G.R. No.
167519 January 14, 2015 WHEREAS, WELLEX, on the other hand, has current airline operation in the
THE WELLEX GROUP, INC., Petitioner,
vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of
Court. The Wellex Group, Inc. (Wellex) prays that the Decision 2 dated July
30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be reversed and
set aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court,
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial
Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (ULand) and
ordered the rescission of the Memorandum of Agreement 5 between Wellex
and U-Land.6
Wellex is a corporation established under Philippine law and it maintains
airline operations in the Philippines.7 It owns shares of stock in several
corporations including Air Philippines International Corporation (APIC),
Philippine Estates Corporation (PEC), and Express Savings Bank
(ESB).8 Wellex alleges that it owns all shares of stock of Air Philippines
Corporation (APC).9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and
existing under the laws of Taiwan, registered to do business . . . in the
Philippines."10 It is engaged in the business of air transportation in Taiwan
and in other Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of
Agreement12 (First Memorandum of Agreement) to expand their respective
airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation in
Taiwan, Philippines and/or in other countries in the Asian region, and
desires to expand its operation and increase its market share by, among
others, pursuing a long-term involvement in the growing Philippine airline
industry;
Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the
Asian regional markets, a Memorandum of Agreement on ______, a
certified copy of which is attached hereto as Annex "A" and is hereby made
an integral part hereof, which sets forth, among others, the basis for
WELLEX’s present ownership of shares in Air Philippines International
Corporation. WHEREAS, the parties recognize the opportunity to develop a
long-term profitable relationship by combining such of their respective
resources in an expanded airline operation as well as in property
development and in other allied business activities in the Philippines, and
desire to set forth herein the basic premises and their understanding with
respect to their joint cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex and U-Land agreed to
develop a long-term business relationship through the creation of joint
interest in airline operations and property development projects in the
Philippines.15 This long-term business relationship would be implemented
through the following transactions, stated in Section 1 of the First
Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC") equivalent
to at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares . . . [;]
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at least
35% of the outstanding capital stock of PEC, but in any case, not
less than 490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with
PEC . . . [; and]
(d) U-LAND shall be given the option to acquire from WELLEX
shares of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of
the outstanding capital stock of ESB . . . under terms to be
mutually agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its
execution date, Wellex and U-Land would execute a share purchase
agreement covering U-Land’s acquisition of the shares of stock of both
APIC (APIC shares) and PEC (PEC shares).17 In this share purchase
agreement, U-Land would purchase from Wellex its APIC shares and PEC
shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of
APIC and 0.65 per share of PEC. However, they likewise agreed that the
final price of the shares of stock would be reflected in the actual share
purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC shares
would be paid upon the execution of the share purchase agreement and
Wellex’s delivery of the stock certificates covering the shares of stock. The
transfer of APIC shares and PEC shares to U-Land was conditioned on the
full remittance of the final purchase price as reflected in the share
purchase agreement. Further, the transfer was conditioned on the
approval of the Securities and Exchange Commission of the issuance of the
shares of stock and the approval by the Taiwanese government of U-
Land’s acquisition of these shares of stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date
hereof (unless extended by mutual agreement), U-LAND and WELLEX shall
execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the SHPA
shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares
at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be
paid in full upon execution of the SHPA against delivery of the Subject
Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a
separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii)
the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required
approval by the Taiwanese government of the acquisition by U-LAND of
the Subject Shares shall likewise have been obtained.21
II. Operation and management of APIC/PEC/APC
U-Land was "entitled to a proportionate representation in the Board of
Directors of APIC and PEC in accordance with Philippine law." 22 Operational
control of APIC and APC would be exercised jointly by Wellex and U-Land
"on the basis of mutual agreement and consultations."23 The parties
intended that U-Land would gain primary control and responsibility for the
international operations of APC.24 Wellex manifested that APC is a
subsidiary of APIC in the second preambular clause of the First
Memorandum of Agreement.25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a
proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law. For this purpose, WELLEX shall cause the
resignation of its nominated Directors in APIC and PEC to accommodate U-
LAND’s pro rata number of Directors. Subject to applicable Philippine law
and regulations, operational control of APIC and Air Philippines Corporation
("APC") shall be lodged jointly to WELLEX and U-LAND on the basis of
mutual agreement and consultations. Further, U-LAND may second
technical and other consultants into APIC and/or APC with the view to
increasing service, productivity and efficiency, identifying and
implementing profit-service opportunities, developing technical capability
and resources, and installing adequate safety systems and procedures. In
addition, U-LAND shall arrange for the lease by APC of at least three (3)
aircrafts owned by ULAND under such terms as the parties shall mutually
agree upon. It is the intent of the parties that U-LAND shall have primary
control and responsibility for APC’s international operations.26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development
agreement simultaneous with the execution of the share purchase
agreement. The joint development agreement shall cover housing and
other real estate development projects.27
U-Land agreed to remit the sum ofUS$3 million not later than May 22,
1998. This sum was to serve as initial funding for the development
projects that Wellex and U-Land were to undertake pursuant to the joint
development agreement. In exchange for the US$3 million, Wellex would
deliver stock certificates covering 57,000,000 PEC shares to U-Land.28
The execution of a joint development agreement was also conditioned on
the execution of a share purchase agreement.29
Section 4 of the First Memorandum of Agreement reads:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint development
agreement ("JDA") to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from
the projects covered by the JDA shall be shared equally between ULAND
and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of
US$3.0 million as initial funding for the aforesaid development projects
against delivery by WELLEX of 57,000,000 shares of PEC as security for
said amount in accordance with Section 9 below.30
In case of conflict between the provisions of the First Memorandum of
Agreement and the provisions of the share purchase agreement or its
implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated otherwise
or the context of any agreement between the parties would reveal a
different intent.31 Thus, in Section 6 of the First Memorandum of
Agreement:
6. Primacy of Agreement. – It is agreed that in case of conflict between
the provisions of this Agreement and those of the SHPA and the
implementing agreements of the SHPA, the provisions of this Agreement
shall prevail, unless the parties specifically state otherwise, or the context
clearly reveal a contrary intent.32
Finally, Wellex and U-Land agreed that if they were unable to agree on the
terms of the share purchase agreement and the joint development
agreement within 40 days from signing, then the First Memorandum of
Agreement would cease to be effective.33
In case no agreements were executed, the parties would be released from
their respective undertakings, except that Wellex would be required to
refund within three (3) days the US$3 million given as initial funding by U-
Land for the development projects. If Wellex was unable to refund the
US$3 million to U-Land, U-Land would have the right to recover on the
57,000,000 PEC shares that would be delivered to it.34 Section 9 of the
First Memorandum of Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of
the SHPA and/or the JDA within forty (40) days from date hereof (or such
period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the
US$3.0 million provided under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover on the 57,000,000 PEC
shares delivered to U-LAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman and
President William T. Gatchalian (Mr. Gatchalian) and U-Land Chairman Ker
Gee Wang (Mr. Wang) on May 16, 1998.36
Annex "A" or the Second Memorandum of Agreement
Attached and made an integral part of the First Memorandum of
Agreement was Annex "A," as stated in the second preambular clause. It is
a document denoted as a "Memorandum of Agreement" entered into by
Wellex, APIC, and APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of
______ at Makati City, by and between:
THE WELLEX GROUP, INC., a corporation duly organized and existing
under the laws of the Philippines, with offices at 22F Citibank Tower, 8741
Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM
PACIFIC, INC.), likewise a corporation duly organized and existing under
the laws of the Philippines, with offices at 8F Rufino Towers, Ayala Avenue,
Makati City (hereinafter referred to as "APIC"),
- and –
AIR PHILIPPINES CORPORATION, corporation duly organized and existing
under the laws of the Philippines, with offices at Multinational Building,
Ayala Avenue, Makati City (hereinafter referred to as "APC").
W I T N E S S E T H: That -
WHEREAS, TWGI is the registered and beneficial owner, or has otherwise
acquired _____ (illegible in rollo) rights to the entire issued and
outstanding capital stock (the "APC SHARES") of AIR PHILIPPINES
CORPORATION ("APC") and has made stockholder advances to APC for the
_____ (illegible in rollo) of aircraft, equipment and for working capital used
in the latter’s operations (the "_____ (illegible in rollo) ADVANCES").
WHEREAS, APIC desires to obtain full ownership and control of APC,
including all of _____ (illegible in rollo) assets, franchise, goodwill and
operations, and for this purpose has offered to acquire the _____ (illegible
in rollo) 302SHARES of TWGI in APC, including the APC ADVANCES due to
TWGI from APC, with _____ (illegible in rollo) of acquiring all the assets,
franchise, goodwill and operations of APC; and TWGI has _____ (illegible
in rollo) to the same in consideration of the conveyance by APIC to TWGI
of certain investments, _____ (illegible in rollo) issuance of TWGI of
shares of stock of APIC in exchange for said APC SHARES and the _____
(illegible in rollo) ADVANCES, as more particularly described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in APIC in
exchange for the _____ (illegible in rollo) by APIC to TWGI
of investment shares of APIC in Express Bank, Petro
Chemical _____ (illegible in rollo) of Asia Pacific, Republic
Resources & Development Corporation and Philippine
_____ (illegible in rollo) Corporation (the "APIC
INVESTMENTS").
. [Wellex] was still in the process of acquiring and consolidating its title to
shares of stock of APIC."39 It "included the terms of a share swap whereby
[Wellex] agreed to transfer to APIC its shareholdings and advances to APC
in exchange for the issuance by APIC of shares of stock to [Wellex]."40
The Second Memorandum of Agreement was signed by Mr. Gatchalian,
APIC President Salud,41 and APC President Augustus C. Paiso.42 It was not
dated, and no place was indicated as the place of signing.43 It was not
notarized either, and no other witnesses signed the document.44

2. TWGI likewise agrees to transfer the APC SHARES to
APIC in exchange solely _____ (illegible in rollo) the
issuance by APIC of One Billion Seven Hundred Ninety-
Seven Million Eight Hundred Fifty Seven Thousand Three
Hundred Sixty Four (1,797,857,364) shares of its capital
stock of a _____ (illegible in rollo) value of ₱1.00 per share
(the "APIC SHARES"), taken from the currently authorized
but _____ (illegible in rollo) shares of the capital stock of
APIC, as well as from the increase in the authorized capital
_____ (illegible in rollo) of APIC from ₱2.0 billion to ₱3.5
billion.
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not
able to enter into any share purchase agreement although drafts were
exchanged between the two.
Despite the absence of a share purchase agreement, U-Land remitted to
Wellex a total of US$7,499,945.00.46These were made in varying amounts
and through the issuance of post-dated checks.47 The dates of remittances
were the following:
Date Amount (in US$)

June 30, 1998 990,000.00

3. It is the basic understanding of the parties hereto that
the transfer of the APC _____ (illegible in rollo) as well as July 2, 1998 990,000.00
the APC ADVANCES to APIC shall be intended to enable
APIC to obtain _____ (illegible in rollo) and control of APC, 20,000.00
including all of APC’s assets, franchise, goodwill and _____ July 30, 1998 990,000.00
(illegible in rollo).
