
himself. It claims that under paragraph 13 of the policy, if the loss or damage
is occasioned by the willful act of the insured, or if the claim is made and
rejected but no action is commenced within 12 months after such rejection,
all benefits under the policy would be forfeited, and that since the claim of the
plaintiffs was denied and plaintiffs received notice of denial on April 18, 1956,
and they brought the action only on May 5, 1958, all the benefits under the
policy have been forfeited.
On February 12, 1959, plaintiffs filed a reply to the above answer of the
Fulton Fire Insurance, alleging that on May 11, 1956, plaintiffs had instituted
Civil Case No. 2949 in the Court of First Instance of Manila, to assert the
claim; that this case was dismissed without prejudice on September 3, 1957
and that deducting the period within which said action was pending, the
present action was still within the 12 month period from April 12, 1956. The
court below held that the bringing of the action in the Court of First Instance
of Manila on May 11, 1956, tolled the running of the 12 month period within
which the action must be filed. Said the court on this point:
True, indeed, plaintiffs committed a procedural mistake in first suing
the agent instead of its principal, the herein defendant, as correctly
pointed out by counsel for the defendant, for 'Un agente residente de
una compania de seguros extranjera que comercia en las Islas
Filipinos no es responsable como mandante ni como mandatario, en
virtud de contratas de seguro expendidos a nombre de la compania',
(Macias & Co. vs. Warner, Barnes & Co., 43 Phil. 161). But the
mistake being merely procedural, and the defendant not having been
misled by the error, 'There is nothing sacred about process or
pleadings, their forms or contents. Their sole purpose is to facilitate
the application of justice to the rival claims of contending parties.
They were created not to hinder and delay, but to facilitate and

promote the administration of justice (Alonso vs. Villamor, 16 Phil


578.)
The complaint, Exh. 'C', was dismissed by the Court without
prejudice (Exh. 'H-1') on September 3, 1957, and motion for
reconsideration dated September 21, 1957. The instant complaint
was filed on May 8, 1958. The Rules of Court (See 132 thereof) is
applicable in the computation of time. Now, as correctly pointed out
by the plaintiffs' counsel, by simple mathematical computation, the
present action was filed leas thin nine (9) months after the notice of
rejection received by plaintiffs on April 19, 1956, because the filing of
the original complaint stopped the running of the period." (Decision,
pp. 42-43, R.O.A.)
In view of the reasons thus above quoted, the court rendered decision in
favor of the plaintiffs.
On the appeal before this Court, defendant-appellant argues that the court
below erred in holding that the filing of the previous suit tolled or suspended
the running of the prescriptive period.
The clause subject of the issue is paragraph 13 of the policy, which reads as
follows:
13. If the claim be in any respect fraudulent, or if any false
declaration is made or used in support thereof, or if any fraudulent
means or devices are used by the Insured or any one acting on his
behalf to obtain any benefit under this Policy, or, if the loss or
damage be occasioned by the willful act or with connivance of the
Insured, or, if the claim be made and rejected and an action or suit
be not commenced within twelve months after such rejection or (in
case of arbitration place in pursuance of the 18th condition of this
Policy) within twelve months after the arbitrator or arbitrators or
umpire shall have made their award, all benefits under this Policy
shall be forfeited. (Emphasis supplied). (Decision. p. 10, R.O.A.).
The appellant cites in support of its contention the cases of E. Macias & Co.
vs. Warner, Barnes & Co., Ltd., 43 Phil 155; E. Macias & Co. vs. China Fire
Insurance Co., 46 Phil. 345 and Castillo etc. vs. Metropolitan Insurance Co.,
47 O.G. (September, 1951).

In answer to appellant's contention, counsel for appellees contend that the


action of the plaintiffs against the defendant had not yet prescribed at the
time of the bringing of the action, because the period of prescription was
interrupted by the filing of the first action against the Paramount Surety &
Insurance Co., in accordance with Article 1155 of the Civil Code. Counsel
further argues that the basis of prescription of an action is the abandonment
by a person of his right of action or claim, so that any act of said person
tending to show his intention not to abandon his right of action or claim, as
the filing of the previous action in the case at bar, interrupts the period of
prescription. Furthermore, counsel argues, the dismissal of the previous
action is without prejudice, which means that plaintiffs have the right to file
another complaint against the principal.
The basic error committed by the trial court is its view that the filing of the
action against the agent of the defendant company was "merely a procedural
mistake of no significance or consequence, which may be overlooked." The
condition contained in the insurance policy that claims must be presented
within one year after rejection is not merely a procedural requirement. The
condition is an important matter, essential to a prompt settlement of claims
against insurance companies, as it demands that insurance suits be brought
by the insured while the evidence as to the origin and cause of destruction
have not yet disappeared. It is in the nature of a condition precedent to the
liability of the insurer, or in other terms, a resolutory cause, the purpose of
which is to terminate all liabilities in case the action is not filed by the insured
within the period stipulated.
The bringing of the action against the Paramount Surety & Insurance
Company, the agent of the defendant Company cannot have any legal effect
except that of notifying the agent of the claim. Beyond such notification, the
filing of the action can serve no other purpose. There is no law giving any
effect to such action upon the principal. Besides, there is no condition in the
policy that the action must be filed against the agent, and this Court can not
by interpretation, extend the clear scope of the agreement beyond what is
agreed upon by the parties.
The case of E. Macias & Co. vs. China Fire Insurance Co. has settled the
issue presented by the appellees in the case at bar definitely against their
claim. In that case, We declared that the contractual station in an insurance
policy prevails over the statutory limitation, as well as over the exceptions to
the statutory limitations that the contract necessarily supersedes the statute
(of limitations) and the limitation is in all phases governed by the former. (E.
Macias & Co. vs. China Fire Insurance & Co., 46 Phil. pp. 345-353). As
stated in said case and in accordance with the decision of the Supreme

Court of the United States in Riddlesbarger vs. Hartford Fire Insurance Co. (7
Wall., 386), the rights of the parties flow from the contract of insurance,
hence they are not bound by the statute of limitations nor by exemptions
thereto. In the words of our own law, their contract is the law between the
parties, and their agreement that an action on a claim denied by the insurer
must be brought within one year from the denial, governs, not the rules on
the prescription of actions.
The judgment appealed from is hereby set aside and the case dismissed,
with costs against the plaintiffs-appellees.

appellee Ker & Co. denied and refused indemnification and payment. To
enforce its claims, plaintiff-appellant instituted its complaint, dated August 30,
1965 docketed as Civil Case No. 63181 of the Court of First Instance of
Manila.
In its answer, defendant-appellee Ker & Co. justified its denial of the claims of
plaintiff-appellant on various reasns, such as non-compliance with the
conditions stipulated in the insurance policy; non-presentation of evidence
regarding the various charges of dishonesty and misrepresentation against
Tomas E. Ablaza and non-production of the documents to prove the alleged
loss. Ker & Co. likewise averred that it was merely an agent and- as such it
was not liable under the policy.
On June 22, 1966, counsel for Ker & Co. filed a request for admission,
furnishing plaintiff-appellant's counsel with a copy thereof requesting
admission of the following facts: 1wph1.t

G.R. No. L-28237 August 31, 1982


BAY VIEW HOTEL., INC., plaintiff-appellant,
vs.
KER & CO., LTD., and PHOENIX ASSURANCE CO., LTD., defendantsappellees.
Mariano V. Ampil, Jr. for plaintiff-appellant.
Alfonso Felix, Jr. for defendants-appellants.
&
TEEHANKEE, J.

This appeal was originally brought before the Court of Appeals but was
certified to this Court pursuant to the appellate court's resolution of October
13, 1967 since it involved purely questions of law.
Sometime in January, 1958, plaintiff-appellant Bay View Hotel, Inc., then the
lessee arid operator of the Manila Hotel, secured a fidelity guarantee bond
from defendant-appellee Ker & Co., Ltd., for its accountable employees
against acts of fraud and dishonesty. Said defendant-appellee Ker & Co.,
Ltd., is the Philippine general agent of Phoenix Assurance Co., Ltd. a foreign
corporation duly licensed to do insurance business in the Philippines.
When one of the bonded employees, Tomas E. Ablaza, while acting in his
capacity as cashier, was discovered by plaintiff-appellant to have had a cash
shortage and unremitted collections in the total amount of P42,490.95, it filed
claims for payments on the said fidelity guarantee bond but defendant-

1. On February 14, 1967, the Bay View Hotel, Inc., applied to the
Phoenix Assurance Co., Ltd., for a fidelity guarantee bond through a
proposal form, a true copy of which is annexed to our answer as
Annex "A" thereof.
2. Such a policy was actually issued on January 22, 1958 by the
Phoenix Assurance Co., Ltd., in favor of the Bay View Hotel, Inc.,
and was renewed from time to time with amendments. A true copy of
the policy as it finally stood at the time of the alleged defalcation is
annexed to our answer as Annex 'B ' thereof.
3. This claim filed by the Bay View Hotel, Inc., under this policy was
denied on behalf of the Phoenix Assurance Co., Ltd., by a letter
dated 18th June, 1965 sent by registered mail to the Bay View Hotel,
Inc. on June 22, 1965. A true copy of this letter of denial is annexed
to the present request as Annex "C" hereof. "
When plaintiff-appellant failed to make any answer to the request for
admission within the period prescribed by the rules, defendant-appellee Ker
& Co. filed a Motion to Dismiss on Affirmative Defense, dated July 6, 1966,
insisting that since under Sec. 2, Rule 26 of the Rules of Court, plaintiffappellant was deemed to have impliedly admitted each of the matters
enumerated in the request for admission, it followed that the proper party in
interest against whom plaintiff-appellant might have a claim was the principal
Phoenix Assurance Co. (Phoenix) and not the agent Ker & Co.

Plaintiff-appellant filed an opposition, dated July 19, 1966 arguing that the
proper remedy, under the circumstances was not to dismiss the complaint
but to amend it in order to bring the necessary or indispensable parties to the
suit. Defendant-appellee Ker & Co. filed a reply to the opposition reiterating
its stand that since it merely acted as an agent, the case should be
dismissed and plaintiff-appellant should file the necessary action against the
principal Phoenix.
On August 1, 1966, plaintiff-appellant filed a Motion for Leave to Admit
Amended Complaint, attaching copy of the complaint, as amended, this time
impleading Phoenix as party defendant. On August 16, 1966, defendantsappellees filed their joint answer to the amended complaint. Again, Ker &
Co., Ltd., argued that it was merely an agent and therefore not liable under
the policy. On the other hand, Phoenix, averred that under Condition 8 of the
insurance policy, plaintiff-appellant was deemed to have abandoned its claim
in view of the fact that it did not ask for an arbitration of its claim within twelve
(12) months from June 22, 1965 the date of receipt of the denial of the claim.
On August 24, 1966, defendants-appellees filed a motion for summary
judgment which the trial court granted in its decision of November 4, 1966,
ordering the dismissal of the case. After denial of its motion for
reconsideration, plaintiff-appellant filed the present appeal, raising the
following assignment of errors: 1wph1.t
I
The lower court erred and acted with grave abuse of discretion in
extending the legal effects, if any, of the request for admission filed
by Ker & Co., Ltd. to the Phoenix Assurance Co., Ltd., which was not
a party-defendant at the time said request was filed and for whom no
similar request was ever filed.
II
The lower court erred and acted with grave abuse of discretion in
giving legal effects to a request for admission by the defendantappellee under the original complaint after the said original complaint
was, with leave of court, amended.
III
The lower court erred and acted with grave abuse of discretion in
holding that "Condition No. 8 of the Policy No. FGC-5018-P requires
that should there be a controversy in the payment of the claims, it
should be submitted to an arbitration" despite the admissions by the
parties and the established fact that Condition No. 8 of said Policy
No. FGC-5018-P provides for Arbitration if any dispute shall arise as
to the amount of company's liability."

IV
The lower court erred and acted with grave abuse of discretion in
granting the Motion for Summary Judgment and dismissing the
complaint.

The first two errors assigned may be taken jointly. Plaintiff-appellant argues
that since the implied admission was made before the amendment of its
complaint so as to include Phoenix, it follows that Phoenix has no right to
avail of these admissions, and that the trial court committed a grave abuse of
discretion in extending to Phoenix the legal effects of the request for
admission filed solely by Ker & Co.
The argument is untenable, Admission is in the nature of evidence and its
legal effects were already part of the records of the case and therefore could
be availed of by any party even by one subsequently impleaded. The
amendment of the complaint per se cannot set aside the legal effects of the
request for admission since its materiality has not been affected by the
amendment. If a fact is admitted to be true at any stage of the proceedings, it
is not stricken out through the amendment of the complaint. To allow a party
to alter the legal effects of the request for admission by the mere amendment
of a pleading would constitute a dangerous and undesirable precedent. The
legal effects of plaintiff- appellant's failure to answer the request for
admission could and should have been corrected below by its filing a motion
to be relieved of the consequences of the implied admission with respect to
respondent Phoenix.
Moreover, since an agent may do such acts as may be conducive to the
accomplishment of the purpose of the agency, admissions secured by the
agent within the scope of the agency ought to favor the principal. This has to
be the rule, for the act or declarations of an agent of the party within the
scope of the agency and during its existence are considered and treated in
turn as the declarations, acts and representations of his principal 1 and may
be given in evidence against such party.
Plaintiff-appellant insists that since the motion for summary judgment was
filed on behalf of defendant-appellee Ker & Co. alone, there was no motion
for summary judgment as far as Phoenix was concerned and the trial court's
decision dismissing the case should not have included the principal Phoenix.
But the motion for summary judgment was filed after the complaint had been
amended and answer thereto had been filed. The issues, therefore, with
respect to Phoenix had already been likewise joined. Moreover, a reading of

the said motion for summary judgment, more particularly the prayer thereof,
shows that Phoenix did join Ker & Co. in moving for the dismissal of the case
and prayed "that the present action be dismissed as against Ker & Co., Ltd.,
because being purely and simply the agent of the insurer, it is not liable
under the policy and as against the Phoenix Assurance Co., Ltd. because by
failing to seek an arbitration within twelve months from the date of its receipt
of the denial of its claim on June 22, 1965, plaintiff Bay View Hotel, Inc., is
deemed under condition 8 of ,, tie policy, to have abandoned its claim against
said defendant phoenix Assurance Co., Ltd."
The main issue raised by plaintiff-appellant is with respect to Condition No. 8
of the insurance policy, photostatic copy of which was submitted to the trial
court and reproduced as follows: 1wph1.t
If any dispute shall arise as to the amount of company's
liability under this Policy the matter shall if required by either
party be to the decision of two neutral persons as arbitrators
one of, whom shall be named by each party or of an umpire
who shall be appointed by the said arbitrators before
entering on the reference and in case either party or his
representative shall neglect or refuse for the space of two
months after request in writing from the other party so to do
to name an arbitrator the arbitrator of the other party may
proceed alone. And it is hereby expressly agreed and
declared that it shag be a condition precedent to any right of
action or upon this Policy that the award by such arbitrators,
arbitrator or umpire of the amount of the loss shall first be
obtained. The costs of and connected with the arbitration
shag be in the discretion of the arbitrators, arbitrator or
umpire. 2
Plaintiff-appellant maintains that Condition No. 8 of the policy provides for
arbitration only "if any dispute should arise as to the amount of company's
liability" consequently, the reference to arbitration is not a condition
precedent to the filing of the suit contrary to the insurer company's posture.
Plaintiff-appellant points out that in the instant case, there is a total and
complete negation of liability. There is no dispute as to the amount of
company's liability because this presupposes an admission of responsibility
although not to the extent of the cost thereof, while here the insurer denies
liability wholly and totally.
We find in favor of plaintiff-appellant. The provisions of Condition No. 8, more
specifically the portion thereof which reads, "if any dispute shall arise as to

the amount of company's liability under this policy ...," do not appear to
require any extended interpretation. Condition No. 8 requires arbitration only
as to disputes regarding the amountof the insurer's liability but not as to any
dispute as to the existence or non- existence of liability. Thus, Condition No.
8 comes into play only if the insurer admits liability but cannot agree with the
insured as to the amount thereof and cannot be invoked in cases like that at
bar where the insurer completely denies any liability. Defendants-appellees'
contention that plaintiff-appellant's failure to request arbitration proceedings
is a bar to its filing of the suit at bar against the insurer company cannot be
sustained, specially considering the established principle that contracts of
adhesion such as the insurance policy in question are to be strictly construed
in case of doubt against the insurer.
As to appellee Ker & Co., Ltd., however, there appears to be no serious
contradiction as to the fact that it merely acted as the agent of its principal,
Phoenix. Considering that there was full disclosure of such agency since the
insurance policy was actually issued by Phoenix, We find no error in the
dismissal of the case against said defendant Ker & Co., Ltd.
Accordingly, the dismissal of the case against Ker & Co., Ltd., is hereby
affirmed and maintained, while the dismissal of the case against Phoenix
Assurance Co., Ltd. is hereby set aside and the case is remanded to the
court of origin for further proceedings and determination on the merits. No
costs.

Province of Samar, alleging therein as a cause of action that between plaintiff


and defendant there have existed commercial relations which gave rise to
the opening of a mutual current account, at 8 percent interest, under the
name of Oria Hermanos & Co., on the books of the plaintiff Gutierrez
Hermanos; that, on January 11, 1909, plaintiff transmitted to defendant an
abstract of the latter's current account on December 31, 1908, which showed
a balance in plaintiff's favor of P144,473.78 and which was approved by
defendant, Oria Hermanos & Co., by a letter of March 9, 1909, which was
copied literally in the complaint; that, on May 25, 1909, plaintiff notified
defendant that the current account existing between them would be closed at
the end of thirty days counting from that date, at the expiration of which
period defendant should pay any debit balance that might be owing; that, on
June 30 of the same year, Gutierrez Hermanos transmitted to the defendant,
Oria Hermanos & Co., the statement of the latter's current account up to that
date and, confirming its previous letter to the defendant of May 25, 1909,
called attention to the necessity of paying the balance, which then amounted
to P147,204.28; that the defendant firm, notwithstanding the said demands
and others subsequently made, and without having made any objection
whatever to the said statement of account, refused to pay the principal and
interest owing on the said account. Plaintiff's counsel therefore prayed that
Oria Hermanos and Co. be sentenced to pay the sum of P147,204.28,
besides the interest thereon at the rate of 8 per cent annum from June 30,
1909, and the costs.

EN BANC
G.R. No. L-8346
March 30, 1915
GUTIERREZ HERMANOS, plaintiff-appellant,
vs.
ORIA HERMANOS & CO., defendant-appellant.
Rafael de la Sierra for plaintiff.
Chicote and Miranda for defendant.
TORRES, J.:
On August 12, 1909, counsel for the mercantile firm of Gutierrez Hermanos
of this city filed a written complaint in the Court of First Instance of Manila
against the commercial concern of Oria Hermanos & Co. of Laoang,

Defendant filed its answer on November 9, 1909, setting up four cross


complaints and six counterclaims against the plaintiff, Gutierrez Hermanos,
and specifically denied such of the allegations of the complaint as were not in
agreement with its answer. Plaintiff demurred to certain paragraphs of the
answer and as to the others thereof prayed the court to order defendant to
make its allegations more specific. The court overruled this demurrer, but
granted the petition that defendant should make its allegations more specific
in the second, third, and fourth cross complaints and first counterclaim.
In compliance with the said order, defendant, on May 4, 1910, filed am
amended answer in which it specifically admitted paragraphs 1 and 2 of the
complaint, and as the first cross complaint, alleged that, by reason of
mercantile relations and the opening of a mutual current account from May 1,
1900, the plaintiff had obligated itself periodically to send to the defendant
firm a memorandum or statement of the current account, and further
obligated itself, in case the said mercantile relations should be finally
terminated, to present a general and complete account, duly supported by
vouchers and other proofs; that plaintiff, Gutierrez Hermanos, had contended
itself by sending to Oria Hermanos and Co. some memoranda or abstracts of

account, accepted by defendant as such "abstract of account," without the


latter's having waived its right to demand the presentation, as agreed upon,
of the vouchers and other proofs upon the closing of the current account, a
stipulation which Gutierrez Hermanos had failed to comply with. Defendant
therefore prayed that the plaintiff, Gutierrez Hermanos, be sentenced to
render and present the said final account, duly accompanied by vouchers, in
conformity with the agreement made.
In the second cross complaint defendant alleged that, by virtue of a
commission contract, Oria Hermanos & Co. had from the 1st of May, 1900, to
the 7th of September, 1909, forwarded 65,119.66 piculs of copra, 70,420
bales of hemp, and 5,175.03 piculs of loose hemp to Gutierrez Hermanos for
sale on commission; that the latter firm informed the defendant that it, the
plaintiff, had sold the said products to third persons for the account of the
defendant, Oria Hermanos & Co.; that by reason of said sale or sales
Gutierrez Hermanos collected large and important sums for commission and
brokerage and had turned in for the goods sold amounts less than what they
were actually worth in Manila; that defendant, Oria Hermanos & Co., had
recently received information that these lots of hemp and copra were
purchased by the firm of Gutierrez Hermanos for itself, notwithstanding that
the latter had stated to its principals, Oria Hermanos & Co., that they had
been sold to third persons; that it collected by reason of such sale,
commission and brokerage; acts which redound to the fraud, injury, and
prejudice of the defendant, Oria Hermanos and Co. Therefore the latter
prayed that Gutierrez Hermanos be sentenced to render a general and
complete account of the amounts of hemp and copra received by it for sale
on commission from the year 1900 to 1909, setting out the dates of the
receipt of the said merchandise, dates of the sales, names of the purchasers,
prices stipulated, discounts obtained, and commissions collected by
Gutierrez Hermanos, etc.
Defendant alleged as the third cross complaint that, by virtue of the said
commission contract, Gutierrez Hermanos sent to the firm of Oria Hermanos
& Co., at different times according to the latter's request, from May 1, 1900,
up to the date of the closing of the current account, 193,310 sacks of rice
alleged to have been purchased from third persons, wherefore Oria
Hermanos & Co. paid a certain stipulated percentage as commission or
brokerage for the sales; but that now Oria Hermanos & Co. have received
information which it believes to be true, and so alleges, that the rice so
forwarded had not been purchased from third persons, but belonged to
Gutierrez Hermanos who sold it directly to defendant, collecting from the
latter excessive prices, advance payments, commission and interest, all to
the fraud and injury of the defendant firm. Oria Hermanos & Co., therefore,

prayed that Gutierrez Hermanos be sentenced to render an account, duly


supported by vouchers, of all the lots of rice forwarded to Oria Hermanos,
with a statement of the dates of the orders, amounts, dates of the purchases,
names of purchasers, amounts charged to Oria Hermanos & Co., etc.
In the fourth cross complaint defendant related that, by reason of the same
commission contract existing between the two firms, Gutierrez Hermanos
had sent to Oria Hermanos & Co., from the 1st of May, 1900, up to the
closing of the current account, various quantities of salt, petroleum, tobacco,
groceries and beverages, and had collected a commission for the purchase
thereof, that afterwards Oria Hermanos & Co. learned that the forwarding
firm, the plaintiff, had set larger prices on the said goods than it had actually
paid for them and had unduly charged such prices, before it had paid them,
to the defendant's account, collecting for itself commission and interest
thereon, to the fraud and prejudice of the defendant firm. Therefore the latter
prayed that Gutierrez Hermanos be sentenced to render a complete account,
accompanied by vouchers, of the shipments aforementioned.
In the first counterclaim filed by the defendant, Oria Hermanos & Co., petition
was made that Gutierrez Hermanos be sentenced to pay it the sum of
P13,894.60, as the amount of an overcharge of 3 per cent in interest
collected from defendant, in a charge of 8 percent interest per annum on a
private debt of P47,649 drawing 5 per cent interest per annum, which latter
amount Juan T. Molleda owed the firm of Gutierrez Hermanos and payment
for which was assumed by Oria Hermanos & Co. upon its organization into a
mercantile firm in May, 1900.
In the second counterclaim the defendant firm, Oria Hermanos & Co. set
forth: That, on April 18, 1900, its predecessor had ordered its consignee in
Manila, Gutierrez Hermanos, to insure against all war risks the stocks of
hemp and merchandise which the said firm possessed in the pueblo
of Laoang, for P35,000, and likewise those it had in Catubig, for P32,000;
that Gutierrez Hermanos did not comply with the said order, only insuring the
stocks in Laoang for P67,000, leaving those of Catubig totally unprotected;
that when, on May 10, 1900, this latter pueblo was destroyed by fire Oria
Hermanos & Co. lost all its stocks there and could not collect the insurance
of P32,000 on the said property, which, through the fault, negligence, and
omission of Gutierrez Hermanos had not been insured. This amount last
mentioned, added to the premiums, expenses, and interest paid by Oria
Hermanos & Co. aggregates the sum of P63,700, payment of which
defendant demanded of plaintiff.

