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ASSIGNED CASE SET 3 (JANUARY 31, 2017) G.R. No.

178610 is a petition for review1 assailing the Decision2


promulgated on 30 March 2006 by the Court of Appeals (CA) in CA-
G.R. No. 178610.November 17, 2010.* G.R. SP No. 62685. The appellate court granted the petition filed by
HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF Fe Gerong (Gerong) and Spouses Bienvenido and Editha Broqueza
RETIREMENT PLAN, (now HSBC Retirement Trust Fund, Inc.), (spouses Broqueza) and dismissed the consolidated complaints
petitioner, vs. SPOUSES BIENVENIDO AND EDITHA filed by Hongkong and Shanghai Banking Corporation, Ltd. - Staff
BROQUEZA, respondents. Retirement Plan (HSBCL-SRP) for recovery of sum of money. The
appellate court reversed and set aside the Decision3 of Branch 139
Labor Law; Benefits; Retirement; Payroll deduction is merely a of the Regional Trial Court of Makati City (RTC) in Civil Case No. 00-
convenient mode of payment and not the sole source of payment 787 dated 11 December 2000, as well as its Order4 dated 5
for the loans.In their Answer, the spouses Broqueza admitted that September 2000. The RTCs decision affirmed the Decision5 dated
prior to Editha Broquezas dismissal from HSBC in December 1993, 28 December 1999 of Branch 61 of the Metropolitan Trial Court
she religiously paid the loan amortizations, which HSBC collected (MeTC) of Makati City in Civil Case No. 52400 for Recovery of a Sum
through payroll check-off. A definite amount is paid to HSBCL-SRP of Money.
on a specific date. Editha Broqueza authorized HSBCL-SRP to make
deductions from her payroll until her loans are fully paid. Editha The Fact
Broqueza, however, defaulted in her monthly loan payment due to The appellate court narrated the facts as follows:
her dismissal. Despite the spouses Broquezas protestations, the
payroll deduction is merely a convenient mode of payment and not Petitioners Gerong and [Editha] Broqueza (defendants below) are
the sole source of payment for the loans. HSBCL-SRP never agreed employees of Hongkong and Shanghai Banking Corporation (HSBC).
that the loans will be paid only through salary deductions. Neither They are also members of respondent Hongkong Shanghai Banking
did HSBCL-SRP agree that if Editha Broqueza ceases to be an Corporation, Ltd. Staff Retirement Plan (HSBCL-SRP, plaintiff below).
employee of HSBC, her obligation to pay the loans will be The HSBCL-SRP is a retirement plan established by HSBC through
suspended. HSBCL-SRP can immediately demand payment of the its Board of Trustees for the benefit of the employees.
loans at anytime because the obligation to pay has no period.
Moreover, the spouses Broqueza have already incurred in default in On October 1, 1990, petitioner [Editha] Broqueza obtained a car
paying the monthly installments. loan in the amount of Php175,000.00. On December 12, 1991, she
again applied and was granted an appliance loan in the amount of
Same; Same; Same; The enforcement of a loan agreement involves Php24,000.00. On the other hand, petitioner Gerong applied and
debtor-creditor relations founded on contract and does not in any was granted an emergency loan in the amount of Php35,780.00 on
way concern employee relations.The enforcement of a loan June 2, 1993. These loans are paid through automatic salary
agreement involves debtor-creditor relations founded on contract deduction.
and does not in any way concern employee relations. As such it
should be enforced through a separate civil action in the regular Meanwhile [in 1993], a labor dispute arose between HSBC and its
courts and not before the Labor Arbiter. employees. Majority of HSBCs employees were terminated, among
whom are petitioners Editha Broqueza and Fe Gerong. The
PETITION for review on certiorari of a decision of the Court of employees then filed an illegal dismissal case before the National
Appeals. Labor Relations Commission (NLRC) against HSBC. The legality or
illegality of such termination is now pending before this appellate
CARPIO,J.: Court in CA-G.R. CV No. 56797, entitled Hongkong Shanghai

Obligations and Contracts


Banking Corp. Employees Union, et al. vs. National Labor Relations 2.To pay the amount of Php20,000.00 each as reasonable
Commission, et al. attorneys fees;

Because of their dismissal, petitioners were not able to pay the 3.Cost of suit.
monthly amortizations of their respective loans. Thus, respondent
HSBCL-SRP considered the accounts of petitioners delinquent. SO ORDERED.8
Demands to pay the respective obligations were made upon Gerong and the spouses Broqueza filed a joint appeal of the MeTCs
petitioners, but they failed to pay.6 decision before the RTC. Gerongs case was docketed Civil Case No.
HSBCL-SRP, acting through its Board of Trustees and represented 00-786, while the spouses Broquezas case was docketed as Civil
by Alejandro L. Custodio, filed Civil Case No. 52400 against the Case No. 00-787.
spouses Broqueza on 31 July 1996. On 19 September 1996, HSBCL- The Regional Trial Courts Ruling
SRP filed Civil Case No. 52911 against Gerong. Both suits were civil
actions for recovery and collection of sums of money. The RTC initially denied the joint appeal because of the belated
filing of Gerong and the spouses Broquezas memorandum. The RTC
The Metropolitan Trial Courts Ruling later reconsidered the order of denial and resolved the issues in the
On 28 December 1999, the MeTC promulgated its Decision7 in interest of justice.
favor of HSBCL-SRP. The MeTC ruled that the nature of HSBCL-SRPs On 11 December 2000, the RTC affirmed the MeTCs decision in
demands for payment is civil and has no connection to the ongoing toto.9
labor dispute. Gerong and Editha Broquezas termination from
employment resulted in the loss of continued benefits under their The RTC ruled that Gerong and Editha Broquezas termination from
retirement plans. Thus, the loans secured by their future retirement employment disqualified them from availing of benefits under their
benefits to which they are no longer entitled are reduced to retirement plans. As a consequence, there is no longer any security
unsecured and pure civil obligations. As unsecured and pure for the loans. HSBCL-SRP has a legal right to demand immediate
obligations, the loans are immediately demandable. settlement of the unpaid balance because of Gerong and Editha
Broquezas continued default in payment and their failure to
The dispositive portion of the MeTCs decision reads: provide new security for their loans. Moreover, the absence of a
WHEREFORE, premises considered and in view of the foregoing, period within which to pay the loan allows HSBCL-SRP to demand
the Court finds that the plaintiff was able to prove by a immediate payment. The loan obligations are considered pure
preponderance of evidence the existence and immediate obligations, the fulfillment of which are demandable at once.
demandability of the defendants loan obligations as judgment is Gerong and the spouses Broqueza then filed a Petition for Review
hereby rendered in favor of the plaintiff and against the defendants under Rule 42 before the CA.
in both cases, ordering the latter:
The Ruling of the Court of Appeals
1.In Civil Case No. 52400, to pay the amount of Php116,740.00 at
six percent interest per annum from the time of demand and in On 30 March 2006, the CA rendered its Decision10 which reversed
Civil Case No. 52911, to pay the amount of Php25,344.12 at six the 11 December 2000 Decision of the RTC. The CA ruled that the
percent per annum from the time of the filing of these cases, until HSBCL-SRPs complaints for recovery of sum of money against
the amount is fully paid; Gerong and the spouses Broqueza are premature as the loan
obligations have not yet matured. Thus, no cause of action accrued

Obligations and Contracts


in favor of HSBCL-SRP. The dispositive portion of the appellate at its office in the Municipality of Makati, Metro Manila, on or before
courts Decision reads as follows: until fully paid the sum of PESOS ___ (P___) Philippine Currency
without discount, with interest from date hereof at the rate of Six
WHEREFORE, the assailed Decision of the RTC is REVERSED and per cent (6%) per annum, payable monthly.
SET ASIDE. A new one is hereby rendered DISMISSING the
consolidated complaints for recovery of sum of money. I/WE agree that the PLAN may, upon written notice, increase the
interest rate stipulated in this note at any time depending on
SO ORDERED.11 prevailing conditions.
HSBCL-SRP filed a motion for reconsideration which the CA denied I/WE hereby expressly consent to any extensions or renewals
for lack of merit in its Resolution12 promulgated on 19 June 2007. hereof for a portion or whole of the principal without notice to the
On 6 August 2007, HSBCL-SRP filed a manifestation withdrawing other(s), and in such a case our liability shall remain joint and
the petition against Gerong because she already settled her several.
obligations. In a Resolution13 of this Court dated 10 September In case collection is made by or through an attorney, I/WE jointly
2007, this Court treated the manifestation as a motion to withdraw and severally agree to pay ten percent (10%) of the amount due on
the petition against Gerong, granted the motion, and considered this note (but in no case less than P200.00) as and for attorneys
the case against Gerong closed and terminated. fees in addition to expenses and costs of suit.
Issues In case of judicial execution, I/WE hereby jointly and severally waive
HSBCL-SRP enumerated the following grounds to support its our rights under the provisions of Rule 39, Section 12 of the Rules
Petition: of Court.15

I.The Court of Appeals has decided a question of substance in a In ruling for HSBCL-SRP, we apply the first paragraph of Article
way not in accord with law and applicable decisions of this 1179 of the Civil Code:
Honorable Court; and Art.1179.Every obligation whose performance does not depend
II.The Court of Appeals has departed from the accepted and usual upon a future or uncertain event, or upon a past event unknown to
course of judicial proceedings in reversing the decision of the the parties, is demandable at once.
Regional Trial Court and the Metropolitan Trial Court.14 x x x. (Emphasis supplied.)
The Courts Ruling We affirm the findings of the MeTC and the RTC that there is no
The petition is meritorious. We agree with the rulings of the MeTC date of payment indicated in the Promissory Notes. The RTC is
and the RTC. correct in ruling that since the Promissory Notes do not contain a
period, HSBCL-SRP has the right to demand immediate payment.
The Promissory Notes uniformly provide: Article 1179 of the Civil Code applies. The spouses Broquezas
obligation to pay HSBCL-SRP is a pure obligation. The fact that
PROMISSORY NOTE
HSBCL-SRP was content with the prior monthly check-off from
P_____ Makati, M.M. ____ 19__ Editha Broquezas salary is of no moment. Once Editha Broqueza
defaulted in her monthly payment, HSBCL-SRP made a demand to
FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to enforce a pure obligation.
pay to THE HSBC RETIREMENT PLAN (hereinafter called the PLAN)
Obligations and Contracts
In their Answer, the spouses Broqueza admitted that prior to Editha Civil Law; Obligations and Contracts; Art. 1267; The term service
Broquezas dismissal from HSBC in December 1993, she religiously should be understood as referring to the performance of the
paid the loan amortizations, which HSBC collected through payroll obligation.Article 1267 speaks of service which has become so
check-off.16 A definite amount is paid to HSBCL-SRP on a specific difficult. Taking into consideration the rationale behind this
date. Editha Broqueza authorized HSBCL-SRP to make deductions provision, the term service should be understood as referring to
from her payroll until her loans are fully paid. Editha Broqueza, the performance of the obligation. In the present case, the
however, defaulted in her monthly loan payment due to her obligation of private respondent consists in allowing petitioners to
dismissal. Despite the spouses Broquezas protestations, the payroll use its posts in Naga City, which is the service contemplated in said
deduction is merely a convenient mode of payment and not the article. Furthermore, a bare reading of this article reveals that it is
sole source of payment for the loans. HSBCL-SRP never agreed that not a requirement thereunder that the contract be for future
the loans will be paid only through salary deductions. Neither did service with future unusual change. According to Senator Arturo M.
HSBCL-SRP agree that if Editha Broqueza ceases to be an employee Tolentino, Article 1267 states in our law the doctrine of unforeseen
of HSBC, her obligation to pay the loans will be suspended. HSBCL- events. This is said to be based on the discredited theory of rebus
SRP can immediately demand payment of the loans at anytime sic stantibus in public international law; under this theory, the
because the obligation to pay has no period. Moreover, the spouses parties stipulate in the light of certain prevailing conditions, and
Broqueza have already incurred in default in paying the monthly once these conditions cease to exist the contract also ceases to
installments. exist. Considering practical needs and the demands of equity and
good faith, the disappearance of the basis of a contract gives rise
Finally, the enforcement of a loan agreement involves debtor- to a right to relief in favor of the party prejudiced.
creditor relations founded on contract and does not in any way
concern employee relations. As such it should be enforced through Same; Same; Reformation of Instruments; In reformation of
a separate civil action in the regular courts and not before the contracts, what is reformed is not the contract itself, but the
Labor Arbiter.17 instrument embodying the contract.On the issue of prescription
of private respondents action for reformation of contract,
WHEREFORE, we GRANT the petition. The Decision of the Court of petitioners allege that respondent courts ruling that the right of
Appeals in CA-G.R. SP No. 62685 promulgated Hongkong and action arose only after said contract had already become
Shanghai Banking Corp., Ltd. Staff Retirement Plan vs. Broqueza, disadvantageous and unfair to it due to subsequent events and
635 SCRA 226, G.R. No. 178610 November 17, 2010 conditions, which must be sometime during the latter part of 1982
or in 1983 x x x is erroneous. In reformation of contracts, what is
reformed is not the contract itself, but the instrument embodying
the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and therefore,
cannot be an element in the determination of the period for
prescription of the action to reform.