490,000.00
4. Unless the parties agree otherwise, the effectivity of this
490,000.00
Agreement and transfers _____ (illegible in rollo) APC
ADVANCES in exchange for the APIC INVESTMENTS, and August 1, 1998 990,000.00
the transfer of the _____ (illegible in rollo) SHARES in
exchange for the issuance of new APIC SHARES, shall be 490,000.00
subject to _____ (illegible in rollo) due diligence as the
490,000.00
parties shall see fit, and the condition subsequent that the
_____ (illegible in rollo) for increase in the authorized August 3, 1998 990,000.00
capital stock of the APIC from ₱2.0 billion to ₱3.5 _____
(illegible in rollo) shall have been approved by the 70,000.00
Securities and Exchange Commission.
September 25, 1998 399,972.50

IN WITNESS WHEREOF, the parties have caused these 99, 972.50

presents to be signed on the date _____ (illegible in rollo)
first above written.38 (Emphasis supplied) Total US$7,499,945.0048

This Second Memorandum of Agreement was allegedly incorporated into Wellex acknowledged the receipt of these remittances in a confirmation
the First Memorandum of Agreement as a "disclosure to [U-Land] [that] . . letter addressed to U-Land dated September 30, 1998.49
According to Wellex, the parties agreed to enter into a security
arrangement. If the sale of the shares of stock failed to push through, the
partial payments or remittances U-Land made were to be secured by these
shares of stock and parcels of land.50 This meant that U-Land could
recover the amount it paid to Wellex by selling these shares of stock and
land titles or using them to generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land
stock certificates representing 60,770,000 PEC shares and 72,601,000
APIC shares.51 These were delivered to U-Land on July 1, 1998, September
1, 1998, and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT)
Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and T-216775
covering properties owned by Westland Pacific Properties Corporation in
Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-
1114398, and T-120772 covering properties owned by Rexlon Realty
Group, Inc.53 On October 1, 1998,54 U-Land received a letter from Wellex,
indicating a list of stock certificates that the latter was giving to the former
by way of "security."55
Despite these transactions, Wellex and U-Land still failed to enter into the
share purchase agreement and the joint development agreement.
In the letter56 dated July 22, 1999, 10 months57 after the last formal
communication between the two parties, U-Land, through counsel,
demanded the return of the US$7,499,945.00.58 This letter was sent 14
months after the signing of the First Memorandum of Agreement.
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to
enter into the. . . Share Purchase Agreement."59 As far as U-Land was
concerned, the First Memorandum of Agreement was no longer in effect,
pursuant to Section 9.60 As such, U-Land offered to return all the stock
certificates covering APIC shares and PEC shares as well as the titles to
real property given by Wellex as security for the amount remitted by U-
Land.61
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-
Land’s claims. Counsel for Wellex stated that the two parties carried out
several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development agreement.
Wellex asserted that under the joint development agreement, U-Land
agreed to remit the sum of US$3 million by May 22,1998 as initial funding
for the development projects.63
Wellex further asserted that it conducted extended discussions with U-
Land in the hope of arriving at the final terms of the agreement despite
the failure of the remittance of the US$3 million on May 22, 1998. 64 That
remittance pursuant to the joint development agreement "would have
demonstrated [U-Land’s] good faith in finalizing the agreements."65
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually
agreed on the terms of both [the share purchase agreement and the joint
development agreement.]"66 Wellex believed that the parties had already
"gone beyond the ‘intent’ stage of the [First Memorandum of Agreement]
and [had already] effected partial implementation of an over-all
agreement."67 U-Land even delivered a total of 12 post-dated checks to
Wellex as payment for the APIC shares and PEC shares.68 "[Wellex] on the
other hand, had [already] delivered to[U-Land] certificates of stock of
APEC [sic] and PEC as well as various land titles to cover actual
remittances."69 Wellex alleged that the agreements were not finalized
because U-Land was "forced to suspend operations because of financial
problems spawned by the regional economic turmoil."70
Thus, Wellex maintained that "the inability of the parties to execute the
[share purchase agreement] and the [joint development agreement]
principally arose from problems at [U-Land’s] side, and not due to
[Wellex’s] ‘unjustified refusal to enter into [the] [share purchase
agreement][.]’"71
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the
First Memorandum of Agreement and damages against Wellex and for the
issuance of a Writ of Preliminary Attachment.73 From U-Land’s point of
view, its primary reason for purchasing APIC shares from Wellex was
APIC’s majority ownership of shares of stock in APC (APC shares).74 After
verification with the Securities and Exchange Commission, U-Land
discovered that "APIC did not own a single share of stock in APC."75 U-
Land alleged that it repeatedly requested that the parties enter into the
share purchase agreement.76 U-Land attached the demand letter dated
July 22, 1999 to the Complaint.77 However, the 40-day period lapsed, and
no share purchase agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still
refused to return the amount of US$7,499,945.00 while refusing to enter
into the share purchase agreement.79 U-Land stated that it was induced by
Wellex to enter into and execute the First Memorandum of Agreement, as
well as release the amount of US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-
Land had no cause of action.82 Wellex maintained that under the First
Memorandum of Agreement, the parties agreed to enter into a share
purchase agreement and a joint development agreement.83 Wellex alleged
that to bring the share purchase agreement to fruition, it would have to
acquire the corresponding shares in APIC.84 It claimed that U-Land was
fully aware that the former "still ha[d] to consolidate its title over these with Wellex’s delivery of the stock certificates for 57,000,000 PEC shares.
shares."85 This was the reason for Wellex’s attachment of the Second These stock certificates were not delivered on that date.100
Memorandum of Agreement to the First Memorandum of Agreement.
Wellex attached the Second Memorandum of Agreement as evidence to With regard to the drafting of the share purchase agreement, U-Land
refute U-Land’s claim of misrepresentation.86 denied that it was Wellex that presented versions of the agreement. U-
Land averred that it was its own counsel who drafted versions of the share
Wellex further alleged that U-Land breached the First Memorandum of purchase agreement and the joint development agreement, which Wellex
Agreement since the payment for the shares was to begin during the 40- refused to sign.101
day period, which began on May 16, 1998.87 In addition, U-Land failed to
remit the US$3 million by May 22, 1998 that would serve as initial funding U-Land specifically denied that it had any knowledge prior to or during the
for the development projects.88 Wellex claimed that the remittance of the execution of the First Memorandum of Agreement that Wellex still had to
US$3 million on May 22, 1998 was a mandatory obligation on the part of "consolidate its title over" its shares in APIC. U-Land averred that it relied
U-Land.89 Wellex averred that it presented draft versions of the share on Wellex’s representation that it was a majority owner of APIC shares and
purchase agreement, which were never finalized.90 Thus, it believed that that APIC owned a majority of APC shares.102
there was an implied extension of the 40-day period within which to enter
into the share purchase agreement and the joint development agreement
Moreover, U-Land denied any knowledge of the initial steps that Wellex
since U-Land began remitting sums of money in partial payment for the
undertook to pursue the development projects and denied any awareness
purchase of the shares of stock.91
of a study conducted by Wellex regarding the potential profit of these
projects.103
In its counterclaim against U-Land, Wellex alleged that it had already set
in motion building and development of real estate projects on four (4)
The case proceeded to trial.
major sites in Cavite, Iloilo, and Davao. It started initial construction on
the basis of its agreement with U-Land to pursue real estate development
projects.92 U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief
Executive Officer, as its sole witness.104 Mr. Tseng testified that
"[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited
Wellex claims that, had the development projects pushed through, the
[U-Land] to join in the operation of his airline company[.]"105 U-Land did
parties would have shared equally in the profits of these projects. 93 These
not accept the offer at that time.106 During the first quarter of 1998, Mr.
projects would have yielded an income of ₱2,404,948,000.00, as per the
Gatchalian "went to Taiwan and invited [U-Land] to invest in Air
study Wellex conducted, which was duly recognized by U-Land.94 Half of
Philippines[.]"107 This time, U-Land alleged that subsequent meetings were
that amount, ₱1,202,474,000.00, would have redounded to
held where Mr. Gatchalian, representing Wellex, "claimed ownership of a
Wellex.95 Wellex, thus, prayed for the rescission of the First Memorandum
majority of the shares of APIC and ownership by APIC of a majority of the
of Agreement and the payment of ₱1,202,474,000 in damages for loss of
shares of [APC,] a domestic carrier in the Philippines."108Wellex, through
profit.96 It prayed for the payment of moral damages, exemplary damages,
Mr. Gatchalian, offered to sell to U-Land PEC shares as well.109
attorney’s fees, and costs of suit.97

According to Mr. Tseng, the parties agreed to enter into the First
In its Reply,98 U-Land denied that there was an extension of the 40-day
Memorandum of Agreement after their second meeting.110 Mr. Tseng
period within which to enter into the share purchase agreement and the
testified that under this memorandum of agreement, the parties would
joint development agreement. It also denied requesting for an extension of
enter into a share purchase agreement "within forty (40) days from its
the 40-day period. It further raised that there was no provision in the First
execution which [would] put into effect the sale of the shares [of stock] of
Memorandum of Agreement that required it to remit payments for Wellex’s
APIC and PEC[.]"111 However, the "[s]hare [p]urchase [a]greement was
shares of stock in APIC and PEC within the 40-day period. Rather, the
not executed within the forty-day period despite the draft . . . given [by U-
remittances were supposed to begin upon the execution of the share
Land to Wellex]."112
purchase agreement.99

Mr. Tseng further testified that it was only after the lapse of the 40-day
As for the remittance of the US$3 million, U-Land stated that the issuance
period that U-Land discovered that Wellex needed money for the transfer
of this amount on May 22, 1998 was supposed to be simultaneously made
of APC shares to APIC. This allegedly shocked U-Land since under the First
Memorandum of Agreement, APIC was supposed to own a majority of APC
shares. Thus, U-Land remitted to Wellex a total of US$7,499,945.00
because of its intent to become involved in the aviation business in the
Philippines. These remittances were confirmed by Wellex through a
confirmation letter. Despite the remittance of this amount, no share
purchase agreement was entered into by the parties.113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice
President of Wellex. She admitted her knowledge of the First Memorandum
of Agreement as she was involved in its drafting. She testified that the
First Memorandum of Agreement made reference, under its second
preambular clause, to the Second Memorandum of Agreement entered into
by Wellex, APIC, and APC. She testified that under the First Memorandum
of Agreement, U-Land’s purchase of APIC shares and PEC shares from
Wellex would take place within 40 days, with the execution of a share
purchase agreement.114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman
Mr. Wang requested sometime in June of 1998 for an extension for the
execution of the share purchase agreement and the remittance of the
US$3 million. As proof that Mr. Wang made this request, Ms. Ting testified
that Mr. Wang sent several post-dated checks to cover the payment of the
APIC shares and PEC shares and the initial funding of US$3 million for the
joint development agreement. She testified that Mr. Wang presented a
draft of the share purchase agreement, which Wellex rejected. Wellex
drafted a new version of the share purchase agreement.115 However, the
share purchase agreement was not executed because during the period of
negotiation, Wellex learned from other sources that U-Land "encountered
difficulties starting October of 1998."116 Ms. Ting admitted that U-Land
made the remittances to Wellex in the amount of US$7,499,945.00.117
Ms. Ting testified that U-Land was supposed to make an initial payment of
US$19 million under the First Memorandum of Agreement. However, U-
Land only paid US$7,499,945.00. The total payments should have
amounted to US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
meeting to thresh out the problems of the First Memorandum of
Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations
through the latter’s demand letter dated July 22, 1999. In response,
Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission and
caused the attachment against the properties of Wellex, causing
embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati
City held that rescission of the First Memorandum of Agreement was
proper:
The first issue must be resolved in the negative. Preponderance of
evidence leans in favor of plaintiff that it is entitled to the issuance of the
writ of preliminary attachment. Plaintiff’s evidence establishes the facts
that it is engaged in the airline business in Taiwan, was approached by
defendant, through its Chairman William Gatchalian, and was invited by
the latter to invest in an airline business in the Philippines, Air Philippines
Corporation (APC); that plaintiff became interested in the invitation of
defendant; that during the negotiations between plaintiff and defendant,
defendant induced plaintiff to buy shares in Air Philippines International
Corporation (APIC) since it owns majority of the shares of APC; that
defendant also induced plaintiff to buy shares of APIC in Philippine Estates
Corporation (PEC); that the negotiations between plaintiff and defendant
culminated into the parties executing a MOA (Exhs. "C" to "C-3", also Exh.