As a third counterclaim it is alleged that, on May 18, 1900, the firm of


Gutierrez Hermanos, complying with orders from Oria Hermanos, & Co.,
insured against all war risks, in a certain insurance company of London,
England, whose agent in the Philippine Islands was Stevenson & Co., the
stock of hemp which the defendant company had in the pueblo of Catarman,
Samar, for 3,000 pounds sterling, and paid the premiums thereon at the rate
of 10 per cent per quarter; that, during the first quarter for which the
premiums had been so paid, all the insured tobacco belonging to Oria
Hermanos & Co., in Catarman, was stolen by the insurgent forces; that then
the underwriter refused to pay the amount of the insurance on the ground
that Gutierrez Hermanos had made out the said insurance defectively
wherefore Oria Hermanos & Co. ordered its agent Gutierrez Hermanos to
institute proceedings before the courts of these Islands for the collection of
the amount of the said insurance; but that plaintiff instead brought suit for the
purpose before the courts of England and by its negligence, indolence, and
carelessness had, during a period of eight years, obliged the defendant firm
to incur costly expenditures which, added to the amount of the insurance
premiums paid, attorney's fees, costs, interest, etc., aggregated P67,000;
that for this sum, together with legal interests thereon, it prayed that it be
reimbursed by Gutierrez Hermanos.
With respect to the fourth counterclaim, the defendant firm set forth that,
under the commission contract and the current account contract existing
between both companies, Gutierrez Hermanos bound itself to acquire for and
forward to Oria Hermanos & Co. such rice and other effects, including cash,
as defendant might order from plaintiff; but that, since the beginning of 1904,
the firm of Gutierrez Hermanos maliciously failed to make the consignments
of rice and other effects, under the false pretext that there were no such
articles in the market, thereby preventing the said firm of Oria Hermanos &
Co. from obtaining a profit of not less than P25,000 and, besides, injuring its
fame, credit, and mercantile reputation in the Island of Samar to the extent of
approximately P50,000. Therefore defendant prayed that Gutierrez
Hermanos be sentenced to pay it the sum of P75,000 as the amount of such
losses and damages occasioned it.
As the fifth counterclaim defendant alleged that, for a period of twenty-two
months, from the month of May, 1900, it chartered several of its boats to the
American military government; that the charter parties aggregated a value of
P400,000; that these contracts were executed and the amounts thereof
collected by Messrs. Oria & Fuster, members of the defendant company, who
turned the said amounts into the current account they had with the firm of
Gutierrez Hermanos; but the plaintiff charged in the current account,
appropriated to itself, and collected from the funds of Oria Hermanos & Co.

which it had in its possession, 2 1/2 per cent of the amount collected by
reason of the said charter parties for commission and brokerage, there being
no stipulation whatever relative to the collection of this commission; that
Gutierrez Hermanos, moreover, charged against the said amount collected
by it 8 per cent compound interest; and that the sum in such wise improperly
charged and appropriated amounted, together with the accumulated interest,
to P15,000, which defendant prayed be returned to it by Gutierrez Hermanos.
The object of the sixth counterclaim is the recovery of P31,000, in which
amount defendant, Oria Hermanos & Co., alleged it was injured by Gutierrez
Hermanos having arbitrarily charged in the current account compound
interest at the rate of 8 per cent per semester from the year 1900 up to the
time of the closing of the said current account, while the agreement made
between both firms upon opening the said account was that the latter should
bear a mutual interest of 8 per cent per annum only.
On May 14, 1910, counsel for Gutierrez Hermanos filed a written answer to
the foregoing countercomplaints and counterclaims, and prayed that plaintiff
be absolved therefrom.
On August 1, 1910, this case came up for hearing and was continued on the
following days until on April 24, 1912, the Honorable S. del Rosario, judge,
rendering judgment therein, the dispositive part of which is as follows:
"Messrs. Oria Hermanos & Co. are sentenced to pay to Messrs. Gutierrez
Hermanos the sum of P147,204.28, with interest thereon at the rate of 8 per
cent per annum from the 30th of June, 1909, after deduction of all the sums
that result as balances, in favor of the former, from the accounts that shall be
rendered by the latter, in conformity with the cross complaints and
counterclaims that have been admitted.
Messrs. Gutierrez Hermanos are sentenced:
(a) With respect to the first cross complaint, to render to Messrs. Oria
Hermanos & co. accounts, supported by vouchers, only of those
articles in the acquisition of which fraud, deceit, or error has been
proven and to which the following pronouncements refer.
(b) As regards the second cross complaint, to return to Messrs. Oria
Hermanos & Co., after due settlement of the accounts, all the sums
collected as internal-revenue tax and referred to in the invoices of
rice, salt, petroleum, lime, rattan, flour, aniseed spirit, cigarettes, and
other articles mentioned in their respective places in the record,

unless plaintiff shows in a satisfactory manner that it did actually pay


to the Bureau of Internal Revenue, the contents of Exhibit 178
notwithstanding, the sums which, for the reason aforestated, were
debited to defendant, in which case the latter may bring an action
against the said Bureau of Internal Revenue.

This action was brought to recover the sum of P147,204.28, the balance of a
current account opened on May 1, 1900, between Gutierrez Hermanos and
the commercial firm of Oria Hermanos & Co., at the rate 8 per cent mutual
interest up to June 30, 1909, which sum was found to be owing by Oria
Hermanos & Co. to the commercial firm of Gutierrez Hermanos.

(c) With respect to the third cross complaint, plaintiff must render to
defendant an account, supported by vouchers, of the shipments of
rice concerned in the invoices examined in which fraud or error was
discovered, and said account shall embrace the 153 invoices
referred to by the litigants in this suit (page 324 of the transcript of
the stenographic notes, session of November 29, 1910).

Other subject matters of the present suit are the rendition of accounts by
Gutierrez Hermanos, as commission agent, to Oria Hermanos & Co., as
principal, and the collection of various sums demanded by the latter in the
cross complaints and counterclaims filed, during the trial, by its counsel
against the claim made by Gutierrez Hermanos for the payment of the
amount specified in the preceding paragraph.

(d) With regard to the fourth cross complaint, plaintiff shall render an
account, supported by vouchers, of all the purchases it made of
petroleum for Messrs. Oria Hermanos & Co., and in connection with
the invoices held in the latter's possession and referred to on page
391 of the transcript of the stenographic notes of the session of
November 29, 1910.

To prove the propriety and justice of its complaint, Gutierrez Hermanos,


plaintiff, alleged: That, in accordance with the agreement made, it sent
semiannually a general account that comprised a statement of the business
transacted during the preceding six months, to Oria Hermanos & Co. who,
after examining the account with its specification and vouchers, sometimes
approved the same without comment of any kind, and at others, after some
objections, but that, in the latter cases, upon explanations being
subsequently given by Gutierrez Hermanos, the defendant firm used at last
to accept the account rendered; that such was the procedure followed during
the nine years approximately that both firms maintained commercial
relations, and that the record showed that during the said nine years Oria
Hermanos & Co. had given in favor of Gutierrez Hermanos 17 agreements or
approvals of account, the last of which, transcribed in the complaint, is of the
following tenor:

(e) In the matter of the second counterclaim, plaintiff shall return to


Messrs. Oria Hermanos & Co. the sum of P1,812 with interest
thereon at the rate of 8 per cent per annum from the 5th of May,
1910, to the date of payment. The interest due shall be compounded
after each semester, reckoning from June 1, 1900, and both the
principal and the interest so compounded shall bear the same
interest of 8 per cent per annum.
Messrs. Gutierrez Hermanos are absolved, in the first place, from the
second cross complaint in so far as concerns the demand therein
made for a rendition of accounts in connection with the hemp and
copra; and in the second place, from the first, third, fourth, fifth, and
sixth counterclaims.
Without special finding as to costs.
The parties, upon their notification of this judgment, duly excepted thereto
and by written motion prayed for a reopening of the case and a new trial.
These motions were overruled, with exception by the appellants, and the
proper bills of exceptions having been filed, the same were approved and
forwarded to the clerk of this court.

LAOAG, March 9, 1909.


Messrs. GUTIERREZ HERMANOS, Manila.
DEAR SIRS: In our possession, your very esteemed letter dated
December 31 last, from which we have withdrawn the extract of our
current account with your firm, closed the same day, showing a
balance in your favor of P144,473.78, which extract meets with our
approval.
We remain,
HERMANOS & Co.

Yours, very respectfully,

ORIA

That, on May 25, 1909, the plaintiff firm notified the defendant firm that it
could not continue to do business with the latter and therefore the current
account stipulated between both parties would be closed within a period of
thirty days; plaintiff therefore transmitted to defendant a general detailed
account that comprised the period from January, 1909, to June 30 of the
same year, with the warning that after that date (May 25, 1909) defendant
would have to pay the debit balance, inasmuch as, although the said last
account had not been approved, no objection whatever had been made
thereto by Oria Hermanos & Co. Therefore in the said letter of May 25,
plaintiff demanded of defendant the payment of the sum mentioned of
P147,204.28 which the latter had not paid in spite of plaintiff's demands and
notwithstanding the fact that defendant had made no objection whatever to
the last account rendered.
Counsel for defendant, Oria Hermanos & Co., after a denial of the facts that
had not been admitted prayed in special defense and in four cross
complaints that the plaintiff, Gutierrez Hermanos, be compelled to present a
general account, duly verified and supported by vouchers, of all the
shipments of hemp, copra, rice and other effects specifically mentioned, and
to render a final account in conformity with the agreement made between
both parties and converting the details mentioned in the said cross
complaints.
Notwithstanding the proof shown in the record of the certainty and reality of
the debt as a balance resulting from the current account kept between the
parties, it is of course impossible to determine the net amount, the object of
the claim presented by plaintiff, until there shall have first been decided
whether there should or not be rendered a general account, accompanied by
vouchers, comprehensive of the business transacted in connection with the
different commercial articles dealt in, and of the mercantile relations between
both firms from May 1, 1900, to June 30, 1909, and also whether Gutierrez
Hermanos is indebted to Oria Hermanos & Co. and what is the amount of the
debt.
Even upon the supposition that the plaintiff, Gutierrez Hermanos, is obliged
to make a general rendition of accounts comprehensive of the business
transacted between both firms within the dates mentioned, it is evident that,
until it be known whether plaintiff is or is not indebted to Oria Hermanos &
Co. and what is the amount owing as disclosed by the account rendered, it
cannot be decided whether plaintiff is or is not entitled to collect the whole
amount claimed in the complaint, for only in view of the result of the rendition
of accounts requested by plaintiff can it be lawfully established whether
Gutierrez Hermanos is a creditor of Oria Hermanos & Co. and what amount

is owing to it by the latter. All this is referred to in the first error alleged by
defendant.
In case it should be held that the law does not allow the rendition of accounts
requested by the defendant, Oria Hermanos & Co., and that this latter is not
a creditor of Gutierrez Hermanos, it is evident of course that plaintiff would be
unquestionably entitled to collect the amount specified in the complaint, or
some other amount duly proved at trial to be owing it by defendant. It is
therefore incumbent upon us to elucidate hereinafter the propriety or
impropriety of the contentions made by defendant in its four cross
complaints.
Defendant's counsel in his first cross-complaint and special defense prayed
that the plaintiff, Gutierrez Hermanos, be compelled to render and present a
general, final, complete and verified account, pursuant to the agreement
made between both parties, inasmuch as plaintiff bound itself to send
periodically to defendant a note or numerical extract of the current account,
and in case the mercantile relations between both firms should come to an
end or be finally closed, Gutierrez Hermanos bound itself to present a
general and complete account, duly supported by vouchers, and defendant,
in accepting and approving the semiannual accounts rendered by plaintiff,
did not waive its right to demand the general account agreed upon, at the
time of the final closing of the said current account, the obligation to furnish
which was not complied with by the plaintiff, Gutierrez Hermanos.
The latter denied in its answer the allegations made by Oria Hermanos & Co.
in its cross-complaint, and set forth that, in consequence of the mutual
current account opened between the parties from the year 1900, plaintiff
transmitted weekly or fortnightly, according to circumstances, a specific
statement of the transactions effected, as well as, semiannually, a general
account of the business done during the six months last elapsed, and that
defendant, after an examination of such semiannual account together with its
details and vouchers, and after some objections thereto had been explained,
was accustomed to prove the same. This was the produre carried on for
more than nine years during which Oria Hermanos & Co. from time to time
approved each one of the 17 account that were presented to it, and upon
Gutierrez Hermanos closing the current account from January to June, 1909,
it also presented to defendant a general detailed account, which,
nothwithstanding that no objection whatever was made to it, was not
approved. Therefore the complaint was filed that initiated this litigation.
Had the agreement between the parties been recorded with all its conditions
in some instrument, it would have appeared whether Gutierrez Hermanos

actually bound itself to present to Oria Hermanos and Co., besides the
semiannual accounts rendered, a general account comprising all the
business undertaken between 1900 and June, 1909, on which latter date it
was considered by Gutierrez Hermanos as terminated. The allegation made
by defendant relative to this point had not been substantiated by any
evidence whatever, and therefore there is no reason nor legal ground
whereby plaintiff could be compelled to present that general account
requested in the first cross-complaint.
It is, in our opinion, appropriate it insert hereinafter what the trial court, in the
judgment rendered, says with respect to this matter: "If commission agents
be obliged to render to their principals itemized accounts, supported by
vouchers, of the sums they collect as commission and of the transactions
effected by them in relation with their principals, as often as the latter may
desire, in cases where there arises some trouble, some difference of opinion
or a conflict of interests, or where the commission agents close the account,
as occurs in the case at bar because the principals did not pay what they
were owing or because, instead of the debt being diminished, it was
increased, the commission contract would become an inexhaustible and
never ending source of litigation and of claims without number, a formidable
arm for spiteful principals against which it would be insufficient to oppose an
arsenal of vouchers such as might be treasured by the most prescient
commission agent, because there could be avoided neither the brother
resulting from their necessary examination, nor the heavy expenses and loss
of time that are the inevitable accompaniment of this class of work."
When an account has been presented or rendered and has been approved
by the party whom it concerns or interests, it is not proper to revise it, unless
it should be proved that in its approval there was deceit, fraud, or error
seriously prejudicial to the party who gave such approval. Arts. 1265 and
1266, Civil Code.)
In the decision rendered in the case of Pastor vs. Nicasio, (6 Phil. Rep., 152),
the following doctrine was laid down;
When accounts of the agent to the principal are once approved by
the principal, the latter has no right to ask afterwards for a revision of
the same or for a detailed account of the business, unless he can
show that there was fraud, deceit, error or mistake in the approval of
the accounts facts not proven in this case.

The record does not show it to have been duly proven that upon Oria
Hermanos & Co. giving its approval to the 17 accounts presented by
Gutierrez Hermanos there was deceit, fraud, or mistake prejudicial to the
former's interests. For the sole reason that Gutierrez Hermanos, upon closing
the current account with Oria Hermanos & Co. was obliged, certainly an
unwarranted obligation, to render a general account comprehensive of all the
business transacted between both parties during more than nine years, and
there being no proof of the alleged agreement between them, it would be
improper to hold that the plaintiff is obliged to render and present a general
account in the sense requested by Oria Hermanos & Co. in its first crosscomplaint.
With respect to the second cross-complaint, relative to the sale on
commission of lots of hemp and copra by defendants to plaintiff during the
period from may, 1900, until the close of the mercantile relations between
both firms, it was alleged that for such sale or sale on commission Gutierrez
Hermanos collected a large and important commission of many thousands of
pesos and credited defendant in the current account with lesser prices than
those obtained and that defendant received information that these lots of
hemp and copra which were said to have sold to third persons were
afterwards found to have been purchased by the firm of Gutierrez Hermanos
itself, to the fraud, injury, and prejudice of the defendant, Oria Hermanos and
Co.; wherefore the latter prayed that plaintiff should present a general and
complete account, duly verified by vouchers and with the details specified of
each and all of the shipments of hemp and copra forwarded to plaintiff from
May, 1900, to 1909. These facts were denied by plaintiff, and the court, in
view of the evidence adduced by both parties, held that the record showed
absolutely no proof that plaintiff, Gutierrez Hermanos, had committed any
fraud or error prejudicial to defendant.
In fact it was not proved that Gutierrez Hermanos credited in the current
account a lesser price than that obtained from the sale on commission of the
lots of hemp and copra sent to it by Oria Hermanos and Co., for from the
documentary evidence consisting of account transmitted by plaintiff to the
commercial firms of Stevenson and Co. and Warner, Barnes and Co.
(Limited), in collection of the price of hemp and copra acquired by these
houses, it appears that the prices fixed at sale to the latter are the same and
agree with those specified in the statements transmitted by plaintiff to
defendant, Oria Hermanos and Co., and that the hemp and copra shipped by
the defendant were sold on commission to third persons that is, to the
aforesaid commercial firms.

The charge laid against plaintiff, that it did not disclose the name of the
commercial firm or concern from whom the hemp that it sold had come, does
not, although it may have concealed this fact, constitute a fraudulent act, nor
one originating civil liability, inasmuch as plaintiff realized on the lots of hemp
under the marks of Oria Hermanos & Co. which they bore from their point of
origin and by which they were known both in Manila and abroad (Exhibit DD)
and not only in the invoices, but also in the accounts presented by Gutierrez
Hermanos upon its collecting the price of such hemp sold on commission,
there appeared the marks stamped by Oria Hermanos & Co. on their lots of
hemp, and therefore it cannot be affirmed that Gutierrez Hermanos
superseded Oria Hermanos & Co. as the owner of the hemp that plaintiff sold
on commission and that came from defendant during the more than nine
years in which the former was a commission agent of the latter.

therefore, the claim made by defendant against the account drawn up by


Gutierrez Hermanos is unreasonable and unfounded.

With respect to the fact of Gutierrez Hermanos not having disclosed the
name of the concern to which the hemp belonged, in the cases where
plaintiff sold it in its own name, plaintiff's procedure cannot be qualified as
deceitful or fraudulent, inasmuch as article 245 of the Code of Commerce
authorized it to act as it did, to contract on its own account without need of
disclosing the name of its principal, in which case Gutierrez Hermanos was
liable to the person or concern with whom it contracted, as if the business
were its own. So, then, the purchaser has no right of action against the
principal, nor the latter against the former, without prejudice to the actions
which lie respectively in behalf of the principal and the commission agent,
pursuant to the provisions of article 246 of the Civil Code.

In view of the provisions of law contained in the aforesaid section 139, it is


not understood how Gutierrez Hermanos could have been compelled to pay
the said tax on the rice, salt, petroleum, lime, mats, rattan, flour, anise-seed
spirit, and cigarettes, nor on the price of the beer, on the supposition that
plaintiff acquired these articles from third persons in this city. In the case of
the rice imported from abroad, the payment of the tax thereon pertains to the
importer who sells it to third persons.

With regard to the lots of copra, notwithstanding the allegations made in this
cross-complaint, defendant has not produced any proof whatever of the facts
charged, in face of plaintiff's denial in its answer. Therefore, in consideration
of the reasons set forth with respect to the lots of hemp, the judgment of the
lower court disallowing defendant's petition that plaintiff render accounts
relative to the sales of hemp and copra is held to be in accordance with law.
In this part of the judgment of the trial court consideration was also given to
the fact of plaintiff's having debited against defendant in the account
rendered it the payment of the internal-revenue tax of one-third of 1 per cent.
With respect to the tax paid on the price of the hemp and copra sold by the
plaintiff in the name and for the account of the defendant, the procedure of
the plaintiff is perfectly legal, in accordance with the provisions of section 139
of the Internal Revenue Law, in laying upon Oria Hermanos & Co. the
obligation to pay the said tax as the owner of the hemp and copra sold, and,

As regards the tax of one-third of 1 per cent which, according to accounts


presented by Gutierrez Hermanos to Oria Hermanos & Co., plaintiff had paid
on the price of the rice, salt, kerosene, lime, mats, rattan, flour, anise-seed
spirits, and cigarettes, inasmuch as the said section of the above cited Act
obliges the vendors and not the purchasers of these articles to pay the said
tax, it is undeniable that the firm of Gutierrez Hermanos that had acquired the
said articles which were forwarded to Oria Hermanos & Co. should neither
have paid the tax in question, nor should have charged it for payment against
defendant, since it had already been paid to the Government by the owners
of the articles sold to plaintiff.