G.R. No. 107112. February 24, 1994.* Same; Same; Art. 1144; Action upon a written contract must be
brought within ten (10) years from the time the right of action
NAGA TELEPHONE CO., INC., (NATELCO) AND LUCIANO M. accrues.Article 1144 of the New Civil Code provides, inter alia,
MAGGAY, petitioners, vs. THE COURT OF APPEALS AND that an action upon a written contract must be brought within ten
CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO (10) years from the time the right of action accrues. Clearly, the ten
II), respondents. (10) year period is to be reckoned from the time the right of action
Obligations and Contracts
accrues which is not necessarily the date of execution of the In other words, fair and square consideration underscores the legal
contract. As correctly ruled by respondent court, private precept therein.
respondents right of action arose sometime during the latter part
of 1982 or in 1983 when according to Atty. Luis General, Jr. x x x, he Naga Telephone Co., Inc. remonstrates mainly against the
was asked by (private respondents) Board of Directors to study application by the Court of Appeals of Article 1267 in favor of
said contract as it already appeared disadvantageous to (private Camarines Sur II Electric Cooperative, Inc. in the case before us.
respondent) (p. 31, tsn, May 8, 1989). (Private respondents) cause Stated differently, the former insists that the complaint should have
of action to ask for reformation of said contract should thus be been dismissed for failure to state a cause of action.
considered to have arisen only in 1982 or 1983, and from 1982 to
January 2, 1989 when the complaint in this case was filed, ten (10) The antecedent facts, as narrated by respondent Court of Appeals
years had not yet elapsed. are, as follows:

PETITION for review of a decision of the Court of Appeals. Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone
company rendering local as well as long distance telephone service
NOCON, J.: in Naga City while private respondent Camarines Sur II Electric
The case of Reyes v. Caltex (Philippines), Inc.1 enunciated the Cooperative, Inc. (CASURECO II) is a private corporation established
doctrine that where a person by his contract charges himself with for the purpose of operating an electric power service in the same
an obligation possible to be performed, he must perform it, unless city.
its performance is rendered impossible by the act of God, by the On November 1, 1977, the parties entered into a contract (Exh. A)
law, or by the other party, it being the rule that in case the party for the use by petitioners in the operation of its telephone service
desires to be excused from performance in the event of the electric light posts of private respondent in Naga City. In
contingencies arising thereto, it is his duty to provide the basis consideration therefor, petitioners agreed to install, free of charge,
therefor in his contract. ten (10) telephone connections for the use by private respondent in
With the enactment of the New Civil Code, a new provision was the following places:
included therein, namely, Article 1267 which provides: (a) 3 UnitsThe Main Office of (private respondent);
When the service has become so difficult as to be manifestly (b) 2 UnitsThe Warehouse of (private respondent);
beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part. (c) 1 UnitThe Sub-Station of (private respondent) at Concepcion
Pequea;
In the report of the Code Commission, the rationale behind this
innovation was explained, thus: (d) 1 UnitThe Residence of (private respondents) President;

The general rule is that impossibility of performance releases the (e) 1 UnitThe Residence of (private respondents) Acting General
obligor. However, it is submitted that when the service has become Manager; &
so difficult as to be manifestly beyond the contemplation of the
(f) 2 UnitsTo be determined by the General Manager.3
parties, the court should be authorized to release the obligor in
whole or in part. The intention of the parties should govern and if it Said contract also provided:
appears that the service turns out to be so difficult as to have been
beyond their contemplation, it would be doing violence to that (a) That the term or period of this contract shall be as long as the
intention to hold the obligor still responsible.2 party of the first part has need for the electric light posts of the
Obligations and Contracts
party of the second part it being understood that this contract shall prescription, the same having been filed more than ten (10) years
terminate when for any reason whatsoever, the party of the second after the execution of the contract; and (3) it is barred by estoppel,
part is forced to stop, abandoned [sic] its operation as a public since private respondent seeks to enforce the contract in the same
service and it becomes necessary to remove the electric lightpost; action. Petitioners further alleged that their utilization of private
(sic)4 respondents posts could not have caused their deterioration
because they have already been in use for eleven (11) years; and
It was prepared by or with the assistance of the other petitioner, that the value of their expenses for the ten (10) telephone lines
Atty. Luciano M. Maggay, then a member of the Board of Directors long enjoyed by private respondent free of charge are far in excess
of private respondent and at the same time the legal. After the of the amounts claimed by the latter for the use of the posts, so
contract had been enforced for over ten (10) years, private that if there was any inequity, it was suffered by them.
respondent filed on January 2, 1989 with the Regional Trial Court of
Naga City (Br. 28) C.C. No. 89-1642 against petitioners for Regarding the second cause of action, petitioners claimed that
reformation of the contract with damages, on the ground that it is private respondent had asked for telephone lines in areas outside
too one-sided in favor of petitioners; that it is not in conformity with Naga City for which its posts were used by them; and that if
the guidelines of the National Electrification Administration (NEA) petitioners had refused to comply with private respondents
which direct that the reasonable compensation for the use of the demands for payment for the use of the posts outside Naga City, it
posts is P10.00 per post, per month; that after eleven (11) years of was probably because what is due to them from private respondent
petitioners use of the posts, the telephone cables strung by them is more than its claim against them.
thereon have become much heavier with the increase in the
volume of their subscribers, worsened by the fact that their And with respect to the third cause of action, petitioners claimed,
linemen bore holes through the posts at which points those posts inter alia, that their telephone service had been categorized by the
were broken during typhoons, that a post now costs as much as National Telecommunication Corporation (NTC) as very high and
P2,630.00; so that justice and equity demand that the contract be of superior quality.
reformed to abolish the inequities thereon. During the trial, private respondent presented the following
As second cause of action, private respondent alleged that starting witnesses:
with the year 1981, petitioners have used 319 posts in the towns of (1) Dioscoro Ragragio, one of the two officials who signed the
Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga contract in its behalf, declared that it was petitioner Maggay who
City, without any contract with it, that at the rate of P10.00 per prepared the contract; that the understanding between private
post, petitioners should pay private respondent for the use thereof respondent and petitioners was that the latter would only use the
the total amount of P267,960.00 from 1981 up to the filing of its posts in Naga City because at that time, petitioners capability was
complaint; and that petitioners had refused to pay private very limited and they had no expectation of expansion because of
respondent said amount despite demands. legal squabbles within the company, that private respondent
And as third cause of action, private respondent complained about agreed to allow petitioners to use its posts in Naga City because
the poor servicing by petitioners of the ten (10) telephone units there were many subscribers therein who could not be served by
which had caused it great inconvenience and damages to the tune them because of lack of facilities; and that while the telephone
of not less than P100,000.00. lines strung to the posts were very light in 1977, said posts have
become heavily loaded in 1989.
In petitioners answer to the first cause of action, they averred that
it should be dismissed because (1) it does not sufficiently state a (2) Engr. Antonio Borja, Chief of private respondents Line
cause of action for reformation of contract; (2) it is barred by Operation and Maintenance Department, declared that the posts
Obligations and Contracts
being used by petitioners totalled 1,403 as of April 17, 1989, 192 of to reform the contract, the former general managers of private
which were in the towns of Pili, Canaman, and Magarao, all outside respondent wanted to adopt a soft approache with petitioners
Naga City (Exhs. B and B-1); that petitioners cables strung to about the matter until the term of General Manager Henry Pascual
the posts in 1989 are much bigger than those in November, 1977; who, after failing to settle the matter amicably with petitioners,
that in 1987, almost 100 posts were destroyed by typhoon Sisang: finally agreed for him to file the present action for reformation of
around 20 posts were located between Naga City and the town of contract.
Pili while the posts in barangay Concepcion, Naga City were broken
at the middle which had been bored by petitioners linemen to On the other hand, petitioner Maggay testified to the following
enable them to string bigger telephone lines; that while the cost effect:
per post in 1977 was only from P700.00 to P1,000.00, their costs in (1) It is true that he was a member of the Board of Directors of
1989 went up from P1,500.00 to P2,000.00, depending on the size; private respondent and at the same time the lawyer of petitioner
that some lines that were strung to the posts did not follow the when the contract was executed, but Atty. Gaudioso Tena, who was
minimum vertical clearance required by the National Building Code, also a member of the Board of Directors of private respondent, was
so that there were cases in 1988 where, because of the low the one who saw to it that the contract was fair to both parties.
clearance of the cables, passing trucks would accidentally touch
said cables causing the posts to fall and resulting in brown-outs (2) With regard to the first cause of action:
until the electric lines were repaired.
(a) Private respondent has the right under the contract to use ten
(3) Dario Bernardez, Project Supervisor and Acting General Manager (10) telephone units of petitioners for as long as it wishes without
of private respondent and Manager of Region V of NEA, declared paying anything therefor except for long distance calls through
that according to NEA guidelines in 1985 (Exh. C), for the use by PLDT out of which the latter get only 10% of the charges.
private telephone systems of electric cooperatives posts, they
(b) In most cases, only drop wires and not telephone cables have
should pay a minimum monthly rental of P4.00 per post, and
been strung to the posts, which posts have remained erect up to
considering the escalation of prices since 1985, electric
the present;
cooperatives have been charging from P10.00 to P15.00 per post,
which is what petitioners should pay for the use of the posts. (c) Petitioners linemen have strung only small messenger wires to
many of the posts and they need only small holes to pass through;
(4) Engineer Antonio Macandog, Department Head of the Office of
and
Services of private respondent, testified on the poor service
rendered by petitioners telephone lines, like the telephone in their (d) Documents existing in the NTC show that the stringing of
Complaints Section which was usually out of order such that they petitioners cables in Naga City are according to standard and
could not respond to the calls of their customers. In case of comparable to those of PLDT. The accidents mentioned by private
disruption of their telephone lines, it would take two to three hours respondent involved trucks that were either overloaded or had
for petitioners to reactivate them notwithstanding their calls on the loads that protruded upwards, causing them to hit the cables.
emergency line.
(3) Concerning the second cause of action, the intention of the
(5) Finally, Atty. Luis General, Jr., private respondents counsel, parties when they entered into the contract was that the coverage
testified that the Board of Directors asked him to study the contract thereof would include the whole area serviced by petitioners
sometime during the latter part of 1982 or in 1983, as it had because at that time, they already had subscribers outside Naga
appeared very disadvantageous to private respondent. City. Private respondent, in fact, had asked for telephone
Notwithstanding his recommendation for the filing of a court action connections outside Naga City for its officers and employees
Obligations and Contracts
residing there in addition to the ten (10) telephone units mentioned by petitioners of private respondents posts outside Naga City.
in the contract. Petitioners have not been charging private Therefore, the trial court held that for reason of equity, the contract
respondent for the installation, transfers and reconnections of said should be reformed by including therein the provision that for the
telephones so that naturally, they use the posts for those telephone use of private respondents posts outside Naga City, petitioners
lines. should pay a monthly rental of P10.00 per post, the payment to
start on the date this case was filed, or on January 2, 1989, and
(4) With respect to the third cause of action, the NTC has found private respondent should also pay petitioners the monthly dues on
petitioners cable installations to be in accordance with engineering its telephone connections located outside Naga City beginning
standards and practice and comparable to the best in the country. January, 1989.
On the basis of the foregoing countervailing evidence of the And with respect to private respondents third cause of action, the
parties, the trial court found, as regards private respondents first trial court found the claim not sufficiently proved.
cause of action, that while the contract appeared to be fair to both
parties when it was entered into by them during the first year of Thus, the following decretal portion of the trial courts decision
private respondents operation and when its Board of Directors did dated July 20, 1990:
not yet have any experience in that business, it had become
disadvantageous and unfair to private respondent because of WHEREFORE, in view of all the foregoing, decision is hereby
subsequent events and conditions, particularly the increase in the rendered ordering the reformation of the agreement (Exh. A);
volume of the subscribers of petitioners for more than ten (10) ordering the defendants to pay plaintiffs electric poles in Naga City
years without the corresponding increase in the number of and in the towns of Milaor, Canaman, Magarao and Pili, Camarines
telephone connections to private respondent free of charge. The Cur and in other places where defendant NATELCO uses plaintiffs
trial court concluded that while in an action for reformation of electric poles, the sum of TEN (P10.00) PESOS per plaintiffs pole,
contract, it cannot make another contract for the parties, it can, per month beginning January, 1989 and ordering also the plaintiff
however, for reasons of justice and equity, order that the contract to pay defendant NATELCO the monthly dues of all its telephones
be reformed to abolish the inequities therein. Thus, said court ruled including those installed at the residence of its officers, namely:
that the contract should be reformed by ordering petitioners to pay Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog,
private respondent compensation for the use of their posts in Naga Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989.
City, while private respondent should also be ordered to pay the Plaintiffs claim for attorneys fees and expenses of litigation and
monthly bills for the use of the telephones also in Naga City. And defendants counterclaim are both hereby ordered dismissed.
taking into consideration the guidelines of the NEA on the rental of Without pronouncement as to costs.
posts by telephone companies and the increase in the costs of such Disagreeing with the foregoing judgment, petitioners appealed to
posts, the trial court opined that a monthly rental of P10.00 for respondent Court of Appeals. In the decision dated May 28, 1992,
each post of private respondent used by petitioners is reasonable, respondent court affirmed the decision of the trial court,5 but
which rental it should pay from the filing of the complaint in this based on different grounds to wit: (1) that Article 1267 of the New
case on January 2, 1989. And in like manner, private respondent Civil Code is applicable and (2) that the contract was subject to a
should pay petitioners from the same date its monthly bills for the potestative condition which rendered said condition void. The
use and transfers of its telephones in Naga City at the same rate motion for reconsideration was denied in the resolution dated
that the public are paying. September 10, 1992.6 Hence, the present petition.
On private respondents second cause of action, the trial court Petitioners assign the following pertinent errors committed by
found that the contract does not mention anything about the use respondent court:
Obligations and Contracts
1) in making a contract for the parties by invoking Article 1267 of Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil
the New Civil Code; Code provide in essence that where through mistake or accident on
the part of either or both of the parties or mistake or fraud on the
2) in ruling that prescription of the action for reformation of the part of the clerk or typist who prepared the instrument, the true
contract in this case commenced from the time it became intention of the parties is not expressed therein, then the
disadvantageous to private respondent; and instrument may be reformed at the instance of either party if there
3) in ruling that the contract was subject to a potestative condition was mutual mistake on their part, or by the injured party if only he
in favor of petitioners. was mistaken.