"1"); that in the second "Whereas" clause of the MOA, defendant
represented that it has a current airline operation through its majority-
owned subsidiary APIC, that under the MOA, the parties were supposed to
enter into a Share Purchase Agreement (SPA) within forty (40) days from
May 16, 1998, the date the MOA in order to effect the transfer of APIC and
PEC shares of defendant to plaintiff; that plaintiff learned from defendant
that APIC does not actually own a single share in APC; that plaintiff
verified with the Securities and Exchange Commission (SEC), by obtaining
a General Information Sheet therefrom (Exh. "C-Attachment"); that APIC
does not in fact own APC; that defendant induced plaintiff to still remit its
investment to defendant, which plaintiff did as admitted by defendant per
its Confirmation Letter (Exh. "D") in order that APC shares could be
transferred to APIC; that plaintiff remitted a total of US$7,499,945.00 to
defendant; and that during the forty-day period stipulated in the MOA and
even after the lapse of the said period, defendant has not entered into the
SPA, nor has defendant caused the transfer of APC shares to APIC.
In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s
misrepresentation that APIC owns APC is made clear, as follows:
"WHEREAS, WELLEX, on the other hand, has current airline operation in
the Philippines through its majority-owned subsidiary Air Philippines
International Corporation (Exh. "C") and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its
operation in the Asian regional markets; x x x" (Second Whereas of Exh.
"C")
On the other hand, defendant’s evidence failed to disprove plaintiff’s
evidence. The testimony of defendant’s sole witness Elvira Ting, that
plaintiff knew at the time of the signing of the MOA that APIC does not
own a majority of the shares of APC because another Memorandum of
Agreement was attached to the MOA (Exh "1") pertaining to the purchase
of APC shares by APIC is unavailing. The second "Whereas" clause of the
MOA leaves no room for interpretation. . . . The second MOA purportedly
attached as Annex "A" of this MOA merely enlightens the parties on the
manner by which APIC acquired the shares of APC. Besides, . . . the
second MOA was not a certified copy and did not contain a marking that it
is an Annex "A" when it was supposed to be an Annex "A" and a certified
copy per the MOA between plaintiff and defendant. As can be also
gathered from her testimony, Ms. Ting does not have personal knowledge
that plaintiff was not informed that APIC did not own shares of APC during
the negotiations as she was not present during the negotiations between
plaintiff and defendant’s William Gatchalian. Her participation in the
agreement between the parties [was] merely limited to the preparation of
the documents to be signed. Ms. Ting testified, as follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the
intended transfer of shares from APC to APIC because of this WHEREAS
CLAUSE and the Annex to this Memorandum of Agreement?
A Yes, it was part of the contract."
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA is
further revealed when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring APC
shares to APIC even as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares of
Air Philippines Corporation at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and
certain individual.
Q How much shares of Air Philippines Corporation is owned by Wellex
Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of
Air Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the
owners?
A As of this moment, no sir."
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of
plaintiff, even if no SPA was executed yet between the parties, to effect
the transfer of APC shares to APIC is admitted by its same witness also in
this wise:
"Q You said that remittances were made to the Wellex Group, Incorporated
by plaintiff for the period from June 1998 to September 1998[,] is that
correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount
of more than seven million dollars, did you ever know if plaintiff asked for
evidence from your company that AIR PHILIPPINES INTERNATIONAL
CORPORATION has already acquired shares of AIR PHILIPPINES
CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances
sometime in September 1998 you have not effected the transfer of shares
of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES INTERNATIONCAL
[sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time it’s still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the
reasons why U-Land Incorporated was convinced to remit the amounts of
money totalling seven million dollars plus,
was that your company said that it needed funds to effect these transfers,
is that correct?
A Yes, sir."
(lbid, pp. 25-29)
As the evidence adduced by the parties stand, plaintiff has established the
fact that it had made remittances in the total amount of US$7,499,945.00
to defendant in order that defendant will make good its representation that
APC is a subsidiary of APIC. The said remittances are admitted by
defendant.
Notwithstanding the said remittances, APIC does not own a single share of
APC. On the other hand, defendant could not even satisfactorily
substantiate its claim that at least it had the intention to cause the transfer
of APC shares to APIC. [D]efendant obviously did not enter into the
stipulated SPA because it did not have the shares of APC transferred to
APIC despite its representations. Under the circumstances, it is clear that
defendant fraudulently violated the provisions of the MOA.120 (Emphasis
supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial
Court.121 In its July 30, 2004 Decision, the Court of Appeals held that the
Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter
itself asked for the rescission of the MOA. Thus, in effect, it prays for the
return of what has been given or paid under the MOA, as the law creates
said obligation to return the things which were the object of the contract,
and the same could be carried out only when he who demands rescission
can return whatever he may be obliged to restore. The law says:
"Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse
to return what has been paid to it. Further, appellant’s claim that the lower
court erred in ruling for the rescission of the MOA is absurd and ridiculous
because rescission thereof is prayed for by the former. . . . This Court
agrees with the lower court that appellee is the injured party in this case,
and therefore is entitled to rescission, because the rescission referred to
here is predicated on the breach of faith by the appellant which breach is
violative of the reciprocity between the parties. It is noted that appellee
has partly complied with its own obligation, while the appellant has not. It
is, therefore, the right of the injured party to ask for rescission because
the guilty party cannot ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendant’s misrepresentations
regarding APIC’s not owning shares in APC vitiates its consent to the MOA.
Defendant’s continued misrepresentation that it will cause the transfer of
APC shares in APIC inducing plaintiff to remit money despite the lapse of
the stipulated forty day period, further establishes plaintiff’s right to have
the MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-execution
of an SPA within the 40 day period, or within the extensions thereof, the
payments made by plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the terms
of the SHPA and/or JDA within forty (40) days from the date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the
US$3.0 million under Section 4 within three (3) days therefrom, otherwise
U-LAND shall have the right to recover the 57,000,000 PEC shares
delivered to ULAND under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA within
and even after the lapse of the stipulated 40 day period. There being no
SPA entered into by and between the plaintiff and defendant, defendant’s
return of the remittances [of] plaintiff in the total amount of US$7,499,945
is only proper, in the same vein, plaintiff should return to defendant the
titles and certificates of stock given to it by defendant.122 (Citations
omitted)
Hence, this Petition was filed.
Petitioner’s Arguments
Petitioner Wellex argues that contrary to the finding of the Court of
Appeals, respondent U-Land was not entitled to rescission because the
latter itself violated the First Memorandum of Agreement. Petitioner Wellex
states that respondent U-Land was actually bound to pay US$17.5 million
for all of APIC shares and PEC shares under the First Memorandum of
Agreement and the US$3 million to pursue the development projects under
the joint development agreement. In sum, respondent U-Land was liable
to petitioner Wellex for the total amount of US$20.5 million. Neither the
Court of Appeals nor the Regional Trial Court made any mention of the
legal effect of respondent U-Land’s failure to pay the full purchase price.123
On the share purchase agreement, petitioner Wellex asserts that its
obligation to deliver the totality of the shares of stock would become
demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock
was a suspensive condition for the execution of the share purchase
agreement and delivery of the shares of stock. Petitioner Wellex argues
that the use of the term "upon" in Section 2 of the First Memorandum of
Agreement clearly provides that the full payment of the purchase price
must be given "simultaneously" or "concurrent" with the execution of the
share purchase agreement.125
Petitioner Wellex raises that the Court of Appeals erred in saying that the
rescission of the First Memorandum of Agreement was proper because
petitioner Wellex itself asked for this in its Answer before the trial
court.126 It asserts that "there can be no rescission of a non-existent
obligation, such as [one] whose suspensive condition has not yet
happened[,]"127 as held in Padilla v. Spouses Paredes.128 Citing Villaflor v.