If Gutierrez Hermanos made a mistake, notwithstanding the clear


phraseology of the said section, said mistake should not prejudice defendant
who, in July, 1905, had already stated that it did not agree with plaintiff's
action in the matter for, in the letter Exhibit FF, defendant demanded that
plaintiff investigate the case in order to avoid a double payment of the tax.
For the foregoing reasons the plaintiffs, Gutierrez Hermanos, after liquidation
of the sums paid as a tax of one-third of 1 per cent on the price of the rice
acquired in this city and of the salt, kerosene, lime, mats, flour, anise-seed
spirit, cigarettes, and beer, referred to in the second counter-complaint, must
pay to Oria Hermanos & Co. the amount shown by said liquidation to be
owing.
As regards the third cross-complaint, wherein it is alleged that fraud, deceit,
or error was committed or incurred by Gutierrez Hermanos in connection with
the accounts for the rice forwarded to Oria Hermanos & Co., a fact denied by
plaintiff, the trial judge, in view of the evidence introduced at the hearing of
the case, established the following conclusion:

Justice, therefore, demands that Messers. Gutierrez Hermanos


render a new account of the lots of rice which they shipped to
Messrs. Oria Hermanos & Co., inasmuch as they, as proved in the
verification of some of the lots, committed the fraud of having
collected a commission of 2 per cent for the purchase of the rice, as
commission agents, in addition to a profit in reference to the said
lots, in their capacity of merchants, on the price of the rice imported
by them from Saigon.
If they acted as committed agents, they could have contented
themselves with the 2 per cent commission and should not have
charged any extra price. If, as commission agents, it was more
advantageous for them to reap the profits from the rice imported from
Saigon, they should neither have charged nor collected the 2 per
cent commission. The commission agent is obliged to acquire the
articles or effects for which he has received an order from his
principal in the most advantageous and less onerous conditions for
the latter. Such an obligation, prescribed by article 258 of the Code
of Commerce, was not fulfilled by the procedure observed by plaintiff
in the matter of the verified invoices of rice, in some of which, as has
been proved, there appears to have been charged a larger amount
than the cost price.
This court reserves its opinion, unit at such proper time it shall have seen to
result, shown by the new accounts to be presented by plaintiff, as to whether,
in the rice accounts rendered by it to defendant, there was fraud or only error
susceptible of correction, for plaintiff alleges in turn, as shown in the letter
Exhibit , that Oria Hermanos & Co. required plaintiff to increase the price in
the invoices of rice, anise-seed spirit, petroleum, etc., by 25 per cent of the
cost of these articles. Therefore plaintiff shall render an account, verified by
vouchers, to Oria Hermanos of all the shipments of rice concerned, not only
in the invoices examined, but also ion those that have not been examined, up
to No. 153, which invoices are those mentioned on page 324 of the transcript
of the stenographic notes of the session of November 29, 1910.
The approval and agreement given by defendant to the 17 semiannual
accounts presented by plaintiff is no impediment to a revision of the same,
once it shall have been shown that there was fraud, error, or serious in
correction prejudicial to the party who accepted the said accounts. The law
which protects him who acts in good faith cannot permit any considerable
prejudice to be caused to the rights and interests of a third party who had
neither the occasion nor the opportunity to acquaint himself with the truth of

the facts which he had admitted as true in such manner as they were
presented to him.
Oria Hermanos & Co., upon its accepting and approving the accounts which
were presented to it by Gutierrez Hermanos, as transcripts or copies from the
latter's books, did not have an opportunity to make the required verification of
the entries of rice contained in the said accounts or of the invoices of this
article in all their details, and whenever it has discovered that Gutierrez
Hermanos, as commission agent, has made overcharged or placed extra
prices in addition to the 2 per cent commission, it has a right to demand
reimbursement of the excess in price which it had erroneously paid as
principal. The judgment of the lower court must, therefore, be affirmed with
respect to the entries of rice made in the 170 invoices referred to in the
accounts presented by plaintiff, by means of a revision of the accounts
presented in connection with the said article of the Code of Commerce.
With respect to the fourth crosscomplaint relative to Gutierrez Hermanos
having entered in the invoices transmitted to Oria Hermanos & Co. higher
prices than those paid for the salt, beverages, tobacco, wine, beer, and
groceries, in spite of the allegations made by plaintiff the record of the
proceedings shows no proof of the truth of the act charged to plaintiff. The
fact of not having recorded in the invoices of the said effects shipped to
defendant the names of the persons who had acquired them does not
constitute proof nor even a presumption of illegal procedure on the part of
Gutierrez Hermanos. Neither is plaintiff obliged by any law to state the
names of the owners of such articles, nor does the omission thereof show
bad faith on the part of the commission agents.
As regards the petroleum, it is undeniable that in the invoices to which the
fourth cross-complaint refers higher prices were given than those it actually
cost. Moreover, Oria Hermanos & Co. is entitled to the discount obtained by
the commission house from the commercial firm which sold the petroleum.
The trial judge, as grounds for his finding, says the following: "It is therefore
evident that, according to the proofs submitted, Messrs. Gutierrez Hermanos
committed fraud in the purchase and shipments of the said article, not only
because they kept the discount allowed by the selling firm by which their
principals, for whom they purchased the petroleum should have profited, and
not the commission agents who acted for them simply in the capacity of
agents; but also because in one of the invoices they charged, besides, a
greater price than they paid to the vendors, and then collected a commission
of 2 per cent on all the invoices. It is the obligation of commission agents to
make the purchases for their principals on the most advantageous terms. For

this they are paid the rate of commission stipulated. They have no right to
keep the discount allowed by the vendors on the price of the articles they
purchase for their principals, even less to increase, to their benefit, the price
charged them."
In consideration, then, of evidence introduced relative to the purchase of the
petroleum shipped to defendant, referred to in the fourth cross-complaint,
plaintiff must render an account, verified by vouchers, of the price of all the
petroleum that it acquired for Oria Hermanos & Co. and which is covered by
the invoices mentioned on page 391 of the transcript of the stenographic
notes taken of the session of December 28, 1910.
The judgment of the lower court treats of the fact that Gutierrez Hermanos
charged interest on the value of the articles which it had purchased for Oria
Hermanos & Co., before even having paid the vendors the price of the
articles acquired. Defendant has complaint against this procedure on the part
of plaintiff and qualifies as improper and illegal the collection of the 8 per cent
interest on the price of the effects forwarded to Oria Hermanos & Co. from
the date of their shipment, when actual payment of such purchases was
made many days afterwards.
The accounts presented by Gutierrez Hermanos, wherein note was made of
the collection of interest at the rate of 8 per cent on the price of the effects
acquired by plaintiff for Oria Hermanos & Co. and shipped to defendant for its
disposal, notwithstanding that they were not paid for unit many days
afterwards, were approved and accepted by plaintiff without any objection
thereto whatever and with no protest against the notation of the interest on
the price of the articles purchased. Therefore, aside from the reasons given
by the lower court in his judgment and relative to this point, it can not be held
that there was either fraud or error in the procedure observed by Gutierrez
Hermanos in charging in its account the stipulated interest from the date
when it acquired the effects, afterwards shipped to the defendant, Oria
Hermanos & Co., because Gutierrez Hermanos could have paid cash for the
articles purchased. Even though payment might have been delayed for a few
days more it is certain that Gutierrez Hermanos as commission agent was
obliged to pay the price of the articles acquired and, consequently, said price
began to draw interest chargeable to the consignee who, as owner of such
articles, could dispose of them freely. For these reasons defendant's claim
can not be sustained.
We now take up the fifth special defense, or the first counterclaim presented
by defendant against plaintiff, wherein it is prayed that the latter be
sentenced to pay to the former the sum of P13,894.60, together with the

legal interest thereon, which sum is the difference between the 5 per cent
which was all Oria Hermanos & Co. should have the sum of P47,649, the
debt contracted by Juan T. Molleda in favor of Gutierrez Hermanos and
transferred to Oria Hermanos and Co. who assumed its payment instead of
Molleda.
The reasons, set forth in the judgment appealed from and based on
documentary evidence, are so clear and conclusive that they could not be
rejected by defendant, nor invalidated at trial by other evidence in rebuttal.
Consequently, we are constrained to admit them as decisive of the point in
controversy and as duly showing that the interest stipulated on the amount
which was transferred to Oria Hermanos and Co. is 8 per cent and not 5 per
cent as defendant claims. Therefore the sum of P13,894.60 claimed cannot
be recovered, and it is held that the finding made by the trial judge in respect
to the first counterclaim filed by defendant is in accord with the law and the
evidence. This finding is based on the following grounds: "If the firm of
Molleda and Oria as well as that of Oria Hermanos & Co., of which latter Mr.
Tomas Oria is manager, both consented to Messrs. Gutierrez Hermanos
charging in all the extracts of current account sent to them an interest of 8
per cent on the sum of P47,649 56; and if they willingly and constantly
acquiesced in the payment of a particular rate of interest instead of that of 5
per cent, during nine years without raising any objection whatever, they are
not entitled to obtained restitution for the difference paid of 3 per cent, nor
have they any right to consider as unlawfully collected the 8 per cent interest
on the sum above mentioned. The record shows no proof of the existence of
any of the vices which, according to law, might invalidate the consent given
by defendant to the collection from it of the interest of 8 per cent, which must
be that stipulated, nor was such a vice alleged by Oria Hermanos & Co."
Moreover, against this finding in plaintiff's favor no error whatever has been
alleged by defendant.
In the second counterclaim, the sixth special defense, defendant prays that
Gutierrez Hermanos be sentenced to the payment of P63,700, with legal
interest thereon from the date of the presentation of this counterclaim, and
alleged; that the firm of Gutierrez Hermanos, disregarding the instructions of
Molleda and Oria, the predecessor of Oria Hermanos and Co., merely
insured the stocks of hemp and merchandise which the latter had in Laoang,
for an imaginary value of P67,000, leaving totally unprotected the stocks of
hemp and merchandise in Catubig, valued at P32,000; that such failure to
comply with said instruction caused Oria Hermanos and Co., by reason of
the fire that occurred in Catubig, to lose the sum of P63,700, including the
premiums. expenses, and interest paid, and that defendant, immediately

upon discovery of the loss by plaintiff's fault and negligence, filed claim
therefor and protested against the same.
In answer Gutierrez Hermanos alleged that in the letter from Oria Hermanos
and Co., of the date of April 28, 1900, the latter stated that it recommended
to plaintiff the question of the insurance of the warehouses in Laoangand of
the houses in Catubig, advised that if the stocks of hemp and merchandise
therein were insured, as defendant believed they were, plaintiff should
endeavor to increase the insurance thereon; and that in another letter of the
same date Don Tomas Oria, after relating the fact that the insurgents had
attacked the pueblo of Catubig and killed the troops there garrisoned, stated
that he earnestly recommended to Gutierrez the matter of the insurance in
order that it might be made as soon as possible in the manner explained in
the official letter of the same date.
Gutierrez Hermanos, supposing that Catubig might already have been
burned and destroyed as a result of the occurrences related by Oria in his
letter, judging by the news published in the newspapers of this city on May 2,
1900, deemed that it would be a useless expense to increase the insurance
of the merchandise held in stock in the said pueblo under ordinary fire
insurance which was that taken out by the firm of Molleda and Oria, for the
reason that the insurance companies would refuse to pay the amount of the
insurance in case the damage was caused by war, invasion, riot, military
force, etc. As Gutierrez Hermanos then had no means whereby it might
communicates with Molleda and Oria to request specific instructions from this
latter firm in regard to the insurance ordered, which ordinary and not war
insurance, it had to consult Don Casimiro Oria, a partner of Oria Hermanos
and Co., and this gentleman, with a full knowledge of the state of affairs in
Catubig, advised that no further attempt be made to increase the ordinary fire
insurance on the goods in Catubig, because it would be a useless expense
and because there were well-founded reasons for supposing that at that date
the pueblo had already been completely destroyed, together with the
buildings and stocks of merchandise which it was proposed to insure. But
after taking into account the importance of the buildings and the large stocks
of goods stored inLaoang, which pueblo, according to a letter from Oria to
Gutierrez Hermanos, was also in danger of being attacked by the insurgents,
plaintiff proceeded to insure them against war risks for three months for
P7,000 sterling, a transaction which was communicated by plaintiff to
Molleda and Oria by a letter of May 5, 1900, and which this latter firm
acknowledged without making any objection whatever to the war insurance
placed; that, since the 2d of June of the same year, neither was any claim or
protest made by the firm of Oria Hermanos, but, on the contrary, Oria
Hermanos and Co. applied to the Government of the United States claiming

an indemnity of P90,000 Philippine currency for the burning of the buildings


and goods in the pueblo of Catubig a claim still pending decision by the
Government.
The judge of the Court of First Instance, deciding the question raised in this
counterclaim, set forth among others the following considerations: "If Messrs.
Gutierrez Hermanos had taken steps to insure the stocks of merchandise in
Catubig and had declared to any officer of the insuring company the truth
about the terrible slaughter which had just taken place, it would have been
impossible to obtain a war insurance on the said merchandise; and if, instead
of declaring the truth, plaintiff had omitted it, the insurance if obtained could
not have been collected. The insurance company would have learned of the
circumstances which had not been stated and had been omitted in the
application and would have refused to pay the insurance, as it did in the case
of the Catarman insurance, as will be seen further on. And if plaintiff had
applied to the English courts, as it did in the case referred to, the result would
have been the same."
Even though Gutierrez Hermanos had increased by value of the insurance
on the hemp and merchandise in Catubig through means of ordinary fire
insurance, pursuant to the instructions given by Molleda and Oria, the
predecessors of Oria Hermanos & Co. and whose rights this latter firm
represents, the same result would have followed, inasmuch as in this class of
insurance the insuring company does not assume risks for fires and
damages caused by war, riot, and military force; and as in the official letter
aforementioned plaintiff was not authorized to increase the insurance through
means of a war insurance policy, it is unquestionable that plaintiff, in not
increasing the ordinary insurance, proceeded in a prudent and reasonable
manner and for the benefit of the defendant by saving the latter from
uselessly paying an important premium for an insurance which it afterwards
could not have collected, Furthermore, the news was already disseminated in
Manila that the pueblo of Catubig had been completely burned to the ground.
Not only, therefore, would it have been impossible to obtain the increase of
an ordinary insurance, but even a war insurance, though offering to pay a
large and excessive premium.
In the letter of the date of May 34, 1900, Exhibit 5, page 190 of the file of the
record, Gutierrez Hermanos informed Oria Hermanos and Co. that the
insurance firm refused to pay the amount of the insurance on the
merchandise in Catubig, for the reason that the cases of fire caused through
military force, etc., were excluded from the policy. So that even though
Gutierrez Hermanos had, in compliance with orders from Oria Hermanos &
Co., increased the amount of the insurance on the stock of merchandise

stored in Catubig, Oria Hermanos & Co. would not have been benefited
thereby, because the insurance company would have refused to pay the
increase, just as it did not pay the amount of the original insurance for the
reason aforementioned. Furthermore, as we have already stated, the order to
increase the insurance only refers to ordinary insurance against fire, and not
to extraordinary insurance against war risks.
With respect to the war insurance placed on the stocks of goods in Laoang,
the trial court could not in accordance with law hold plaintiff to be liable for
the payment of the sum Oria Hermanos and Co. did not protest nor object in
any wise against the placing of the said war insurance on the merchandise
in Laoang, and also because in the second counterclaim no petition or
demand whatever was made in connection with this transaction. For these
reasons therefore, Gutierrez Hermanos must be absolved of the second
counterclaim.
We now come to the third counterclaim, the seventh special defense
presented by defendant, wherein petition was made that the firm of Gutierrez
Hermanos be compelled to pay to Oria Hermanos the sum of P67,000,
besides the legal interest thereon since the filing of this claim, which sum
was the amount of the insurance, premiums paid, fees, costs, interest, and
charges for telegrams, etc., alleged to have been expended and lost through
the inattention, negligence, improvidence, and carelessness of the plaintiff,
Gutierrez Hermanos, without defendant's being able to collect the amount of
the insurance on the stock of hemp in Catarman, Samar.
In a letter of May 10, 1900, addressed by Oria Hermanos & Co. to Gutierrez
Hermanos, the former commissioned the latter to try to insure against war
risks some 1,400 piculs of hemp that Oria Hermanos and Co. had in the
pueblo of Catarman which had been evacuated by the American troops; and
in another letter of the same date Tomas Oria said to Gutierrez Hermanos
that Catarman had been evacuated by the troops three days after the
departure of the steamer Santander which was unable to load about 3,000
piculs of hemp that his firm had there, and, as he knew that the said pueblo
had not been burned, he wished to have insurance taken out on the value of
about 1,400 piculs of hemp stored in the Delgado warehouse. Gutierrez
Hermanos had Stevenson and Co., of Manila, cable to the latter's head office
in London for the desired insurance, and as soon as it was obtained
Gutierrez Hermanos wrote to Oria Hermanos & Co. informing defendant that
plaintiff had insured against war risks 1,400 piculs of hemp deposited in the
Delgado warehouse in Catarman, for three months from the 18th of May,
1900.

A few days subsequent to the placing of this insurance, Oria Hermanos & Co.
ordered Gutierrez Hermanos to collect the amount of the insurance, for the
reason that all the stock of hemp in Catarman had been stolen by the
insurgents. The representative of the underwriter refused, however, to pay
the amount of the insurance because Oria Hermanos and Co. had concealed
certain facts which, had they been known to the underwriter, would have
deterred the company from issuing a policy for the hemp, and all the steps
taken for the purpose of obtaining the collection of the 3,000 sterling for
which the hemp had been insured, resulted in failure.
Therefore, on petition of the firm of Oria Hermanos & Co. through the firm of
Stevenson and Co., suit was duly brought before the English courts in
London. The prosecution of this suit was commended to English attorneys to
whom Oria Hermanos & Co. furnished, through Gutierrez Hermanos, all the
documents and data conducive to a successful issue. Notwithstanding, the
claim of Oria Hermanos & Co. was rejected by the London courts. No liability
attached to Gutierrez Hermanos for the failure of the suit in London.
The firm of Gutierrez Hermanos merely complied with the orders of Oria
Hermanos & Co. to insure the stock of hemp in Cataraman, with an
insurance company established in London, through Stevenson and Co. of
Manila, in view of the fact that there was no insurance company in this city
which would issue policies against war risks. For this purpose, by a letter of
October 17, 1905, Exhibit F-2 Oria Hermanos & Co. transmitted to Gutierrez
Hermanos the power of attorney and the letter for Messrs. Horsley, Kibble
and Co. for the purpose of the latter's negotiating with the underwriters for
some honorable settlement of the matter, during the time required for the
receipt of all the documents that had been requested. In another letter of
January 25, 1906, Oria Hermanos & Co. stated to Stevenson and Co. that it
took pleasure in replying to the latter's favor of the 19th instant, addressed to
Mr. Oria; that Delgado's letter to Oria of the date of October 19, 1901, was
forwarded in the original to London, through Messrs. Gutierrez Hermanos, to
Stevenson and Co., on July 16, 1904; that defendant inclosed a copy of
Delgado's declaration before the municipal judge of Catarman, transmitted to
Stevenson and Co. on November 21, 1903; and that the two letters to
Gutierrez Hermanos, of May 28, 1903, and October 2, 1901, as well as the
memorandum of the values of the goods, had been transmitted to Gutierrez
Hermanos with a telegraphic order to said firm to deliver them to Stevenson
and Co. If the amount of the insurance could not afterwards be collected, it
was not through fault of Gutierrez Hermanos, who acted in the matter in
accordance with instructions from Oria Hermanos and Co.

So that firm of Gutierrez Hermanos was a mere conductor through which the
stock of hemp in Catarman was insured by a firm in London through
mediation of Messrs. Stevenson and Co., for the firm of Oria Hermanos and
Co. had to grant a power of attorney on behalf of the said Messrs. Horsley,
Kibble and Co. in order that the latter might represent the former before the
courts in England. If afterwards the representatives of Oria Hermanos and
Co. did not obtain a favorable decision in those courts, the loss of the suit
cannot be ascribed to either the fault or the negligence of Gutierrez
Hermanos, inasmuch as this plaintiff merely complied with the orders of the
defendant, Oria Hermanos and Co., to bring suit in the English courts, not
against Stevenson and Co. of these Islands, but against the insurance
company of London.
The firm of Gutierrez Hermanos, in executing orders and charges of Oria
Hermanos and Co., became, by virtue of an implied agency, an agent of the
latter and, in the fulfillment of the orders of the principal, adjusted its action to
the instructions of Oria Hermanos & Co. The record does not show that in so
doing it proceeded with negligence or with deceit. Therefore there is no
reason nor legal ground whereby plaintiff should be compelled to pay the
sum demanded in the third counterclaim for the causes therein stated. (Arts.
1710, 1719 and 1726 of the Civil Code.) Consequently Gutierrez Hermanos
should be absolved from the third counterclaim filed by defendant.
In the fourth counterclaim, the eighth special defense, defendant, Oria
Hermanos & Co., prays that plaintiff, Gutierrez Hermanos, be sentenced to
pay P75,000 for losses and damages, with interest, inasmuch as by reason
of a contract executed between both parties, plaintiff bound itself to acquire
for and transmit to defendant rice and other articles, including coin, which
Oria Hermanos & Co. might request at Laoang, Samar, and so plaintiff did;
but since 1904, the fifth year of their mercantile relations, plaintiff failed
repeatedly to comply with its obligation to send the rice and other article
requested by defendant, totally sometimes and at other times partially limiting
the shipment of the effects ordered and excusing itself from remitting money
on the pretext that it could not obtain insurance for the shipment of cash; that
defendant afterwards discovered that there were in this city large stocks of
rice and other effects which plaintiff [defendant] had requested, and could
surely have been sold in Laoang and the pueblos of the coast of Samar, as
Oria Hermanos & Co. was the only importing firm in that island; and had
defendant received from plaintiff the rice and the other effects the former had
requested to be shipped to it, defendant would have obtained a profit of not
less than P25,000 whereupon it could have bought large quantities of hemp
which would have brought it great profit. Defendant further alleged that such
failure on the part of plaintiff to comply with the agreement made caused

injury to the reputation and mercantile credit of Oria Hermanos and Co., in
Samar, and losses and damages of the value of about P50,000, the total of
the losses and damages suffered on both accounts amounting to a sum of
not less than P75, 000; and that the motive of such procedure on the part of
Gutierrez Hermanos was to injure and destroy defendant's credit
in Laoang and on the entire coast of Samar, because plaintiff planned to
establish there a business of its own like that of Oria Hermanos and Co.
Plaintiff, Gutierrez Hermanos, specifically denied the facts alleged by
defendant in its counterclaim and set forth that the evidence introduced
relative to such facts showed that since 1904 plaintiff had been reducing the
shipments of rice, wine, and other effects to such extent that in 1906 and
1907 cases occurred where the order shipped was reduced to one-third, and
in 1908 also where the steamer Serantes was sent without any cargo
whatever, for the reason that the debit balance in defendant's current account
amounted, in 1905, to P321,000 and because Oria Hermanos and Co. did
not send a quantity of hemp and copra sufficient in value to cover the value
of the remittance of money and of the shipments of the effects requested;
that defendant, instead of sending hemp to plaintiff for the gradual payment
of its debt, sent it to Cebu; that therefore Oria Hermanos & Co. had no wellfounded grounds whereupon to claim indemnity for losses and damages,
especially since, according to the stipulations of the agreement and as
shown by the evidence, the part of the credit utilized by defendant was to be
covered and paid for with the price of the hemp, copra and other effects
which Oria Hermanos & Co. should have to send to Gutierrez Hermanos;
and that, if the debtor balance of the current account continued to increase
instead of decreasing, it must be concluded that the procedure of Gutierrez
Hermanos in reducing the amount of the shipments of the orders was due to
the conduct of Oria Hermanos & Co. who did not endeavor by the shipment
of copra, hemp, and other effects gradually to pay even a part of the credit
opened, notwithstanding that the rights and obligations established in the
contract should have been mutual.
If defendant, without concerning itself with diminishing its debtor balance, did
no more than order goods for sale and remit drafts to the paid by Gutierrez
Hermanos, not sending in exchange to plaintiff hemp, copra, and other
effects, plaintiff, Gutierrez Hermanos, in refusing discretionally to furnish
certain effects to defendant and to pay drafts drawn by the latter, did not
violate the obligations it assumed in the contract.
The fact that the debtor balance accepted by Oria Hermanos and Co. on
March 9, 1909, Exhibit A, was raised to P144,473.78, is the best proof of the
good conduct observed by plaintiff during the nine years of mercantile

relations between both parties, and is at the same time the most graphical
demonstration that defendant's contention made in its fourth counterclaim is
not based on any just or legal grounds.
Article 1100, last paragraph of subarticle 2, of the Civil Code prescribes: "In
mutual obligations none of the persons bound shall incur default if the other
does not fulfill or does not submit to properly fulfill what is incumbent upon
him. From the time one of the persons obligated fulfills his obligation the
default begins for the other party." Article 1124 of the same Code provides as
follows: "The right to rescind the obligations is considered as implied in
mutual ones, in case one of the obligated persons does not comply with what
is incumbent upon him.
The person prejudiced may chose between exacting the fulfillment of
the obligation or its rescission, with indemnity for damages and
payment of interest in either case. He may also demand the
rescission, even after having requested its fulfillment, should the
latter appear impossible." Under these grounds we hold that the
absolutory finding contained in the judgment appealed from is in
accordance with the law and the evidence.
In the fifth counterclaim, the ninth special defense, defendant, Oria
Hermanos and CO., prayed that Gutierrez Hermanos be sentenced to pay
the sum of P15,000, together with the legal interest thereon, inasmuch as
plaintiff, Gutierrez Hermanos, charged in the current account, collected and
appropriated to itself the funds which Oria Hermanos & Co. had in plaintiff's
possession and assessed against the same compound interest at 8 per cent
and 2 per cent on the net amount of the collection made as charterage for
the steamers Serantes and Laoang, the launches Comillas and Golondrina,
and the cutter Remedios, as commission for said charterage, when all the
steps for the collection of the same were taken personally by Messrs. Oria
and further, defendant's partners and there was no contracts whatever
between the parties whereby Gutierrez Hermanos might collect, enter into
the current account and appropriate to itself the said amount as commission
through the collection of the aforesaid charterage.
Plaintiff's counsel merely denied the facts alleged, which certainly were not
proved at the trial. It was, on the contrary, fully proven that Don Tomas Oria
and the managers of Oria Hermanos & Co. knew, by reason of the accounts
Gutierrez Hermanos had been sending them, that the plaintiff firm charged
the 2 per cent commission on the amount of the charterages, for it is so
recorded in the letter from Oria addressed to Gutierrez Hermanos under date
of June 12, 1901, in which P690 appears annotated as the amount of

plaintiff's 2 per cent commission for the charterage of the Laoang and
the Serantes, and in other letter from Oria Hermanos and Co. of October 18,
1900, (Exhibit A-2, page 476 of the record) wherein demand was made for
vouchers and a memorandum of the collections effected for the charterage of
these steamers, the Laoang, and the Serates. Furthermore, it appears in this
same letter for it is stead that credit has been given in Gutierrez Hermanos'
account for P272.50, as being the amount this firm was entitled to receive as
2 per cent commission on the P15,625 collected by it from the quartermaster
for the charterage of the Serates and for the transportation of eight
passengers on the steamerLaoang; and it is also therein stated that
Gutierrez Hermanos' account has been credited with the sum of P24, as the
amount of 2 per cent commission on P1,200 collected for four days'
charterage of the Laoang. These documents show that Gutierrez Hermanos
has taken part in the collection of the said charterages and, therefore, was
entitled to receive the amount agreed upon as commission for such
collection. Oria's assertion that Gutierrez Hermanos did nothing for the
collection of the P400,000, the amount of the charterage for the boats of Oria
Hermanos and Co., Gutierrez Hermanos relative to the collection of the
charterages due for the launchesGolondrina and Adela, and for this purpose
he sent the proper vouchers for such collection. Consequently there is
neither reason nor legal ground to prevent our holding as proper the finding
established by the trial court that Oria Hermanos & Co. did, with due
knowledge of the matter, approve the amount of the commissions collected
by Gutierrez Hermanos on the sums it had collected as charterage for the
defendant's boats, in accordance with the agreement made between the
parties, which defendant can not repudiate, nor can its regret for the part it
took therein avail it for the reimbursement sought in its fifth counterclaim. The
finding of the trial judge in regard to the latter is, therefore, in conformity with
the law.
The object of the sixth counterclaim is to obtain reimbursement of the sum of
P31,000, the amount of the interest charged and compounded semiannually,
instead of annually, at the rate of 8 per cent net interest. Oria Hermanos &
Co. demands this sum from Gutierrez Hermanos, alleging that there was an
agreement between the parties to the effect that a settlement of the interest
should be made at the end of each year, and also that the interest due and
unpaid should be capitalized annually.
The firm of Oria Hermanos & Co., Tomas Oria, one of the partners of the
same, and the defendant's bookkeeper, a relative of the said Oria and also a
partner of the firm, had been receiving extracts or copies of the semiannual
accounts rendered by Gutierrez Hermanos, and, after a careful examination
of the same, after offering objections thereto which sometimes delayed Oria