Petitioners assert earnestly that Article 1267 of the New Civil Code Here, plaintiff-appellee did not allege in its complaint, nor does its
is not applicable primarily because the contract does not involve evidence prove, that there was a mistake on its part or mutual
the rendition of service or a personal prestation and it is not for mistake on the part of both parties when they entered into the
future service with future unusual change. Instead, the ruling in the agreement Exh. A, and that because of this mistake, said
case of Occea, et al. v. Jabson, etc., et al.,7 which interpreted the agreement failed to express their true intention Rather, plaintiffs
article, should be followed in resolving this case. Besides, said evidence shows that said agreement was prepared by Atty. Luciano
article was never raised by the parties in their pleadings and was Maggay, then a member of plaintiffs Board of Directors and its
never the subject of trial and evidence. legal counsel at that time, who was also the legal counsel for
defendant-appellant, so that as legal counsel for both companies
In applying Article 1267, respondent court rationalized: and presumably with the interests of both companies in mind when
he prepared the aforesaid agreement, Atty. Maggay must have
We agree with appellant that in order that an action for
considered the same fair and equitable to both sides, and this was
reformation of contract would lie and may prosper, there must be
affirmed by the lower court when it found said contract to have
sufficient allegations as well as proof that the contract in question
been fair to both parties at the time of its execution. In fact, there
failed to express the true intention of the parties due to error or
were no complaints on the part of both sides at the time of and
mistake, accident, or fraud. Indeed, in embodying the equitable
after the execution of said contract, and according to 73-year old
remedy of reformation of instruments in the New Civil Code, the
Justino de Jesus, Vice President and General manager of appellant
Code Commission gave its reasons as follows:
at the time who signed the agreement Exh. A in its behalf and
Equity dictates the reformation of an instrument in order that the who was one of the witnesses for the plaintiff (sic), both parties
true intention of the contracting parties may be expressed. The complied with said contract from the very beginning (p. 5, tsn,
courts by the reformation do not attempt to make a new contract April 17, 1989).
for the parties, but to make the instrument express their real
That the aforesaid contract has become inequitous or unfavorable
agreement. The rationale of the doctrine is that it would be unjust
or disadvantageous to the plaintiff with the expansion of the
and inequitable to allow the enforcement of a written instrument
business of appellant and the increase in the volume of its
which does not reflect or disclose the real meeting of the minds of
subscribers in Naga City and environs through the years,
the parties. The rigor of the legalistic rule that a written instrument
necessitating the stringing of more and bigger telephone cable
should be the final and inflexible criterion and measure of the rights
wires by appellant to plaintiffs electric posts without a
and obligations of the contracting parties is thus tempered to
corresponding increase in ten (10) telephone connections given by
forestall the effects of mistake, fraud, inequitable conduct, or
appellant to plaintiff free of charge in the agreement Exh. A as
accident. (pp. 55-56, Report of Code Commission)
consideration for its use of the latters electric posts in Naga City,
appear, however, undisputed from the totality of the evidence on
Obligations and Contracts
record and the lower court so found. And it was for this reason that Ragragio also declared that while the telephone wires strung to the
in the later (sic) part of 1982 or 1983 (or five or six years after the electric posts of plaintiff were very light and that very few
subject agreement was entered into by the parties), plaintiffs telephone lines were attached to the posts of CASURECO II in 1977,
Board of Directors already asked Atty. Luis General who had said posts have become heavily loaded in 1989 (tsn. id.).
become their legal counsel in 1982, to study said agreement which
they believed had become disadvantageous to their company and In truth, as also correctly found by the lower court, despite the
to make the proper recommendation, which study Atty. General did, increase in the volume of appellants subscribers and the
and thereafter, he already recommended to the Board the filing of a corresponding increase in the telephone cables and wires strung by
court action to reform said contract, but no action was taken on it to plaintiffs electric posts in Naga City for the more than 10 years
Atty. Generals recommendation because the former general that the agreement Exh, A of the parties has been in effect, there
managers of plaintiff wanted to adopt a soft approach in discussing has been no corresponding increase in the ten (10) telephone units
the matter with appellant, until, during the term of General connected by appellant free of charge to plaintiffs offices and other
Manager Henry Pascual, the latter, after failing to settle the places chosen by plaintiffs general manager which was the only
problem with Atty. Luciano Maggay who had become the president consideration provided for in said agreement for appellants use of
and general manager of appellant, already agreed for Atty. plaintiffs electric posts. Not only that, appellant even started using
Generals filing of the present action. The fact that said contract plaintiffs electric posts outside Naga City although this was not
has become inequitous or disavantageous to plaintiff as the years provided for in the agreement Exh. A as it extended and
went by did not, however, give plaintiff a cause of action for expanded its telephone services to towns outside said city. Hence,
reformation of said contract, for the reasons already pointed out while very few of plaintiffs electric posts were being used by
earlier But this does not mean that plaintiff is completely without a appellant in 1977 and they were all in the City of Naga, the number
remedy, for we believe that the allegations of its complaint herein of plaintiffs electric posts that appellant was using in 1989 had
and the evidence it has presented sufficiently make out a cause of jumped to 1,403, 192 of which are outside Naga City (Exh. B).
action under Art. 1267 of the New Civil Code for its release from the Add to this the destruction of some of plaintiffs poles during
agreement in question. typhoons like the strong typhoon Sisang in 1987 because of the
heavy telephone cables attached thereto, and the escalation of the
xxx xxx xxx costs of electric poles from 1977 to 1989, and the conclusion is
indeed ineluctable that the agreement Exh. A has already become
The understanding of the parties when they entered into the too one-sided in favor of appellant to the great disadvantage of
Agreement Exh. A on November 1, 1977 and the prevailing plaintiff, in short, the continued enforcement of said contract has
circumstances and conditions at the time, were described by manifestly gone far beyond the contemplation of plaintiff, so much
Dioscoro Ragragio, the President of plaintiff in 1977 and one of its so that it should now be released therefrom under Art. 1267 of the
two officials who signed said agreement in its behalf, as follows: New Civil Code to avoid appellants unjust enrichment at its
Our understanding at that time is that we will allow NATELCO to (plaintiffs) expense. As stated by Tolentino in his commentaries on
utilize the posts of CASURECO II only in the City of Naga because at the Civil Code citing foreign civilist Ruggiero, equity demands a
that time the capability of NATELCO was very limited, as a matter certain economic equilibrium between the prestation and the
of fact we do [sic] not expect to be able to expand because of the counterprestation, and does not permit the unlimited
legal squabbles going on in the NATELCO. So, even at that time impoverishment of one party for the benefit of the other by the
there were so many subscribers in Naga City that cannot be served excessive rigidity of the principle of the obligatory force of
by the NATELCO, so as a matter of public service we allowed them contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed., pp.
to sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989) 247-248).

Obligations and Contracts


We, therefore, find nothing wrong with the ruling of the trial court, modification of the terms and conditions of the contract that they
although based on a different and wrong premise (i.e., reformation entered into by fixing the proper shares that should pertain to them
of contract), that from the date of the filing of this case, appellant out of the gross proceeds from the sales of subdivided lots. We
must pay for the use of plaintiffs electric posts in Naga City at the ordered the dismissal of the complaint therein for failure to state a
reasonable monthly rental of P10.00 per post, while plaintiff should sufficient cause of action. We rationalized that the Court of Appeals
pay appellant for the telephones in the same City that it was misapplied Article 1267 because:
formerly using free of charge under the terms of the agreement
Exh. A at the same rate being paid by the general public. In x x x respondents complaint seeks not release from the
affirming said ruling we are not making a new contract for the subdivision contract but that the court render judgment modifying
parties herein, but we find it necessary to do so in order not to the terms and conditions of the contract . . . by fixing the proper
disrupt the basic and essential services being rendered by both shares that should pertain to the herein parties out of the gross
parties herein to the public and to avoid unjust enrichment by proceeds from the sale of subdivided lots of subject subdivision.
appellant at the expense of plaintiff, said arrangement to continue The cited article (Article 1267) does not grant the courts (the)
only until such time as said parties can renegotiate another authority to remake, modify or revise the contract or to fix the
agreement over the same subject-matter covered by the division of shares between the parties as contractually stipulated
agreement Exh. A. Once said agreement is reached and executed with the force of law between the parties, so as to substitute its
by the parties, the aforesaid ruling of the lower court and affirmed own terms for those covenanted by the parties themselves.
by us shall cease to exist and shall be substituted and superseded Respondents complaint for modification of contract manifestly has
by their new agreement. x x x.8 no basis in law and therefore states no cause of action. Under the
particular allegations of respondents complaint and the
Article 1267 speaks of service which has become so difficult. circumstances therein averred, the courts cannot even in equity
Taking into consideration the rationale behind this provision,9 the grant the relief sought.11
term service should be understood as referring to the
performance of the obligation. In the present case, the obligation The ruling in the Occea case is not applicable because we agree
of private respondent consists in allowing petitioners to use its with respondent court that the allegations in private respondents
posts in Naga City, which is the service contemplated in said complaint and the evidence it has presented sufficiently made out
article. Furthermore, a bare reading of this article reveals that it is a cause of action under Article 1267. We, therefore, release the
not a requirement thereunder that the contract be for future parties from their correlative obligations under the contract.
service with future unusual change. According to Senator Arturo M. However, our disposition of the present controversy does not end
Tolentino,10 Article 1267 states in our law the doctrine of here. We have to take into account the possible consequences of
unforeseen events. This is said to be based on the discredited merely releasing the parties therefrom: petitioners will remove the
theory of rebus sic stantibus in public international law; under this telephone wires/cables in the posts of private respondent, resulting
theory, the parties stipulate in the light of certain prevailing in disruption of their essential service to the public; while private
conditions, and once these conditions cease to exist the contract respondent, in consonance with the contract12 will return all the
also ceases to exist. Considering practical needs and the demands telephone units to petitioners, causing prejudice to its business. We
of equity and good faith, the disappearance of the basis of a shall not allow such eventuality. Rather, we require, as ordered by
contract gives rise to a right to relief in favor of the party the trial court: 1) petitioners to pay private respondent for the use
prejudiced. of its posts in Naga City and in the towns of Milaor, Canaman,
Magarao and Pili, Camarines Sur and in other places where
In a nutshell, private respondent in the Occea case filed a petitioners use private respondents posts, the sum of ten (P10.00)
complaint against petitioner before the trial court praying for pesos per post, per month, beginning January, 1989; and 2) private
Obligations and Contracts
respondent to pay petitioner the monthly dues of all its telephones the best way and manner it can in the light of the proven facts and
at the same rate being paid by the public beginning January, 1989. the law or laws applicable thereto.
The peculiar circumstances of the present case, as distinguished
further from the Occea case, necessitates exercise of our equity It is settled that when the trial court decides a case in favor of a
jurisdiction.13 By way of emphasis, we reiterate the rationalization party on a certain ground, the appellate court may uphold the
of respondent court that: decision below upon some other point which was ignored or
erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40
x x x In affirming said ruling, we are not making a new contract for Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18
the parties herein, but we find it necessary to do so in order not to SCRA 467). Furthermore, the appellate court has the discretion to
disrupt the basic and essential services being rendered by both consider an unassigned error that is closely related to an error
parties herein to the public and to avoid unjust enrichment by properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v.
appellant at the expense of plaintiff x x x.14 Andal, 78 Phil. 196). It has also been held that the Supreme Court
(and this Court as well) has the authority to review matters, even if
Petitioners assertion that Article 1267 was never raised by the they are not assigned as errors in the appeal, if it is found that their
parties in their pleadings and was never the subject of trial and consideration is necessary in arriving at a just decision of the case
evidence has been passed upon by respondent court in its well (Saura Import & Export Co., Inc. v. Phil. International Surety Co. and
reasoned resolution, which we hereunder quote as our own: PNB, 8 SCRA 143). For it is the material allegations of fact in the
First, we do not agree with defendant-appellant that in applying complaint, not the legal conclusion made therein or the prayer, that
Art. 1267 of the New Civil Code to this case, we have changed its determines the relief to which the plaintiff is entitled, and the
theory and decided the same on an issue not invoked by plaintiff in plaintiff is entitled to as much relief as the facts warrant although
the lower court. For basically, the main and pivotal issue in this that relief is not specifically prayed for in the complaint (Rosales v.
case is whether the continued enforcement of the contract Exh. A Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844;
between the parties has, through the years (since 1977), become Baguioro v. Barrios, 77 Phil. 120). To quote an old but very
too inequitous or disadvantageous to the plaintiff and too one-sided illuminating decision of our Supreme Court through the pen of
in favor of defendant-appellant, so that a solution must be found to American jurist Adam C. Carson:
relieve plaintiff from the continued operation of said agreement and Under our system of pleading it is the duty of the courts to grant
to prevent defendant-appellant from further unjustly enriching itself the relief to which the parties are shown to be entitled by the
at plaintiffs expense. It is indeed unfortunate that defendant had allegations in their pleadings and the facts proven at the trial, and
turned deaf ears to plaintiffs requests for renegotiation, the mere fact that they themselves misconstrue the legal effect of
constraining the latter to go to court. But although plaintiff cannot, the facts thus alleged and proven will not prevent the court from
as we have held, correctly invoke reformation of contract as a placing the just construction thereon and adjudicating the issues
proper remedy (there having been no showing of a mistake or error accordingly. (Alzua v. Johnson, 21 Phil. 308)
in said contract on the part of any of the parties so as to result in
its failure to express their true intent), this does not mean that And in the fairly recent case of Caltex Phil., Inc. v. IAC, 176 SCRA
plaintiff is absolutely without a remedy in order to relieve itself from 741, the Honorable Supreme Court also held:
a contract that has gone far beyond its contemplation and has
become so highly inequitous and disadvantageous to it through the We rule that the respondent court did not commit any error in
years because of the expansion of defendant-appellants business taking cognizance of the aforestated issues, although not raised
and the increase in the volume of its subscribers. And as it is the before the trial court. The presence of strong consideration of
duty of the Court to administer justice, it must do so in this case in substantial justice has led this Court to relax the well-entrenched
rule that, except questions on jurisdiction, no question will be
Obligations and Contracts
entertained on appeal unless it has been raised in the court below said contract as it already appeared disadvantageous to (private
and it is within the issues made by the parties in their pleadings respondent) (p. 31, tsn, May 8, 1989). (Private respondents) cause
(Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). x x x of action to ask for reformation of said contract should thus be
considered to have arisen only in 1982 or 1983, and from 1982 to
We believe that the above authorities suffice to show that this January 2, 1989 when the complaint in this case was filed, ten (10)
Court did not err in applying Art. 1267 of the New Civil Code to this years had not yet elapsed.17
case. Defendant-appellant stresses that the applicability of said
provision is a question of fact, and that it should have been given Regarding the last issue, petitioners allege that there is nothing
the opportunity to present evidence on said question. But purely potestative about the prestations of either party because
defendant-appellant cannot honestly and truthfully claim that it petitioners permission for free use of telephones is not made to
(did) not (have) the opportunity to present evidence on the issue of depend purely on their will, neither is private respondents
whether the continued operation of the contract Exh. A has now permission for free use of its posts dependent purely on its will.
become too one-sided in its favor and too inequitous, unfair, and
disadvantageous to plaintiff. As held in our decision, the abundant Apart from applying Article 1267, respondent court cited another
and copious evidence presented by both parties in this case and legal remedy available to private respondent under the allegations
summarized in said decision established the following essential and of its complaint and the preponderant evidence presented by it:
vital facts which led us to apply Art. 1267 of the New Civil Code to x x x we believe that the provision in said agreement
this case:
(a) That the term or period of this contract shall be as long as the
xxx xxx x x x.15 party of the first part [herein appellant] has need for the electric
On the issue of prescription of private respondents action for light posts of the party of the second part [herein plaintiff] it being
reformation of contract, petitioners allege that respondent courts understood that this contract shall terminate when for any reason
ruling that the right of action arose only after said contract had whatsoever, the party of the second part is forced to stop,
already become disadvantageous and unfair to it due to abandoned [sic] its operation as a public service and it becomes
subsequent events and conditions, which must be sometime during necessary to remove the electric light post [sic]; (Emphasis
the latter part of 1982 or in 1983 x x x16 is erroneous. In supplied)
reformation of contracts, what is reformed is not the contract itself, is invalid for being purely potestative on the part of appellant as it
but the instrument embodying the contract. It follows that whether leaves the continued effectivity of the aforesaid agreement to the
the contract is disadvantageous or not is irrelevant to reformation latters sole and exclusive will as long as plaintiff is in operation. A
and therefore, cannot be an element in the determination of the similar provision in a contract of lease wherein the parties agreed
period for prescription of the action to reform. that the lessee could stay on the leased premises for as long as
Article 1144 of the New Civil Code provides, inter alia, that an the defendant needed the premises and can meet and pay said
action upon a written contract must be brought within ten (10) increases was recently held by the Supreme Court in Lim v. C.A.,
years from the time the right of action accrues. Clearly, the ten (10) 191 SCRA 150, citing the much earlier case of Encarnacion v.
year period is to be reckoned from the time the right of action Baldomar, 77 Phil. 470, as invalid for being a purely potestative
accrues which is not necessarily the date of execution of the condition because it leaves the effectivity and enjoyment of
contract. As correctly ruled by respondent court, private leasehold rights to the sole and exclusive will of the lessee. Further
respondents right of action arose sometime during the latter part held the High Court in the Lim case:
of 1982 or in 1983 when according to Atty. Luis General, Jr. x x x, he
was asked by (private respondents) Board of Directors to study
Obligations and Contracts
The continuance, effectivity and fulfillment of a contract of lease which are casual conditions since they depend on chance, hazard,
cannot be made to depend exclusively upon the free and or the will of a third person.20 In sum, the contract is subject to
uncontrolled choice of the lessee between continuing the payment mixed conditions, that is, they depend partly on the will of the
of the rentals or not, completely depriving the owner of any say in debtor and partly on chance, hazard or the will of a third person,
the matter. Mutuality does not obtain in such a contract of lease which do not invalidate the aforementioned provision.21
and no equality exists between the lessor and the lessee since the Nevertheless, in view of our discussions under the first and second
life of the contract is dictated solely by the lessee. issues raised by petitioners, there is no reason to set aside the
questioned decision and resolution of respondent court.
The above can also be said of the agreement Exh. A between the
parties in this case. There is no mutuality and equality between WHEREFORE, the petition is hereby DENIED. The decision of the
them under the afore-quoted provision thereof since the life and Court of Appeals dated May 28, 1992 and its resolution dated
continuity of said agreement is made to depend as long as September 10, 1992 are AFFIRMED.
appellant needs plaintiffs electric posts. And this is precisely why,
since 1977 when said agreement was executed and up to 1989 SO ORDERED. Naga Telephone Co., Inc. vs. Court of Appeals, 230
when this case was finally filed by plaintiff, it could do nothing to be SCRA 351, G.R. No. 107112 February 24, 1994
released from or terminate said agreement notwithstanding that its
continued effectivity has become very disadvantageous and
inequitous to it due to the expansion and increase of appellants
telephone services within Naga City and even outside the same
without a corresponding increase in the ten (10) telephone units
being used by plaintiff free of charge, as well as the bad and G.R. No. 70789. October 19, 1992.*
inefficient service of said telephones to the prejudice and
inconvenience of plaintiff and its customers. x x x.18 RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R.
TANTOCO, SR., and ROMEO S. VERGARA, petitioners, vs.
Petitioners allegations must be upheld in this regard. A potestative THE INTERMEDIATE APPELLATE COURT AND ILIGAN
condition is a condition, the fulfillment of which depends upon the DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and
sole will of the debtor, in which case, the conditional obligation is ROBERTO G. BORROMEO, respondents.
void.19 Based on this definition, respondent courts finding that the
provision in the contract, to wit: Civil Law; Obligations and Contracts; It is a truism in legal
jurisprudence that a condition which is both potestative (or
(a) That the term or period of this contract shall be as long as the facultative) and resolutory may be valid even though the saving
party of the first part (petitioner) has need for the electric light clause is left to the will of the obligor.A purely potestative
posts of the party of the second part (private respondent) x x x. imposition of this character must be obliterated from the face of
the contract without affecting the rest of the stipulations
is a potestative condition, is correct. However, it must have
considering that the condition relates to the fulfillment of an
overlooked the other conditions in the same provision, to wit:
already existing obligation and not to its inception (Civil Code
x x x it being understood that this contract shall terminate when Annotated, by Padilla, 1987 Edition, Volume 4, Page 160). It is, of
for any reason whatsoever, the party of the second part (private course, a truism in legal jurisprudence that a condition which is
respondent) is forced to stop, abandoned (sic) its operation as a both potestative (or facultative) and resolutory may be valid, even
public service and it becomes necessary to remove the electric though the saving clause is left to the will of the obligor.
light post (sic);
Obligations and Contracts
Corporation Law; The President and Manager of a corporation who A. . . . IN HOLDING PERSONALLY LIABLE UNDER THE CONTRACT OF
entered into and signed a contract in his official capacity cannot be SALE PETITIONER TANTOCO WHO SIGNED MERELY AS
made liable thereunder in his individual capacity in the absence of REPRESENTATIVE OF PETITIONER RUSTAN, AND PETITIONER
stipulation to that effect due to the personality of the corporation VERGARA WHO DID NOT SIGN AT ALL;
being separate and distinct from the persons composing it.We
have to agree with petitioners citation of authority to the effect B. . . . IN HOLDING THAT PETITIONER RUSTANS DECISION TO
that the President and Manager of a corporation who entered into SUSPEND TAKING DELIVERY OF PULP WOOD FROM RESPONDENT
and signed a contract in his official capacity, cannot be made liable LLUCH, WHICH WAS PROMPTED BY SERIOUS AND UNFORESEEN
thereunder in his individual capacity in the absence of stipulation to DEFECTS IN THE MILL, WAS NOT IN THE LAWFUL EXERCISE OF ITS
that effect due to the personality of the corporation being separate RIGHT UNDER THE CONTRACT OF SALE; and
and distinct from the persons composing it (Banque Generale Belge C. . . . IN AWARDING MORAL DAMAGES AND ATTORNEYS FEES IN
vs. Walter Bull and Co., Inc., 84 Phil. 164). And because of this THE ABSENCE OF FRAUD OR BAD FAITH. (page 18, Petition; page
precept, Vergaras supposed non-participation in the contract of 24, Rollo)
sale although he signed the letter dated September 30, 1968 is
completely immaterial. The two exceptions contemplated by Article The generative facts of the controversy, as gathered from the
1897 of the New Civil Code where agents are directly responsible pleadings, are fairly simple.
are absent and wanting.
Sometime in 1966, petitioner Rustan established a pulp and paper
PETITION for review of the decision of the then Intermediate mill in Baloi, Lanao del Norte. On March 20, 1967, respondent
Appellate Court. Lluch, who is a holder of a forest products license, transmitted a
letter to petitioner Rustan for the supply of raw materials by the
MELO, J.: former to the latter. In response thereto, petitioner Rustan
When petitioners informed herein private respondents to stop the proposed, among other things, in the letter-reply:
delivery of pulp wood supplied by the latter pursuant to a contract 2. That the contract to supply is not exclusive because Rustan
of sale between them, private respondents sued for breach of their shall have the option to buy from other suppliers who are qualified
covenant. The court of origin dismissed the complaint but at the and holder of appropriate government authority or license to sell
same time enjoined petitioners to respect the contract of sale if and dispose pulp wood.
circumstances warrant the full operation in a commercial scale of
petitioners Baloi plant and to continue accepting and paying for These prefatory business proposals culminated in the execution,
deliveries of pulp wood products from Romeo Lluch (page 14, during the month of April, 1968, of a contract of sale whereby
Petition; page 20, Rollo). On appeal to the then Intermediate Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc.
Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who spoke undertook to pay the price of P30.00 per cubic meter of pulp wood
for the First Civil Cases Division, with Justices Caguioa, Quetulio- raw materials to be delivered at the buyers plant in Baloi, Lanao
Losa, and Luciano, concurring, modified the judgment by directing del Norte. Of pertinent significance to the issue at hand are the
herein petitioners to pay private respondents, jointly and severally, following stipulations in the bilateral undertaking:
the sum of P30,000.00 as moral damages and P15,000.00 as
3. That BUYER shall have the option to buy from other SELLERS
attorneys fees (pages 48-58, Rollo).
who are equally qualified and holders of appropriate government
In the petition at bar, it is argued that the Appellate Court erred: authority or license to sell or dispose, that BUYER shall not buy
from any other seller whose pulp woods being sold shall have been