Court of Appeals129 and Spouses Agustin v. Court of Appeals,130 it argues
that "the vendor. . . has no obligation to deliver the thing sold. . . if the
buyer. . . fails to fully pay the price as required by the contract."131 In this
case, petitioner Wellex maintains that respondent U-Land’s remittance of
US$7,499,945.00 constituted mere partial performance of a reciprocal
obligation.132 Thus, respondent U-Land was not entitled to rescission. The
nature of this reciprocal obligation requires both parties’ simultaneous
fulfillment of the totality of their reciprocal obligations and not only partial
performance on the part of the allegedly injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a
seller may sell a thing not yet belonging to him at the time of the
transaction, provided that he will become the owner at the time of delivery
so that he can transfer ownership to the buyer. Contrary to the finding of
the lower courts, petitioner Wellex was obliged to be the owner of the
shares only when the time came to deliver these to respondent U-Land
and not during the perfection of the contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have
recovered through the securities given to the latter.134 Petitioner Wellex
invokes Suria v. Intermediate Appellate Court,135 which held that an
"action for rescission is not a principal action that is retaliatory in character
[under Article 1191 of the Civil Code, but] a subsidiary one which. . . is
available only in the absence of any other legal remedy [under Article
1384 of the Civil Code]."136Respondent’s Arguments
Respondent U-Land argues that it was the execution of the share purchase
agreement that would result in its purchase of the APIC shares and PEC
shares.137 It was not the full remittance of the purchase price of the shares
of stock as indicated in the First Memorandum of Agreement, as alleged by
petitioner Wellex.138 Respondent U-Land asserts that the First
Memorandum of Agreement provides that the exact number of APIC
shares and PEC shares to be purchased under the share purchase
agreement and the final price of these shares were not yet determined by
the parties.139
Respondent U-Land reiterates that it was petitioner Wellex that requested
for the remittances amounting to US$7,499,945.00 to facilitate APIC’s
purchase of APC shares.140 Thus, it was petitioner Wellex’s refusal to enter
into the share purchase agreement that led to respondent U-Land
demanding rescission of the First Memorandum of Agreement and the
return of the US$7,499,945.00.141 Respondent U-Land further argues
before this court that petitioner Wellex failed to present evidence as to
how the money was spent, stating that Ms. Ting admitted that the Second
Memorandum of Agreement "was not consummated at any
time."142 Respondent U-Land raises that petitioner Wellex was guilty of
fraud by making it appear that APC was a subsidiary of APIC. 143 It
reiterates that, as an airline company, its primary reason for entering into
the First Memorandum of Agreement was to acquire management of APC,
another airline company.144 Under Article 1191 of the Civil Code,
respondent U-Land, as the injured party, was entitled to rescission due to
the fatal misrepresentations committed by petitioner Wellex.145
Respondent U-Land further asserts that the "shareholdings in APIC and
APC were never in question."146 Rather, it was petitioner Wellex’s
misrepresentation that APIC was a majority shareholder of APC that
compelled it to enter into the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable
because the pertinent provision in Suria was not Article 1191 but
rescission under Article 1383 of the Civil Code.148 The "rescission" referred
to in Article 1191 referred to "resolution" of a contract due to a breach of a
mutual obligation, while Article 1384 spoke of "rescission" because of
lesion and damage.149 Thus, the rescission that is relevant to the present
case is that of Article 1191, which involves breach in a reciprocal
obligation. It is, in fact, resolution, and not rescission as a result of fraud
or lesion, as found in Articles 1381, 1383, and 1384 of the Civil Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred
in affirming the Decision of the Regional Trial Court that granted the
rescission of the First Memorandum of Agreement prayed for by U-Land.
The Petition must be denied.
I
The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are controlling
to this case, particularly Article 1370, which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its
stipulations shall control.
If the words appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former.
In Norton Resources and Development Corporation v. All Asia Bank
Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the first
paragraph of Article 1370 of the Civil Code: "[i]f the terms of a contract
are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control." This provision is akin to
the "plain meaning rule" applied by Pennsylvania courts, which assumes
that the intent of the parties to an instrument is "embodied in the writing
itself, and when the words are clear and unambiguous the intent is to be
discovered only from the express language of the agreement." It also
resembles the "four corners" rule, a principle which allows courts in some
cases to search beneath the semantic surface for clues to meaning. A
court's purpose in examining a contract is to interpret the intent of the
contracting parties, as objectively manifested by them. The process of
interpreting a contract requires the court to make a preliminary inquiry as
to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations.
Where the written terms of the contract are not ambiguous and can only
be read one way, the court will interpret the contract as a matter of law. If
the contract is determined to be ambiguous, then the interpretation of the
contract is left to the court, to resolve the ambiguity in the light of the
intrinsic evidence.152 (Emphasis supplied)
As held in Norton, this court must first determine whether a provision or
stipulation contained in a contract is ambiguous. Absent any ambiguity,
the provision on its face will be read as it is written and treated as the
binding law of the parties to the contract.
The parties have differing interpretations of the terms of the First
Memorandum of Agreement. Petitioner Wellex even admits that "the facts
of the case are fairly undisputed [and that] [i]t is only the parties’
respective [understanding] of these facts that are not in harmony."153
The second preambular clause of the First Memorandum of Agreement
reads:
WHEREAS, WELLEX, on the other hand, has current airline operation in the
Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the
Asian regional markets; a Memorandum of Agreement on ______, a
certified copy of which is attached hereto as Annex "A" and is hereby made
an integral part hereof, which sets forth, among others, the basis for
WELLEX’s present ownership of shares in Air Philippines International
Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement reads:
I. Basic Agreement. - The parties agree to develop a long-term business
relationship initially through the creation of joint interest in airline
operations as well as in property development projects in the Philippines to
be implemented as follows:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC") equivalent
to at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares (the "APIC Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at least
35% of the outstanding capital stock of PEC, but in any case, not
less than 490,000,000 shares (the "PEC Shares").
(c) U-LAND shall enter into a joint development agreement with
PEC to jointly pursue property development projects in the
Philippines.
(d) U-LAND shall be given the option to acquire from WELLEX
shares of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of
the outstanding capital stock of ESB (the "ESB Shares") under
terms to be mutually agreed.155
The First Memorandum of Agreement contained the following stipulations
regarding the share purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date
hereof (unless extended by mutual agreement), U-LAND and WELLEX shall
execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the SHPA
shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares
at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be
paid in full upon execution of the SHPA against delivery of the Subject
Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a
separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii)
the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required
approval by the Taiwanese government of the acquisition by U-LAND of
the Subject Shares shall likewise have been obtained.156 (Emphasis
supplied)
As for the joint development agreement, the First Memorandum of
Agreement contained the following stipulation:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint development
agreement ("JDA") to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from
the projects covered by the JDA shall be shared equally between ULAND
and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of
US$3.0 million as initial funding for the aforesaid development projects
against delivery by WELLEX of 57,000,000 shares of PEC as security for
said amount in accordance with Section 9 below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure to
agree on the terms of the share purchase agreement or the joint
development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of
the SHPA and/or the JDA within forty (40) days from date hereof (or such
period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the
US$3.0 million provided under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover on the 57,000,000 PEC
shares delivered to U-LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that the
execution of a share purchase agreement containing mutually agreeable
terms and conditions must first be accomplished by the parties before
respondent U-Land purchases any of the shares owned by petitioner
Wellex. A perusal of the stipulation on its face allows for no other
interpretation.
The need for a share purchase agreement to be entered into before
payment of the full purchase price can further be discerned from the other
stipulations of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture,
through entering into two (2) agreements: a share purchase agreement
and a joint development agreement. However, Section 1 provides that in
the share purchase agreement, "U-LAND shall acquire from WELLEX,
shares of stock of AIR PHILIPPINES INTERNATIONAL CORPORATION
(‘APIC’) equivalent to at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares (the ‘APIC
Shares’)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall
purchase from petitioner Wellex "shares of stock of PHILIPPINE ESTATES
CORPORATION (‘PEC’) equivalent to at least 35% of the outstanding
capital stock of PEC, but in any case, not less than 490,000,000 shares(the
‘PEC Shares’)."160
The use of the terms "at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares" and "at least
35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares" means that the parties had yet to agree on the
number of shares of stock to be purchased.
The need to execute a share purchase agreement before payment of the
purchase price of the shares is further shown by the clause, "[w]ithout
prejudice to any subsequent agreement between the parties, the purchase
price for the APIC Shares to be reflected in the [share purchase
agreement] shall be... P0.30 per share and that for the PEC Shares at...
P0.65 per share."161 This phrase clearly shows that the final price of the
shares of stock was to be reflected in the share purchase agreement.
There being no share purchase agreement executed, respondent U-Land
was under no obligation to begin payment or remittance of the purchase
price of the shares of stock.
Petitioner Wellex argues that the use of "upon" in Section 2162 of the First
Memorandum of Agreement means that respondent U-Land must pay the
purchase price of the shares of stock in its entirety when they are
transferred. This argument has no merit.
Article 1373 of the Civil Code provides:
ART. 1373. If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and
the number of shares of stock to be purchased before respondent U-Land
is obligated to pay or remit the entirety of the purchase price. Thus,
petitioner Wellex’s argument cannot be sustained since the parties to the
First Memorandum of Agreement were clearly unable to agree on all the
terms concerning the share purchase agreement. It would be absurd for
petitioner Wellex to expect payment when respondent U-Land did not yet
agree to the final amount to be paid for the totality of an indeterminate
number of shares of stock.
The third paragraph of Section 2163 provides that the "transfer of the
Subject Shares" shall take place upon the fulfillment of certain conditions,
such as full payment of the purchase price "as reflected in the [share
purchase agreement]." The transfer of the shares of stock is different from
the execution of the share purchase agreement. The transfer of the shares
of stock requires full payment of the final purchase price. However, that
final purchase price must be reflected in the share purchase agreement.
The execution of the share purchase agreement will require the existence
of a final agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex
argued that the payment of the shares of stock was to begin within the 40-
day period. Petitioner Wellex’s claim is not in any of the stipulations of the
contract. Its subsequent claim that respondent U-Land was actually
required to remit a total of US$20.5 million is likewise bereft of basis since
there was no final purchase price of the shares of stock that was agreed
upon, due to the failure of the parties to execute a share purchase
agreement. In addition, the parties had yet to agree on the final number of
APIC shares and PEC shares that respondent U-Land would acquire from
petitioner Wellex.
Therefore, the understanding of the parties captured in the First
Memorandum of Agreement was to continue their negotiation to determine
the price and number of the shares to be purchased. Had it been
otherwise, the specific number or percentage of shares and its price should
already have been provided clearly and unambiguously. Thus, they agreed
to a 40-day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides that:
In the event the parties are unable to agree on the terms of the SHPA
and/or the JDA within forty (40)days from date hereof (or such period as
the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective
undertakings herein . . .164
The First Memorandum of Agreement was, thus, an agreement to enter
into a share purchase agreement. The share purchase agreement should
have been executed by the parties within 40 days from May 16, 1998, the
date of the signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of
the First Memorandum of Agreement ceased. The parties were "released
from their respective undertakings." Thus, from June 25, 1998, the date
when the 40-day period lapsed, the parties were no longer obliged to
negotiate with each other in order to enter into a share purchase
agreement.
However, Section 9 provides for another period within which the parties
could still be required to negotiate. The clause "or such period as the
parties shall mutually agree" means that the parties should agree on a
period within which to continue negotiations for the execution of an
agreement. This means that after the 40-day period, the parties were still
allowed to negotiate, provided that they could mutually agree on a new
period of negotiation.