Hermanos and Co.'s approval thereof for more than six months, after
receiving the explanations requested and vouchers demanded of plaintiff,
they concluded by admitting and agreeing to the accounts rendered and the
amounts involved, and made neither objection nor protest whatever against
the system or method employed by Gutierrez Hermanos in capitalizing at the
end of each year the interest of the semiannual accounts rendered, nor
against the interest charged on the capitalized interest, not only in
defendant's debit, but also by reciprocation in the credit given it in the
account of the receipts obtained from price of the hemp, copra and other
products shipped to Gutierrez Hermanos. All the foregoing facts appear on
page 18 of the transcript of the stenographic notes taken of the hearing on
July 14, 1914.
The transaction effected by Gutierrez Hermanos in the accounts it presented
to defendant, Oria Hermanos & Co., is confirmed by some twenty letters
signed, some of them, by Pria Hermanos and Co., others, the greater part of
them, by Tomas Oria, and still others by Mr. Fuster, a partner of the latter
firm. Therefore the semiannual capitalization made by plaintiff, Gutierrez
Hermanos, was sanctioned and approved by defendant on the seventeen
occasions that it approved the accounts presented by plaintiff, expressive of
such capitalization of the reciprocal interest stipulated between the
contracting parties.
Article 1109 of the Civil Code prescribes as follows: "Interest due shall earn
legal interest from the time it is judicially demanded, even if the obligation
should have been silent on this point.
In commercial transactions the provisions of the Code of Commerce
shall be observed.
Article 317 of the Code of Commerce provides: "Interest which has fallen due
and has not been paid shall not earn interest. The contracting parties may,
however, capitalized the net interest which has not been paid, which, as new
principal, shall earn interest."
Upon the execution of the contract which was the origin of the mercantile
relations between Gutierrez Hermanos and Oria Hermanos & Co., the
stipulation made between both parties were not sent forth in any document,
they being content with a verbal agreement in which it was stipulated that the
rate of interest of the reciprocal current account to be kept between them
should be 8 per cent, without determining whether such interest was to fall
due annually, as affirmed by Tomas Oria, the manager of Oria Hermanos &

Co., or semiannually, as contended by Gutierrez Hermanos. However, it is


certain that in the seventeen accounts presented by plaintiff to defendant, at
the end of each period of six months from 1900 to December 31, 1908,
embracing nearly nine years, the interest due was liquidated every six
months in the reciprocal current account between both firms, without
opposition or protest on the part of Oria Hermanos and Co. In the absence of
a written agreement defendant's procedure raises the presumption that such
were the stipulations verbally made between made between the interested
parties, and the verbal agreement was constantly maintained and confirmed
without protest or objection whatever on the part of the managers of Oria
Hermanos & Co. If Tomas Oria, changing his opinion, after the firm of which
he is principal member had approved the said seventeen accounts, believed
that he was authorized to contradict his own acts and to allege another
manner of computing and liquidating the 8 per cent interests stipulated by
stating that it should have been collected annually, and not semiannually as
was done and approvead in the seventeen accounts rendered during a
period of more than nine years, the rectification afterwards made of an
assent and agreement repentance what he himself did in agreement with
defendant, since they were authorized to take such action by article 317 of
the Code of Commerce. Therefore the ruling of the trial judge absolving
plaintiff of the sixth counterclaim filed by defendant is in accordance with the
law and with the evidence as disclosed by the record.
For all the reasons hereinabove set forth as grounds for the findings
rendered in respect to the complaint and to each one of the cross-complaints
and counterclaims presented by defendant, the errors assigned to the
judgment appealed from and not admitted in this decision have been duly
refused.
Therefore, for the reasons assigned in this decision, we sentence the
commercial firm of Oria Hermanos & Co. to the payment of the sum of
P147,204.28 and of the stipulated interest at the rate of 8 per cent per annum
from June 30, 1909, after deduction of all the sums which as balances in
favor of defendant may result from the accounts to be rendered by Gutierrez
Hermanos, in conformity with the finding made, especially in reference to the
second, third, and fourth cross-complaints.
Gutierrez Hermanos is absolved from the first cross-complaint, and also from
the second, in which latter defendant prayed for an accounting of the hemp
and copra business. Plaintiff is likewise absolved from the fourth crosscomplaint, excepting the part thereof relative to the petroleum, and also from
the first, second, third, fourth, fifth, and sixth counterclaims filed by
defendant.

Held: (1) That Gutierrez Hermanos, after Liquidation of the sums


paid as a one-third per cent tax on the price of the rice acquired in
this city, of that of the salt, kerosene, lime, mats, rattan, flour,
anisette, cigarettes, beer, and other articles, for which plaintiff paid
said sums and charged them to defendant's account, must pay to
Oria Hermanos & Co. the sum disclosed by the said liquidation, in
conformity with the second cross-complaint.
(2) That Gutierrez Hermanos shall render to defendant an account,
supported by vouchers, of the price, expenses, and all amounts paid
for the shipments of rice covered by the invoices examined during
the trial of this case, as well as the 153 invoices mentioned by the
parties in the hearing of November 29, 1910.
(3) That plaintiff shall render an account, supported by vouchers, of
all the petroleum it acquired for Oria Hermanos & Co., the invoices of
which are mentioned in the transcript of the stenographic notes taken
at the hearing of December 28, 1910.
The judgment appealed from is affirmed in so far as it is in accord with this
decision and is reversed in so far as it is not, without special finding as to
costs.

EN BANC
G.R. No. L-20567
July 30, 1965
PHILIPPINE NATIONAL BANK, petitioner,
vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF
APPEALS (Second Division), respondents.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.
REYES, J.B.L., J.:
The Philippine National Bank petitions for the review and reversal of the
decision rendered by the Court of Appeals (Second Division), in its case CAG.R. No. 24232-R, dismissing the Bank's complaint against respondent
Manila Surety & Fidelity Co., Inc., and modifying the judgment of the Court of
First Instance of Manila in its Civil Case No. 11263.
The material facts of the case, as found by the appellate Court, are as
follows:
The Philippine National Bank had opened a letter of credit and advanced
thereon $120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt.
Of this amount, 2,000 tons worth P279,000.00 were released and delivered
to Adams & Taguba Corporation (known as ATACO) under a trust receipt
guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00.
To pay for the asphalt, ATACO constituted the Bank its assignee and
attorney-in-fact to receive and collect from the Bureau of Public Works the
amount aforesaid out of funds payable to the assignor under Purchase Order
No. 71947. This assignment (Exhibit "A") stipulated that:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit
accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed as our
Attorney-in-Fact for us and in our name, place and stead, to collect
and to receive the payments to be made by virtue of the aforesaid
Purchase Order, with full power and authority to execute and deliver
on our behalf, receipt for all payments made to it; to endorse for
deposit or encashment checks, money order and treasury warrants

which said Bank may receive, and to apply said payments to the
settlement of said credit accommodation.

4. Dismissing the counterclaim of defendants Adams & Taguba


Corporation and Manila Surety & Fidelity Co., Inc.

This power of attorney shall also remain irrevocable until our total
indebtedness to the said Bank have been fully liquidated. (Exhibit E)

From said decision, only the defendant Surety Company has duly perfected
its appeal. The Central Bank of the Philippines did not appeal, while
defendant ATACO failed to perfect its appeal.

ATACO delivered to the Bureau of Public Works, and the latter accepted,
asphalt to the total value of P431,466.52. Of this amount the Bank regularly
collected, from April 21, 1948 to November 18, 1948, P106,382.01.
Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952
its investigators found that more moneys were payable to ATACO from the
Public Works office, because the latter had allowed mother creditor to collect
funds due to ATACO under the same purchase order to a total of
P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the
Bank sued both in the Court of First Instance of Manila to recover the
balance of P158,563.18 as of February 15, 1950, plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc., to pay plaintiff, Philippines National Bank,
the sum of P174,462.34 as of February 24, 1956, minus the amount
of P8,000 which defendant, Manila Surety Co., Inc. paid from March,
1956 to October, 1956 with interest at the rate of 5% per annum from
February 25, 1956, until fully paid provided that the total amount that
should be paid by defendant Manila Surety Co., Inc., on account of
this case shall not exceed P75,000.00, and to pay the costs;
2. Orderinq cross-defendant, Adams & Taguba Corporation, and
third-party defendant, Pedro A. Taguba, jointly and severally, to pay
cross and third-party plaintiff, Manila Surety & Fidelity Co., Inc.,
whatever amount the latter has paid or shall pay under this
judgment;
3. Dismissing the complaint insofar as the claim for 17% special tax
is concerned; and

The Bank recoursed to the Court of Appeals, which rendered an adverse


decision and modified the judgment of the court of origin as to the surety's
liability. Its motions for reconsideration having proved unavailing, the Bank
appealed to this Court.
The Court of Appeals found the Bank to have been negligent in having
stopped collecting from the Bureau of Public Works the moneys falling due in
favor of the principal debtor, ATACO, from and after November 18, 1948,
before the debt was fully collected, thereby allowing such funds to be taken
and exhausted by other creditors to the prejudice of the surety, and held that
the Bank's negligence resulted in exoneration of respondent Manila Surety &
Fidelity Company.
This holding is now assailed by the Bank. It contends the power of attorney
obtained from ATACO was merely in additional security in its favor, and that it
was the duty of the surety, and not that of the creditor, owed see to it that the
obligor fulfills his obligation, and that the creditor owed the surety no duty of
active diligence to collect any, sum from the principal debtor, citing Judge
Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.
This argument of appellant Bank misses the point. The Court of Appeals did
not hold the Bank answerable for negligence in failing to collect from the
principal debtor but for its neglect in collecting the sums due to the debtor
from the Bureau of Public Works, contrary to its duty as holder of an
exclusive and irrevocable power of attorney to make such collections, since
an agent is required to act with the care of a good father of a family (Civ.
Code, Art. 1887) and becomes liable for the damages which the principal
may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the
Bank could not expect that the Bank would diligently perform its duty under
its power of attorney, but because they could not have collected from the
Bureau even if they had attempted to do so. It must not be forgotten that the
Bank's power to collect was expressly made irrevocable, so that the Bureau
of Public Works could very well refuse to make payments to the principal
debtor itself, and a fortiori reject any demands by the surety.

Even if the assignment with power of attorney from the principal debtor were
considered as mere additional security still, by allowing the assigned funds to
be exhausted without notifying the surety, the Bank deprived the former of
any possibility of recoursing against that security. The Bank thereby
exonerated the surety, pursuant to Article 2080 of the Civil Code:
ART. 2080. The guarantors, even though they be solidary, are
released from their obligation whenever by come act of the creditor
they cannot be subrogated to the rights, mortgages and preferences
of the latter. (Emphasis supplied.)
The appellant points out to its letter of demand, Exhibit "K", addressed to the
Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit "G",
informing the debtor that as of its date, October 31, 1949, its outstanding
balance was P156,374.83. Said Exhibit "G" has no bearing on the issue
whether the Bank has exercised due diligence in collecting from the Bureau
of Public Works, since the letter was addressed to ATACO, and the funds
were to come from elsewhere. As to the letter of demand on the Public
Works office, it does not appear that any reply thereto was made; nor that the
demand was pressed, nor that the debtor or the surety were ever apprised
that payment was not being made. The fact remains that because of the
Bank's inactivity the other creditors were enabled to collect P173,870.31,
when the balance due to appellant Bank was only P158,563.18. The finding
of negligence made by the Court of Appeals is thus not only conclusive on us
but fully supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in
support of the decision now under appeal, because the rules on application
of payments, giving preference to secured obligations are only operative in
cases where there are several distinct debts, and not where there is only one
that is partially secured, the error is of no importance, since the principal
reason based on the Bank's negligence furnishes adequate support to the
decision of the Court of Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against
appellant Philippine National Bank.

G.R. Nos. L-25836-37 January 31, 1981


THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the
order of the Court of First Instance of Manila, Branch XIII, in Civil Case No.
42066 denying his motion to set aside the order declaring him in default, 1and
from the order of said court in the same case denying his motion to set aside
the judgment rendered after he was declared in default. 2 These two appeals
of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO.
27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the
Court of Appeals to file one consolidated record on appeal of CA-G.R. NO.
27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First
Division, certified the consolidated appeal to the Supreme Court on the
ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against
Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of

about P35,000.00 with daily interest thereon from November 17, 1959 until
fully paid and commission equivalent to 3/8% for every thirty (30) days or
fraction thereof plus attorney's fees equivalent to 10% of the total amount
due and costs. 6 The complaint filed by the Philippine Bank of Commerce
contains twenty-two (22) causes of action referring to twenty-two (22)
transactions entered into by the said Bank and Aruego on different dates
covering the period from August 28, 1950 to March 14, 1951. 7 The sum
sought to be recovered represents the cost of the printing of "World Current
Events," a periodical published by the defendant. To facilitate the payment of
the printing the defendant obtained a credit accommodation from the plaintiff.
Thus, for every printing of the "World Current Events," the printer, Encal
Press and Photo Engraving, collected the cost of printing by drawing a draft
against the plaintiff, said draft being sent later to the defendant for
acceptance. As an added security for the payment of the amounts advanced
to Encal Press and Photo-Engraving, the plaintiff bank also required
defendant Aruego to execute a trust receipt in favor of said bank wherein
said defendant undertook to hold in trust for plaintiff the periodicals and to
sell the same with the promise to turn over to the plaintiff the proceeds of the
sale of said publication to answer for the payment of all obligations arising
from the draft. 8
Aruego received a copy of the complaint together with the summons on
December 2, 1959. 9 On December 14, 1959 defendant filed an urgent
motion for extension of time to plead, and set the hearing on December 16,
1959. 10 At the hearing, the court denied defendant's motion for extension.
Whereupon, the defendant filed a motion to dismiss the complaint on
December 17, 1959 on the ground that the complaint states no cause of
action because:
a) When the various bills of exchange were presented to the defendant as
drawee for acceptance, the amounts thereof had already been paid by the
plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge
or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the
defendant drawee is an accommodating party only for the drawer (Encal
Press and Photo-Engraving) and win be liable in the event that the
accommodating party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of
which was received by the defendant on December 24, 1959. 12

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On


March 7, 1960, acting upon the motion for reconsideration filed by the
plaintiff, the trial court set aside its order dismissing the complaint and set the
case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the
order setting aside the order of dismissal was received by the defendant on
March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of
the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March
12, 1960, the defendant filed a motion to postpone the trial of the case on the
ground that there having been no answer as yet, the issues had not yet been
joined. 15 On the same date, the defendant filed his answer to the complaint
interposing the following defenses: That he signed the document upon which
the plaintiff sues in his capacity as President of the Philippine Education
Foundation; that his liability is only secondary; and that he believed that he
was signing only as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the
defendant in default on the ground that the defendant should have filed his
answer on March 11, 1960. He contends that by filing his answer on March
12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court
declared the defendant in default. 18 The defendant learned of the order
declaring him in default on March 21, 1960. On March 22, 1960 the
defendant filed a motion to set aside the order of default alleging that
although the order of the court dated March 7, 1960 was received on March
11, 1960 at 5:00 in the afternoon, it could not have been reasonably
expected of the defendant to file his answer on the last day of the
reglementary period, March 11, 1960, within office hours, especially because
the order of the court dated March 7, 1960 was brought to the attention of
counsel only in the early hours of March 12, 1960. The defendant also
alleged that he has a good and substantial defense. Attached to the motion
are the affidavits of deputy sheriff Mamerto de la Cruz that he served the
order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in
the afternoon and the affidavit of the defendant Aruego that he has a good
and substantial defense. 19 The trial court denied the defendant's motion on
March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment
sentencing the defendant to pay to the plaintiff the sum of P35,444.35
representing the total amount of his obligation to the said plaintiff under the
twenty-two (22) causes of action alleged in the complaint as of November 15,
1957 and the sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated
March 25, 1961 denying his motion to set aside the order declaring him in
default, an appeal bond in the amount of P60.00, and his record on appeal.
The plaintiff filed his opposition to the approval of defendant's record on

appeal on May 13, 1960. The following day, May 14, 1960, the lower court
dismissed defendant's appeal from the order dated March 25, 1960 denying
his motion to set aside the order of default. 22 On May 19, 1960, the
defendant filed a motion for reconsideration of the trial court's order
dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing appeal. 24 On
May 21, 1960, the trial court reconsidered its previous order dismissing the
appeal and approved the defendant's record on appeal. 25 On May 30, 1960,
the defendant received a copy of a notice from the Clerk of Court dated May
26, 1960, informing the defendant that the record on appeal filed ed by the
defendant was forwarded to the Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered
after he was declared in default reiterating the same ground previously
advanced by him in his motion for relief from the order of default. 27 Upon
opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the
defendant's motion to set aside the judgment by default in an order of June
11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal from
the order of the court denying his motion to set aside the judgment by
default, his appeal bond, and his record on appeal. The defendant's record
on appeal was approved by the trial court on June 25, 1960. 30 Thus, the
defendant had two appeals with the Court of Appeals: (1) Appeal from the
order of the lower court denying his motion to set aside the order of default
docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his
motion to set aside the judgment by default docketed as CA-G.R. NO.
27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE
DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE
MOTION TO DECLARE DEFENDANT IN DEFAULT
ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE
AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF
SAID ANSWER IN AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S
PETITION FOR RELIEF OF ORDER OF DEFAULT AND
FROM
JUDGMENT
BY
DEFAULT
AGAINST
DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken against
him through his mistake, inadvertence, surprise or excusable neglect, he
must show to the court that he has a meritorious defense. 32 In other words,
in order to set aside the order of default, the defendant must not only show
that his failure to answer was due to fraud, accident, mistake or excusable
negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together
with the summons on December 2, 1960; that on December 17, 1960, the
last day for filing his answer, Aruego filed a motion to dismiss; that on
December 22, 1960 the lower court dismissed the complaint; that on January
23, 1960, the plaintiff filed a motion for reconsideration and on March 7,
1960, acting upon the motion for reconsideration, the trial court issued an
order setting aside the order of dismissal; that a copy of the order was
received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon
as shown in the affidavit of the deputy sheriff; and that on the following day,
March 12, 1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for
pleading is excusable. The order setting aside the dismissal of the complaint
was received at 5:00 o'clock in the afternoon. It was therefore impossible for
him to have filed his answer on that same day because the courts then held
office only up to 5:00 o'clock in the afternoon. Moreover, the defendant
immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer
was due to excusable negligence, he has failed to show that he has a
meritorious defense. The defendant does not have a good and substantial
defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's
complaint in a representative capacity, as the then President of the Philippine
Education Foundation Company, publisher of "World Current Events and
Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer
of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but
as accommodation or additional party obligor, to add to the security of said

plaintiff bank. The reason for this statement is that unlike real bills of
exchange, where payment of the face value is advanced to the drawer only
upon acceptance of the same by the drawee, in the case in question,
payment for the supposed bills of exchange were made before acceptance;
so that in effect, although these documents are labelled bills of exchange,
legally they are not bills of exchange but mere instruments evidencing
indebtedness of the drawee who received the face value thereof, with the
defendant as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of
exchange as an agent of the Philippine Education Foundation Company
where he is president. Section 20 of the Negotiable Instruments Law
provides that "Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing him as an agent or as
filing a representative character, without disclosing his principal, does not
exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere
has he disclosed that he was signing as a representative of the Philippine
Education Foundation Company. 34 He merely signed as follows: "JOSE
ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an
accommodation party and as such, should be made liable only after a
showing that the drawer is incapable of paying. This contention is also
without merit.

An accommodation party is one who has signed the instrument as maker,


drawer, indorser, without receiving value therefor and for the purpose of
lending his name to some other person. Such person is liable on the
instrument to a holder for value, notwithstanding such holder, at the time of
the taking of the instrument knew him to be only an accommodation
party. 35 In lending his name to the accommodated party, the accommodation
party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part
of the consideration for the instrument but assumes liability to the other
parties thereto because he wants to accommodate another. In the instant
case, the defendant signed as a drawee/acceptor. Under the Negotiable
Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a
lawyer, he should not have signed as an acceptor/drawee. In doing so, he
became primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really
bills of exchange but mere pieces of evidence of indebtedness because
payments were made before acceptance. This is also without merit. Under
the Negotiable Instruments Law, a bill of exchange is an unconditional order
in writting addressed by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum certain in money to order or to
bearer. 36 As long as a commercial paper conforms with the definition of a bill
of exchange, that paper is considered a bill of exchange. The nature of
acceptance is important only in the determination of the kind of liabilities of
the parties involved, but not in the determination of whether a commercial
paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the
defendant's prayer will result in a new trial which will serve no purpose and
will just waste the time of the courts as well as of the parties because the
defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court
of First Instance of Manila denying the petition for relief from the judgment
rendered in said case is hereby affirmed, without pronouncement as to costs.
SO ORDERED.

hire of ship known as "MV Sea Runner" with defendant National


Grains Authority. Under the said contract Medalla obligated to
transport on the "MV Sea Runner" 8,550 sacks of rice belonging to
defendant National Grains Authority from the port of San Jose,
Occidental Mindoro, to Malabon, Metro Manila.