Obligations and Contracts


established to have emanated from the SELLERS lumber and/or MILLS, INC.
firewood concession . . . .
By:
And that SELLER has the priority to supply the pulp wood materials
requirement of the BUYER; DR. ROMEO S. VERGARA

xxx Resident Manager

7. That the BUYER shall have the right to stop delivery of the said Private respondent Romeo Lluch sought to clarify the tenor of the
raw materials by the seller covered by this contract when supply of letter as to whether stoppage of delivery or termination of the
the same shall become sufficient until such time when need for contract of sale was intended, but the query was not answered by
said raw materials shall have become necessary provided, petitioners. This alleged ambiguity notwithstanding, Lluch and the
however, that the SELLER is given sufficient notice. (pages 8-9, other suppliers resumed deliveries after the series of talks between
Petition; pages 14-15, Rollo) Romeo S. Vergara and Romeo Lluch.

In the installation of the plant facilities, the technical staff of Rustan On January 23, 1969, the complaint for contractual breach was filed
Pulp and Paper Mills, Inc. recommended the acceptance of which, as earlier noted, was dismissed. In the process of discussing
deliveries from other suppliers of the pulp wood materials for which the merits of the appeal interposed therefrom, respondent Court
the corresponding deliveries were made. But during the test run of clarified the eleven errors assigned below by herein petitioners and
the pulp mill, the machinery line thereat had major defects while it seems that petitioners were quite satisfied with the Appellate
deliveries of the raw materials piled up, which prompted the Courts in seriatim response since petitioners trimmed down their
Japanese supplier of the machinery to recommend the stoppage of discourse before this Court to three basic matters, relative to the
the deliveries. The suppliers were informed to stop deliveries and nature of liability, the propriety of the stoppage, and the feasibility
the letter of similar advice sent by petitioners to private of awarding moral damages including attorneys fees.
respondents reads: Respondent Court found it ironic that petitioners had to exercise
September 30, 1968 the prerogative regarding the stoppage of deliveries via the letter
addressed to Iligan Diversified Projects, Inc. on September 30, 1968
Iligan Diversified Projects, Inc. because petitioners never really stopped accepting deliveries from
private respondents until December 23, 1968. Petitioners
Iligan City paradoxical stance was portrayed in this manner:
Attention: Mr. Romeo A. Lluch . . . We cannot accept the reasons given by appellees as to why
Dear Mr. Lluch: they were stopping deliveries of pulp wood materials. First, We find
it preposterous for a business company like the appellee to
This is to inform you that the supply of raw materials to us has accumulate stockpiles of cut wood even after its letter to appellants
become sufficient and we will not be needing further delivery from dated September 30, 1968 stopping the deliveries because the
you. As per the terms of our contract, please stop delivery thirty supply of raw materials has become sufficient. The fact that
(30) days from today. appellees were buying and accepting pulp wood materials from
other sources other than the appellants even after September 30,
Very truly yours,
1968 belies that they have more than sufficient supply of pulp
RUSTAN PULP AND PAPER wood materials, or that they are unable to go into full commercial
operation or that their machineries are defective or even that the
Obligations and Contracts
pulp wood materials coming from appellants are sub-standard. same from other sources. Added to this, the court a quo was
Second, We likewise find the court a quos finding that even with imposing a new condition in the contract, one that was not agreed
one predicament in which defendant Rustan found itself wherein upon by the parties. (Pages 8-10, Decision; Pages 55-57, Rollo)
commercial operation was delayed, it accommodated all its
suppliers of raw materials, including plaintiff, Romeo Lluch, by The matter of Tantocos and Vergaras joint and several liability as a
allowing them to deliver all its stockpiles of cut wood (Decision, result of the alleged breach of the contract is dependent, first of all,
page 202, Record on Appeal) to be both illogical and inconsistent. on whether Rustan Pulp and Paper Mills may legally exercise the
Illogical, because as appellee Rustan itself claimed if the plant right of stoppage should there be a glut of raw materials at its
could not be operated on a commercial scale, it would then be plant.
illogical for defendant Rustan to continue accepting deliveries of And insofar as the express discretion on the part of petitioners is
raw materials. Inconsistent because this kind of concern or concerned regarding the right of stoppage, We feel that there is
accommodation is not usual or consistent with ordinary business cogent basis for private respondents apprehension on the illusory
practice considering that this would mean adequate losses to the resumption of deliveries inasmuch as the prerogative suggests a
company. More so, if We consider that appellee is a new company condition solely dependent upon the will of petitioners. Petitioners
and could not therefore afford to absorb more losses than it already can stop delivery of pulp wood from private respondents if the
allegedly incurred by the consequent defects in the machineries. supply at the plant is sufficient as ascertained by petitioners,
Clearly therefore, this is a breach of the contract entered into by subject to re-delivery when the need arises as determined likewise
and between appellees and appellants which warrants the by petitioners. This is Our simple understanding of the literal import
intervention of this Court. of paragraph 7 of the obligation in question. A purely potestative
imposition of this character must be obliterated from the face of
xxx the contract without affecting the rest of the stipulations
considering that the condition relates to the fulfillment of an
xxx already existing obligation and not to its inception (Civil Code
. . . The letter of September 30, 1968, Exh. D shows that Annotated, by Padilla, 1987 Edition, Volume 4, Page 160). It is, of
defendants were terminating the contract of sale (Exh. A), and course, a truism in legal jurisprudence that a condition which is
refusing any future or further deliverywhether on the ground that both potestative (or facultative) and resolutory may be valid, even
they had sufficient supply of pulp wood materials or that appellants though the saving clause is left to the will of the obligor like what
cannot meet the standard of quality of pulp wood materials that this Court, through Justice Street, said in Taylor vs. Uy Tieng Piao
Rustan needs or that there were defects in appellees machineries and Tan Liuan (43 Phil. 873; 879; cited in Commentaries and
resulting in an inability to continue full commercial operations. Jurisprudence on the Civil Code, by Tolentino, Volume 4, 1991
Furthermore, there is evidence on record that appellees have been edition, page 152). But the conclusion drawn from the Taylor case,
accepting deliveries of pulp wood materials from other sources, i.e. which allowed a condition for unilateral cancellation of the contract
Salem Usman, Fermin Villanueva and Pacasum even after when the machinery to be installed on the factory did not arrive in
September 30, 1968. Lastly, it would be unjust for the court a quo Manila, is certainly inappropriate for application to the case at hand
to rule that the contract of sale be temporarily suspended until because the factual milieu in the legal tussle dissected by Justice
Rustan, et al., are ready to accept deliveries from appellants. This Street conveys that the proviso relates to the birth of the
would make the resumption of the contract purely dependent on undertaking and not to the fulfillment of an existing obligation.
the will of one partythe appellees, and they could always claim, In support of the second ground for allowance of the petition,
as they did in the instant case, that they have more than sufficient petitioners are of the impression that the letter dated September
supply of pulp wood when in fact they have been accepting the
Obligations and Contracts
30, 1968 sent to private respondents is well within the right of Petitioners argue next that Tantoco and Vergara should not have
stoppage guaranteed to them by paragraph 7 of the contract of been adjudged to pay moral damages and attorneys fees because
sale which was construed by petitioners to be a temporary Tantoco merely represented the interest of Rustan Pulp and Paper
suspension of deliveries. There is no doubt that the contract speaks Mills, Inc. while Romeo S. Vergara was not privy to the contract of
loudly about petitioners prerogative but what diminishes the legal sale. On this score, We have to agree with petitioners citation of
efficacy of such right is the condition attached to it which, as authority to the effect that the President and Manager of a
aforesaid, is dependent exclusively on their will for which reason, corporation who entered into and signed a contract in his official
We have no alternative but to treat the controversial stipulation as capacity, cannot be made liable thereunder in his individual
inoperative (Article 1306, New Civil Code). It is for this same capacity in the absence of stipulation to that effect due to the
reason that We are not inclined to follow the interpretation of personality of the corporation being separate and distinct from the
petitioners that the suspension of delivery was merely temporary persons composing it (Banque Generale Belge vs. Walter Bull and
since the nature of the suspension itself is again conditioned upon Co., Inc., 84 Phil. 164). And because of this precept, Vergaras
petitioners determination of the sufficiency of supplies at the plant. supposed non-participation in the contract of sale although he
signed the letter dated September 30, 1968 is completely
Neither are We prepared to accept petitioners exculpation immaterial. The two exceptions contemplated by Article 1897 of
grounded on frustration of the commercial object under Article the New Civil Code where agents are directly responsible are
1267 of the New Civil Code, because petitioners continued absent and wanting.
accepting deliveries from the suppliers. This conduct will estop
petitioners from claiming that the breakdown of the machinery line WHEREFORE, the decision appealed from is hereby MODIFIED in the
was an extraordinary obstacle to their compliance to the prestation. sense that only petitioner Rustan Pulp and Paper Mills is ordered to
It was indeed incongruous for petitioners to have sent the letters pay moral damages and attorneys fees as awarded by respondent
calling for suspension and yet, they in effect disregarded their own Cour
advice by accepting the deliveries from the suppliers. The
demeanor of petitioners along this line was sought to be justified as Roman Catholic Archbishop of Manila vs. Court of Appeals
an act of generous accommodation, which entailed greater loss to G.R. No. 77425. June 19, 1991.*
them and was not motivated by the usual businessmans
obsession with profit (Page 34, Petition; Page 40, Rollo). Altruism Civil Law; Donation; Rescission; Article 764 of the Civil Code not
may be a noble gesture but petitioners stance in this respect applicable in the case at bar; The deed of donation expressly
hardly inspires belief for such an excuse is inconsistent with a provides for automatic reversion of the property donated in case of
normal business enterprise which takes ordinary care of its concern violation of the condition therein, hence a judicial declaration
in cutting down on expenses (Section 3, (d), Rule 131, Revised revoking the same is not necessary.Although it is true that under
Rules of Court). Knowing fully well that they will encounter difficulty Article 764 of the Civil Code an action for the revocation of a
in producing output because of the defective machinery line, donation must be brought within four (4) years from the non-
petitioners opted to open the plant to greater loss, thus, compliance of the conditions of the donation, the same is not
compounding the costs by accepting additional supply to the applicable in the case at bar. The deed of donation involved herein
stockpile. Verily, the Appellate Court emphasized the absurdity of expressly provides for automatic reversion of the property donated
petitioners action when they acknowledged that if the plant could in case of violation of the condition therein, hence a judicial
not be operated on a commercial scale, it would then be illogical for declaration revoking the same is not necessary.
defendant Rustan to continue accepting deliveries of raw
Same; Same; Same; Same; There is nothing in the law that
materials. (Page 202, Record on Appeal; Page 8, Decision; Page
prohibits the parties from entering into an agreement that a
55, Rollo).
Obligations and Contracts
violation of the terms of the contract would cause its cancellation rules on contract and the general rules on prescription should apply
even without court intervention.In support of its aforesaid and not Article 764 of the Civil Code.When a deed of donation, as
position, respondent court relied on the rule that a judicial action in this case, expressly provides for automatic revocation and
for rescission of a contract is not necessary where the contract reversion of the property donated, the rules on contract and the
provides that it may be revoked and cancelled for violation of any general rules on prescription should apply, and not Article 764 of
of its terms and conditions. It called attention to the holding that the Civil Code.
there is nothing in the law that prohibits the parties from entering
into an agreement that a violation of the terms of the contract Same; Same; Same; Stipulation of the parties providing for
would cause its cancellation even without court intervention, and automatic revocation of the deed of donation without prior judicial
that it is not always necessary for the injured party to resort to action for that purpose is valid subject to the determination of the
court for rescission of the contract. It reiterated the doctrine that a propriety of the rescission sought.Since Article 1306 of said Code
judicial action is proper only when there is absence of a special authorizes the parties to a contract to establish such stipulations,
provision granting the power of cancellation. clauses, terms and conditions not contrary to law, morals, good
customs, public order or public policy, we are of the opinion that, at
Same; Same; Same; Same; Validity of a stipulation in the deed of the very least, that stipulation of the parties providing for
donation providing for the automatic reversion of the donated automatic revocation of the deed of donation, without prior judicial
property to the donor upon non-compliance of the condition was action for that purpose, is valid subject to the determination of the
upheld in the recent case of De Luna et. al, vs Abrigo, et. al.The propriety of the rescission sought. Where such propriety is
validity of such a stipulation in the deed of donation providing for sustained, the decision of the court will be merely declaratory of
the automatic reversion of the donated property to the donor upon the revocation, but it is not in itself the revocatory act.
non-compliance of the condition was upheld in the recent case of
De Luna, et al. vs. Abrigo, et al. It was held therein that said Same; Same; Prescription; Court of Appeals committed no error in
stipulation is in the nature of an agreement granting a party the holding that the cause of action of private respondents has not yet
right to rescind a contract unilaterally in case of breach, without prescribed since an action to enforce a written contract prescribed
need of going to court, and that, upon the happening of the in ten (10) years.On the foregoing ratiocinations, the Court of
resolutory condition or non-compliance with the conditions of the Appeals committed no error in holding that the cause of action of
contract, the donation is automatically revoked without need of a herein private respondents has not yet prescribed since an action
judicial declaration to that effect. to enforce a written contract prescribes in ten (10) years. It is our
view that Article 764 was intended to provide a judicial remedy in
Same; Same; Same; Same; In contracts providing for automatic case of non-fulfillment or contravention of conditions specified in
revocation, judicial intervention is necessary in order to determine the deed of donation if and when the parties have not agreed on
whether or not the rescission was proper.The rationale for the the automatic revocation of such donation upon the occurrence of
foregoing is that in contracts providing for automatic revocation, the contingency contemplated therein. That is not the situation in
judical intervention is necessary not for purposes of obtaining a the case at bar.
judicial declaration rescinding a contract already deemed rescinded
by virtue of an agreement providing for rescission even without Same; Same; The condition imposed in the deed of donation in this
judicial intervention, but in order to determine whether or not the case constitutes a patently unreasonable and undue restriction on
rescission was proper. the right of the donee to dispose of the property donated.
Donation, as a mode of acquiring ownership, results in an effective
Same; Same; Same; When the deed of donation expressly provides transfer of title over the property from the donor to the donee.
for automatic revocation and reversion of the property donated, the Once a donation is accepted, the donee becomes the absolute
Obligations and Contracts
owner of the property donated. Although the donor may impose necessary where the Court is in a position to resolve the dispute
certain conditions in the deed of donation, the same must not be based on the records before it. On many occasions, the Court, in
contrary to law, morals, good customs, public order and public the public interest and for the expeditious administration of justice,
policy. The condition imposed in the deed of donation in the case has resolved actions on the merits instead of remanding them to
before us constitutes a patently unreasonable and undue restriction the trial court for further proceedings, such as where the ends of
on the right of the donee to dispose of the property donated, which justice, would not be subserved by the remand of the case.
right is an indispensable attribute of ownership. Such a prohibition
against alienation, in order to be valid, must not be perpetual or for PETITIONS for review on certiorari to overturn the decision of the
an unreasonable period of time. Court of Appeals.