Based on the records and the findings of the lower courts, the parties were
never able to arrive at a specific period within which they would bind
themselves to enter into an agreement. There being no other period
specified, the parties were no longer under any obligation to negotiate and
enter into a share purchase agreement. Section 9 clearly freed them from
this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore,
independent of the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
mentioned that there was an "implied partial objective or real
novation"165 of the First Memorandum of Agreement. Petititoner did not
raise this argument of novation before this court. In Gayos v.
Gayos,166 this court held that "it is a cherished rule of procedure that a
court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future
litigation[.]"167
Articles 1291 and 1292 of the Civil Code provides how obligations may be
modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of
novation:
Novation extinguishes an obligation between two parties when there is a
substitution of objects or debtors or when there is subrogation of the
creditor. It occurs only when the new contract declares so "in unequivocal
terms" or that "the old and the new obligations be on every point
incompatible with each other."
....
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So it
is deeply rooted in the Roman Law jurisprudence, the principle — novatio
non praesumitur— that novation is never presumed. At bottom, for
novation to be a jural reality, its animus must be ever present, debitum
pro debito— basically extinguishing the old obligation for the new
one.169 (Emphasis from the original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original
obligation.
After the 40-day period, the parties did not enter into any subsequent
written agreement that was couched in unequivocal terms. The transaction
of the First Memorandum of Agreement involved large amounts of money
from both parties. The parties sought to participate in the air travel
industry, which has always been highly regulated and subject to the
strictest commercial scrutiny. Both parties admitted that their counsels
participated in the crafting and execution of the First Memorandum of
Agreement as well as in the efforts to enter into the share purchase
agreement. Any subsequent agreement would be expected to be clearly
agreed upon with their counsels’ assistance and in writing, as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto v.
People:170
[N]o specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts.
While there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
....
. . . The test of incompatibility is whether or not the two obligations can
stand together, each one having its independent existence. If they cannot,
they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature
and not merely accidental. The incompatibility must take place in any of
the essential elements of the obligation, such as its object, cause or
principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original
obligation.171(Citations omitted)
There was no incompatibility between the original terms of the First
Memorandum of Agreement and the remittances made by respondent U-
Land for the shares of stock. These remittances were actually made with
the view that both parties would subsequently enter into a share purchase
agreement. It is clear that there was no subsequent agreement
inconsistent with the provisions of the First Memorandum of Agreement.
Thus, no implied novation took place. In previous cases,172 this court has
consistently ruled that presumed novation or implied novation is not
deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central
Guaranty Corporation:173
Neither can novation be presumed in this case. As explained in Duñgo v.
Lopena:
"Novation by presumption has never been favored. To be sustained, it
need be established that the old and new contracts are incompatible in all
points, or that the will to novate appears by express agreement of the
parties or in acts of similar import."174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement,
respondent U-Land is entitled to the return of the amount it remitted to
petitioner Wellex. Petitioner Wellex is likewise entitled to the return of the
certificates of shares of stock and titles of land it delivered to respondent
U-Land. This is simply an enforcement of Section 9 of the First
Memorandum of Agreement. Pursuant to Section 9, only the execution of a
final share purchase agreement within either of the periods contemplated
by this stipulation will justify the parties’ retention of what they received or
would receive from each other.
III
Applying Article 1185 of the
Code, the parties are obligated
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a
determinate time shall render the obligation effective from the moment
the time indicated has elapsed, or if it has become evident that the event
cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such
time as may have probably been contemplated, bearing in mind the nature
of the obligation.
Article 1185 provides that if an obligation is conditioned on the
nonoccurrence of a particular event at a determinate time, that obligation
arises (a) at the lapse of the indicated time, or(b) if it has become evident
that the event cannot occur.
Petitioner Wellex and respondent U-Land bound themselves to negotiate
with each other within a 40-day period to enter into a share purchase
agreement. If no share purchase agreement was entered into, both parties
would be freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase
agreement that would give rise to the obligation to both parties to free
each other from their respective undertakings. This includes returning to
each other all that they received in pursuit of entering into the share
purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share
purchase agreement. This lapse is the first circumstance provided for in
Article 1185 that gives rise to the obligation. Applying Article 1185, the
parties were then obligated to return to each other all that they had
received in order to be freed from their respective undertakings.
However, the parties continued their negotiations after the lapse of the 40-
day period. They made subsequent transactions with the intention to enter
into the share purchase agreement. Despite that, they still failed to enter
into a share purchase agreement. Communication between the parties
ceased, and no further transactions took place.
It became evident that, once again, the parties would not enter into the
share purchase agreement. This is the second circumstance provided for in
Civil Article 1185. Thus, the obligation to free each other from their respective
to undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made by
respondent U-Land, in the same way that respondent U-Land is obligated
to return the certificates of shares of stock and the land titles to petitioner
Wellex.
IV
Respondent U-Land is praying for
rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the
rescission of the First Memorandum of Agreement. This requires a
clarification of rescission under Article 1191, and rescission under Article
1381 of the Civil Code.
Article 1191 of the Civil Code provides:
ART. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of
rescissible contracts: ART. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. ART. 1381. The following
contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot
in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval
of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to
rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to
obtain reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of
the contract are legally in the possession of third persons who did not act
in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss. Gotesco Properties v. Fajardo175 categorically stated
that Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not
merely terminate the contract and release the parties from further
obligations to each other, but abrogates the contract from its inception and
restores the parties to their original positions as if no contract has been
made. Consequently, mutual restitution, which entails the return of the
benefits that each party may have received as a result of the contract, is
thus required. To be sure, it has been settled that the effects of rescission
as provided for in Article 1385 of the Code are equally applicable to cases
under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article
1191. This means bringing the parties back to their original status prior to
the inception of the contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of
the contract are legally in the possession of third persons who did not act
in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.
This Court has consistently ruled that this provision applies to rescission
under Article 1191: [S]ince Article 1385 of the Civil Code expressly and
clearly states that "rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain
petitioners’ position that said Article 1385 does not apply to rescission
under Article 1191. x x x176 (Emphasis from the original, citations omitted)
Rescission, as defined by Article 1385, mandates that the parties must
return to each other everything that they may have received as a result of
the contract. This pertains to rescission or resolution under Article 1191,
as well as the provisions governing all forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal
prestations as distinguished from mutual obligations between or among
the parties. A prestation is the object of an obligation, and it is the conduct
required by the parties to do or not to do, or to give. 177 Parties may be
mutually obligated to each other, but the prestations of these obligations
are not necessarily reciprocal. The reciprocal prestations must necessarily
emanate from the same cause that gave rise to the existence of the
contract. This distinction is best illustrated by an established authority in
civil law, the late Arturo Tolentino:
This article applies only to reciprocal obligations. It has no application to
every case where two persons are mutually debtor and creditor of each
other. There must be reciprocity between them. Both relations must arise
from the same cause, such that one obligation is correlative to the other.
Thus, a person may be the debtor of another by reason of an agency, and
his creditor by reason of a loan. They are mutually obligated, but the
obligations are not reciprocal. Reciprocity arises from identity of cause,
and necessarily the two obligations are created at the same
time.178(Citation omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the
cause in perfecting the existence of an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156,
Civil Code). The obligation is constituted upon the concurrence of the
essential elements thereof, viz: (a) The vinculum juris or juridical tie which
is the efficient cause established by the various sources of obligations (law,
contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which
is the prestation or conduct, required to be observed (to give, to do or not
to do); and (c) the subject-persons who, viewed from the demandability of
the obligation, are the active (obligee) and the passive (obligor)
subjects.180
The cause is the vinculum juris or juridical tie that essentially binds the
parties to the obligation. This linkage between the parties is a binding
relation that is the result of their bilateral actions, which gave rise to the
existence of the contract.
The failure of one of the parties to comply with its reciprocal prestation
allows the wronged party to seek the remedy of Article 1191. The wronged
party is entitled to rescission or resolution under Article 1191, and even
the payment of damages. It is a principal action precisely because it is a
violation of the original reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission
where creditors or even third persons not privy to the contract can file an
action due to lesion or damage as a result of the contract. In Ong v. Court
of Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil
Code, is a remedy granted by law to the contracting parties and even to
third persons, to secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of things to their
condition at the moment prior to the celebration of the contract. It implies
a contract, which even if initially valid, produces a lesion or a pecuniary
damage to someone.182(Citations omitted)
Ong elaborated on the confusion between "rescission" or resolution under
Article 1191 and rescission under Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission
applicable to reciprocal obligations. Reciprocal obligations are those which
arise from the same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously such that
the performance of one is conditioned upon the simultaneous fulfillment of
the other. Rescission of reciprocal obligations under Article 1191 of the
New Civil Code should be distinguished from rescission of contracts under
Article 1383. Although both presuppose contracts validly entered into and
subsisting and both require mutual restitution when proper, they are not
entirely identical.
While Article 1191 uses the term "rescission," the original term which was
used in the old Civil Code, from which the article was based, was
"resolution." Resolution is a principal action which is based on breach of a
party, while rescission under Article 1383 is a subsidiary action limited to
cases of rescissionfor lesion under Article 1381 of the New Civil Code,
which expressly enumerates the following rescissible contracts:
 1. Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one fourth of the
value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in
any manner collect the claims due them;
4. Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval
of the litigants or of competent judicial authority; [and]
5. All other contracts specially declared by law to be subject to
rescission.183 (Citations omitted)
When a party seeks the relief of rescission as provided in Article 1381,
there is no need for reciprocal prestations to exist between or among the
parties. All that is required is that the contract should be among those
enumerated in Article 1381 for the contract to be considered rescissible.
Unlike Article 1191, rescission under Article 1381 must be a subsidiary
action because of Article 1383.
Contrary to petitioner Wellex’s argument, this is not rescission under
Article 1381 of the Civil Code. This case does not involve prejudicial
transactions affecting guardians, absentees, or fraud of creditors. Article
1381(3) pertains in particular to a series of fraudulent actions on the part
of the debtor who is in the process of transferring or alienating property
that can be used to satisfy the obligation of the debtor to the creditor.
There is no allegation of fraud for purposes of evading obligations to other
creditors. The actions of the parties involving the terms of the First
Memorandum of Agreement do not fall under any of the enumerated
contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under
Article 1191, which is a principal action. Justice J.B.L. Reyes’ concurring
opinion in the landmark case of Universal Food Corporation v. Court of
Appeals184gave a definitive explanation on the principal character of
resolution under Article 1191 and the subsidiary nature of actions under
Article 1381:
The rescission on account of breach of stipulations is not predicated on
injury to economic interests of the party plaintiff but on the breach of faith
by the defendant, that violates the reciprocity between the parties. It is
not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his obligations
by the defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his promises
when the other violates his. As expressed in the old Latin aphorism: "Non
servanti fidem, non est fides servanda." Hence, the reparation of damages
for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison detre as well as the measure of the right
to rescind. Hence, where the defendant makes good the damages caused,
the action cannot be maintained or continued, as expressly provided in
Articles 1383 and 1384. But the operation of these two articles is limited to
the cases of rescission for lesión enumerated in Article 1381 of the Civil
Code of the Philippines, and does not apply to cases under Article 1191.185
Rescission or resolution under Article 1191, therefore, is a principal action
that is immediately available to the party at the time that the reciprocal
prestation was breached. Article 1383 mandating that rescission be
deemed a subsidiary action cannot be applicable to rescission or resolution
under Article 1191. Thus, respondent U-Land correctly sought the principal
relief of rescission or resolution under Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which
arose from the same cause: the desire of both parties to enter into a share
purchase agreement that would allow both parties to expand their
respective airline operations in the Philippines and other neighboring
countries.