G.R. No. 75640


April 5, 1990
NATIONAL FOOD AUTHORITY, (NFA), petitioner,
vs.
INTERMEDIATE APPELLATE COURT, SUPERIOR (SG) SHIPPING
CORPORATION, respondents.
Zapanta, Gloton & Ulejorada for petitioner.
Sison, Ortiz & Associates for private respondents.
PARAS, J.:

This is a petition for review on certiorari made by National Food Authority


(NFA for brevity) then known as the National Grains Authority or NGA from
the decision 1 of the Intermediate Appellate Court affirming the decision 2of
the trial court, the decretal portion of which reads:
WHEREFORE, defendants Gil Medalla and National Food Authority
are ordered to pay jointly and severally the plaintiff:

Upon completion of the delivery of rice at its destination, plaintiff on


October 17, 1979, wrote a letter requesting defendant NGA that it be
allowed to collect the amount stated in its statement of account
(Exhibit "D"). The statement of account included not only a claim for
freightage but also claims for demurrage and stevedoring charges
amounting to P93,538.70.
On November 5, 1979, plaintiff wrote again defendant NGA, this time
specifically requesting that the payment for freightage and other
charges be made to it and not to defendant Medalla because plaintiff
was the owner of the vessel "MV Sea Runner" (Exhibit "E"). In reply,
defendant NGA on November 16, 1979 informed plaintiff that it could
not grant its request because the contract to transport the rice was
entered into by defendant NGA and defendant Medalla who did not
disclose that he was acting as a mere agent of plaintiff (Exhibit "F").
Thereupon on November 19, 1979, defendant NGA paid defendant
Medalla the sum of P25,974.90, for freight services in connection
with the shipment of 8,550 sacks of rice (Exhibit "A").
On December 4, 1979, plaintiff wrote defendant Medalla demanding
that he turn over to plaintiff the amount of P27,000.00 paid to him by
defendant NFA. Defendant Medalla, however, "ignored the demand."
Plaintiff was therefore constrained to file the instant complaint.

a. the sum of P25,974.90, with interest at the legal rate from


October 17, 1979 until the same is fully paid; and,
b. the sum of P10,000.00 as and for attorney's fees.

Defendant-appellant National Food Authority admitted that it entered


into a contract with Gil Medalla whereby plaintiffs vessel "MV Sea
Runner" transported 8,550 sacks of rice of said defendant from San
Jose, Mindoro to Manila.

Costs against both defendants.


SO ORDERED. (p. 22, Rollo)
Hereunder are the undisputed facts as established by the then Intermediate
Appellate Court (now Court of Appeals), viz:
On September 6, 1979 Gil Medalla, as commission agent of the
plaintiff Superior Shipping Corporation, entered into a contract for

For services rendered, the National Food Authority paid Gil Medalla
P27,000.00 for freightage.
Judgment was rendered in favor of the plaintiff. Defendant National
Food Authority appealed to this court on the sole issue as to whether
it is jointly and severally liable with defendant Gil Medalla for
freightage. (pp. 61-62, Rollo)

The appellate court affirmed the judgment of the lower court, hence, this
appeal by way of certiorari, petitioner NFA submitting a lone issue to wit:
whether or not the instant case falls within the exception of the general rule
provided for in Art. 1883 of the Civil Code of the Philippines.
It is contended by petitioner NFA that it is not liable under the exception to
the rule (Art. 1883) since it had no knowledge of the fact of agency between
respondent Superior Shipping and Medalla at the time when the contract was
entered into between them (NFA and Medalla). Petitioner submits that "(A)n
undisclosed principal cannot maintain an action upon a contract made by his
agent unless such principal was disclosed in such contract. One who deals
with an agent acquires no right against the undisclosed principal."
Petitioner NFA's contention holds no water. It is an undisputed fact that Gil
Medalla was a commission agent of respondent Superior Shipping
Corporation which owned the vessel "MV Sea Runner" that transported the
sacks of rice belonging to petitioner NFA. The context of the law is clear. Art.
1883, which is the applicable law in the case at bar provides:
Art. 1883. If an agent acts in his own name, the principal has no right
of action against the persons with whom the agent has contracted;
neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the
person with whom he has contracted, as if the transaction were his
own, except when the contract involves things belonging to the
principal.
The provision of this article shall be understood to be without
prejudice to the actions between the principal and agent.
Consequently, when things belonging to the principal (in this case, Superior
Shipping Corporation) are dealt with, the agent is bound to the principal
although he does not assume the character of such agent and appears
acting in his own name. In other words, the agent's apparent representation
yields to the principal's true representation and that, in reality and in effect,
the contract must be considered as entered into between the principal and
the third person (Sy Juco and Viardo v. Sy Juco, 40 Phil. 634). Corollarily, if
the principal can be obliged to perform his duties under the contract, then it
can also demand the enforcement of its rights arising from the contract.
WHEREFORE, PREMISES CONSIDERED, the petition is hereby DENIED
and the appealed decision is hereby AFFIRMED.
SO ORDERED.

The vessel arrived in Manila on October 3, 1979, and unloaded part of the
consignee's goods, then proceeded to Cebu on October 19, 1979, to
discharge the rest of the cargo. On October 31, 1979, the consignee filed a
formal claim against Maritime, copy furnished Macondray, for the amount of
P87,163.54, representing C & F value of the 1,383 shortlanded bags. 5 On
January 12, 1980, the consignee filed another formal claim, this time against
Viva Customs Brokerage, for the amount of P36,030.23, representing the
value of 574 bags of net unrecovered spillage. 6

G.R. No. 77638 July 12, 1990


MARITIME AGENCIES & SERVICES, INC., petitioner,
vs.
COURT OF APPEALS, and UNION INSURANCE SOCIETY OF CANTON,
LTD., respondents.
G.R. No. 77674 July 12, 1990
UNION INSURANCE SOCIETY OF CANTON, LTD., petitioner,
vs.
COURT OF APPEALS, HONGKONG ISLAND CO., LTD., MARITIME
AGENCIES & SERVICES, INC., and/or VIVA CUSTOMS
BROKERAGE, respondents.
Del Rosario & Del Rosario for petitioner in G.R. No. 77638.
Zapa Aguillardo & Associates for petitioner in G.R. No. 77674.
Bito, Misa & Lozada for Hongkong Island Co. Ltd. and Macondray & Co., Inc.

CRUZ, J.:
Transcontinental Fertilizer Company of London chartered from Hongkong
Island Shipping Company of Hongkong the motor vessel named "Hongkong
Island" for the shipment of 8073.35 MT (gross) bagged urea from
Novorossisk, Odessa, USSR to the Philippines, the parties signing for this
purpose a Uniform General Charter dated August 9, 1979. 1
Of the total shipment, 5,400.04 MT was for the account of Atlas Fertilizer
Company as consignee, 3,400.04 to be discharged in Manila and the
remaining 2,000 MT in Cebu. 2 The goods were insured by the consignee
with the Union Insurance Society of Canton, Ltd. for P6,779,214.00 against
all risks. 3
Maritime Agencies & Services, Inc. was appointed as the charterer's agent
and Macondray Company, Inc. as the owner's agent. 4

These claims having been rejected, the consignee then went to Union, which
on demand paid the total indemnity of P113,123.86 pursuant to the insurance
contract. As subrogee of the consignee, Union then filed on September 19,
1980, a complaint for reimbursement of this amount, with legal interest and
attorney's fees, against Hongkong Island Company, Ltd., Maritime Agencies
& Services, Inc. and/or Viva Customs Brokerage. 7 On April 20, 1981, the
complaint was amended to drop Viva and implead Macondray Company, Inc.
as a new defendant. 8
On January 4, 1984, after trial, the trial court rendered judgment holding the
defendants liable as follows:
(a) defendants Hongkong Island Co., Ltd., and its local agent
Macondray & Co., Inc. to pay the plaintiff the sum of P87,163.54 plus
12% interest from April 20, 1981 until the whole amount is fully paid,
P1,000.00 as attorney's fees and to pay one-half (1/2) of the costs;
and
(b) defendant Maritime Agencies & Services, Inc., to pay the plaintiff
the sum of P36,030.23, plus 12% interest from April 20, 1981 until
the whole amount is fully paid, P600.00 as attorney's fees and to pay
one-half (1/2) of the costs. 9
Petitioner appealed the decision to the Court of Appeals, which rendered a
decision on November 28, 1986, the dispositive portion of which reads:
WHEREFORE, the decision appealed from is modified, finding the
charterer Transcontinental Fertilizer Co., Ltd. represented by its
agent Maritime Agencies & Services, Inc. liable for the amount of
P87,163.54 plus interest at 12% plus attorney's fees of P1,000.00.
Defendant Hongkong Island Co., Ltd. represented by Macondray
Co., Inc. are accordingly exempted from any liability. 10

Maritime and Union filed separate motions for reconsideration which were
both denied. The movants are now before us to question the decision of the
respondent court.
In G.R. No. 77638, Maritime pleads non-liability on the ground that it was
only the charterer's agent and should not answer for whatever responsibility
might have attached to the principal. It also argues that the respondent court
erred in applying Articles 1734 and 1735 of the Civil Code in determining the
charterer's liability.
In G.R. No. 77674, Union asks for the modification of the decision of the
respondent court so as to make Maritime solidarily and solely liable, its
principal not having been impleaded and so not subject to the jurisdiction of
our courts.
These two cases were consolidated and given due course, the parties being
required to submit simultaneous memoranda. All complied, including
Hongkong Island Company, Ltd., and Macondray Company, Inc., although
they pointed out that they were not involved in the petitions.
There are three general categories of charters, to wit, the demise or
"bareboat charter," the time charter and the voyage charter.
A demise involves the transfer of full possession and control of the vessel for
the period covered by the contract, the charterer obtaining the right to use
the vessel and carry whatever cargo it chooses, while manning and
supplying the ship as well. 11
A time charter is a contract to use a vessel for a particular period of time, the
charterer obtaining the right to direct the movements of the vessel during the
chartering period, although the owner retains possession and control. 12
A voyage charter is a contract for the hire of a vessel for one or a series of
voyages usually for the purpose of transporting goods for the charterer. The
voyage charter is a contract of affreightment and is considered a private
carriage. 13
Tested by those definitions, the agreement entered into in the cases at bar
should be considered. This brings us to the basic question of who, in this
kind of charter, shall be liable for the cargo.

A voyage charter being a private carriage, the parties may freely contract
respecting liability for damage to the goods and other matters. The basic
principle is that "the responsibility for cargo loss falls on the one who agreed
to perform the duty involved" in accordance with the terms of most voyage
charters. 14
This is true in the present cases where the charterer was responsible for
loading, stowage and discharging at the ports visited, while the owner was
responsible for the care of the cargo during the voyage. Thus, Par. 2 of the
Uniform General Charter read:
2. Owners are to be responsible for loss of or damage to the goods
or for delay in delivery of the goods only in case the loss, damage or
delay has been caused by the improper or negligent stowage of the
goods or by personal want of due diligence on the part of the Owners
or their Manager to make the vessel in all respects seaworthy and to
secure that she is properly manned, equipped and supplied or by the
personal act or default of the Owners or their Manager.
And the Owners are responsible for no loss or damage or delay
arising from any other cause whatsoever, even from the neglect or
default of the Captain or crew or some other person employed by the
Owners onboard or ashore for whose acts they would, but for this
clause, be responsible, or from unseaworthiness of the vessel on
loading or commencement of the voyage or at any time whatsoever.
Damage caused by contact with or leakage, smell or evaporation
from other goods or by the inflammable or explosive nature or
insufficient package of other goods not to be considered as caused
by improper or negligent stowage, even if in fact so caused.
while Clause 17 of Additional Clauses to Charter party provided:
The cargo shall be loaded, stowed and discharged free of expense
to the vessel under the Master's supervision. However, if required at
loading and discharging ports the vessel is to give free use of
winches and power to drive them gear, runners and ropes. Also
slings, as on board. Shore winchmen are to be employed and they
are to be for Charterers' or Shippers' or Receivers' account as the
case may be. Vessel is also to give free use of sufficient light, as on
board, if required for night work. Time lost through breakdown of
winches or derricks is not to count as laytime.

In Home Insurance Co. v. American Steamship Agencies, Inc., 15 the trial


court rejected similar stipulations as contrary to public policy and, applying
the provisions of the Civil Code on common carriers and of the Code of
Commerce on the duties of the ship captain, held the vessel liable in
damages for loss of part of the cargo it was carrying. This Court reversed,
declaring as follows:
The provisions of our Civil Code on common carriers were taken
from Anglo-American law. Under American jurisprudence, a common
carrier undertaking to carry a special cargo or chartered to a special
person only, becomes a private carrier. As a private carrier, a
stipulation exempting the owner from liability for the negligence of its
agent is not against public policy, and is deemed valid.
Such doctrine we find reasonable. The Civil Code provisions on
common carriers should not be applied where the carrier is not
acting as such but as a private carrier. The stipulation in the charter
party absolving the owner from liability for loss due to the negligence
of its agent would be void only if the strict public policy governing
common carriers is applied. Such policy has no force where the
public at large is not involved, as in the case of a ship totally
chartered for the use of a single party.
Nevertheless, this ruling cannot benefit Hongkong, because there was no
showing in that case that the vessel was at fault. In the cases at bar, the trial
court found that 1,383 bags were shortlanded, which could only mean that
they were damaged or lost on board the vessel before unloading of the
shipment. It is not denied that the entire cargo shipped by the charterer in
Odessa was covered by a clean bill of lading. 16 As the bags were in good
order when received in the vessel, the presumption is that they were
damaged or lost during the voyage as a result of their negligent improper
stowage. For this the ship owner should be held liable.
But we do agree that the period for filing the claim is one year, in accordance
with the Carriage of Goods by Sea Act. This was adopted and embodied by
our legislature in Com. Act No. 65 which, as a special law, prevails over the
general provisions of the Civil Code on prescription of actions. Section 3(6) of
that Act provides as follows:
In any event, the carrier and the ship shall be discharged from all
liability in respect of loss or damage unless suit is brought within one
year after delivery of the goods or the date when the goods should

have been delivered; Provided, that if a notice of loss for damage;


either apparent or concealed, is not given as provided for in this
section, that fact shall not effect or prejudice the right of the shipper
to bring suit within one year after the delivery of the goods or the
date when the goods should have been delivered.
This period was applied by the Court in the case of Union Carbide,
Philippines, Inc. v. Manila Railroad Co., 17where it was held:
Under the facts of this case, we held that the one-year period was
correctly reckoned by the trial court from December 19, 1961, when,
as agreed upon by the parties and as shown in the tally sheets, the
cargo was discharged from the carrying vessel and delivered to the
Manila Port Service. That one-year period expired on December 19,
1962. Inasmuch as the action was filed on December 21, 1962, it
was barred by the statute of limitations.
The one-year period in the cases at bar should commence on October 20,
1979, when the last item was delivered to the consignee. 18 Union's complaint
was filed against Hongkong on September 19, 1980, but tardily against
Macondray on April 20, 1981. The consequence is that the action is
considered prescribed as far as Macondray is concerned but not against its
principal, which is what matters anyway.
As regards the goods damaged or lost during unloading, the charterer is
liable therefor, having assumed this activity under the charter party "free of
expense to the vessel." The difficulty is that Transcontinental has not been
impleaded in these cases and so is beyond our jurisdiction. The liability
imposable upon it cannot be borne by Maritime which, as a mere agent, is
not answerable for injury caused by its principal. It is a well-settled principle
that the agent shall be liable for the act or omission of the principal only if the
latter is undisclosed. 19
Union seeks to hold Maritime liable as ship agent on the basis of the ruling of
this
Court
in
the
case
of Switzerland
General
Insurance
Co., Ltd. v. Ramirez. 20 However, we do not find that case is applicable.
In that case, the charterer represented itself on the face of the bill of lading
as the carrier. The vessel owner and the charterer did not stipulate in the
Charter party on their separate respective liabilities for the cargo. The
loss/damage to the cargo was sustained while it was still on board or under
the custody of the vessel. As the charterer was itself the carrier, it was made

liable for the acts of the ship captain who was responsible for the cargo while
under the custody of the vessel.
As for the charterer's agent, the evidence showed that it represented the
vessel when it took charge of the unloading of the cargo and issued cargo
receipts (or tally sheets) in its own name. Claims against the vessel for the
losses/damages sustained by that cargo were also received and processed
by it. As a result, the charterer's agent was also considered a ship agent and
so was held to be solidarily liable with its principal.

xxx xxx xxx


Issues, though not specifically raised in the pleadings in the
appellate court, may, in the interest of justice, be properly considered
by said court in deciding a case, if they are questions raised in the
trial court and are matters of record having some bearing on the
issue submitted which the parties failed to raise or the lower court
ignore(d). 22
xxx xxx xxx

The facts in the cases at bar are different. The charterer did not represent
itself as a carrier and indeed assumed responsibility ability only for the
unloading of the cargo, i.e, after the goods were already outside the custody
of the vessel. In supervising the unloading of the cargo and issuing Daily
Operations Report and Statement of Facts indicating and describing the dayto-day discharge of the cargo, Maritime acted in representation of the
charterer and not of the vessel. It thus cannot be considered a ship agent. As
a mere charterer's agent, it cannot be held solidarily liable with
Transcontinental for the losses/damages to the cargo outside the custody of
the vessel. Notably, Transcontinental was disclosed as the charterer's
principal and there is no question that Maritime acted within the scope of its
authority.
Hongkong and Macondray point out in their memorandum that the appealed
decision is not assailed insofar as it favors them and so has become final as
to them. We do not think so. First of all, we note that they were formally
impleaded as respondents in G.R No. 77674 and submitted their comment
and later their memorandum, where they discussed at length their
position vis-a-vis the claims of the other parties. Secondly, we reiterate the
rule that even if issues are not formally and specifically raised on appeal,
they may nevertheless be considered in the interest of justice for a proper
decision of the case.itc-asl Thus, we have held that:
Besides, an unassigned error closely related to the error properly
assigned, or upon which the determination of the question raised by
the error properly assigned is dependent, will be considered by the
appellate court notwithstanding the failure to assign it as error.
At any rate, the Court is clothed with ample authority to review
matters, even if they are not assigned as errors in their appeal, if it
finds that their consideration is necessary in arriving at a just
decision of the case. 21

While an assignment of error which is required by law or rule of court


has been held essential to appellate review, and only those assigned
will be considered, there are a number of cases which appear to
accord to the appellate court a broad discretionary power to waive
this lack of proper assignment of errors and consider errors not
assigned. 23
In his decision dated January 4, 1984, Judge Artemon de Luna of the
Regional Trial Court of Manila held:
The Court, on the basis of the evidence, finds nothing to disprove the
finding of the marine and cargo surveyors that of the 66,390 bags of
urea fertilizer, 65,547 bags were "discharged ex-vessel" and there
were "shortlanded" "1,383 bags", valued at P87,163.54. This sum
should be the principal and primary liability and responsibility of the
carrying vessel. Under the contract for the transportation of goods,
the vessel's responsibility commence upon the actual delivery to, and
receipt by the carrier or its authorized agent, until its final discharge
at the port of Manila. Defendant Hongkong Island Co., Ltd., as
"shipowner" and represented by the defendant Macondray & Co.,
Inc., as its local agent in the Philippines, should be responsible for
the value of the bags of urea fertilizer which were shortlanded.
The remainder of the claim in the amount of P36,030.23,
representing the value of the 574 bags of unrecovered spillages
having occurred after the shipment was discharged from the vessel
unto the ex-lighters as well as during the discharge from the lighters
to the truck which transported the shipment to the consignee's
warehouses should be for the account of the defendant Maritime
Agencies & Services, Inc.

We affirm the factual findings but must modify the legal conclusions. As
previously discussed, the liability of Macondray can no longer be enforced
because the claim against it has prescribed; and as for Maritime, it cannot be
held liable for the acts of its known principal resulting in injury to Union. The
interest must also be reduced to the legal rate of 6%, conformably to our
ruling in Reformina v. Tomol 24 and Article 2209 of the Civil Code, and should
commence, not on April 20, 1981, but on September 19, 1980, date of the
filing of the original complaint.
WHEREFORE, the decision of the respondent court is SET ASIDE and that
of the trial court is REINSTATED as above modified. The parties shall bear
their respective costs.

This Petition for Review on certiorari assails the 25 July 1995 decision
of the Court of Appeals[1] in CA GR CV No. 41407, entitled Nicholas Y.
Cervantes vs. Philippine Air Lines Inc., affirming in totothe judgment of the
trial court dismissing petitioners complaint for damages.
On March 27, 1989, the private respondent, Philippines Air Lines, Inc. (PAL),
issued to the herein petitioner, Nicholas Cervantes (Cervantes), a round trip
plane ticket for Manila-Honolulu-Los Angeles-Honolulu-Manila, which ticket
expressly provided an expiry of date of one year from issuance, i.e., until
March 27, 1990. The issuance of the said plane ticket was in compliance with
a Compromise Agreement entered into between the contending parties in
two previous suits, docketed as Civil Case Nos. 3392 and 3451 before the
Regional Trial Court in Surigao City.[2]

SO ORDERED.
On March 23, 1990, four days before the expiry date of subject ticket,
the petitioner used it. Upon his arrival in Los Angeles on the same day, he
immediately booked his Los Angeles-Manila return ticket with the PAL office,
and it was confirmed for the April 2, 1990 flight.
Upon learning that the same PAL plane would make a stop-over in San
Francisco, and considering that he would be there on April 2, 1990, petitioner
made arrangements with PAL for him to board the flight in San Francisco
instead of boarding in Los Angeles.
On April 2, 1990, when the petitioner checked in at the PAL counter in
San Francisco, he was not allowed to board. The PAL personnel concerned
marked the following notation on his ticket: TICKET NOT ACCEPTED DUE
EXPIRATION OF VALIDITY.
Aggrieved, petitioner Cervantes filed a Complaint for Damages, for
breach of contract of carriage docketed as Civil Case No. 3807 before
Branch 32 of the Regional Trial Court of Surigao del Norte in Surigao
City. But the said complaint was dismissed for lack of merit.[3]

[G.R. No. 125138. March 2, 1999]


NICHOLAS Y. CERVANTES, petitioner, vs. COURT OF APPEALS AND
THE PHILIPPINE AIR LINES, INC., respondent.
DECISION
PURISIMA, J.:

On September 20, 1993, petitioner interposed an appeal to the Court of


Appeals, which came out with a Decision, on July 25, 1995, upholding the
dismissal of the case.
On May 22, 1996, petitioner came to this Court via the Petition for
Review under consideration.

The issues raised for resolution are: (1) Whether or not the act of the
PAL agents in confirming subject ticket extended the period of validity of
petitioners ticket; (2) Whether or not the defense of lack of authority was
correctly ruled upon; and (3) Whether or not the denial of the award for
damages was proper.
To rule on the first issue, there is a need to quote the findings
below. As a rule, conclusions and findings of fact arrived at by the trial court
are entitled to great weight on appeal and should not be disturbed unless for
strong and cogent reasons.[4]
The facts of the case as found by the lower court [5] are, as follows:
The plane ticket itself (Exhibit A for plaintiff; Exhibit 1 for defendant) provides
that it is not valid after March 27, 1990. (Exhibit 1-F). It is also stipulated in
paragraph 8 of the Conditions of Contract (Exhibit 1, page 2) as follows:
"8. This ticket is good for carriage for one year from date of
issue, except as otherwise provided in this ticket, in carriers tariffs,
conditions of carriage, or related regulations. The fare for carriage hereunder
is subject to change prior to commencement of carriage. Carrier may refuse
transportation if the applicable fare has not been paid. [6]
The question on the validity of subject ticket can be resolved in light of
the ruling in the case of Lufthansa vs. Court of Appeals[7]. In the said case,
the Tolentinos were issued first class tickets on April 3, 1982, which will be
valid until April 10,1983. On June 10, 1982, they changed their
accommodations to economy class but the replacement tickets still contained
the same restriction. On May 7, 1983, Tolentino requested that subject tickets
be extended, which request was refused by the petitioner on the ground that
the said tickets had already expired. The non-extension of their tickets
prompted the Tolentinos to bring a complaint for breach of contract of
carriage against the petitioner. In ruling against the award of damages, the
Court held that the ticket constitute the contract between the parties. It is
axiomatic that when the terms are clear and leave no doubt as to the
intention of the contracting parties, contracts are to be interpreted according
to their literal meaning.
In his effort to evade this inevitable conclusion, petitioner theorized that
the confirmation by the PALs agents in Los Angeles and San Francisco
changed the compromise agreement between the parties.