Same; Same; Same; The prohibition in the deed of donation against REGALADO, J.:
the alienation of the property for an entire century should be These two petitions for review on certiorari1 seek to overturn the
declared as an illegal or impossible condition within the decision of the Court of Appeals in CA-G.R. CV No. 05456 2 which
contemplation of Article 727 of the Civil Code.In the case at bar, reversed and set aside the order of the Regional Trial Court of Imus,
we hold that the prohibition in the deed of donation against the Cavite dismissing Civil Case No. 095-84, as well as the order of said
alienation of the property for an entire century, being an respondent court denying petitioners motions for the
unreasonable emasculation and denial of an integral attribute of reconsideration of its aforesaid decision.
ownership, should be declared as an illegal or impossible condition
within the contemplation of Article 727 of the Civil Code. On November 29, 1984, private respondents as plaintiffs, filed a
Consequently, as specifically stated in said statutory provision, complaint for nullification of deed of donation, rescission of contract
such condition shall be considered as not imposed. No reliance may and reconveyance of real property with damages against
accordingly be placed on said prohibitory paragraph in the deed of petitioners Florencio and Soledad C. Ignao and the Roman Catholic
donation. Bishop of Imus, Cavite, together with the Roman Catholic
Archbishop of Manila, before the Regional Trial Court, Branch XX,
Remedial Law; Appeal; Court is clothed with ample authority to Imus, Cavite and which was docketed as Civil Case No. 095-84
review matters even if they are not assigned as errors on appeal if therein.3
it finds that their consideration is necessary in arriving at a just
decision of the case.This Court is clothed with ample authority to In their complaint, private respondents alleged that on August 23,
review matters, even if they are not assigned as errors on appeal, if 1930, the spouses Eusebio de Castro and Martina Rieta, now both
it finds that their consideration is necessary in arriving at a just deceased, executed a deed of donation in favor of therein
decision of the case: Thus, we have held that an unassigned error defendant Roman Catholic Archbishop of Manila covering a parcel
closely related to an error properly assigned, or upon which the of land (Lot No. 626, Cadastral Survey of Kawit), located at Kawit,
determination of the question properly assigned is dependent, will Cavite, containing an area of 964 square meters, more or less. The
be considered by the appellate court notwithstanding the failure to deed of donation allegedly provides that the donee shall not
assign it as error. dispose or sell the property within a period of one hundred (100)
years from the execution of the deed of donation, otherwise a
Same; Same; Same; Remand of the case to the lower court for violation of such condition would render ipso facto null and void the
further reception of evidence not necessary where the court is in a deed of donation and the property would revert to the estate of the
position to resolve the dispute based on the records before it. donors.
Additionally, we have laid down the rule that the remand of the
case to the lower court for further reception of evidence is not
Obligations and Contracts
It is further alleged that on or about June 30, 1980, and while still prescription carries with it the dismissal of the main action for
within the prohibitive period to dispose of the property, petitioner reconveyance of real property.6
Roman Catholic Bishop of Imus, in whose administration all
properties within the province of Cavite owned by the Archdiocese On December 23, 1986, respondent Court of Appeals, holding that
of Manila was allegedly transferred on April 26, 1962, executed a the action has not yet prescibed, rendered a decision in favor of
deed of absolute sale of the property subject of the donation in private respondents, with the following dispositive portion:
favor of petitioners Florencio and Soledad C. Ignao in consideration WHEREFORE, the Order of January 31, 1985 dismissing appellants
of the sum of P114,000.00. As a consequence of the sale, Transfer complaint is SET ASIDE and Civil Case No. 095-84 is hereby ordered
Certificate of Title No. 115990 was issued by the Register of Deeds REINSTATED and REMANDED to the lower court for further
of Cavite on November 15, 1980 in the name of said petitioner proceedings. No costs.7
spouses.
Petitioners Ignao and the Roman Catholic Bishop of Imus then filed
What transpired thereafter is narrated by respondent court in its their separate motions for reconsideration which were denied by
assailed decision.4 On December 17, 1984, petitioners Florencio respondent Court of Appeals in its resolution dated February 6,
Ignao and Soledad C. Ignao filed a motion to dismiss based on the 1987,8 hence, the filing of these appeals by certiorari.
grounds that (1) herein private respondents, as plaintiffs therein,
have no legal capacity to sue; and (2) the complaint states no It is the contention of petitioners that the cause of action of herein
cause of action. private respondents has already prescribed, invoking Article 764 of
the Civil Code which provides that (t)he donation shall be revoked
On December 19, 1984, petitioner Roman Catholic Bishop of Imus at the instance of the donor, when the donee fails to comply with
also filed a motion to dismiss on three (3) grounds, the first two (2) any of the conditions which the former imposed upon the latter,
grounds of which were identical to that of the motion to dismiss and that (t)his action shall prescribe after four years from the non-
filed by the Ignao spouses, and the third ground being that the compliance with the condition, may be transmitted to the heirs of
cause of action has prescribed. the donor, and may be exercised against the donees heirs.
On January 9, 1985, the Roman Catholic Archbishop of Manila We do not agree.
likewise filed a motion to dismiss on the ground that he is not a real
party in interest and, therefore, the complaint does not state a Although it is true that under Article 764 of the Civil Code an action
cause of action against him. for the revocation of a donation must be brought within four (4)
years from the non-compliance of the conditions of the donation,
After private respondents had filed their oppositions to the said the same is not applicable in the case at bar. The deed of donation
motions to dismiss and the petitioners had countered with their involved herein expressly provides for automatic reversion of the
respective replies, with rejoinders thereto by private respondents, property donated in case of violation of the condition therein,
the trial court issued an order dated January 31, 1985, dismissing hence a judicial declaration revoking the same is not necessary. As
the complaint on the ground that the cause of action has aptly stated by the Court of Appeals:
prescribed.5
By the very express provision in the deed of donation itself that
Private respondents thereafter appealed to the Court of Appeals the violation of the condition thereof would render ipso facto null
raising the issues on (a) whether or not the action for rescission of and void the deed of donation, WE are of the opinion that there
contracts (deed of donation and deed of sale) has prescribed; and would be no legal necessity anymore to have the donation judicially
(b) whether or not the dismissal of the action for rescission of declared null and void for the reason that the very deed of donation
contracts (deed of donation and deed of sale) on the ground of itself declares it so. For where (sic) it otherwise and that the donors
Obligations and Contracts
and the donee contemplated a court action during the execution of contract, the donation is automatically revoked without need of a
the deed of donation to have the donation judicially rescinded or judicial declaration to that effect. While what was the subject of
declared null and void should the condition be violated, then the that case was an onerous donation which, under Article 733 of the
phrase reading would render ipso facto null and void would not Civil Code is governed by the rules on contracts, since the donation
appear in the deed of donation.9 in the case at bar is also subject to the same rules because of its
provision on automatic revocation upon the violation of a resolutory
In support of its aforesaid position, respondent court relied on the condition, from parity of reasons said pronouncements in De Luna
rule that a judicial action for rescission of a contract is not pertinently apply.
necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions.10 It called The rationale for the foregoing is that in contracts providing for
attention to the holding that there is nothing in the law that automatic revocation, judical intervention is necessary not for
prohibits the parties from entering into an agreement that a purposes of obtaining a judicial declaration rescinding a contract
violation of the terms of the contract would cause its cancellation already deemed rescinded by virtue of an agreement providing for
even without court intervention, and that it is not always necessary rescission even without judicial intervention, but in order to
for the injured party to resort to court for rescission of the determine whether or not the rescission was proper.14
contract.11 It reiterated the doctrine that a judicial action is proper
only when there is absence of a special provision granting the When a deed of donation, as in this case, expressly provides for
power of cancellation.12 automatic revocation and reversion of the property donated, the
rules on contract and the general rules on prescription should
It is true that the aforesaid rules were applied to the contracts apply, and not Article 764 of the Civil Code. Since Article 1306 of
involved therein, but we see no reason why the same should not said Code authorizes the parties to a contract to establish such
apply to the donation in the present case. Article 732 of the Civil stipulations, clauses, terms and conditions not contrary to law,
Code provides that donations inter vivos shall be governed by the morals, good customs, public order or public policy, we are of the
general provisions on contracts and obligations in all that is not opinion that, at the very least, that stipulation of the parties
determined in Title III, Book III on donations. Now, said Title III does providing for automatic revocation of the deed of donation, without
not have an explicit provision on the matter of a donation with a prior judicial action for that purpose, is valid subject to the
resolutory condition and which is subject to an express provision determination of the propriety of the rescission sought. Where such
that the same shall be considered ipso facto revoked upon the propriety is sustained, the decision of the court will be merely
breach of said resolutory condition imposed in the deed therefor, as declaratory of the revocation, but it is not in itself the revocatory
is the case of the deed presently in question. The suppletory act.
application of the foregoing doctrinal rul-ings to the present
controversy is consequently justified. On the foregoing ratiocinations, the Court of Appeals committed no
error in holding that the cause of action of herein private
The validity of such a stipulation in the deed of donation providing respondents has not yet prescribed since an action to enforce a
for the automatic reversion of the donated property to the donor written contract prescribes in ten (10) years.15 It is our view that
upon non-compliance of the condition was upheld in the recent Article 764 was intended to provide a judicial remedy in case of
case of De Luna, et al. vs. Abrigo, et al.13 It was held therein that non-fulfillment or contravention of conditions specified in the deed
said stipulation is in the nature of an agreement granting a party of donation if and when the parties have not agreed on the
the right to rescind a contract unilaterally in case of breach, without automatic revocation of such donation upon the occurrence of the
need of going to court, and that, upon the happening of the contingency contemplated therein. That is not the situation in the
resolutory condition or non-compliance with the conditions of the case at bar.
Obligations and Contracts
Nonetheless, we find that although the action filed by private prevent an unreasonable departure from the normative policy
respondents may not be dismissed by reason of prescription, the expressed in the aforesaid Articles 494 and 870 of the Code.
same should be dismissed on the ground that private respondents
have no cause of action against petitioners. In the case at bar, we hold that the prohibition in the deed of
donation against the alienation of the property for an entire
The cause of action of private respondents is based on the alleged century, being an unreasonable emasculation and denial of an
breach by petitioners of the resolutory condition in the deed of integral attribute of ownership, should be declared as an illegal or
donation that the property donated should not be sold within a impossible condition within the contemplation of Article 727 of the
period of one hundred (100) years from the date of execution of the Civil Code. Consequently, as specifically stated in said statutory
deed of donation. Said condition, in our opinion, constitutes an provision, such condition shall be considered as not imposed. No
undue restriction on the rights arising from ownership of petitioners reliance may accordingly be placed on said prohibitory paragraph
and is, therefore, contrary to public policy. in the deed of donation. The net result is that, absent said
proscription, the deed of sale supposedly constitutive of the cause
Donation, as a mode of acquiring ownership, results in an effective of action for the nullification of the deed of donation is not in truth
transfer of title over the property from the donor to the donee. violative of the latter hence, for lack of cause of action, the case for
Once a donation is accepted, the donee becomes the absolute private respondents must fail.
owner of the property donated. Although the donor may impose
certain conditions in the deed of donation, the same must not be It may be argued that the validity of such prohibitory provision in
contrary to law, morals, good customs, public order and public the deed of donation was not specifically put in issue in the
policy. The condition imposed in the deed of donation in the case pleadings of the parties. That may be true, but such oversight or
before us constitutes a patently unreasonable and undue restriction inaction does not prevent this Court from passing upon and
on the right of the donee to dispose of the property donated, which resolving the same.
right is an indispensable attribute of ownerhsip. Such a prohibition
against alienation, in order to be valid, must not be perpetual or for It will readily be noted that the provision in the deed of donation
an unreasonable period of time. against alienation of the land for one hundred (100) years was the
very basis for the action to nullify the deed of donation. At the
Certain provisions of the Civil Code illustrative of the aforesaid same time, it was likewise the controverted fundament of the
policy may be considered applicable by analogy. Under the third motion to dismiss the case a quo, which motion was sustained by
paragraph of Article 494, a donor or testator may prohibit partition the trial court and set aside by respondent court, both on the issue
for a period which shall not exceed twenty (20) years. Article 870, of prescription. That ruling of respondent court interpreting said
on its part, declares that the dispositions of the testator declaring provision was assigned as an error in the present petition. While the
all or part of the estate inalienable for more than twenty (20) years issue of the validity of the same provision was not squarely raised,
are void. it is ineluctably related to petitioners aforesaid assignment of error
since both issues are grounded on and refer to the very same
It is significant that the provisions therein regarding a testator also provision.
necessarily involve, in the main, the devolution of property by
gratuitous title hence, as is generally the case of donations, being This Court is clothed with ample authority to review matters, even
an act of liberality, the imposition of an unreasonable period of if they are not assigned as errors on appeal, if it finds that their
prohibition to alienate the property should be deemed anathema to consideration is necessary in arriving at a just decision of the
the basic and actual intent of either the donor or testator. For that case:16 Thus, we have held that an unassigned error closely
reason, the regulatory arm of the law is or must be interposed to related to an error properly assigned,17 or upon which the
determination of the question properly assigned is dependent, will
Obligations and Contracts
be considered by the appellate court notwithstanding the failure to contracting party must be made known to the other and is always
assign it as error.18 provisional, being ever subject to scrutiny and review by the proper
court. If the other party denies that rescission is justified, it is free
Additionally, we have laid down the rule that the remand of the to resort to judicial action in its own behalf, and bring the matter to
case to the lower court for further reception of evidence is not court, Then, should the court, after due hearing, decide that the
necessary where the Court is in a position to resolve the dispute resolution of the contract was not warranted, the responsible party
based on the records before it. On many occasions, the Court, in will be sentenced to damages; in the contrary case, the resolution
the public interest and for the expeditious administration of justice, will be af firmed, and the consequent indemnity awarded to the
has resolved actions on the merits instead of remanding them to party prejudiced.
the trial court for further proceedings, such as where the ends of
justice, would not be subserved by the remand of the case.19 The Same; Sales; Unilateral cancellation of contract to sell not
aforestated considerations obtain in and apply to the present case warranted if breach is only slight or casual.The breach of the
with respect to the matter of the validity of the resolutory condition contract adverted to by the defendants-appellants is so slight and
in question. casual when we consider that apart from the initial downpayment
of P392.00 the plaintiffs-appellees had already paid the monthly
WHEREFORE, the judgment of respondent court is SET ASIDE and installments for a period of almost nine (9) years. In other words, in
another judgment is hereby rendered DISMISSING Civil Case No. only a short time, the entire obligation would have been paid.
095-84 of the Regional Trial Court, Branch XX, Imus, Cavite. Furthermore, although the principal obligation was only P3,920.00
SO ORDERED. Roman Catholic Archbishop of Manila vs. Court of excluding the 7 percent interests, the plaintiffs-appellees had
Appeals, 198 SCRA 300, G.R. No. 77425, G.R. No. 77450 June 19, already paid an aggregate amount of P4,533.38. To sanction the
1991 rescission made by the defendants-appellants will work injustice to
the plaintiffs-appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31
No. L-42283. March 18, 1985.* SCRA 829). It would unjustly enrich the defendants-appellants.
BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees, vs. Same; Same; Waiver; Acceptance of delayed installment payments
URSULA TORRES CALASANZ, ET AL., defendantsappellants. beyond grace period amounts to waiver of right of rescission.The
defendants-appellants argue that paragraph nine clearly allows the
Contracts; Nothing in Art 1191 of the new Civil Code prohibits
seller to waive the observance of paragraph 6 not merely once, but
agreement on cancellation of contract by a party without judicial
for as many times as he wishes. The defendantsappellants
intervention.Article 1191 is explicit. In reciprocal obligations,
contention is without merit. We agree with the plaintiffsappellees
either party has the right to rescind the contract upon the failure of
that when the defendants-appellants, instead of availing of their
the other to perform the obligation assumed thereunder, Moreover,
alleged right to rescind, have accepted and received delayed
there is nothing in the law that prohibits the parties from entering
payments of installments, though the plaintiffs-appellees have
into an agreement that violation of the terms of the contract would
been in arrears beyond the grace period mentioned in paragraph 6
cause its cancellation even without court intervention (Froilan v.
of the contract, the defendants-appellants have waived and are
Pan Oriental Shipping Co., et al., 12 SCRA 276).
now estopped from exercising their alleged right of rescission.
Same; The right to cancel a contract even if agreed upon may,
Same; Same; Contracts to sell lots are contracts of adhesion when
however, be questioned in court by the affected party to determine
buyer is merely required to sign a prepared agreement.We agree
whether or not cancellation was warranted."Of course, it must be
with the plaintiffs-appellees. The contract to sell entered into by the
understood that the act of a party in treating a contract as
parties has some characteristics of a contract of adhesion. The
cancelled or resolved on account of infractions by the other
Obligations and Contracts
defendants-appellants drafted and prepared the contract. The Same; Same; Same.Thus, since the principal obligation under the
plaintiffs-appellees, eager to acquire a lot upon which they could contract is only P3,920.00 and the plaintiffs-appellees have already
build a home, affixed their signatures and assented to the terms paid an aggregate amount of P4,533.38, the courts should only
and conditions of the contract, They had no opportunity to question order the payment of the few remaining installments but not
nor change any of the terms of the agreement. It was offered to uphold the cancellation of the contract. Upon payment of the
them on a take it or leave it basis. balance of P671.67 without any interest thereon, the defendants-
appellants must immediately execute the final deed of sale in favor
Same; Same; Where installment buyer has already paid more than of the plaintiffs-appellees and execute the necessary transfer
the agreed price, the fact that during delayed payments of some documents as provided in paragraph 12 of the contract. The
monthly installments the same was applied to interest agreed attorneys fees are justified. WHEREFORE, the instant petition is
upon, would not justify cancellation of contract for failure to pay a DENIED for lack of merit. The decision appealed from is AFFIRMED
small balance of required installment.While it is true that with the modification that the plaintiffs-appellees should pay the
paragraph 2 of the contract obligated the plaintiffs-appellees to pay balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN
the defendantsappellants the sum of P3,920.00 plus 7% interest CENTAVOS (P671.67) without any interests. Costs against the
per annum, it is likewise true that under paragraph 12 the seller is defendantsappellants.
obligated to transfer the title to the buyer upon payment of the
P3,920.00 price sale. The contract to sell, being a contract of APPEAL from the decision of the Court of First Instance of Rizal, Br.
adhesion, must be construed against the party causing it We agree X.
with the observation of the plaintiffs-appellees to the effect that
the terms of a contract must be interpreted against the party who The facts are stated in the opinion of the Court.
drafted the same, especially where such interpretation will help GUTIERREZ, JR., J.:
effect justice to buyers who, after having invested a big amount of
money, are now sought to be deprived of the same thru the prayed This is an appeal from the decision of the Court of First Instance of
application of a contract clever in its phraseology, condemnable in Rizal, Seventh Judicial District, Branch X, declaring the contract to
its lopsidedness and injurious in its effect which, in essence, and in sell as not having been validly cancelled and ordering the
its entirety is most unfair to the buyers. defendants-appellants to execute a final deed of sale in favor of the
plaintiffs-appellees, to pay P500.00 attorneys fees and costs.