V
The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against
respondent U-Land’s right to rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this
court specifically stated that the parties entered into a contract of sale,
and their reciprocal obligations had already been fulfilled:186
There is no dispute that the parties entered into a contract of sale as
distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the
ownership of and to deliver a determinate thing to the buyer, who in turn,
is obligated to pay a price certain in money or its equivalent (Art. 1458,
Civil Code). From the respondents’ own arguments, we note that they
have fully complied with their part of the reciprocal obligation. As a matter
of fact, they have already parted with the title as evidenced by the transfer
certificate of title in the petitioners’ name as of June 27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the
deed of mortgage. The payments on an installment basis secured by the
execution of a mortgage took the place of a cash payment. In other words,
the relationship between the parties is no longer one of buyer and seller
because the contract of sale has been perfected and consummated. It is
already one of a mortgagor and a mortgagee. In consideration of the
petitioners’ promise to pay on installment basis the sum they owe the
respondents, the latter have accepted the mortgage as security for the
obligation.
The situation in this case is, therefore, different from that envisioned in the
cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of obligations
is not with respect to the perfected contract of sale but in the obligations
created by the mortgage contract. The remedy of rescission is not a
principal action retaliatory in character but becomes a subsidiary one
which by law is available only in the absence of any other legal remedy.
(Art. 1384, Civil Code). Foreclosure here is not only a remedy accorded by
law but, as earlier stated, is a specific provision found in the contract
between the parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not
rescission or resolution under Article 1191. In addition, the First
Memorandum of Agreement is not a contract to sell shares of stock. It is
an agreement to negotiate with the view of entering into a share purchase
agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court
held that non-payment of consideration of contracts only gave rise to the
right to sue for collection, but this non-payment cannot serve as proof of a
simulated contract.188 The case did not rule that the vendor has no
obligation to deliver the thing sold if the buyer fails to fully pay the price
required by the contract. In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts
proves their simulation. We disagree. Nonpayment, at most, gives him
only the right to sue for collection. Generally, in a contract of sale,
payment of the price is a resolutory condition and the remedy of the seller
is to exact fulfillment or, in case of a substantial breach, to rescind the
contract under Article 1191 of the Civil Code. However, failure to pay is not
even a breach, but merely an event which prevents the vendor’s obligation
to convey title from acquiring binding force.189 (Citations omitted) This
court’s statement in Villaflor regarding rescission under Article 1191 was a
mere obiter dictum. In Land Bank of the Philippines v. Suntay,190 this court
discussed the nature of an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court
upon some question of law that is not necessary in the determination of
the case before the court. It is a remark made, or opinion expressed, by a
judge, in his decision upon a cause by the way, that is, incidentally or
collaterally, and not directly upon the question before him, or upon a point
not necessarily involved in the determination of the cause, or introduced
by way of illustration, or analogy or argument. It does not embody the
resolution or determination of the court, and is made without argument, or
full consideration of the point. It lacks the force of an adjudication, being a
mere expression of an opinion with no binding force for purposes of res
judicata.191 (Citations omitted)
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses
Agustin v. Court of Appeals is also misplaced. In these cases, this court
held that there can be no rescission for an obligation that is nonexistent,
considering that the suspensive condition that will give rise to the
obligation has not yet happened. This is based on an allegation that the
contract involved is a contract to sell. In a contract to sell, the failure of
the buyer to pay renders the contract without effect. A suspensive
condition is one whose non-fulfillment prevents the existence of the
obligation.192 Payment of the purchase price, therefore, constitutes a
suspensive condition in a contract to sell. Thus, this court held that non-
remittance of the full price allowed the seller to withhold the transfer of
the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell.
Entering into the share purchase agreement or the joint development
agreement remained a stipulation that the parties themselves agreed to
pursue in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the share
purchase agreement was necessary to put into effect respondent U-Land’s
purchase of the shares of stock. This is the stipulation indicated in this
memorandum of agreement. There was no suspensive condition of full
payment of the purchase price needed to execute either the share
purchase agreement or the joint development agreement. Upon the
execution of the share purchase, the obligation of petitioner Wellex to
transfer the shares of stock and of respondent U-Land to pay the price of
these shares would have arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the
same effect as rescission or resolution under Article 1191 of the Civil Code.
The parties are obligated to return to each other all that they may have
received as a result of the breach by petitioner Wellex of the reciprocal
obligation. Therefore, the Court of Appeals did not err in affirming the
rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court
found that petitioner Wellex committed fraud by inducing respondent U-
Land to purchase APIC shares and PEC shares and by leading the latter to
believe that APC was a subsidiary of APIC.
Determining the existence of fraud is not necessary in an action for
rescission or resolution under Article 1191. The existence of fraud must be
established if the rescission prayed for is the rescission under Article 1381.
However, the existence of fraud is a question that the parties have raised
before this court. To settle this question with finality, this court will
examine the established facts and determine whether petitioner Wellex
indeed defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines,193 this court
enumerated the relevant provisions of the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.
This is followed by the articles which provide legal examples and
illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former’s special
knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the
same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n) The distinction between fraud as a ground for
rendering a contract voidable or as basis for an award of damages is
provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
(1270)194
Tankeh further discussed the degree of evidence needed to prove the
existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This
standard of proof is derived from American common law. It is less than
proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability is
higher than that of an ordinary civil case. Civil cases only require a
preponderance of evidence to meet the required burden of proof. However,
when fraud is alleged in an ordinary civil case involving contractual
relations, an entirely different standard of proof needs to be satisfied. The
imputation of fraud in a civil case requires the presentation of clear and
convincing evidence. Mere allegations will not suffice to sustain the
existence of fraud. The burden of evidence rests on the part of the plaintiff
or the party alleging fraud. The quantum of evidence is such that fraud
must be clearly and convincingly shown.195
To support its allegation of fraud, Mr. Tseng, respondent U-Land’s witness
before the trial court, testified that Mr. Gatchalian approached respondent
U-Land on two (2) separate meetings to propose entering into an
agreement for joint airline operations in the Philippines. Thus, the parties
entered into the First Memorandum of Agreement. Respondent U-Land
primarily anchors its allegation of fraud against petitioner Wellex on the
existence of the second preambular clause of the First Memorandum of
Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
admitted that "[t]he amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares."196 In that brief, it argued that the
parties were already in the process of partially executing the First
Memorandum of Agreement.
As held in Tankeh, there must be clear and convincing evidence of fraud.
Based on the established facts, respondent U-Land was unable to clearly
convince this court of the existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain whether
APC was indeed a subsidiary of APIC. This is a multimillion dollar
transaction, and both parties admitted that the share purchase agreement
underwent several draft creations. Both parties admitted the participation
of their respective counsels in the drafting of the First Memorandum of
Agreement. Respondent U-Land had every opportunity to ascertain the
ownership of the shares of stock. Respondent U-Land itself admitted that it
was not contesting petitioner Wellex’s ownership of the APIC shares or APC
shares; hence, it was not contesting the existence of the Second
Memorandum of Agreement. Upon becoming aware of petitioner Wellex’s
representations concerning APIC’s ownership or control of APC as a
subsidiary, respondent U-Land continued to make remittances totalling the
amount sought to be rescinded. It had the option to opt out of negotiations
after the lapse of the 40-day period. However, it proceeded to make the
remittances to petitioner Wellex and proceed with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to the
First Memorandum of Agreement.1awp++i1 To constitute fraud under
Article 1338, the words and machinations must have been so insidious or
deceptive that the party induced to enter into the contract would not have
agreed to be bound by its terms if that party had an opportunity to be
aware of the truth.197 Respondent U-Land was already aware that APC was
not a subsidiary of APIC after the 40-day period. Still, it agreed to be
bound by the First Memorandum of Agreement by making the remittances
from June 30 to September 25, 1998.198 Thus, petitioner Wellex’s failure to
inform respondent U-Land that APC was not a subsidiary of APIC when the
First Memorandum of Agreement was being executed did not constitute
fraud.
However, the absence of fraud does not mean that petitioner Wellex is free
of culpability. By failing to inform respondent U-Land that APC was not yet
a subsidiary of APIC at the time of the execution of the First Memorandum
of Agreement, petitioner Wellex violated Article 1159 of the Civil Code.
Article 1159 reads:
ART. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality with no technical meaning
or statutory definition, and it encompasses, among other things, an honest
belief, the absence of malice and the absence of design to defraud or to
seek an unconscionable advantage. It implies honesty of intention, and
freedom from knowledge of circumstances which ought to put the holder
upon inquiry. The essence of good faith lies in an honest belief in the
validity of one’s right, ignorance of a superior claim and absence of
intention to overreach another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the
pending share purchase agreement in good faith. This duty included
providing a full disclosure of the nature of the ownership of APIC in APC.
Unilaterally compelling respondent U-Land to remit money to finalize the
transactions indicated in the Second Memorandum of Agreement cannot
constitute good faith.
The absence of fraud in a transaction does not mean that rescission under
Article 1191 is not proper. This case is not an action to declare the First
Memorandum of Agreement null and void due to fraud at the inception of
the contract or dolo causante. This case is not an action for fraud based on
Article 1381 of the Civil Code. Rescission or resolution under Article 1191
is predicated on the failure of one of the parties in a reciprocal obligation
to fulfill the prestation as required by that obligation. It is not based on
vitiation of consent through fraudulent misrepresentations.
VII
Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3
million to petitioner Wellex does not justify the actions of the latter in
refusing to return the US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from
all of them taken jointly.
The execution of the joint development agreement was contingent on the
execution of the share purchase agreement.1âwphi1 This is provided for in
Section 4 of the First Memorandum of Agreement, which stated that the
execution of the two agreements is "[s]imultaneous."201 Thus, the failure
of the share purchase agreement’s execution would necessarily mean the
failure of the joint development agreement’s execution.
Section 9 of the First Memorandum of Agreement provides that should the
parties fail to execute the agreement, they would be released from their
mutual obligations. Had respondent U-Land paid the US$3 million and
petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of
the joint development agreement, they would have been obligated to
return these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be
interpreted together. Since the parties were unable to agree on a final
share purchase agreement and there was no exchange of money or shares
of stock due to the continuing negotiations, respondent U-Land was no
longer obliged to provide the money for the real estate development
projects. The payment of the US$3 million was for pursuing the real estate
development projects under the joint development agreement. There
being no joint development agreement, the obligation to deliver the US$3
million and the delivery of the PEC shares for that purpose were no longer
incumbent upon the parties.