As aptly ruled by the appellate court:


xxx on March 23, 1990, he was aware of the risk that his ticket could expire,
as it did, before he returned to the Philippines. (pp. 320-321,
Original Records)[8]
The question is: Did these two (2) employees, in effect , extend the
validity or lifetime of the ticket in question? The answer is in the
negative. Both had no authority to do so. Appellant knew this from the very
start when he called up the Legal Department of appellee in the Philippines
before he left for the United States of America. He had first hand knowledge
that the ticket in question would expire on March 27,1990 and that to secure
an extension, he would have to file a written request for extension at the
PALs office in the Philippines (TSN, Testimony of Nicholas Cervantes, August
2, 1991, pp 20-23).Despite this knowledge, appellant persisted to use the
ticket in question.[9]
From the aforestated facts, it can be gleaned that the petitioner was fully
aware that there was a need to send a letter to the legal counsel of PAL for
the extension of the period of validity of his ticket.
Since the PAL agents are not privy to the said Agreement and petitioner
knew that a written request to the legal counsel of PAL was necessary, he
cannot use what the PAL agents did to his advantage.The said agents,
according to the Court of Appeals,[10] acted without authority when they
confirmed the flights of the petitioner.
Under Article 1898[11] of the New Civil Code, the acts of an agent beyond
the scope of his authority do not bind the principal, unless the latter ratifies
the same expressly or impliedly. Furthermore, when the third person (herein
petitioner) knows that the agent was acting beyond his power or authority,
the principal cannot be held liable for the acts of the agent. If the said third
person is aware of such limits of authority, he is to blame, and is not entitled
to recover damages from the agent, unless the latter undertook to secure the
principals ratification.[12]
Anent the second issue, petitioners stance that the defense of lack of
authority on the part of the PAL employees was deemed waived under Rule
9, Section 2 of the Revised Rules of Court, is unsustainable. Thereunder,
failure of a party to put up defenses in their answer or in a motion to dismiss
is a waiver thereof.

Petitioner stresses that the alleged lack of authority of the PAL


employees was neither raised in the answer nor in the motion to dismiss. But
records show that the question of whether there was authority on the part of
the PAL employees was acted upon by the trial court when Nicholas
Cervantes was presented as a witness and the depositions of the PAL
employees, Georgina M. Reyes and Ruth Villanueva, were presented.

a back-up ticket to ensure his departure. Should there be a finding of bad


faith, we are of the opinion that it should be on the petitioner. What the
employees of PAL did was one of simple negligence. No injury resulted on
the part of petitioner because he had a back-up ticket should PAL refuse to
accommodate him with the use of subject ticket.

The admission by Cervantes that he was told by PALs legal counsel that
he had to submit a letter requesting for an extension of the validity of subject
tickets was tantamount to knowledge on his part that the PAL employees had
no authority to extend the validity of subject tickets and only PALs legal
counsel was authorized to do so.

Neither can the claim for exemplary damages be upheld. Such kind of
damages is imposed by way of example or correction for the public good,
and the existence of bad faith is established. The wrongful act must be
accompanied by bad faith, and an award of damages would be allowed only
if the guilty party acted in a wanton, fraudulent, reckless or malevolent
manner.[15] Here, there is no showing that PAL acted in such a manner. An
award for attorneys fees is also improper.

However, notwithstanding PALs failure to raise the defense of lack of


authority of the said PAL agents in its answer or in a motion to dismiss, the
omission was cured since the said issue was litigated upon, as shown by the
testimony of the petitioner in the course of trial. Rule 10, Section 5 of the
1997 Rules of Civil Procedure provides:

WHEREFORE, the Petition is DENIED and the decision of the Court of


Appeals dated July 25, 1995 AFFIRMED in toto. No pronouncement as to
costs.
SO ORDERED.

Sec. 5. Amendment to conform or authorize presentation of


evidence. - When issues not raised by the pleadings are tried with express
or implied consent of the parties, as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause
them to conform to the evidence and to raise these issues may be made
upon motion of any party at any time, even after judgment; but failure to
amend does not affect the result of the trial of these issues. xxx
Thus, when evidence is presented by one party, with the express or
implied consent of the adverse party, as to issues not alleged in the
pleadings, judgment may be rendered validly as regards the said issue,
which shall be treated as if they have been raised in the pleadings. There is
implied consent to the evidence thus presented when the adverse party fails
to object thereto.[13]
Re: the third issue, an award of damages is improper because
petitioner failed to show that PAL acted in bad faith in refusing to allow him to
board its plane in San Francisco.
In awarding moral damages for breach of contract of carriage, the breach
must be wanton and deliberately injurious or the one responsible acted
fraudulently or with malice or bad faith. [14] Petitioner knew there was a strong
possibility that he could not use the subject ticket, so much so that he bought

G.R. No. L-109937 March 21, 1994


DEVELOPMENT
BANK
OF
THE
PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS,
represented by CANDIDA G. DANS, and the DBP MORTGAGE
REDEMPTION INSURANCE POOL, respondents.
Office of the Legal Counsel for petitioner.
Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance
Pool.
QUIASON, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules
of Court to reverse and set aside the decision of the Court of Appeals in CAG.R CV No. 26434 and its resolution denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I

In May 1987, Juan B. Dans, together with his wife Candida, his son and
daughter-in-law, applied for a loan of P500,000.00 with the Development
Bank of the Philippines (DBP), Basilan Branch. As the principal mortgagor,
Dans, then 76 years of age, was advised by DBP to obtain a mortgage
redemption insurance (MRI) with the DBP Mortgage Redemption Insurance
Pool (DBP MRI Pool).

At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and
exhibits submitted by respondent Estate. As a result of these admissions, the
trial court narrowed down the issues and, without opposition from the parties,
found the case ripe for summary judgment. Consequently, the trial court
ordered the parties to submit their respective position papers and
documentary evidence, which may serve as basis for the judgment.

A loan, in the reduced amount of P300,000.00, was approved by DBP on


August 4, 1987 and released on August 11, 1987. From the proceeds of the
loan, DBP deducted the amount of P1,476.00 as payment for the MRI
premium. On August 15, 1987, Dans accomplished and submitted the "MRI
Application for Insurance" and the "Health Statement for DBP MRI Pool."

On March 10, 1990, the trial court rendered a decision in favor of respondent
Estate and against DBP. The DBP MRI Pool, however, was absolved from
liability, after the trial court found no privity of contract between it and the
deceased. The trial court declared DBP in estoppel for having led Dans into
applying for MRI and actually collecting the premium and the service fee,
despite knowledge of his age ineligibility. The dispositive portion of the
decision read as follows:

On August 20, 1987, the MRI premium of Dans, less the DBP service fee of
10 percent, was credited by DBP to the savings account of the DBP MRI
Pool. Accordingly, the DBP MRI Pool was advised of the credit.

WHEREFORE, in view of the foregoing consideration and in the


furtherance of justice and equity, the Court finds judgment for the
plaintiff and against Defendant DBP, ordering the latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus
legal rate of interest as amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all
interest accumulated or otherwise to have been settled, satisfied or
set-off by virtue of the insurance coverage of the late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation
and other expenses, and other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are
hereby dismissed. The Cross-claim of Defendant DBP is likewise
dismissed (Rollo, p. 79)

On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice,
relayed this information to the DBP MRI Pool. On September 23, 1987, the
DBP MRI Pool notified DBP that Dans was not eligible for MRI coverage,
being over the acceptance age limit of 60 years at the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her
late husband's MRI application. The DBP offered to refund the premium of
P1,476.00 which the deceased had paid, but Candida Dans refused to
accept the same, demanding payment of the face value of the MRI or an
amount equivalent to the loan. She, likewise, refused to accept an ex
gratia settlement of P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as
administratrix, filed a complaint with the Regional Trial Court, Branch I,
Basilan, against DBP and the insurance pool for "Collection of Sum of Money
with Damages." Respondent Estate alleged that Dans became insured by the
DBP MRI Pool when DBP, with full knowledge of Dans' age at the time of
application, required him to apply for MRI, and later collected the insurance
premium thereon. Respondent Estate therefore prayed: (1) that the sum of
P139,500.00, which it paid under protest for the loan, be reimbursed; (2) that
the mortgage debt of the deceased be declared fully paid; and (3) that
damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with the
former asserting a cross-claim against the latter.

The DBP appealed to the Court of Appeals. In a decision dated September 7,


1992, the appellate court affirmedin toto the decision of the trial court. The
DBP's motion for reconsideration was denied in a resolution dated April 20,
1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health
Statement for DBP MRI Pool" (Exh. "5-Bank") with the following declaration:

I hereby declare and agree that all the statements and answers
contained herein are true, complete and correct to the best of my
knowledge and belief and form part of my application for insurance. It
is understood and agreed that no insurance coverage shall be
effected unless and until this application is approved and the full
premium is paid during my continued good health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1)
when the application shall be approved by the insurance pool; and (2) when
the full premium is paid during the continued good health of the applicant.
These two conditions, being joined conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP
MRI Pool. The pool, however, did not approve the application of Dans. There
is also no showing that it accepted the sum of P1,476.00, which DBP
credited to its account with full knowledge that it was payment for Dan's
premium. There was, as a result, no perfected contract of insurance; hence,
the DBP MRI Pool cannot be held liable on a contract that does not exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans, the
borrower, to secure MRI coverage. Instead of allowing Dans to look for his
own insurance carrier or some other form of insurance policy, DBP compelled
him to apply with the DBP MRI Pool for MRI coverage. When Dan's loan was
released on August 11, 1987, DBP already deducted from the proceeds
thereof the MRI premium. Four days latter, DBP made Dans fill up and sign
his application for MRI, as well as his health statement. The DBP later
submitted both the application form and health statement to the DBP MRI
Pool at the DBP Main Building, Makati Metro Manila. As service fee, DBP
deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender,
and the second as an insurance agent.

As an insurance agent, DBP made Dans go through the motion of applying


for said insurance, thereby leading him and his family to believe that they had
already fulfilled all the requirements for the MRI and that the issuance of their
policy was forthcoming. Apparently, DBP had full knowledge that Dan's
application was never going to be approved. The maximum age for MRI
acceptance is 60 years as clearly and specifically provided in Article 1 of the
Group Mortgage Redemption Insurance Policy signed in 1984 by all the
insurance companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts
as such is not personally liable to the party with whom he contracts, unless
he expressly binds himself or exceeds the limits of his authority without
giving such party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its clients are
more than 60 years of age (Exh. "1-Pool"). Knowing all the while that Dans
was ineligible for MRI coverage because of his advanced age, DBP
exceeded the scope of its authority when it accepted Dan's application for
MRI by collecting the insurance premium, and deducting its agent's
commission and service fee.
The liability of an agent who exceeds the scope of his authority depends
upon whether the third person is aware of the limits of the agent's powers.
There is no showing that Dans knew of the limitation on DBP's authority to
solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of the
authority conferred by the principal on the agent and he (third person) has
been deceived by the non-disclosure thereof by the agent, then the latter is
liable for damages to him (V Tolentino, Commentaries and Jurisprudence on
the Civil Code of the Philippines, p. 422 [1992], citing Sentencia [Cuba] of
September 25, 1907). The rule that the agent is liable when he acts without
authority is founded upon the supposition that there has been some wrong or
omission on his part either in misrepresenting, or in affirming, or concealing
the authority under which he assumes to act (Francisco, V., Agency 307
[1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the nondisclosure of the limits of the agency carries with it the implication that a
deception was perpetrated on the unsuspecting client, the provisions of
Articles 19, 20 and 21 of the Civil Code of the Philippines come into play.
Article 19 provides:

Every person must, in the exercise of his rights and in the


performance of his duties, act with justice give everyone his due and
observe honesty and good faith.

respondent Estate in ex gratia settlement of its claim and that DBP's nondisclosure of the limits of its authority amounted to a deception to its client,
an award of moral damages in the amount of P50,000.00 would be
reasonable.

Article 20 provides:
Every person who, contrary to law, willfully or negligently causes
damage to another, shall indemnify the latter for the same.
Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
The DBP's liability, however, cannot be for the entire value of the insurance
policy. To assume that were it not for DBP's concealment of the limits of its
authority, Dans would have secured an MRI from another insurance
company, and therefore would have been fully insured by the time he died, is
highly speculative. Considering his advanced age, there is no absolute
certainty that Dans could obtain an insurance coverage from another
company. It must also be noted that Dans died almost immediately, i.e., on
the nineteenth day after applying for the MRI, and on the twenty-third day
from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss
suffered by him as he has duly proved (Civil Code of the Philippines, Art.
2199). Damages, to be recoverable, must not only be capable of proof, but
must be actually proved with a reasonable degree of certainty (Refractories
Corporation v. Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek
Hee v. Philippine Publishing Co., 34 Phil. 447 [1916]). Speculative damages
are too remote to be included in an accurate estimate of damages (Sun Life
Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled to moral
damages. No proof of pecuniary loss is required in the assessment of said
kind of damages (Civil Code of Philippines, Art. 2216). The same may be
recovered in acts referred to in Article 2219 of the Civil Code.
The assessment of moral damages is left to the discretion of the court
according to the circumstances of each case (Civil Code of the Philippines,
Art. 2216). Considering that DBP had offered to pay P30,000.00 to

The award of attorney's fees is also just and equitable under the
circumstances (Civil Code of the Philippines, Article 2208 [11]).
WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to
REIMBURSE respondent Estate of Juan B. Dans the amount of P1,476.00
with legal interest from the date of the filing of the complaint until fully paid;
and (2) to PAY said Estate the amount of Fifty Thousand Pesos (P50,000.00)
as moral damages and the amount of Ten Thousand Pesos (P10,000.00) as
attorney's fees. With costs against petitioner.
SO ORDERED.

[G.R. No. 150718. March 26, 2003]


BASILIO BORJA, SR., petitioner, vs. SULYAP, INC. and THE COURT OF
APPEALS, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review assailing the April 20, 2001 Decision [1] of the
Court of Appeals in CA-G.R. CV No. 62237, and its October 31, 2001
Resolution[2] denying petitioners motion for reconsideration.
The antecedent facts reveal that petitioner Basilio Borja, Sr., as lessor,
and private respondent Sulyap Inc., as lessee, entered into a contract of
lease involving a one-storey office building owned by the petitioner and
located at 12th Street, New Manila, Quezon City. Pursuant to the lease,
private respondent paid, among others, advance rentals, association dues
and deposit for electrical and telephone expenses. Upon the expiration of
their lease contract, private respondent demanded the return of the said
advance rentals, dues and deposit but the petitioner refused to do so. Thus,
on October 5, 1995, the former filed with the Regional Trial Court of Quezon
City, Branch 80, a complaint for sum of money against the petitioner.
[3]
Subsequently, the parties entered into and submitted to the trial court a
Compromise Agreement dated October 16, 1995.[4] On the basis thereof, the
trial court, on October 24, 1995 rendered a decision [5] approving the
compromise agreement. The full text of the said decision reads:
Parties thru counsel submitted the following compromise agreement:
1. That the parties agree that defendant is the LESSOR and owner of the
premises subject of the herein complaint and that herein plaintiff is the
LESSEE thereof who is to vacate the leased premises peacefully on
November 7, 1995;
2. That in the possession of defendant are the following amounts:
a) P20,000.00 deposited by plaintiff to defendant on June
7, 1994 for utilities;

d) 55,000.00 [rental] deposit [to be applied as rental payment]


for the period of October 7 to November 7, 1995.
3. That likewise plaintiff paid for the 5% withholding taxes to the Bureau of
Internal Revenue for the rentals which is due from the defendant amounting
to P25,175.00 covering the period from July 1994, to July of 1995, whereon
plaintiff is hereto attaching proof of payment or receipts as annexes A and B
of said withholding taxes and had been credited to the defendant entitling
plaintiff to full reimbursement;
4. That it is expressly agreed that prior to or on November 7, 1995, defendant
will reimburse to plaintiff the withholding taxes paid to the Bureau of Internal
Revenue in the name of defendant upon signing of the herein compromise
agreement plus the association dues of P5,400.00 or a total of P30,575.00;
5. That with the P55,000.00 consumed by way of rentals up to November 7,
1995, there will be left in the possession of defendant of plaintiffs money in
the amount of P50,000.00; said amount shall be turned over by defendant to
plaintiff within 5 days from arrival of billings for telephone, electrical and
water charges only;
6. That the amount shall be subject to actual billings ending November 7,
1995 only and shall immediately as stated, be hand[ed] over to plaintiff;
7. That it is expressly agreed that the parties shall comply in good faith to the
terms of the herein compromise agreement and that any amount due not
paid within the period stated in this agreement shall earn 2% interest
per month until fully paid plus twenty five 25% attorneys fees of the
amount collectible and that writ of execution shall be issued as a matter of
right. (Emphasis supplied)
WHEREFORE, in light of the above, it is respectfully prayed of this
Honorable Court that judgment be rendered on the basis of the above
compromise agreement.
Manila for Quezon City
October 16, 1995.

b) 5,400.00 as returnable association dues to plaintiff;


c) 30,000.00 deposited by the plaintiff to defendant on August
30, 1994, for telephone [expenses];

Finding the foregoing compromise agreement to be not contrary to law,


morals and public policy, the same is hereby APPROVED.

WHEREFORE, judgment is hereby rendered in accordance with the terms


and conditions set forth in the compromise agreement and the parties are
hereby enjoined to comply with and abide by the said terms and conditions
thereof.

parties shall comply in good faith to the terms of the herein compromise
agreement and that any violation thereof shall automatically entitle the
aggrieved party to damages in the amount of P250,000.00 plus P50,000.00
attorneys fees.[12]

SO ORDERED.[6]

On October 26, 1998, the trial court issued the assailed order denying
petitioners motion seeking to quash the writ of execution and to modify the
judgment on compromise. It gave credence to the testimony of Atty.
Leonardo Cruz that petitioner consented to the penalty clause in the
compromise agreement. The court further noted that it was only on February
20, 1997, or more than one year from receipt of the judgment on compromise
on October 25, 1995, when he questioned the inclusion of the penalty clause
in the approved compromise agreement despite several opportunities to
raise said objection. The dispositive portion of the said order states:

Petitioner, however, failed to pay the amounts of P30,575.00 and


P50,000.00 stated in the judicial compromise. Hence, private respondent
filed a motion for the issuance of a writ of execution for the total amounts of
P30,575.00 and P50,000.00 or a total of P102,733.12, inclusive of 2%
interest and 25% attorneys fees.[7] The trial court, in its February 7, 1996
order,[8]granted the motion over the opposition [9] of the petitioner. On May 24,
1996, the latter filed a motion to quash the writ of execution, contending that
the penalty of 2% monthly interest and 25% attorneys fees should not be
imposed on him because his failure to pay the amounts of P30,575.00 and
P50,000.00 within the agreed period was due to private respondents fault. [10]
On February 20, 1997, petitioner filed another motion praying for the
quashal of the writ of execution and modification of the decision. [11] This time,
he contended that there was fraud in the execution of the compromise
agreement. He claimed that 3 sets of compromise agreement were submitted
for his approval. Among them, he allegedly chose and signed the
compromise agreement which contained no stipulation as to the payment of
2% monthly interest and 25% attorneys fees in case of default in
payment. He alleged that his former counsel, Atty. Leonardo Cruz, who
assisted him in entering into the said agreement, removed the page of the
genuine compromise agreement where he affixed his signature and
fraudulently attached the same to the compromise agreement submitted to
the court in order to make it appear that he agreed to the penalty clause
embodied therein.
Private respondent, on the other hand, vehemently denied the
contention of the petitioner. To refute the latters claim, he presented Atty.
Leonardo Cruz, who declared that the petitioner gave his consent to the
inclusion of the penalty clause of 2% monthly interest and 25% attorneys
fees in the compromise agreement. He added that the compromise
agreement approved by the court was in fact signed by the petitioner inside
the courtroom before the same was submitted for approval. Atty. Cruz
stressed that the penalty clause of 2% interest per month until full payment of
the amount due, plus 25% thereof as attorneys fees, in case of default in
payment, was actually chosen by the petitioner over another proposed more
burdensome penalty clause which states That it is expressly agreed that the

WHEREFORE, premises considered, and as earlier stated, the defendants


motion to quash the writ of execution and modification of judgment is denied.
SO ORDERED.[13]
On appeal by the petitioner to the Court of Appeals, the latter affirmed
the challenged order of the trial court.
Hence, the instant petition.
Is the petitioner bound by the penalty clause in the compromise
agreement?
The settled rule in criminal as well as in civil cases is that, in the matter
of credibility of witnesses, the findings of the trial courts are given great
weight and highest degree of respect by the appellate court considering that
the latter is in a better position to decide the question, having heard the
witnesses themselves and observed their deportment and manner of
testifying during the trial, unless it plainly overlooked certain facts of
substance and value that, if considered, might affect the result of the case.
In the case at bar, we are faced with the conflicting claim of the
petitioner that the questioned penalty clause was fraudulently added to the
compromise agreement approved by the court, and the assertion of private
respondent that the petitioner consented to the inclusion thereof in the
compromise agreement. A scrutiny of the records reveal that the trial court
correctly sustained the claim of private respondent. While a judicial

compromise may be annulled or modified on the ground of vitiated consent


or forgery,[14] we find that the testimony of the petitioner failed to establish the
attendance of fraud in the instant case. Indeed, the testimony of Atty.
Leonardo Cruz is worthy of belief and credence. We are inclined to believe
that the petitioner had knowledge of and consented to the penalty clause
embodied in the agreement considering that the same is less burdensome
than the automatic imposition of the penalty of P250,000.00 and attorneys
fees of P50,000.00 in case of violation of the terms of the agreement or
default in payment. Moreover, we see nothing irregular in the compromise
agreement approved by the trial court. No evidence was presented by
petitioner other than his bare allegation that his former counsel fraudulently
attached the page of the genuine compromise agreement where he affixed
his signature to the compromise agreement submitted to the court.
What further militates against the claim of the petitioner is his conduct
after receiving the judgment based on the compromise agreement. From
October 25, 1995, when he received the judgment reproducing the full text of
the compromise agreement, to February 19, 1997, he never raised the issue
of the fraudulent inclusion of the penalty clause in their agreement. We note
that petitioner is a doctor of medicine. He must have read and understood
the contents of the judgment on compromise. In fact, on November 13, 1995,
he filed, without the assistance of counsel, a motion praying that the amounts
of P50,000.00 and 37,575.00 be withheld from his total obligation and
instead be applied to the expenses for the repair of the leased premises
which was allegedly vandalized by the private respondent. [15] He did not
question the penalty clause in the compromise agreement. Even when the
petitioner was already represented by his new counsel, Atty. Felixberto F.
Abad, to whom he allegedly confided his former counsels fraudulent inclusion
of the penalty clause, the issue of fraud was never brought to the trial courts
attention. On January 31, 1996, when petitioner filed an opposition to the
private respondents motion for the issuance of a writ of execution, he
likewise failed to mention the fraud complained of. On May 24, 1996,
petitioner filed a motion to quash the writ of execution but based on a
different ground. He argued that the penalty of 2% monthly interest and 25%
attorneys fees cannot be imposed on him considering that his failure to pay
on time was due to the fault of the private respondent. He allegedly refused
to pay because the person sent by private respondent to collect payment did
not present a special power of attorney authorizing him to receive said
payment.[16] In effect, therefore, petitioner acknowledged the validity of the
penalty clause.
Evidently, petitioner cannot feign ignorance of the existence of the
penalty clause in the compromise agreement approved by the court. Even

assuming that Atty. Leonardo Cruz exceeded his authority in inserting the
penalty clause, the status of the said clause is not void but merely
voidable, i.e., capable of being ratified. [17] Indeed, petitioners failure to
question the inclusion of the 2% monthly interest and 25% attorneys fees in
the judicial compromise despite several opportunities to do so was
tantamount to ratification. Hence, he is estopped from assailing the validity
thereof.[18]
Finally, we find no merit in petitioners contention that the compromise
agreement should be annulled because Atty. Leonardo Cruz, who assisted
him in entering into such agreement, was then an employee of the Quezon
City government, and is thus prohibited from engaging in the private practice
of his profession. Suffice it to state that the isolated assistance provided by
Atty. Cruz to the petitioner in entering into a compromise agreement does not
constitute a prohibited private practice of law by a public official. Private
practice of a profession, specifically the law profession does not pertain to an
isolated court appearance; rather, it contemplates a succession of acts of the
same nature habitually or customarily holding ones self to the public as a
lawyer.[19] Such was never established in the instant case.
WHEREFORE, in view of all the foregoing, the instant petition
is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 62237,
which sustained the trial courts denial of petitioners motion to quash the writ
of execution and to modify the compromise judgment, is AFFIRMED.
SO ORDERED.

obligation. In entering into the contract, Namerco, however, did not disclose
to NPC that Namercos principal, in a cabled instruction, stated that the sale
was subject to availability of a steamer, and contrary to its principals
instruction, Namerco agreed that non-availability of a steamer was not a
justification for non-payment of liquidated damages. The New York supplier
was not able to deliver the sulfur due to its inability to secure shipping space.
Consequently, the Government Corporate Counsel rescinded the contract of
sale due to the suppliers non-performance of its obligations, and demanded
payment of liquidated damages from both Namerco and the surety.
Thereafter, NPC sued for recovery of the stipulated liquidated damages. After
trial, the Court of First Instance rendered judgment ordering defendantsappellants to pay solidarity to the NPC reduced liquidated damages with
interest.
The Supreme Court held that Namerco is liable fur damages because under
Article 1897 of the Civil Code the agent who exceeds the limits of his
authority without giving the party with whom he contracts sufficient notice of
his powers is personally liable to such party. The Court, however, further
reduced the solidary liability of defendants-appellants for liquidated damages.
SYLLABUS

[G.R. Nos. L-33819 and L-33897. October 23, 1982.]