The facts being undisputed, the Court of Appeals certified the case
to us since only pure questions of law have been raised for
appellate review.

On December 19, 1957, defendants-appellants Ursula Torres


Calasanz and Tomas Calasanz and plaintiffs-appellees
Buenaventura Angeles and Teofila Juani entered into a contract to
sell a piece of land located in Cainta, Rizal for the amount of P
3,920.00 plus 7% interest per annum.

The plaintiffs-appellees made a downpayment of P392.00 upon the


execution of the contract. They promised to pay the balance in
monthly installments of P41.20 until fully paid, the installments
being due and payable on the 19th day of each month, The
Obligations and Contracts
plaintiffs-appellees paid the monthly installments until July 1966, of the plaintiffs and to pay the sum of P500.00 by way of attorneys
when their aggregate payment already amounted to P4,533.38. On fees. Costs against the defendants.
numerous occasions, the defendants-appellants accepted and
received delayed installment payments from the plaintiffs- A motion for reconsideration filed by the defendantsappellants was
appellees. denied.

On December 7, 1966, the defendants-appellants wrote the As earlier stated, the then Court of Appeals certified the case to us
plaintiffs-appellees a letter requesting the remittance of past due considering that the appeal involves pure questions of law.
accounts. The defendants-appellants assigned the following alleged errors of
On January 28, 1967, the defendants-appellants cancelled the said the lower court:
contract because the plaintif f s-appellees f ailed to meet First Assignment of Error
subsequent payments, The plaintiffs letter with their plea for
reconsideration of the said cancellation was denied by the THE LOWER COURT ERRED IN NOT HOLDING THE CON
defendants-appellants.
TRACT TO SELL (ANNEX A" OF COMPLIANCE) AS HAVING
The plaintiffs-appellees filed Civil Case No. 8943 with the Court of
BEEN LEGALLY AND VALIDLY CANCELLED.
First Instance of Rizal, Seventh Judicial District, Branch X to compel
the defendants-appellants to execute in their favor the final deed of Second Assignment of Error
sale alleging inter alia that after computing all subsequent
payments for the land in question, they found out that they have EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT
already paid the total amount of P4,533.38 including interests,
TO SELL HAS NOT BEEN LEGALLY AND VALIDLY
realty taxes and incidental expenses for the registration and
transfer of the land. CANCELLED, THE LOWER COURT ERRED IN ORDERING
The defendants-appellants alleged in their answer that the DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN
complaint states no cause of action and that the plaintiffsappellees
violated paragraph six (6) of the contract to sell when they failed FAVOR OF THE PLAINTIFF.
and refused to pay and/or offer to pay the monthly installments
Third Assignment of Error
corresponding to the month of August, 1966 for more than five (5)
months, thereby constraining the defendants-appellants to cancel THE LOWER COURT ERRED IN ORDERING DEFENDANTS
the said contract
TO PAY PLAINTIFFS THE SUM OF P500.00 AS ATTORNEYS
The lower court rendered judgment in favor of the plaintif f
sappellees. The dispositive portion of the decision reads: FEES.