VIII
Respondent U-Land was not
obligated to exhaust the "securities"
given by petitioner Wellex
Contrary to petitioner Wellex’s assertion, there is no obligation on the part
of respondent U-Land to exhaust the "securities" given by petitioner
Wellex. No such meeting of the minds to create a guarantee or surety or
any other form of security exists. The principal obligation is not a loan or
an obligation subject to the conditions of sureties or guarantors under the
Civil Code. Thus, there is no need to exhaust the securities given to
respondent U-Land, and there is no need for a legal condition where
respondent U-Land should pursue other remedies.
Neither petitioner Wellex nor respondent U-Land stated that there was
already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of
stock and the land titles were not in the nature of a pledge or
mortgage.202 It received the certificates of shares of stock and the land
titles with an understanding that the parties would subsequently enter a
share purchase agreement. There being no share purchase agreement,
respondent U-Land is obligated to return the certificates of shares of stock
and the land titles to petitioner Wellex.
The parties are bound by the 40-day period provided for in the First
Memorandum of Agreement. Adherence by the parties to Section 9 of the
First Memorandum of Agreement has the same effect as the rescission or
resolution prayed for and granted by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be
based on the say-so of each party and is a fragile setting for good business
transactions. It will contribute to the unpredictability of the market as it
would provide courts with extraordinary expectations to determine the
business actor's intentions. The parties appear to be responsible
businessmen who know that their expectations and obligations should be
clearly articulated between them. They have the resources to engage legal
representation. Indeed, they have reduced their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not
appear in these instruments. We cannot do so. This court cannot interfere
in the bargains, good or bad, entered into by the parties. Our duty is to
affirm legal expectations, not to guarantee good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional Trial
Court in Civil Case No. 99-1407 and the Decision of the Court of Appeals in
CA-G.R. CV No. 74850 are AFFIRMED. Costs against petitioner The Wellex
Group, Inc.
SO ORDERED.
G.R. No. 212375
KABISIG REAL WEALTH DEV., INC. and FERNANDO C.
TIO,, Petitioners
vs.
YOUNG BUILDERS CORPORATION, Respondent
DECISION
PERALTA, J.:
This is a Petition for Review which petitioners Kabisig Real Wealth Dev.,
Inc. and Fernando C. Tio filed assailing the Court of Appeals (CA)
Decision1 dated June 28, 2013 and Resolution2 dated March 28, 2014 in
CAG.R. CV No. 02945, affirming the Decision of the Regional Trial Court
(RTC) of Cebu City, Branch 12, dated July 31, 2008 in Civil Case No. CEB-
27950.
The following are the pertinent antecedents of the case, as shown by the
records:
Sometime in April 2001, Kabisig Real Wealth Dev., Inc. (Kabisig), through
Ferdinand Tio (Tio), contracted the services of Young Builders Corporation
(Young Builders) to supply labor, tools, equipment, and materials for the
renovation of its building in Cebu City. Young Builders then finished the
work in September 2001 and billed Kabisig for P4,123,320.95. However,
despite numerous demands, Kabisig failed to pay. It contended that no
written contract was ever entered into between the parties and it was
never informed of the estimated cost of the renovation. Thus, Young
Builders filed an action for Collection of Sum of Money against Kabisig.
On July 31, 2008, the RTC of Cebu City rendered a Decision finding for
Young Builders, thus:
WHEREFORE, judgment is hereby rendered ordering the defendants to pay
plaintiff P4,123,320.95 representing the value of services rendered and
materials used in the renovation of the building of defendant Kabisig Real
Wealth Dev., Inc. into a restaurant of defendant Ferdinand Tio, by way of
actual damages, plus 12% per annum from September 11, 2001 until it is
fully paid. Costs against defendants.
SO ORDERED.3
Therefore, Kabisig elevated the case to the CA. On June 28, 2013, the
appellate court affirmed the RTC Decision, with modification, viz.:
WHEREFORE, foregoing premises considered, the Decision dated July 31,
2008 rendered by the Regional Trial Court of Cebu City, Branch 12 in Civil
Case No. CEB-27950 is hereby AFFIRMED with MODIFICATION, deleting
the award for actual damages. As modified, the defendants Kabisig Real
Wealth Dev., Inc. and Ferdinand Tio are ordered to jointly pay the plaintiff
Young Builders Corporation Two Million Four Hundred Thousand
(₱2,400,000.00) Pesos as TEMPERATE DAMAGES for the value of
services, rendered and materials used in the renovation of defendants-
appellants building. In addition, the total amount adjudged shall earn
interest at the rate of 12% per annum from September 11, 2001, until it is
fully paid. Costs against defendants.
SO ORDERED.4
Subsequently, Young Builders and Kabisig moved for reconsideration, but
both were denied by the CA.5
Hence, Kabisig filed the instant petition.
The sole issue is whether or not Kabisig is liable to Young Builders for the
damages claimed:
Under the Civil Code, a contract is a meeting of minds, with respect to the
other, to give something or to render some service. Article 1318 reads:
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract; and
(3) Cause of the obligation which is established.
Accordingly, for a contract to be valid, it must have the following essential
elements: (1) consent of the contracting parties; (2) object certain, which
is the subject matter of the contract; and (3) cause of the obligation which
is established. Consent must exist, otherwise, the contract is nonexistent.
Consent is manifested by the meeting of the offer and the acceptance of
the thing and the cause, which are to constitute the contract. By law, a
contract of sale, is perfected at the moment there is a meeting of the
minds upon the thing that is the object of the contract and upon the price.
Indeed, it is a consensual contract which is perfected by mere consent.6
Through the testimonies of both Young Builders' and Kabisig's witnesses,
Tio commissioned the company of his friend, Nelson Yu, to supply labor,
tools, equipment, and materials for the renovation of Kabisig's building
into a restaurant. While Tio argues that the renovation was actually for the
benefit of his partners, Fernando Congmon, Gold En Burst Foods Co., and
Sunburst Fried Chicken, Inc., and therefore, they should be the ones who
must shoulder the cost of the renovation, said persons were never
impleaded in the instant case. Moreover, all the documents pertaining to
the project, such as official receipts of payment for the building permit
application, are under the names of Kabisig and Tio.
Further, Kabisig's claim as to the absence of a written contract between it
and Young Builders simply does not hold water.1avvphi1 It is settled that
once perfected, a contract is generally binding in whatever form, whether
written or oral, it may have been entered into, provided the
aforementioned essential requisites for its validity are present.7 Article
1356 of the Civil Code provides:
Art. 1356. Contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present.
xxxx
There is nothing in the law that requires a written contract for the
agreement in question to be valid and enforceable. Also, the Court notes
that neither Kabisig nor Tio had objected to the renovation work, until it
was already time to settle the bill.
Likewise, the appellate court aptly reduced the amount of damages
awarded by the RTC. Under Article 2199 of the Civil Code, actual or
compensatory damages are those awarded in satisfaction of, or in
recompense for, loss or injury sustained. They proceed from a sense of
natural justice and are designed to repair the wrong that has been done,
to compensate for the injury inflicted. They either refer to the loss of what
a person already possesses (dano emergente ), or the failure to receive as
a benefit that which would have pertained to him (lucro cesante ),8 as in
this case.
For an injured party to recover actual damages, however, he is required to
prove the actual amount of loss with reasonable degree of certainty
premised upon competent proof and on the best evidence available. The
burden of proof is on the party who would be defeated if no evidence
would be presented on either side. He must establish his case by a
preponderance of evidence, which means that the evidence adduced by
one side is superior to that of the other. In other words, damages cannot
be presumed and courts, in making an award, must point out specific facts
that could afford a basis for measuring compensatory damages. A court
cannot merely rely on speculations, conjectures, or guesswork as to the
fact and amount of damages as well as hearsay or uncorroborated
testimony whose truth is suspect. A party is entitled to adequate
compensation only for such pecuniary loss actually suffered and duly
proved. Indeed, to recover actual damages, the amount of loss must not
only be capable of proof but must actually be proven with a reasonable
degree of certainty, premised upon competent proof or best evidence
obtainable of its actual amount.9 Here, the evidence reveals that Young
Builders failed to submit any competent proof of the specific amount of
actual damages being claimed. The documents submitted by Young
Builders either do not bear the name of Kabisig or Tio, their conformity, or
signature, or do not indicate in any way that the amount reflected on its
face actually refers to the renovation project.
Notwithstanding the absence of sufficient proof, Young Builders still
deserves to be recompensed for actually completing the work. In the
absence of competent proof on the amount of actual damages, the courts
allow the party to receive temperate damages. Temperate or moderate
damages, which are more than nominal but less than compensatory
damages, may be recovered when the court finds that some pecuniary loss
has been suffered but its amount cannot, from the nature of the case, be
proved with certainty.10
To determine the compensation due and to avoid unjust enrichment from
resulting out of a fulfilled contract, the principle of quantum meruit may be
used. Under this principle, a contractor is allowed to recover the
reasonable value of the services rendered despite the lack of a written
contract. The measure of recovery under the principle should relate to the
reasonable value of the services performed. The principle prevents undue
enrichment based on the equitable postulate that it is unjust for a person
to retain any benefit without paying for it. Being predicated on equity, said
principle should only be applied if no express contract was entered into,
and no specific statutory provision was applicable.11
The principle of quantum meruit justifies the payment of the reasonable
value of the services rendered and should apply in the absence of an
express agreement on the fees. It is notable that the issue revolves
around the parties' inability to agree on the fees that Young Builders
should receive. Considering the absence of an agreement, and in view of
the completion of the renovation, the Court has to apply the principle of
quantum meruit in determining how much is due to Young Builders. Under
the established circumstances, the total amount of ₱2,400,000.00 which
the CA awarded is deemed to be a reasonable compensation under the
principle of quantum meruit since the renovation of Kabisig's building had
already been completed in 2001. 12
Finally, the rate of interest should be modified. When the obligation is
breached, and it consists in the payment of a sum of money, as in this
case, the interest due should be that which may have been stipulated in
writing. In the absence of stipulation, the rate of interest shall be 12%,
later reduced to 6%,13 per annum to be computed from default, i.e., from
judicial or extrajudicial demand, subject to the provisions of Article
116914 of the Civil Code. Here, the records would show that Young Builders
made the demand on September 11, 2001. Also, the rate of legal interest
for a judgment awarding a sum of money shall be 6% per annum from the
time such judgment becomes final and executory until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance
of credit.15
WHEREFORE, PREMISES CONSIDERED, the Court DISMISSES the
petition for lack of merit and AFFIRMS the Decision of the Court of
Appeals dated June 28, 2013, and its Resolution dated March 28, 2014, in
CA-G.R. CV No. 02945, with MODIFICATION as to the interest which
must be twelve percent (12%) per annum of the amount awarded from
the time of demand on September 11, 2001 to June 30, 2013, and six
percent (6%) per annum from July 1, 2013 until its full satisfaction. SO
ORDERED.