NATIONAL POWER CORPORATION, Plaintiff-Appellant, v. NATIONAL
MERCHANDISING CORPORATION and DOMESTIC INSURANCE
COMPANY OF THE PHILIPPINES, Defendants-Appellants.
The Solicitor General, for Plaintiff-Appellant.
Sycip, Salazar, Luna Manalo & Feliciano, for Defendants-Appellants.
SYNOPSIS
Plaintiff-appellant National Power Corporation (NPC) and defendantappellant National Merchandising Corporation (NAMERCO), the Philippine
representative of New York-based International Commodities Corporation,
executed a contract of sale of sulfur with a stipulation for liquidated damages
in case of breach. Defendant-appellant Domestic Insurance Company
executed a performance bond in favor of NPC to guarantee the sellers

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; AGENCY; AN AGENT


WHO EXCEEDS THE LIMITS OF HIS AUTHORITY IS PERSONALLY
LIABLE. Under Article 1897 of the Civil Code the agent who exceeds the
limits of his authority without giving the party with whom he contracts
sufficient notice of his powers is personally liable to such party.
2. ID.; ID.; ID.; ID.; CASE AT BAR. In the present case, Namerco, the
agent of a New York-based principal, entered into a contract of sale with the
National Power Corporation without disclosing to the NPC the limits of its
powers and, contrary to its principals prior cabled instructions that the sale
should be subject to availability of a steamer, it agreed that non-availability of
a steamer was not a justification for nonpayment of the liquidated damages.
Namerco. therefore, is liable for damages.
3. ID.; ID.; ID.; THE RULE THAT EVERY PERSON DEALING WITH AN
AGENT IS PUT UPON AN INQUIRY AND MUST DISCOVER UPON HIS
PERIL THE AUTHORITY OF THE AGENT IS NOT APPLICABLE WHERE
THE AGENT, NOT THE PRINCIPAL, IS SOUGHT TO BE HELD LIABLE ON
THE CONTRACT. The rule that every person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent
would apply only in cases where the principal is sought to be held liable on
the contract entered into by the agent. The said rule is not applicable in the

instant case since it is the agent, not the principal, that is sought to be held
liable on the contract of sale which was expressly repudiated by the principal
because the agent took chances, it exceeded its authority and, in effect. it
acted in its own name.
4. ID.; ID.; ID.; THE CONTRACT ENTERED INTO BY AN AGENT WHO
ACTED BEYOND HIS POWERS IS UNENFORCEABLE ONLY AS AGAINST
THE PRINCIPAL BUT NOT AGAINST THE AGENT AND ITS SURETY.
Article 1403 of the Civil Code which provides that a contract entered into in
the name of another person by one who has acted beyond his powers is
unenforceable, refers to the unenforceability of the contract against the
principal. In the instant case, the contract containing the stipulation for
liquidated damages is not being enforced against its principal but against the
agent and its surety. It being enforced against the agent because Article 1897
implies that the agent who acts in excess of his authority is personally liable
to the party with whom he contracted. And that rule is complimented by
Article 1898 of the Civil Code which provides that "if the agent contracts, in
the name of the principal, exceeding the scope of his authority, and the
principal does not ratify the contract, it shall be void if the party with whom
the agent contracted is aware of the limits of the powers granted by the
principal." Namerco never disclosed to the NPC the cabled or written
instructions of its principal. For that reason and because Namerco exceeded
the limits of its authority, it virtually acted in its own name and not as agent
and it is, therefore, bound by the contract of sale which, however, it not
enforceable against its principal. If, as contemplated in Articles 1897 and
1898, Namerco is bound under the contract of sale, then it follows that it is
bound by the stipulation for liquidated damages in that contract.
5. ID.; ID.; ID.; THE LIABILITY OF AN AGENT WHO EXCEEDS THE LIMITS
OF HIS AUTHORITY IS BASED ON CONTRACT AND NOT ON TORT OR
QUASI-DELICT; CASE AT BAR. Defendants contention that Namercos
liability should be based on tort or quasi-delict, as held in some American
cases, like Mendelson v. Holton, 149 N.E. 38,42 ACR 1307, is not well-taken.
As correctly argued by the NPC, it would be unjust and inequitable for
Namerco to escape liability of the contract after it had deceived the NPC by
not disclosing the limits of its powers and entering into the contract with
stipulations contrary to its principals instructions.
6. ID.; ID.; ID.; LIABILITY OF THE SURETY ON THE OBLIGATION
CONTRACTED BY AN AGENT WHO EXCEEDED HIS AUTHORITY IS NOT
AFFECTED THEREBY. The contention of the defendants that the
Domestic Insurance Company is not liable to the NPC because its bond was
posted, not to Namerco, the agent, but for the New York firm which is not
liable on the contract of sale, cannot be sustained because it was Namerco
that actually solicited the bond from the Domestic Insurance Company and,
Namerco is being held liable under the contract of sale because it virtually

acted in its own name. In the last analysis, the Domestic Insurance Company
acted as surety for Namerco. The rule is that "want of authority of the person
who executes an obligation as the agent or representative of the principal will
not, as a general rule, affect the surety thereon, especially in the absence of
fraud, even though the obligation is not binding on the principal." (72 C.J.S.
525).
7. CIVIL LAW; DAMAGES; IMPOSITION OF INTEREST THEREON NOT
WARRANTED WHERE THE DISPOSITION OF THE CASE HAS BEEN
DELAYED DUE TO NO FAULT OF DEFENDANTS. With respect to the
imposition of the legal rate of interest on the damages from the filing of the
complaint in 1957, or a quarter of a century ago, defendants contention that
interest should not be collected on the amount of damages is meritorious. It
should be manifestly iniquitous to collect interest on the damages especially
considering that the disposition of this case has been considerably delayed
due to no fault of the defendants
8. ID.; ID.; LIQUIDATED DAMAGES; NO PROOF OF PECUNIARY LOSS IS
REQUIRED FOR RECOVERY THEREOF. No proof of pecuniary lost is
required for the recovery of liquited damages. The stipulatian for liquidated
damages is intended to obviate controversy on the amount of damages.
There can be no question that the NPC suffered damages because its
production of fertilizer was disrupted or diminished by reason of the nondelivery of the sulfur. The parties foresaw that it might be difficult to ascertain
the exact amount of damages for non-delivey of the sulfur. So, they fixed the
liquidated damages to be paid as indemnity to the NPC.
9. ID.; ID.; NOMINAL DAMAGES; NOT A CASE OF. Nominal damages
are damages in name only or are in fact the same as no damages (25 C.J.S.
466). It would not be correct to hold in this case that the NPC suffered
damages in name only or that the breach of contract "as merely technical in
character since the NPC suffered damages because its production of
fertilizer "as disrupted or diminished by reason of the non-delivery of the
sulfur.
DECISION
AQUINO, J.:
This case is about the recovery of liquidated damages from a sellers agent
that allegedly exceeded its authority in negotiating the sale.
Plaintiff National Power Corporation appealed on questions of law from the
decision of the Court of First Instance of Manila dated October 10, 1966,
ordering defendants National Merchandising Corporation and Domestic
Insurance Company of the Philippines to pay solidarily to the National Power

Corporation reduced liquidated damages in the sum of P72,114.66 plus legal,


rate of interest from the filing of the complaint and the costs (Civil Case No.
33114).
The two defendants appealed from the same decision allegedly because it is
contrary to law and the evidence. As the amount originally involved is
P360,572.80 and defendants appeal is tied up with plaintiffs appeal on
questions of law, defendants appeal can be entertained under Republic Act
No. 2613 which amended section 17 of the Judiciary Law.
On October 17, 1956, the National Power Corporation and National
Merchandising Corporation (Namerco) of 3111 Nagtahan Street, Manila, as
the representative of the International Commodities Corporation of 11 Mercer
Street, New York City (Exh. C), executed in Manila a contract for the
purchase by the NPC from the New York firm of four thousand long tons of
crude sulfur for its Maria Cristina Fertilizer Plant in Iligan City at a total price
of (450,716 (Exh. E).
On that same date, a performance bond in the sum of P90,143.20 was
executed by the Domestic Insurance Company in favor of the NPC to
guarantee the sellers obligations (Exh. F).
It was stipulated in the contract of sale that the seller would deliver the sulfur
at Iligan City within sixty days from notice of the establishment in its favor of
a letter of credit for $212,120 and that failure to effect delivery would subject
the seller and its surety to the payment of liquidated damages at the rate of
two-fifth of one percent of the full contract price for the first thirty days of
default and four-fifth of one percent for every day thereafter until complete
delivery is made (Art. 8, p. 111, Defendants Record on Appeal).
In a letter dated November 12, 1956, the NPC advised John Z. Sycip, the
president of Namerco, of the opening on November 8 of a letter of credit for
$212,120 in favor of International Commodities Corporation which would
expire on January 31, 1957 (Exh. I). Notice of that letter of credit was,
received by cable by the New York firm on November 15, 1956 (Exh. 80Wallick). Thus, the deadline for the delivery of the sulfur was January 15,
1957.
The New York supplier was not able to deliver the sulfur due to its inability to
secure shipping space. During the period from January 20 to 26, 1957 there
was a shutdown of the NPCs fertilizer plant because there was no sulfur. No
fertilizer was produced (Exh. K).
In a letter dated February 27, 1957, the general manager of the NPC advised
Namerco and the Domestic Insurance Company that under Article 9 of the
contract of sale "non-availability of bottom or vessel" was not a fortuitous

event that would excuse non-performance and that the NPC would resort to
legal remedies to enforce its rights (Exh. L and M).
The Government Corporate Counsel in his letter to Sycip dated May 8, 1957
rescinded the contract of sale due to the New York suppliers nonperformance of its obligations (Exh. G). The same counsel in his letter of
June 8, 1957 demanded from Namerco the payment of P360,572.80 as
liquidated damages. He explained that time was of the essence of the
contract. A similar demand was made upon the surety (Exh. H and H-1).
The liquidated damages were computed on the basis of the 115-day period
between January 15, 1957, the deadline for the delivery of the sulfur at Iligan
City, and May 9, 1957 when Namerco was notified of the rescission of the
contract, or P54,085.92 for the first thirty days and P306,486.88 for the
remaining eighty-five days. Total: P360,572.80.
On November 5, 1957, the NPC sued the New York firm, Namerco and the
Domestic Insurance Company for the recovery of the stipulated liquidated
damages (Civil Case No. 33114).
The trial court in its order of January 17, 1958 dismissed the case as to the
New York firm for lack of jurisdiction because it was not doing business in the
Philippines (p. 60, Defendants Record on Appeal).
On the other hand, Melvin Wallick, as the assignee of the New York
corporation and after the latter was dropped as a defendant in Civil Case No.
33114, sued Namerco for damages in connection with the same sulfur
transaction (Civil Case No. 37019). The two cases, both filed in the Court of
First Instance of Manila, were consolidated. A joint trial was held. The lower
court rendered separate decisions in the two cases on the same date.
In Civil Case No. 37019, the trial court dismissed Wallicks action for
damages against Namerco because the assignment in favor of Wallick was
champertous in character. Wallick appealed to this Court. The appeal was
dismissed because the record on appeal did not disclose that the appeal was
perfected on time (Res. of July 11, 1972 in L-33893).In this Civil Case No.
33114, although the records on appeal were approved in 1967, inexplicably,
they were elevated to this Court in 1971. That anomaly initially contributed to
the delay in the adjudication of this case.
Defendants appeal L-33819. They contend that the delivery of the sulfur
was conditioned on the availability of a vessel to carry the shipment and that
Namerco acted within the scope of its authority as agent in signing the
contract of sale.
The documentary evidence belies these contentions. The invitation to bid

issued by the NPC provides that non-availability of a steamer to transport the


sulfur is not a ground for non-payment of the liquidated damages in case of
non-performance by the seller.
"4. Responsibility for availability of vessel. The availability of vessel to
transport the quantity of sulfur within the time specified in item 14 of this
specification shall be the responsibility of the bidder. In case of award of
contract, failure to ship on time allegedly due to non-availability of vessels
shall not exempt the Contractor from payment of liquidated damages
provided in item 15 of this specification."cralaw virtua1aw library

should be allowed to withdraw right away the full amount of the letter of credit
and not merely eighty percent thereof (pp- 123-124, Record on Appeal).
The defendants argue that it was incumbent upon the NPC to inquire into the
extent of the agents authority and, for its failure to do so, it could not claim
any liquidated damages which, according to the defendants, were provided
for merely to make the seller more diligent in looking for a steamer to
transport the sulfur.
The NPC counter-argues that Namerco should have advised the NPC of the
limitations on its authority to negotiate the sale.

"15. Liquidated damages. . . .


"Availability of vessel being a responsibility of the Contractor as specified in
item 4 of this specification, the terms unforeseeable causes beyond the
control and without the fault or negligence of the Contractor and force
majeure as used herein shall not be deemed to embrace or include lack or
nonavailability of bottom or vessel. It is agreed that prior to making his bid, a
bidder shall have made previous arrangements regarding shipments within
the required time. It is clearly understood that in no event shall the Contractor
be exempt from the payment of liquidated damages herein specified for
reason of lack of bottom or vessel. Lack of bottom or nonavailability of vessel
shall, in no case, be considered as a ground for extension of
time. . . . ."cralaw virtua1aw library
Namercos bid or offer is even more explicit. It provides that it was
"responsible for the availability of bottom or vessel" and that it "guarantees
the availability of bottom or vessel to ship the quantity of sulfur within the time
specified in this bid" (Exh. B, p. 22, Defendants Record on Appeal).
In the contract of sale itself item 15 of the invitation to bid is reproduced in
Article 9 which provides that "it is clearly understood that in no event shall the
seller be entitled to an extension of time or be exempt from the payment of
liquidated damages herein specified for reason of lack of bottom or vessel"
(Exh. E, p. 36, Record on Appeal).
It is true that the New York corporation in its cable to Namerco dated August
9, 1956 stated that the sale was subject to availability of a steamer (Exh. N).
However, Namerco did not disclose that cable to the NPC and, contrary to its
principals instruction, it agreed that nonavailability of a steamer was not a
justification for nonpayment of the liquidated damages.
The trial court rightly concluded that Namerco acted beyond the bounds of its
authority because it violated its principals cabled instructions (1) that the
delivery of the sulfur should be "C & F Manila", not "C & F Iligan City" ; (2)
that the sale be subject to the availability of a steamer and (3) that the seller

We agree with the trial court that Namerco is liable for damages because
under article 1897 of the Civil Code the agent who exceeds the limits of his
authority without giving the party with whom he contracts sufficient notice of
his powers is personally liable to such party.
The truth is that even before the contract of sale was signed Namerco was
already aware that its principal was having difficulties in booking shipping
space. In a cable dated October 16, 1956, or one day before the contract of
sale was signed, the New York supplier advised Namerco that the latter
should not sign the contract unless it (Namerco) wished to assume sole
responsibility for the shipment (Exh. T).
Sycip, Namercos president, replied in his letter to the seller dated also
October 16, 1956, that he had no choice but to finalize the contract of sale
because the NPC would forfeit Namercos bidders bond in the sum of
P45,100 posted by the Domestic Insurance Company if the contract was not
formalized (Exh. 14, 14-A and Exh. V).
Three days later, or on October 19, the New York firm cabled Namerco that
the firm did not consider itself bound by the contract of sale and that
Namerco signed the contract on its own responsibility (Exh. W).
In its letters dated November 8 and 19, 1956, the New York corporation
informed Namerco that since the latter acted contrary to the formers cabled
instructions, the former disclaimed responsibility for the contract and that the
responsibility for the sale rested on Namerco (Exh. Y and Y-1).
The letters of the New York firm dated November 26 and December 11, 1956
were even more revealing. It bluntly told Namerco that the latter was never
authorized to enter into the contract and that it acted contrary to the repeated
instructions of the former (Exh. U and Z). Said the vice-president of the New
York firm to Namerco:chanrobles virtual lawlibrary
"As we have pointed out to you before, you have acted strictly contrary to our

repeated instructions and, however regretfully, you have no one but


yourselves to blame."cralaw virtua1aw library
The rule relied upon by the defendants-appellants that every person dealing
with an agent is put upon inquiry and must discover upon his peril the
authority of the agent would apply in this case if the principal is sought to be
held liable on the contract entered into by the agent.
That is not so in this case. Here, it is the agent that it sought to be held liable
on a contract of sale which was expressly repudiated by the principal
because the agent took chances, it exceeded its authority, and, in effect, it
acted in its own name.
As observed by Castan Tobeas, an agent "que haya traspasado los limites
dew mandato, lo que equivale a obrar sin mandato" (4 Derecho Civil
Espaol, 8th Ed., 1956, p. 520).
As opined by Olivieri, "si el mandante contesta o impugna el negocio juridico
concluido por el mandatario con el tercero, aduciendo el exceso de los
limites impuestos, es justo que el mandatario, que ha tratado con engao al
tercero, sea responsable personalmente respecto de el des las
consecuencias de tal falta de aceptacion por parte del mandate. Tal
responsabilidad del mandatario se informa en el principio de la falta de
garantia de la existencia del mandato y de la cualidad de mandatario,
garantia impuesta coactivamente por la ley, que quire que aquel que contrata
como mandatario este obligado a garantizar al tercero la efectiva existencia
de los poderes que afirma se halla investido, siempre que el tercero mismo
sea de buena fe. Efecto de tal garantia es el resarcimiento de los daos
causados al tercero como consecuencia de la negativa del mandante a
reconocer lo actuado por el mandatario." (26, part II, Scaveola, Codigo Civil,
1951, pp. 358-9).
Manresa says that the agent who exceeds the limits of his authority is
personally liable "porque realmente obra sin poderes" and the third person
who contracts with the agent in such a case would be defrauded if he would
not be allowed to sue the agent (11 Codigo Civil, 6th Ed., 1972, p. 725).
The defendants also contend that the trial court erred in holding as
enforceable the stipulation for liquidated damages despite its finding that the
contract was executed by the agent in excess of its authority and is,
therefore, allegedly unenforceable.
In support of that contention, the defendants cite article 1403 of the Civil
Code which provides that a contract entered into in the name of another
person by one who has acted beyond his powers is unenforceable.

We hold that defendants contention is untenable because article 1403 refers


to the unenforceability of the contract against the principal. In the instant
case, the contract containing the stipulation for liquidated damages is not
being enforced against it principal but against the agent and its surety.
It is being enforced against the agent because article 1807 implies that the
agent who acts in excess of his authority is personally liable to the party with
whom he contracted.
And that rule is complemented by article 1898 of the Civil Code which
provides that "if the agent contracts in the name of the principal, exceeding
the scope of his authority, and the principal does not ratify the contract, it
shall be void if the party with whom the agent contracted is aware of the
limits of the powers granted by the principal."
It is being enforced against the agent because article 1897 implies that the
agent who acts in excess of his authority is personally liable to the party with
whom he contracted.
And the rule is complemented by article 1898 of the Civil Code which
provides that "if the agent contracts in the name of the principal, exceeding
the scope of his authority, and the principal does not ratify the contract, it
shall be void if the party with whom the agent contracted is aware of the
limits of the powers granted by the principal."
As priorly discussed, namerco, as agent, exceeded the limits of its authority
in contracting with the NPC in the name of its principal. The NPC was
unaware of the limitations on the powers granted by the New York firm to
Namerco.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
The New York corporation in its letter of April 26, 1956
said:jgc:chanrobles.com.ph
"We hereby certify that National Merchandising Corporation . . . are our
exclusive representatives in the Philippines for the sale of our products.
"Furthermore, we certify that they are empowered to present our offers in our
behalf in accordance with our cabled or written instructions." (Exh. C).
Namerco never disclosed to the NPC the cabled or written instructions of its
principal. For that reason and because Namerco exceeded the limits of its
authority, it virtually acted in its own name and not as agent and it is,
therefore, bound by the contract of sale which, however, is not enforceable
against its principal.
If, as contemplated in articles 1897 and 1898, Namerco is bound under the

contract of sale, then it follows that it is bound by the stipulation for liquidated
damages in that contract.
Defendants contention that Namercos liability should be based on tort or
quasi-delict, as held in some American cases, like Mendelsohn v. Holton, 149
N.E. 38, 42 ALR 1307, is not well-taken. As correctly argued by the NPC, it
would be unjust and inequitable for Namerco to escape liability after it had
deceived the NPC.
Another contention of the defendants is that the Domestic Insurance
Company is not liable to the NPC because its bond was posted, not for
Namerco, the agent, but for the New York firm which is not liable on the
contract of sale.
That contention cannot be sustained because it was Namerco that actually
solicited the bond from the Domestic Insurance Company and, as explained
already, Namerco is being held liable under the contract of sale because it
virtually acted in its own name. It became the principal in the performance
bond. In the last analysis, the Domestic Insurance Company acted as surety
for Namerco.

reason of the nondelivery of the sulfur.chanrobles.com.ph : virtual law library


The parties foresaw that it might be difficult to ascertain the exact amount of
damages for nondelivery of the sulfur. So, they fixed the liquidated damages
to be paid as indemnity to the NPC.
On the other hand, nominal damages are damages in name only or are in
fact the same as no damages (25 C.J.S. 466). It would not be correct to hold
in this case that the NPC suffered damages in name only or that the breach
of contract was merely technical in character.
As to the contention that the damages should be computed on the basis of
forty-five days, the period required by a vessel leaving Galveston, Texas to
reach Iligan City, that point need not be resolved in view of our conclusion
that the liquidated damages should be equivalent to the amount of the
bidders bond posted by Namerco.
NPCs appeal, L-33897. The trial court reduced the liquidated damages to
twenty percent of the stipulated amount. the NPC contends the it is entitled to
the full amount of liquidated damages in the sum of P360,572.80.

The rule is that "want of authority of the person who executes an obligation
as the agent or representative of the principal will not, as a general rule,
affect the suretys liability thereon, especially in the absence of fraud, even
though the obligation is not binding on the principal" (72 C.J.S. 525).

In reducing the liquidated damages, the trial court relied on article 2227 of
the Civil Code which provides that "liquidated damages, whether intended as
an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable."

Defendants other contentions are that they should be held liable only for
nominal damages, that interest should not be collected on the amount of
damages and that the damages should be computed on the basis of a fortyfive day period and not for a period of one hundred fifteen days.

Apparently, the trial court regarded as an equitable consideration the


persistent efforts of Namerco and its principal to charter a steamer and that
the failure of the New York firm to secure shipping space was not attributable
to its fault or negligence.