WHEREFORE, based on the foregoing considerations, the Court The main issue to be resolved is whether or not the contract to sell
hereby renders judgment in favor of the plaintiffs and against the has been automatically and validly cancelled by the defendants-
defendants declaring that the contract subject matter of the instant appellants.
case was NOT VALIDLY cancelled by the defendants. Consequently, The defendants-appellants submit that the contract was validly
the defendants are ordered to execute a final Deed of Sale in favor cancelled pursuant to paragraph six of the contract which provides:

Obligations and Contracts


xxx xxx xxx The defendants-appellants argue that the plaintiffsappellees failed
to pay the August, 1966 installment despite demands for more than
SIXTH.In case the party of the SECOND PART fails to satisfy any four (4) months. The defendantsappellants point to Jocson v. Capitol
monthly installments, or any other payments herein agreed upon, Subdivision (G.R. No. L6573, February 28, 1955) where this Court
he is granted a month of grace within which to make the retarded upheld the right of the subdivision owner to automatically cancel a
payment, together with the one corresponding to the said month of contract to sell on the strength of a provision or stipulation similar
grace; it is understood, however, that should the month of grace to paragraph 6 of the contract in this case. The
herein granted to the party of the SECOND PART expired; without defendantsappellants also argue that even in the absence of the
the payments corresponding to both months having been satisfied, aforequoted provision, they had the right to cancel the contract to
an interest of 10% per annum will be charged on the amounts he sell under Article 1191 of the Civil Code of the Philippines.
should have paid; it is understood farther. that should a period of
90 days elapse, to begin from the expiration of the month of grace The plaintiffs-appellees on the other hand contend that the Jocson
herein mentioned, and the party of SECOND PART has not paid all ruling does not apply. They state that paragraph 6 of the contract
the amounts he should have paid with the corresponding interest to sell is contrary to law insofar as it provides that in case of
up to that date, the party of the FIRST PART has the right to declare specified breaches of its terms, the sellers have the right to declare
this contract cancelled and of no effect, and as consequence the contract cancelled and of no effect, because it granted the
thereof, the party of the FIRST PART may dispose of the parcel of sellers an absolute and automatic right of rescission.
land covered by this contract in favor of other persons, as if this
contract had never been entered into. in case of such cancellation Article 1191 of the Civil Code on the rescission of reciprocal
of the contract, all the amounts paid in accordance with this obligations provides:
agreement together with all the improvements made on the The power to rescind obligations is implied in reciprocal ones, in
premises, shall be considered as rents paid for the use and case one of the obligors should not comply with what is incumbent
occupation of the above mentioned premises, and as payment for upon him.
the damages suffered by failure of the party of the SECOND PART to
fulfill his part of the agreement; and the party of the SECOND PART The injured party may choose between the fulfillment and the
hereby renounces all his right to demand or reclaim the return of rescission of the obligation, with the payment of damages in either
the same and obliges himself to peacefully vacate the premises case, He may also seek rescission, even after he has chosen
and deliver the same to the party of the FIRST PART." (Italics fulfillment, if the latter should become impossible.
supplied by appellant)
xxx xxx xxx
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either party has
the right to rescind the contract upon the failure of the other to
perform the obligation assumed thereunder. Moreover, there is
nothing in the law that prohibits the parties from entering into an
agreement that violation of the terms of the contract would cause
its cancellation even without court Intervention (Froilan v. Pan
Oriental Shipping, Co., et al., 12 SCRA 276)

Well settled is, however, the rule that a judicial action for the
rescission of a contract is not necessary where the contract
provides that it may be revoked and cancelled for violation of any
Obligations and Contracts
of its terms and conditions (Lopez v. Commissioner of Customs, 37 jurisdiction can conclusively settle whether the resolution was
SCRA 327, 334, and cases cited therein) proper or not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will remain
Resort to judicial action for rescission is obviously not contestable and subject to judicial invalidation, unless attack
contemplated . . . The validity of the stipulation can not be thereon should become barred by acquiescence, estoppel or
seriously disputed. It is in the nature of a facultative resolutory prescription.
condition which in many cases has been upheld by this Court.
(Ponce Enrile v. Court of Appeals, 29 SCRA 504)." The right to rescind the contract for non-performance of one of its
stipulations, therefore, is not absolute. In Universal Food Corp. v.
The rule that it is not always necessary for the injured party to Court of Appeals (33 SCRA 1) the Court stated that
resort to court for rescission of the contract when the contract itself
provides that it may be rescinded for violation of Its terms and The general rule is that rescission of a contract will not be
conditions, was qualified by this Court in University of the permitted for a slight or casual breach, but only for such substantial
Philippines v. De los Angeles, (35 SCRA 102) where we explained and fundamental breach as would defeat the very object of the
that; parties in making the agreement. (Song Fo & Co. v. Hawaiian-
Philippine Co., 47 Phil. 821, 827) The question of whether a breach
Of course, it must be understood that the act of a party in treating of a contract is substantial depends upon the attendant
a contract as cancelled or resolved on account of infractions by the circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720,
other contracting party must be made known to the other and is Jan. 17, 1968)." x x x.
always provisional, being ever subject to scrutiny and review by the
proper court. If the other party denies that rescission is justified, it The defendants-appellants state that the plaintif f s-appellees
is free to resort to judicial action in its own behalf, and bring the violated Section two of the contract to sell which provides:
matter to court. Then, should the court, after due hearing, decide
that the resolution of the contract was not warranted, the SECOND.That in consideration of the agreement of sale of the
responsible party will be sentenced to damages; in the contrary above described property, the party of the SECOND PART obligates
case, the resolution will be affirmed, and the consequent indemnity himself to pay to the party of the FIRST PART the Sum of THREE
awarded to the party prejudiced. THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine
Currency, plus interest at the rate of 7% per annum, as follows:
In other words, the party who deems the contract violated many
consider it resolved or rescinded, and act accordingly, without "(a) The amount of THREE HUNDRED NINETY TWO only (P392.00)
previous court action, but it proceeds at its own risk. For it is only when this contract is signed; and
the final judgment of the corresponding court that will conclusively "(b) The sum of FORTY ONE AND 20/100 ONLY (P41.20) on or before
and finally settle whether the action taken was or was not correct in the 19th day of each month, from this date until the total payment
law. x x x. of the price above stipulated, including interest.
We see no conflict between this ruling and the previous because they failed to pay the August installment, despite demand,
jurisprudence of this Court invoked by respondent declaring that for more than four (4) months.
judicial action is necessary for the resolution of a reciprocal
obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 The breach of the contract adverted to by the defendantsappellants
Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. is so slight and casual when we consider that apart from the initial
820) since in every case where the extrajudicial resolution is downpayment of P392.00 the plaintiffsappellees had already paid
contested only the final award of the court of competent the monthly installments for a period of almost nine (9) years. In
Obligations and Contracts
other words, in only a short time, the entire obligation would have The defendants-appellants contention is without merit. We agree
been paid. Furthermore, although the principal obligation was only with the plaintiffs-appellees that when the defendantsappellants,
P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees instead of availing of their alleged right to rescind, have accepted
had already paid an aggregate amount of P4,533.38. To sanction and received delayed payments of installments, though the plaintiff
the rescission made by the defendants-appellants will work s-appellees have been in arrears beyond the grace period
injustice to the plaintiffs-appellees. (See J.M. Tuazon and Co., Inc. v. mentioned in paragraph 6 of the contract, the defendants-
Javier, 31 SCRA 829) It would unjustly enrich the appellants have waived and are now estopped from exercising their
defendantsappellants. alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68), we
held that:
Article 1234 of the Civil Code which provides that:
xxx xxx xxx
If the obligation has been substantially performed in good faith,
the obligor may recover as though there had been a strict and But defendants do not deny that in spite of the long arrearages
complete fulfillment, less damages suffered by the obligee. also neither they nor their predecessor, Teodoro de Guzman, even took
militates against the unilateral act of the defendantsappellants in steps to cancel the option or to eject the appellees from the home-
cancelling the contract. lot in question. On the contrary, it is admitted that the delayed
payments were received without protest or qualification, x x x
We agree with the observation of the lower court to the effect that: Under these circumstances, We cannot but agree with the lower
Although the primary object of selling subdivided lots is business, court that at the time appellees exercised their option, appellants
yet, it cannot be denied that this subdivision is likewise purposely had already forfeited their right to invoke the above-quoted
done to afford those landless, low income group people of realising provision regarding the nullifying effect of the non-payment of six
their dream of a little parcel of land which they can really call their months rentals by appellees by their having accepted without
own. qualification on July 21,1964 the full payment by appellees of all
their arrearages.
The defendants-appellants cannot rely on paragraph 9 of the
contract which provides: The defendants-appellants contend in the second assignment of
error that the ledger of payments show a balance of P671.67 due
NINTH.That whatever consideration of the party of the FIRST from the plaintiffs-appellees, They submit that while it is true that
PART may concede to the party of the SECOND PART, as not the total monthly installments paid by the plaintiffs-appellees may
exacting a strict compliance with the conditions of paragraph 6 of have exceeded P3,920.00, a substantial portion of the said
this contract, as well as any other condonation that the party of the payments were applied to the interests since the contract
FIRST PART may give to the party of the SECOND PART with regards specifically provides for a 7% in terest per annum on the remaining
to the obligations of the latter, should not be interpreted as a balance. The defendantsappellants rely on paragraph 2 of the
renunciation on the part of the party of the FIRST PART of any right contract which provides:
granted it by this contract, in case of default or non-compliance by
the party of the SECOND PART." SECOND.That in consideration of the agreement of sale of the
above described property, the party of the SECOND PART obligates
The defendants-appellants argue that paragraph nine clearly allows himself to pay to the party of the FIRST PART the Sum of THREE
the seller to waive the observance of paragraph 6 not merely once, THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine
but for as many times as he wishes. Currency, plus interest at the rate of 7% per annum x x x. (Italics
supplied)

Obligations and Contracts


The plaintiffs-appellees on the other hand are firm in their While it is true that paragraph 2 of the contract obligated the
submission that since they have already paid the plaintiffs-appellees to pay the defendants-appellants the sum of
defendantsappellants a total sum of P4,533.38, the defendants- P3,920.00 plus 7% interest per annum, it is likewise true that under
appellants must now be compelled to execute the final deed of sale paragraph 12 the seller is obligated to transfer the title to the
pursuant to paragraph 12 of the contract which provides: buyer upon payment of the P3,920.00 price sale.

TWELFTH.That once the payment of the sum of P3,920.00, the The contract to sell, being a contract of adhesion, must be
total price of the sale is completed, the party to the FIRST PART will construed against the party causing it. We agree with the
execute in favor of the party of the SECOND PART, the necessary observation of the plaintiffs-appellees to the effect that the terms
deed or deeds to transfer to the latter the title of the parcel of land of a contract must be interpreted against the party who drafted the
sold, free from all liens and encumbrances other than those same, especially where such interpretation will help effect justice to
expressly provided in this contract; it is understood, however, that buyers who, after having invested a big amount of money, are now
all the expenses which may be incurred in the said transfer of title sought to be deprived of the same thru the prayed application of a
shall be paid by the party of the SECOND PART, as above stated. contract clever in its phraseology, condemnable in its lopsidedness
and injurious in its effect which, in essence, and in its entirety is
Closely related to the second assignment of error is the submission most unfair to the buyers.
of the plaintiffs-appellees that the contract herein is a contract of
adhesion. Thus, since the principal obligation under the contract is only
P3,920.00 and the plaintiffs-appellees have already paid an
We agree with the plaintiffs-appellees. The contract to sell entered aggregate amount of P4,533.38, the courts should only order the
into by the parties has some characteristics of a contract of payment of the few remaining installments but not uphold the
adhesion. The defendants-appellants drafted and prepared the cancellation of the contract. Upon payment of the balance of
contract. The plaintiffs-appellees, eager to acquire a lot upon which P671.67 without any interest thereon, the defendantsappellants
they could build a home, affixed their signatures and assented to must immediately execute the final deed of sale in favor of the
the terms and conditions of the contract They had no opportunity plaintiffs-appellees and execute the necessary transfer documents
to question nor change any of the terms of the agreement. It was as provided in paragraph 12 of the contract. The attorneys fees are
offered to them on a take it or leave it basis. In Sweet Lines, Inc. justified.
v. Teves (83 SCRA 381), we held that:
WHEREFORE, the instant petition is DENIED for lack of merit. The
xxx xxx xxx decision appealed from is AFFIRMED with the modification that the
x x x (W)hile generally, stipulations in a contract come about after plaintiffs-appellees should pay the balance of SIX HUNDRED
deliberate drafting by the parties thereto, . . . there are certain SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67)
contracts almost all the provisions of which have been drafted only without any interests. Costs against the defendants-appellants.
by one party, usually a corporation. Such contracts are called SO ORDERED. Angeles vs. Calasanz, 135 SCRA 323, No. L-42283
contracts of adhesion, because the only participation of the party is March 18, 1985
the signing of his signature or his adhesion thereto. Insurance
contracts, bills of lading, contracts of sale of lots on the installment
plan fall into this category. (Paras, Civil Code of the Philippines,
Seventh ed., Vol. 1, p. 80,)" (Italics supplied) G.R. No. 96643. April 23, 1993.*

Obligations and Contracts


ERNESTO DEIPARINE, JR., petitioner, vs. THE HON. COURT OF one of them that violates the reciprocity between them. The
APPEALS, CESARIO CARUNGAY and ENGR. NICANOR violation of reciprocity between Deiparine and the Carungay
TRINIDAD, respondents. spouses, to wit, the breach caused by Deiparines failure to follow
the stipulated plans and specifications, has given the Carungay
P.D. 1746; Philippine Domestic Construction Board; The spouses the right to rescind or cancel the contract.
adjudicatory powers of the Philippine Domestic Construction Board
are meant to apply only to public construction contracts.The Same; Same; Same; Basic principle in human relations that every
wording of P.D. 1746 is clear. The adjudicatory powers of the person must, in the performance of his duties, act with justice, give
Philippine Domestic Construction Board are meant to apply only to everyone his due and observe honesty and good faith.While it is
public construction contracts. Its power over private construction true that the stress test was not required in any of the contract
contracts is limited to the formulation and recommendation of rules documents, conducting the test was the only manner by which the
and procedures for the adjudication and settlement of disputes owner could determine if the contractor had been faithfully
involving such (private) contracts. It therefore has no jurisdiction complying with his prestations under their agreement. Furthermore,
over cases like the one at bar which remain cognizable by the both parties later agreed in writing that the core test should be
regular courts of justice. conducted. When the structure failed under this test, the Carungay
spouses were left with no other recourse than to rescind their
Civil Law; Obligations and Contracts; Rescission; Art. 1191, unlike contract. It is a basic principle in human relations, acknowledged in
Art. 1385, is not predicated on economic prejudice to one of the Article 19 of the Civil Code, that every person must, in the
parties that violates but on breach of faith by one of them that performance of his duties, act with justice, give everyone his due,
violates the reciprocity between them.There is also a right of and observe honesty and good faith. This admonition is reiterated
rescission under the law on obligations as granted in Article 1191, in Article 159, which states that obligations arising from contracts
providing as follows: have the force of law between the contracting parties and should
Art. 1191. The power to rescind obligations is implied in reciprocal be complied with in good faith. The petitioner has ignored these
ones, in case one of the obligors should not comply with what is exhortations and is therefore not entitled to the relief he seeks.
incumbent upon him. The injured party may choose between the Legal Ethics; Contempt of Court; Atty. Gregorio B. Escasinas has
fulfillment and the rescission of the obligation, with the payment of committed contempt of Court by deliberately changing the
damages in either case. He may also seek rescission, even after he language of Sec. 6 (b), paragraph 3, of P.D. 1746.For deliberately
has chosen fulfillment, if the latter should become impossible. The changing the language of Section 6(b), paragraph 3, of P.D. No.
court shall decree the rescission claimed, unless there be just cause 1746, Atty. Gregorio B. Escasinas is hereby fined P1,000.00, with
authorizing the fixing of a period. This is understood to be without the warning that repetition of a similar offense will be dealt with
prejudice to the rights of third persons who have acquired the more severely.
thing, in accordance with articles 1385 and 1388 and the Mortgage
Law. This was the provision the trial court and the respondent court PETITION for review of the decision of the Court of Appeals.
correctly applied because it relates to contracts involving reciprocal
obligations like the subject construction contract. The construction CRUZ, J.:
contract falls squarely under the coverage of Article 1191 because This case involves not only the factual issue of breach of contract
it imposes upon Deiparine the obligation to build the structure and and the legal questions of jurisdiction and rescission. The basic
upon the Carungays the obligation to pay for the project upon its inquiry is whether the building subject of this litigation is safe
completion. Article 1191, unlike Article 1385, is not predicated on enough for its future occupants. The petitioner says it is, but the
economic prejudice to one of the parties but on breach of faith by private respondents demur. They have been sustained by the trial
Obligations and Contracts
court and the appellate court. The petitioner says they have all samples failed.6 This meant that the building was structurally
erred. defective.