With respect to the imposition of the legal rate of interest on the damages
from the filing of the complaint in 1957, or a quarter of a century ago,
defendants contention is meritorious. It would be manifestly inequitable to
collect interest on the damages especially considering that the disposition of
this case has been considerably delayed due to no fault of the defendants.

The trial court also took into account the fact that the selling price of the
sulfur was P450,716 and that to award as liquidated damages more than
eighty percent of the price would not be altogether reasonable.

The contention that only nominal damages should be adjudged is contrary to


the intention of the parties (NPC, Namerco and its surety) because it is
clearly provided that liquidated damages are recoverable for delay in the
delivery of the sulfur and, with more reason, for nondelivery.
No proof of pecuniary loss is required for the recovery of liquidated damages.
the stipulation for liquidated damages is intended to obviate controversy on
the amount of damages. There can be no question that the NPC suffered
damages because its production of fertilizer was disrupted or diminished by

The NPC contends that Namerco was an obligor in bad faith and, therefore, it
should be responsible for all damages which could be reasonably attributed
to its nonperformance of the obligation as provided in article 2201 of the Civil
Code.
On the other hand, the defendants argue that Namerco having acted as a
mere agent, was not liable for the liquidated damages stipulated in the
alleged unenforceable contract of sale; that, as already noted, Namercos
liability should be based on tort or quasi-delict and not on the contract of
sale; that if Namerco is not liable, then the insurance company, its surety, is
likewise not liable; that the NPC is entitled only to nominal damages because

it was able to secure the sulfur from another source (58-59 tsn November 10,
1960) and that the reduced award of stipulated damages is highly iniquitous,
considering that Namerco acted in good faith and that the NPC did not suffer
any actual damages.chanrobles law library : red
These contentions have already been resolved in the preceding discussion.
We find no sanction or justification for NPCs claim that it is entitled to the full
payment of the liquidated damages computed by its official.
Ruling on the amount of damages. A painstaking evaluation of the equities
of the case in the light of the arguments of the parties as expounded in their
five briefs leads to the conclusion that the damages due from the defendants
should be further reduced to P45,100 which is equivalent to their bidders
bond or to about ten percent of the selling price of the sulfur.
WHEREFORE, the lower courts judgment is modified and defendants
National Merchandising Corporation and Domestic Insurance Company of
the Philippines are ordered to pay solidarily to the National Power
Corporation the sum of P45,100.00 as liquidated damages. No costs.
SO ORDERED.

JESUS M. GOZUN,
Petitioner,
- versus JOSE TEOFILO T. MERCADO a.k.a. DON
PEPITO MERCADO,
Respondent.

DECISION
CARPIO MORALES, J.:
On challenge via petition for review on certiorari is the Court of Appeals
Decision of December 8, 2004 and Resolution of April 14, 2005 in CA-G.R.
CV No. 76309[1] reversing the trial courts decision [2] against Jose Teofilo T.
Mercado a.k.a. Don Pepito Mercado (respondent) and accordingly dismissing
the complaint of Jesus M. Gozun (petitioner).

In the local elections of 1995, respondent vied for the gubernatorial post
in Pampanga. Upon respondents request, petitioner, owner of JMG
Publishing House, a printing shop located in San Fernando, Pampanga,
submitted to respondent draft samples and price quotation of campaign
materials.
By petitioners claim, respondents wife had told him that respondent
already approved his price quotation and that he could start printing the
campaign materials, hence, he did print campaign materials like posters
bearing respondents photograph,[3] leaflets containing the slate of party
candidates,[4] sample ballots,[5] poll watcher identification cards,[6] and
stickers.
Given the urgency and limited time to do the job order, petitioner
availed of the services and facilities of Metro Angeles Printing and of St.
Joseph Printing Press, owned by his daughter Jennifer Gozun and
mother Epifania Macalino Gozun, respectively.[7]
Petitioner delivered the campaign materials to respondents
headquarters along Gapan-Olongapo Road in San Fernando, Pampanga.[8]
Meanwhile,
on March
31,
1995,
respondents
sister-inlaw, Lilian Soriano (Lilian) obtained from petitioner cash advance
of P253,000 allegedly for the allowances of poll watchers who were attending
a seminar and for other related expenses. Lilian acknowledged on petitioners
1995 diary[9] receipt of the amount.[10]
Petitioner later sent respondent a Statement of Account [11] in the total
amount of P2,177,906 itemized as follows: P640,310 for JMG Publishing
House; P837,696 for Metro Angeles Printing; P446,900 for St. Joseph
Printing Press; and P253,000, the cash advance obtained by Lilian.
On August 11, 1995, respondents wife partially paid P1,000,000 to
petitioner who issued a receipt[12] therefor.
Despite repeated demands and respondents promise to pay,
respondent failed to settle the balance of his account to petitioner.
Petitioner and respondent being compadres, they having been
principal sponsors at the weddings of their respective daughters, waited for
more than three (3) years for respondent to honor his promise but to no avail,
compelling petitioner to endorse the matter to his counsel who sent
respondent a demand letter.[13] Respondent, however, failed to heed the
demand.[14]
Petitioner thus filed with the Regional Trial Court of Angeles City on
November 25, 1998 a complaint[15] against respondent to collect the

remaining amount ofP1,177,906 plus inflationary adjustment and attorneys


fees.

acknowledged that nothing of that sort was written on all the materials made
by petitioner.[21]

In his Answer with Compulsory Counterclaim,[16] respondent denied


having transacted with petitioner or entering into any contract for the printing
of campaign materials.He alleged that the various campaign materials
delivered to him were represented as donations from his family, friends and
political supporters. He added that all contracts involving his personal
expenses were coursed through and signed by him to ensure compliance
with pertinent election laws.

As adverted to earlier, the trial court rendered judgment in favor of


petitioner, the dispositive portion of which reads:

On petitioners claim that Lilian, on his (respondents) behalf, had


obtained from him a cash advance of P253,000, respondent denied having
given her authority to do so and having received the same.
At the witness stand, respondent, reiterating his allegations in his Answer,
claimed that petitioner was his over-all coordinator in charge of the conduct
of seminars for volunteers and the monitoring of other matters bearing on his
candidacy; and
that
while
his
campaign
manager, Juanito Johnny Cabalu (Cabalu), who was authorized to approve
details with regard to printing materials, presented him some campaign
materials, those were partly donated.[17]
When confronted with the official receipt issued to his wife acknowledging
her payment to JMG Publishing House of the amount of P1,000,000,
respondent claimed that it was his first time to see the receipt, albeit he
belatedly came to know from his wife and Cabalu that the P1,000,000
represented compensation [to petitioner] who helped a lot in the campaign as
a gesture of goodwill.[18]
Acknowledging that petitioner is engaged in the printing business,
respondent explained that he sometimes discussed with petitioner strategies
relating to his candidacy, he (petitioner) having actively volunteered to help in
his campaign; that his wife was not authorized to enter into a contract with
petitioner regarding campaign materials as she knew her limitations; that he
no longer questioned the P1,000,000 his wife gave petitioner as he thought
that it was just proper to compensate him for a job well done; and that he
came to know about petitioners claim against him only after receiving a copy
of the complaint, which surprised him because he knew fully well that the
campaign materials were donations.[19]
Upon questioning by the trial court, respondent could not, however,
confirm if it was his understanding that the campaign materials delivered by
petitioner were donations from third parties.[20]
Finally, respondent, disclaiming knowledge of the Comelec rule that
if a campaign material is donated, it must be so stated on its face,

WHEREFORE, the plaintiff having proven its (sic) cause of


action by preponderance of evidence, the Court hereby
renders a decision in favor of the plaintiff ordering the
defendant as follows:
1. To pay the plaintiff the sum of P1,177,906.00 plus
12% interest per annum from the filing of this
complaint until fully paid;
2. To pay the sum of P50,000.00 as attorneys fees
and the costs of suit.
SO ORDERED.[22]
Also as earlier adverted to, the Court of Appeals reversed the trial
courts decision and dismissed the complaint for lack of cause of action.
In reversing the trial courts decision, the Court of Appeals held that
other than petitioners testimony, there was no evidence to support his claim
that Lilian was authorized by respondent to borrow money on his behalf. It
noted that the acknowledgment receipt [23] signed by Lilian did not specify in
what capacity she received the money. Thus, applying Article 1317[24] of the
Civil Code, it held that petitioners claim for P253,000 is unenforceable.
On the accounts claimed to be due JMG Publishing House P640,310, Metro
Angeles Printing P837,696, and St. Joseph Printing Press P446,900, the
appellate court, noting thatsince the owners of the last two printing presses
were not impleaded as parties to the case and it was not shown that
petitioner was authorized to prosecute the same in their behalf, held that
petitioner could not collect the amounts due them.
Finally, the appellate court, noting that respondents wife had paid P1,000,000
to petitioner, the latters claim of P640,310 (after excluding the P253,000) had
already been settled.
Hence, the present petition, faulting the appellate court to have erred:
1.
. . . when it dismissed the complaint on the ground that
there is no evidence, other than petitioners own testimony, to
prove
that Lilian R. Soriano was
authorized
by the

respondent to receive the cash advance from the petitioner


in the amount of P253,000.00.

verbally given him.[31] (Emphasis and underscoring


supplied)

xxxx
2.
. . . when it dismissed the complaint, with respect to the
amounts due to the Metro Angeles Press and St. Joseph
Printing Press on the ground that the complaint was not
brought by the real party in interest.
By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another, with the
consent or authority of the latter.[26] Contracts entered into in the name of
another person by one who has been given no authority or legal
representation or who has acted beyond his powers are classified as
unauthorized contracts and are declared unenforceable, unless they are
ratified.[27]
Generally, the agency may be oral, unless the law requires a specific
form.[28] However, a special power of attorney is necessary for an agent to, as
in this case, borrow money, unless it be urgent and indispensable for the
preservation of the things which are under administration. [29] Since nothing in
this case involves the preservation of things under administration, a
determination of whether Soriano had the special authority to borrow money
on behalf of respondent is in order.
Lim Pin v. Liao Tian, et al.[30] held that the requirement of a special
power of attorney refers to the nature of the authorization and not to its form.
. . . The requirements are met if there is a clear mandate
from the principal specifically authorizing the performance of
the act. As early as 1906, this Court in Strong v. GutierrezRepide (6 Phil. 680) stated that such a mandate may be
either oral or written. The one thing vital being that it shall be
express. And more recently, We stated that, if the special
authority is not written, then it must be duly established by
evidence:
the Rules require, for attorneys to compromise the
litigation of their clients, a special authority. And
while the same does not state that the special
authority be in writing the Court has every reason to
expect that, if not in writing, the same be duly
established by evidence other than the self-serving
assertion of counsel himself that such authority was

Petitioner submits that his following testimony suffices to establish that


respondent had authorized Lilian to obtain a loan from him, viz:
Q : Another caption appearing on Exhibit A is cash advance,
it states given on 3-31-95 received by
Mrs. Lilian Soriano in behalf of Mrs. Annie
Mercado, amount P253,000.00, will you kindly tell
the Court and explain what does that caption
means?
A : It is the amount representing the money borrowed from
me by the defendant when one morning they
came very early and talked to me and told me that
they were not able to go to the bank to get money for
the allowances of Poll Watchers who were having a
seminar at the headquarters plus other election
related expenses during that day, sir.
Q : Considering that this is a substantial amount which
according to you was taken by Lilian Soriano, did
you happen to make her acknowledge the amount at
that time?
A : Yes, sir.[32] (Emphasis supplied)
Petitioners testimony failed to categorically state, however, whether the loan
was made on behalf of respondent or of his wife. While petitioner claims
that Lilian was authorized by respondent, the statement of account marked
as Exhibit A states that the amount was received by Lilian in behalf of Mrs.
Annie Mercado.
Invoking Article 1873[33] of the Civil Code, petitioner submits that respondent
informed him that he had authorized Lilian to obtain the loan, hence,
following Macke v. Camps[34] which holds that one who clothes another
with apparent authority as his agent, and holds him out to the public as
such, respondent cannot be permitted to deny the authority.
Petitioners submission does not persuade. As the appellate court observed:
. . . Exhibit B [the receipt issued by petitioner] presented by
plaintiff-appellee to support his claim unfortunately only
indicates the Two Hundred Fifty Three Thousand Pesos
(P253,0000.00) was received by one Lilian R. Soriano on 31
March 1995, but without specifying for what reason the said

amount
was
delivered
and
in
what
capacity
did Lilian R. Soriano received [sic] the money. The note
reads:

Respondent counters that the claim of sub-contracting is a change in


petitioners theory of the case which is not allowed on appeal.
In Oco v. Limbaring,[37] this Court ruled:

3-31-95
261,120 ADVANCE MONEY FOR TRAINEE
RECEIVED BY
RECEIVED FROM JMG THE AMOUNT OF
253,000 TWO HUNDRED FIFTY THREE
THOUSAND PESOS
(SIGNED)
LILIAN R. SORIANO
3-31-95
Nowhere in the note can it be inferred that defendantappellant was connected with the said transaction. Under
Article 1317 of the New Civil Code, a person cannot be
bound by contracts he did not authorize to be entered into
his behalf.[35] (Underscoring supplied)
It bears noting that Lilian signed in the receipt in her name alone, without
indicating therein that she was acting for and in behalf of respondent. She
thus bound herself in her personal capacity and not as an agent of
respondent or anyone for that matter.
It is a general rule in the law of agency that, in order to
bind the principal by a mortgage on real property executed
by an agent, it must upon its face purport to be made, signed
and sealed in the name of the principal, otherwise, it will bind
the agent only. It is not enough merely that the agent was in
fact authorized to make the mortgage, if he has not acted in
the name of the principal. x x x[36] (Emphasis and
underscoring supplied)
On the amount due him and the other two printing presses, petitioner
explains that he was the one who personally and directly contracted with
respondent and he merely sub-contracted the two printing establishments in
order to deliver on time the campaign materials ordered by respondent.

The parties to a contract are the real parties in interest in an


action upon it, as consistently held by the Court. Only the
contracting parties are bound by the stipulations in the
contract; they are the ones who would benefit from and
could violate it. Thus, one who is not a party to a contract,
and for whose benefit it was not expressly made, cannot
maintain an action on it. One cannot do so, even if the
contract performed by the contracting parties would
incidentally inure to one's benefit.[38] (Underscoring supplied)
In light thereof, petitioner is the real party in interest in this case. The trial
courts findings on the matter were affirmed by the appellate court. [39] It erred,
however, in not declaring petitioner as a real party in interest insofar as
recovery of the cost of campaign materials made by petitioners mother and
sister are concerned, upon the wrong notion that they should have been, but
were not, impleaded as plaintiffs.
In sum, respondent has the obligation to pay the total cost of printing his
campaign materials delivered by petitioner in the total of P1,924,906, less the
partial payment ofP1,000,000, or P924,906.
WHEREFORE,
the
petition
is GRANTED. The
Decision
dated December 8, 2004 and the Resolution dated April 14, 2005 of the
Court of Appeals are herebyREVERSED and SET ASIDE.
The
April
10,
2002
Decision
of
the Regional Trial Court of Angeles City, Branch 57, is REINSTATED mutatis
mutandis, in light of the foregoing discussions. The trial courts decision
is MODIFIED in that the amount payable by respondent to petitioner is
reduced to P924,906.
SO ORDERED.

This is a petition for certiorari under Section 1, Rule 65 of the Rules of Court
seeking the annulment and setting aside of the decision of the Court of
Appeals * and promulgated on September 2, 1974 in CA-G.R. No. 48521-R
entitled "Union Import and Export Corporation, et al., Plaintiffs-Appellees v.
Marimperio Compaia Naviera, S.A., Defendant-Appellant", ordering
petitioner to pay respondent the total sum of US $265,482.72 plus attorney's
fees of US$100,000.00 and (b) the resolution of the said Court of Appeals in
the same case, dated February 17, 1975 fixing the amount of attorney, s fees
to Pl00,000.00 instead of $100,000.00 as erroneously stated in the decision
but denying petitioner's motion for reconsideration and/or new trial.
The dispositive portion of the decision sought to be annulled (Rollo, p. 215)
reads as follows:
For all the foregoing, and in accordance therewith, let judgment be
entered (a) affirming the decision appealed from insofar as it directs
the defendant-appellant: (1) to pay plaintiffs the sum of US
$22,500.00 representing the remittance of plaintiffs to said defendant
for the first 15-day hire of the vessel "SS PAXOI" including overtime
and an overpayment of US $254.00; (2) to pay plaintiffs the sum of
US $16,000.00, corresponding to the remittance of plaintiffs to
defendant for the second 15-day hire of the aforesaid vessel; (3) to
pay plaintiffs the sum of US $6,982.72, representing the cost of
bunker oil, survey and watering of the said vessel; (4) to pay plaintiffs
the sum of US $100,000.00 as and for attorney's fees; and, (b)
reversing the portion granting commission to the intervenor-appellee
and hereby dismissing the complaint-in-intervention. The order of the
court a quo denying the plaintiffs' Motion for Partial Reconsideration,
is likewise, affirmed, without any special pronouncement as to costs.
The facts of the case as gathered from the amended decision of the lower
court (Amended Record on Appeal, p. 352), are as follows:

G.R. No. L-40234 December 14, 1987


MARIMPERIO COMPAIA NAVIERA, S.A., petitioner,
vs.
COURT OF APPEALS and UNION IMPORT & EXPORT CORPORATION
and PHILIPPINES TRADERS CORPORATION, respondents.
PARAS, J.:

In 1964 Philippine Traders Corporation and Union Import and Export


Corporation entered into a joint business venture for the purchase of copra
from Indonesia for sale in Europe. James Liu President and General
Manager of the Union took charge of the European market and the chartering
of a vessel to take the copra to Europe. Peter Yap of Philippine on the other
hand, found one P.T. Karkam in Dumai Sumatra who had around 4,000 tons
of copra for sale. Exequiel Toeg of Interocean was commissioned to look for
a vessel and he found the vessel "SS Paxoi" of Marimperio available.
Philippine and Union authorized Toeg to negotiate for its charter but with
instructions to keep confidential the fact that they are the real charterers.

Consequently on March 21, 1965, in London England, a "Uniform Time


Charter" for the hire of vessel "Paxoi" was entered into by the owner,
Marimperio Compania Naviera, S.A. through its agents N. & J. Vlassopulos
Ltd. and Matthews Wrightson, Burbridge, Ltd. to be referred to simply as
Matthews, representing Interocean Shipping Corporation, which was made to
appear as charterer, although it merely acted in behalf of the real charterers,
private respondents herein.

29. Export and/or import permits for Charterers'cargo to the


Charterers'risk and expense. Charterers to obtain and be responsible
for all the necessary permits to enter and/or trade in and out of all
ports during the currency of the Charter at their risk and expense. ...
33. Charterers to pay as overtime, bonus and premiums to Master,
Officers and crew, the sum of 200 (Two Hundred Pounds) per month
to be paid together with hire.

The pertinent provisions or clauses of the Charter Party read:


1. The owners let, and the Charterers hire the Vessel for a period of
1 (one) trip via safe port or ports Hong Kong, Philippine Islands
and/or INDONESIA from the time the Vessel is delivered and placed
at the disposal of the Charterers on sailing HSINKANG ... .
4. The Charterers are to provide and pay for oil-fuel, water for
boilers, port charges, pilotages ... .
6. The Charterers to pay as hire s.21 (Twenty-one Shillings per
deadweights ton per 30 days or pro rata commencing in accordance
with Clause 1 until her redelivery to the owners.
Payment of hire to be made in cash as per Clause 40 without
discount, every 15 days in advance.
In default of payment of the Owners to have the right of withdrawing
the vessel from the services of the Charterers, without noting any
protest and without interference by any court or any formality
whatsoever and without prejudice the Owners may otherwise have
on the Charterers under the Charter.
7. The Vessel to be redelivered on the expiration of the Charter in the
same good order as when delivered to the Charterers (fair wear and
tear expected) in the Charterer's option in ANTWERP HAMBURG
RANGE.
20. The Charterers to have the option of subletting the Vessel, giving
due notice to the Owners, but the original Charterers always to
remain responsible to the Owners for due performance of the
Charter.

37. Bunkers on delivery as on board. Bunkers on redelivery


maximum 110 tons. Prices of bunkers at 107' per long ton at both
ends.
38. Upon sailing from each loading port, Master to cable SEASHIPS
MANILA advising the quantity loaded and the time of completion.
40. The hire shall be payable in external sterling or at Charterers'
option in U.S. dollars in London; - Williams Deacon's Vlassopulos
Ltd., Account No. 861769.
In view of the aforesaid Charter, on March 30, 1965 plaintiff Charterer cabled
a firm offer to P.T. Karkam to buy the 4,000 tons of copra for U.S.$180.00 per
ton, the same to be loaded either in April or May, 1965. The offer was
accepted and plaintiffs opened two irrevocable letters of Credit in favor of P.T.
Karkam
On March 29, 1965, the Charterer was notified by letter by Vlassopulos
through Matthews that the vessel "PAXOI" had sailed from Hsinkang at
noontime on March 27, 196-5 and that it had left on hire at that time and date
under the Uniform Time-Charter.
The Charterer was however twice in default in its payments which were
supposed to have been done in advance. The first 15-day hire comprising
the period from March 27 to April 1-1, 1965 was paid despite follow-ups only
on April 6, 1965 and the second 15-day hire for the period from April 12 to
April 27, 1965 was paid also despite follow-ups only on April 26, 1965. On
April 14, 1965 upon representation of Toeg, the Esso Standard Oil
(Hongkong) Company supplied the vessel with 400 tons of bunker oil at a
cost of US $6,982.73.
Although the late payments for the charter of the vessel were received and
acknowledged by Vlassopulos without comment or protest, said agent

notified Matthews, by telex on April 23, 1965 that the shipowners in


accordance with Clause 6 of the Charter Party were withdrawing the vessel
from Charterer's service and holding said Charterer responsible for unpaid
hirings and all legal claims.
On April 29, 1965, the shipowners entered into another charter agreement
with another Charterer, the Nederlansche Stoomvart of Amsterdam, the
delivery date of which was around May 3, 1965 for a trip viaIndonesia to
Antwep/Hamburg at an increase charter cost.
Meanwhile, the original Charterer again remitted on April 30, 1965, the
amount corresponding to the 3rd 15-day hire of the vessel "PAXOI" but this
time the remittance was refused.
On May 3,1965, respondents Union Import and Export Corporation and
Philippine Traders Corporation filed a complaint with the Court of First
Instance of Manila, Branch VIII, against the Unknown Owners of the Vessel
"SS Paxoi" for specific performance with prayer for preliminary attachment,
alleging, among other things, that the defendants (unknown owners) through
their duly authorized agent in London, the N & J Vlassopulos Ltd., ship
brokers, entered into a contract of Uniform Time-Charter with the Interocean
Shipping Company of Manila through the latter's duly authorized broker, the
Overseas Steamship Co., Inc., for the Charter of the vessel SS PAXOI' under
the terms and conditions appearing therein ...; that, immediately thereafter,
the Interocean Shipping Company sublet,the said vessel to the plaintiff Union
Import & Export, Corporation which in turn sublet the same to the other
plaintiff, the Philippine Traders Corporation (Amended Record on Appeal, p.
17). Respondents as plaintiffs in the complaint obtained a writ of preliminary
attachment of vessel PAXOI' " which was anchored at Davao on May 5,
1969, upon the filing of the corresponding bond of P1,663,030.00 (Amended
Record on Appeal, p. 27). However, the attachment was lifted on May 15,
1969 upon defendant's motion and filing of a counterbond for P1,663,030
(Amended Record on Appeal, p. 62).
On May 11, 1965, the complaint was amended to Identify the defendant as
Marimperio Compania Naviera S.A., petitioner herein (Amended Record on
Appeal, p. 38). In answer to the amended complaint, by way of special
defenses defendant (petitioner herein) alleged among others that the Charter
Party covering its vessel "SS PAXOI" was entered into by defendant with
Interocean Shipping Co. which is not a party in the complaint; that defendant
has no agreement or relationship whatsoever with the plaintiffs; that pla