The spouses Cesario and Teresita Carungay entered into an In view of this finding, the spouses Carungay filed a complaint with
agreement with Ernesto Deiparine, Jr. on August 13, 1982, for the the Regional Trial Court of Cebu for the rescission of the
construction of a three-story dormitory in Cebu City.1 The construction contract and for damages, Deiparine moved to
Carungays agreed to pay P970,000.00, inclusive of contractors fee, dismiss, alleging that the court had no jurisdiction over
and Deiparine bound himself to erect the building in strict construction contracts, which were now cognizable by the
accordance to (sic) plans and specifications. Nicanor Trinidad, Jr., a Philippine Construction Development Board pursuant to Presidential
civil engineer, was designated as the representative of the Decree No. 1746. The motion was denied in an order dated April 12,
Carungay spouses, with powers of inspection and coordination with 1984.
the contractor.
After trial on the merits, Judge Juanito A. Bernad rendered
Deiparine started the construction on September 1, 1982.2 On judgment: a) declaring the construction agreement rescinded; b)
November 6, 1982, Trinidad sent him a document entitled General condemning Deiparine to have forfeited his expenses in the
Conditions and Specifications which inter alia prescribed 3,000 psi construction in the sum of P244,253.70; c) ordering Deiparine to
(pounds per square inch) as the minimum acceptable compressive reimburse to the spouses Carungay the sum of P15,104.33 for the
strength of the building.3 core testing; d) ordering Deiparine to demolish and remove all the
existing structures and restore the premises to their former
In the course of the construction, Trinidad reported to Cesario condition before the construction began, being allowed at the same
Carungay that Deiparine had been deviating from the plans and time to take back with him all the construction materials belonging
specifications, thus impairing the strength and safety of the to him; and e) ordering Deiparine to pay the Carungay spouses
building. On September 25, 1982, Carungay ordered Deiparine to attorneys fees in the amount of P10,000.00 as well as the costs of
first secure approval from him before pouring cement.4 This order the suit.7
was not heeded, prompting Carungay to send Deiparine another
memorandum complaining that the construction works are faulty On appeal, the decision was affirmed in toto by the respondent
and done haphazardly . . . mainly due to lax supervision coupled court on August 14, 1990.8 His motion for reconsideration having
with . . . inexperienced and unqualified staff.5 This memorandum been denied, petitioner Ernesto Deiparine, Jr. has come to this
was also ignored. Court to question once more the jurisdiction of the regular courts
over the case and the power of the trial court to grant rescission.
After several conferences, the parties agreed to conduct cylinder He will lose again.
tests to ascertain if the structure thus far built complied with safety
standards. Carungay suggested core testing. Deiparine was The challenge to the jurisdiction of the trial court is untenable.
reluctant at first but in the end agreed. He even promised that if
the tests should show total failure, or if the failure should exceed P.D. 1746 created the Construction Industry Authority of the
10%, he would shoulder all expenses; otherwise, the tests should Philippines (CIAP) as the umbrella organization which shall exercise
be for the account of Carungay. jurisdiction and supervision over certain administrative bodies
acting as its implementing branches. The implementing body in this
The core testing was conducted by Geo-Testing International, a case is the Philippine Domestic Construction Board (PDCB) and not
Manila-based firm, on twenty-four core samples. On the basis of the inexistent Philippine Construction Development Board as
3,000 psi, all the samples failed; on the basis of 2,500 psi, only maintained by Deiparine.
three samples passed; and on the basis of 2,000 psi, nineteen
Obligations and Contracts
Among the functions of the PDCB under Section 6 of the decree are The wording of P.D. 1746 is clear. The adjudicatory powers of the
to: Philippine Domestic Construction Board are meant to apply only to
public construction contracts. Its power over private construction
xxx contracts is limited to the formulation and recommendation of rules
3. Adjudicate and settle claims and disputes in the implementation and procedures for the adjudication and settlement of disputes
of public construction contracts and for this purpose, formulate and involving such (private) contracts. It therefore has no jurisdiction
adopt the necessary rules and regulations subject to the approval over cases like the one at bar which remain cognizable by the
of the President; regular courts of justice.

xxx On the issue of rescission, Deiparine insists that the construction


agreement does not specify any compressive strength for the
5. Formulate and recommend rules and procedures for the structure nor does it require that the same be subjected to any kind
adjudication and settlement of claims and disputes in the of stress test. Therefore, since he did not breach any of his
implementation of contracts in private construction; (Emphasis covenants under the agreement, the court erred in rescinding the
supplied) contract.
Deiparine argues that the Philippine Construction Development The record shows that Deiparine commenced the construction soon
Board (that is, the Philippine Domestic Construction Board) has after the signing of the contract, even before Trinidad had
exclusive jurisdiction to hear and try disputes arising from domestic submitted the contract documents, including the General
constructions. He invokes the above-mentioned functions to prove Conditions and Specifications.
his point.
According to Eduardo Logarta, the petitioners own project
His counsel is obviously trying to mislead the Court. First, he engineer, Deiparine actually instructed him and some of the other
purposely misquotes Section 6(b), paragraph 3, substituting the workers to ignore the specific orders or instructions of Garungay or
word the for public, thus: Trinidad relative to the construction.9 Most of these orders involved
safety measures such as: (1) the use of two concrete vibrators in
3. Adjudicate and settle claims and disputes in the implementation
the pouring of all columns, beams and slabs; (2) making PVC pipes
of the construction contracts and for this purpose, formulate and
well-capped to prevent concrete from getting inside them; (3) the
adopt the necessary rules and regulations subject to the approval
use of 12-mm reinforcement bars instead of 10-mm bars; (4) the
of the President; (Italics ours)
use of mixed concrete reinforcements instead of hollow block
Second, he makes the wrong emphasis in paragraph 5, thus: reinforcements; and (5) securing the approval of the owner or his
representative before any concrete-pouring so that it could be
5. Formulate and recommend rules and procedures for the determined whether the cement mixture complied with safety
ADJUDICATION and SETTLEMENT of CLAIMS and DISPUTES in the standards. Deiparine obviously wanted to avoid additional
implementation of CONTRACTS in PRIVATE CONSTRUCTIONS. expenses which would reduce his profit.
For deliberately changing the language of the abovequoted Parenthetically, it is not disputed that Deiparine is not a civil
paragraph 3, Atty. Gregorio B. Escasinas has committed contempt engineer or an architect but a master mariner and former ship
of this Court and shall be disciplined. As for paragraph 5, the captain;10 that Pio Bonilla, a retainer of Deiparine Construction,
correct stress should be on the words formulate and recommend, was not the supervising architect of the project;11 that the real
which is all the body can do, rather than on adjudication and supervisor of the construction was Eduardo Logarta, who was only
settlement. a third year civil engineering student at the time;12 that his
Obligations and Contracts
understudy was Eduardo Martinez, who had then not yet passed Deiparine also avers that the contract does not also require any
the board examinations;13 and that the supposed project engineer, kind of test to be done on the structure and that, test or no test, he
Nilo Paglinawan, was teaching full-time at the University of San has not violated the agreement. Nevertheless, he subjected the
Jose-Recoletos, and had in fact entered the construction site only building to a cylinder test just to convince Carungay that the
after November 4, 1982, although the construction had already unfinished dormitory was structurally sound.
begun two months earlier.14
A cylinder test is done by taking samples from fresh concrete,
It was after discovering that the specifications and the field placing them, in cylinder mold and allowing them to harden for a
memorandum were not being followed by Deiparine that Carungay maximum of 28 days, following which they are subjected to
insisted on the stress tests. compression to determine if the cement mixture to be poured
conforms to accepted standards in construction17 Carungay was
There were actually two sets of specifications. The first not satisfied with the results of the cylinder test because they were
Specifications are labeled as such and are but a general summary inconsistent and could easily be falsified by the simple expedient of
of the materials to be used in the construction. These were replacing the samples with a good mixture although a different
prepared by Trinidad prior to the execution of the contract for the mixture had been used in the actual pouring. Consequently.
purpose only of complying with the document requirements of the Carungay requested core testing, a more reliable procedure
loan application of Cesario Carungay with the Development Bank of because the specimens obtained by extracting concrete from the
the Philippines. The other specifications, which were also prepared hardened existing structure would determine its actual strength.
by Trinidad, are entitled General Conditions and Specifications The core test is less prone to manipulation than the cylinder test
and laid down in detail the requirements of the private respondent because the samples in the former are taken from the building
in the construction of his building. which is already standing.18
In his testimony, Deiparine declared that when the contract was Deiparine vehemently refused to go along with the core test,
signed on August 13, 1982, it was understood that the plans and insisting that the results of the cylinder test earlier made were
specifications would be given to him by Trinidad later.15 Deiparine conclusive enough to prove that the building was structurally
thus admitted that the plans and specifications referred to in the sound. What was the real reason for this refusal? After all, Carungay
construction agreement were not the first Specifications but the would shoulder the expenses if the specimens passed the core test,
General Conditions and Specifications submitted by Trinidad in unlike the cylinder test, which was for the petitioners account. The
November 1982. This second set of specifications required a only logical explanation would be that Deiparine was not sure that
structural compressive strength of 3,000 psi.16 It completely belies the core test would prove favorable to him.
Deiparines contention that no compressive strength of the
dormitory was required. We see no reason to disturb the factual finding of the courts below
that Deiparine did not deal with the Carungays in good faith. His
Deiparine further argues that by following the concrete mixture breach of this duty constituted a substantial violation of the
indicated in the first specifications, that is, 1:2:4, the structure contract correctible by judicial rescission.
would still attain a compressive strength of 2,500 psi, which was
acceptable for dormitories. According to him, the 3,000 psi The petitioner challenges the application by the lower court of
prescribed in the General Conditions and Specifications was Article 1191 of the Civil Code in rescinding the construction
recommended for roads, not for buildings. In so arguing, he is agreement. His position is that the applicable rules are Articles
interpreting the two specifications together but applying only the 1385 and 1725 of the Civil Code.
first and rejecting the second.
Article 1385 states:
Obligations and Contracts
Rescission creates the obligation to return the things which were Art. 1191. The power to rescind obligations is implied in reciprocal
the object of the contract, together with their fruits, and the price ones, in case one of the obligors should not comply with what is
with its interest; consequently, it can be carried out only when he incumbent upon him.
who demands rescission can return whatever he may be obliged to
restore. The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
Article 1725 provides that in a contract for a piece of work: case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The owner may withdraw at will from the construction of the work,
although it may have been commenced, indemnifying the The court shall decree the rescission claimed, unless there be just
contractor for all the latters expenses, work, and the usefulness cause authorizing the fixing of a period.
which the owner may obtain therefrom, and damages.
This is understood to be without prejudice to the rights of third
Deiparine seems to be confused over the right of rescission, which persons who have acquired the thing, in accordance with articles
is used in two different contexts in the Civil Code. 1385 and 1388 and the Mortgage Law.

Under the law on contracts, there are what are called rescissible This was the provision the trial court and the respondent court
contracts which are enumerated in Article 1381 thus: correctly applied because it relates to contracts involving reciprocal
obligations like the subject construction contract. The construction
(1) Those which are entered into by guardians whenever the wards contract falls squarely under the coverage of Article 1191 because
whom they represent suffer lesion by more than one-fourth of the it imposes upon Deiparine the obligation to build the structure and
value of the things which are the object thereof; upon the Carungays the obligation to pay for the project upon its
(2) Those agreed upon in representation of absentees, if the latter completion.
suffer the lesion stated in the preceding number; Article 1191, unlike Article 1385, is not predicated on economic
(3) Those undertaken in fraud of creditors when the latter cannot in prejudice to one of the parties but on breach of faith by one of
any other manner collect the claims due them; them that violates the reciprocity between them.19 The violation of
reciprocity between Deiparine and the Carungay spouses, to wit,
(4) Those which refer to things under litigation if they have been the breach caused by Deiparines failure to follow the stipulated
entered into by the defendants without the knowledge and plans and specifications, has given the Carungay spouses the right
approval of the litigants or of competent judicial authority; to rescind or cancel the contract.
(5) All other contracts specially declared by law to be subject to Article 1725 cannot support the petitioners position either, for this
rescission. contemplates a voluntary withdrawal by the owner without fault on
the part of the contractor, who is therefore entitled to indemnity,
Article 1385, upon which Deiparine relies, deals with the rescission
and even damages, for the work he has already commenced. There
of the contracts enumerated above, which do not include the
is no such voluntary withdrawal in the case at bar. On the contrary,
construction agreement in question.
the Carungays have been constrained to ask for judicial rescission
There is also a right of rescission under the law on obligations as because of the petitioners failure to comply with the terms and
granted in Article 1191, providing as follows: conditions of their contract.

The other applicable provisions are:

Obligations and Contracts


Article 1714. If the contractor agrees to produce the work from Furthermore, both parties later agreed in writing that the core test
material furnished by him, he shall deliver the thing produced to should be conducted. When the structure failed under this test, the
the employer and transfer dominion over the thing. This contract Carungay spouses were left with no other recourse than to rescind
shall be governed by the following articles as well as by the their contract.
pertinent provisions on warranty of title and against hidden defects
and the payment of price in a contract of sale. It is a basic principle in human relations, acknowledged in Article 19
of the Civil Code, that every person must, in the performance of
Article 1715. The contractor shall execute the work in such a his duties, act with justice, give everyone his due, and observe
manner that it has the qualities agreed upon and has no defects honesty and good faith. This admonition is reiterated in Article
which destroy or lessen its value or fitness for its ordinary or 159, which states that obligations arising from contracts have the
stipulated use. Should the work be not of such quality, the force of law between the contracting parties and should be
employer may require that the contractor remove the defect or complied with in good faith. The petitioner has ignored these
execute another work. If the contractor fails or refuses to comply exhortations and is therefore not entitled to the relief he seeks.
with this obligation, the employer may have the defect removed or
another work executed, at the contractors cost. WHEREFORE, the challenged decision is hereby AFFIRMED and the
instant petition for review is DENIED, with costs against the
Article 1727. The contractor is responsible for the work done by petitioner. For deliberately changing the language of Section 6(b),
persons employed by him. paragraph 3, of P.D. No. 1746, Atty. Gregorio B. Escasinas is hereby
fined P1,000.00, with the warning that repetition of a similar
While it is true that the stresa test was not required in any of the offense will be dealt with more severely. It is so ordered. Deiparine,
contract documents, conducting the test was the only manner by Jr. vs. Court of Appeals, 221 SCRA 503, G.R. No. 96643 April 23,
which the owner could determine if the contractor had been 1993
faithfully complying with his prestations under their agreement.

Obligations and Contracts