G.R. No. 171428 November 11, 2013
ALEJANDRO V. TANKEH, Petitioner,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, STERLING SHIPPING
LINES, INC., RUPERTO V. TANKEH, VICENTE ARENAS, and ASSET
PRIVATIZATION TRUST, Respondents.
DECISION
LEONEN, J.:
This is a Petition for Review on Certiorari praying that the assailed October
25, 2005 Decision and the February 9, 2006 Resolution of the Court of
Appeals1 be reversed, and that the January 4, 1996 Decision of the
Regional Trial Court of Manila Branch 32 be affirmed. Petitioner prays that
this Court grant his claims for moral damages and attorney’s fees, as
proven by the evidence.
Respondent Ruperto V. Tankeh is the president of Sterling Shipping Lines,
Inc. It was incorporated on April 23, 1979 to operate ocean-going vessels
engaged primarily in foreign trade.2 Ruperto V. Tankeh applied for a $3.5
million loan from public respondent Development Bank of the Philippines
for the partial financing of an ocean-going vessel named the M/V Golden
Lilac. To authorize the loan, Development Bank of the Philippines required
that the following conditions be met:
1) A first mortgage must be obtained over the vessel, which by then had
been renamed the M/V Sterling Ace;
2) Ruperto V. Tankeh, petitioner Dr. Alejandro V. Tankeh, Jose Marie
Vargas, as well as respondents Sterling Shipping Lines, Inc. and Vicente
Arenas should become liable jointly and severally for the amount of the
loan;
3) The future earnings of the mortgaged vessel, including proceeds of
Charter and Shipping Contracts, should be assigned to Development Bank
of the Philippines; and
4) Development Bank of the Philippines should be assigned no less than
67% of the total subscribed and outstanding voting shares of the
company. The percentage of shares assigned should be maintained at all
times, and the assignment was to subsist as long as the assignee,
Development Bank of the Philippines, deemed it necessary during the
existence of the loan.3
According to petitioner Dr. Alejandro V. Tankeh, Ruperto V. Tankeh
approached him sometime in 1980.4 Ruperto informed petitioner that he
was operating a new shipping line business. Petitioner claimed that
respondent, who is also petitioner’s younger brother, had told him that
petitioner would be given one thousand (1,000) shares to be a director of
the business. The shares were worth ₱1,000,000.00.5
On May 12, 1981, petitioner signed the Assignment of Shares of Stock
with Voting Rights.6 Petitioner then signed the May 12, 1981 promissory
note in December 1981. He was the last to sign this note as far as the
other signatories were concerned.7 The loan was approved by respondent
Development Bank of the Philippines on March 18, 1981. The vessel was
acquired on September 29, 1981 for $5.3 million.8 On December 3, 1981,
respondent corporation Sterling Shipping Lines, Inc. through respondent
Ruperto V. Tankeh executed a Deed of Assignment in favor of
Development Bank of the Philippines. The deed stated that the assignor,
Sterling Shipping Lines, Inc.:
x x x does hereby transfer and assign in favor of the ASSIGNEE (DBP), its
successors and assigns, future earnings of the mortgaged M/V "Sterling
Ace," including proceeds of charter and shipping contracts, it being
understood that this assignment shall continue to subsist for as long as the
ASSIGNOR’S obligation with the herein ASSIGNEE remains unpaid.9
On June 16, 1983, petitioner wrote a letter to respondent Ruperto V.
Tankeh saying that he was severing all ties and terminating his
involvement with Sterling Shipping Lines, Inc.10 He required that its board
of directors pass a resolution releasing him from all liabilities, particularly
the loan contract with Development Bank of the Philippines. In addition,
petitioner asked that the private respondents notify Development Bank of
the Philippines that he had severed his ties with Sterling Shipping Lines,
Inc.11
The accounts of respondent Sterling Shipping Lines, Inc. in the
Development Bank of the Philippines were transferred to public respondent
Asset Privatization Trust on June 30, 1986.12
Presently, respondent Asset Privatization Trust is known as the
Privatization and Management Office. Asset Privatization Trust was a
government agency created through Presidential Proclamation No. 50,
issued in 1986. Through Administrative Order No. 14, issued by former
President Corazon Aquino dated February 3, 1987, assets including loans
in favor of Development Bank of the Philippines were ordered to be
transferred to the national government. In turn, the management and
facilitation of these assets were delegated to Asset Privatization Trust,
pursuant to Presidential Proclamation No. 50. In 1999, Republic Act No.
8758 was signed into law, and it provided that the corporate term of Asset
Privatization Trust would end on December 31, 2000. The same law
empowered the President of the Philippines to determine which office
would facilitate the management of assets held by Asset Privatization
Trust. Thus, on December 6, 2000, former President Joseph E. Estrada
signed Executive Order No. 323, creating the Privatization Management
Office. Its present function is to identify disposable assets, monitor the
progress of privatization activities, and approve the sale or divestment of
assets with respect to price and buyer.13
On January 29, 1987, the M/V Sterling Ace was sold in Singapore for
$350,000.00 by Development Bank of the Philippines’ legal counsel Atty.
Prospero N. Nograles. When petitioner came to know of the sale, he wrote
respondent Development Bank of the Philippines to express that the final
price was inadequate, and therefore, the transaction was irregular. At this
time, petitioner was still bound as a debtor because of the promissory note
dated May 12, 1981, which petitioner signed in December of 1981. The
promissory note subsisted despite Sterling Shipping Lines, Inc.’s
assignment of all future earnings of the mortgaged M/V Sterling Ace to
Development Bank of the Philippines. The loan also continued to bind
petitioner despite Sterling Shipping Lines, Inc.’s cash equity contribution of
₱13,663,200.00 which was used to cover part of the acquisition cost of the
vessel, pre-operating expenses, and initial working capital.14
Petitioner filed several Complaints15 against respondents, praying that the
promissory note be declared null and void and that he be absolved from
any liability from the mortgage of the vessel and the note in question.
In the Complaints, petitioner alleged that respondent Ruperto V. Tankeh,
together with Vicente L. Arenas, Jr. and Jose Maria Vargas, had exercised
deceit and fraud in causing petitioner to bind himself jointly and severally
to pay respondent Development Bank of the Philippines the amount of the
mortgage loan.16 Although he had been made a stockholder and director of
the respondent corporation Sterling Shipping Lines, Inc., petitioner alleged
that he had never invested any amount in the corporation and that he had
never been an actual member of the board of directors.17 He alleged that
all the money he had supposedly invested was provided by respondent
Ruperto V. Tankeh.18 He claimed that he only attended one meeting of the
board. In that meeting, he was introduced to two directors representing
Development Bank of the Philippines, namely, Mr. Jesus Macalinag and Mr.
Gil Corpus. Other than that, he had never been notified of another meeting
of the board of directors.
Petitioner further claimed that he had been excluded deliberately from
participating in the affairs of the corporation and had never been
compensated by Sterling Shipping Lines, Inc. as a director and
stockholder.19 According to petitioner, when Sterling Shipping Lines, Inc.
was organized, respondent Ruperto V. Tankeh had promised him that he
would become part of the administration staff and oversee company
operations. Respondent Ruperto V. Tankeh had also promised petitioner
that the latter’s son would be given a position in the company. 20 However,
after being designated as vice president, petitioner had not been made an
officer and had been alienated from taking part in the respondent
corporation.21
Petitioner also alleged that respondent Development Bank of the
Philippines had been inexcusably negligent in the performance of its
duties.22 He alleged that Development Bank of the Philippines must have
been fully aware of Sterling Shipping Lines, Inc.’s financial situation.
Petitioner claimed that Sterling Shipping Lines, Inc. was controlled by the
Development Bank of the Philippines because 67% of voting shares had
been assigned to the latter.23Furthermore, the mortgage contracts had
mandated that Sterling Shipping Lines, Inc. "shall furnish the DBP with
copies of the minutes of each meeting of the Board of Directors within one
week after the meeting. Sterling Shipping Lines Inc. shall likewise furnish
DBP its annual audited financial statements and other information or data
that may be needed by DBP as its accommodations [sic] with DBP are
outstanding."24 Petitioner further alleged that the Development Bank of the
Philippines had allowed "highly questionable acts"25 to take place, including
the gross undervaluing of the M/V Sterling Aces.26 Petitioner alleged that
one day after Development Bank of the Philippines’ Atty. Nograles sold the
vessel, the ship was re-sold by its buyer for double the amount that the
ship had been bought.27
As for respondent Vicente L. Arenas, Jr., petitioner alleged that since
Arenas had been the treasurer of Sterling Shipping Lines, Inc. and later on
had served as its vice president, he was also responsible for the financial
situation of Sterling Shipping Lines, Inc.
Lastly, in the Amended Complaint dated April 16, 1991, petitioner
impleaded respondent Asset Privatization Trust for being the agent and
assignee of the M/V Sterling Ace.
In their Answers28 to the Complaints, respondents raised the following
defenses against petitioner: Respondent Development Bank of the
Philippines categorically denied receiving any amount from Sterling
Shipping Lines, Inc.’s future earnings and from the proceeds of the
shipping contracts. It maintained that equity contributions could not be
deducted from the outstanding loan obligation that stood at ₱245.86
million as of December 31, 1986. Development Bank of the Philippines also
maintained that it is immaterial to the case whether the petitioner is a
"real stockholder" or merely a "pseudo-stockholder" of the
corporation.29 By affixing his signature to the loan agreement, he was
liable for the obligation. According to Development Bank of the Philippines,
he was in pari delicto and could not be discharged from his obligation.
Furthermore, petitioner had no cause of action against Development Bank
of the Philippines since this was a case between family members, and
earnest efforts toward compromise should have been complied with in
accordance with Article 222 of the Civil Code of the Philippines.30
Respondent Ruperto V. Tankeh stated that petitioner had voluntarily
signed the promissory note in favor of Development Bank of the
Philippines and with full knowledge of the consequences. Respondent
Tankeh also alleged that he did not employ any fraud or deceit to secure
petitioner’s involvement in the company, and petitioner had been fully
aware of company operations. Also, all that petitioner had to do to avoid
liability had been to sell his shareholdings in the company.31
Respondent Asset Privatization Trust raised that petitioner had no cause of
action against them since Asset Privatization Trust had been mandated
under Proclamation No. 50 to take title to and provisionally manage and
dispose the assets identified for privatization or deposition within the
shortest possible period. Development Bank of the Philippines had
transferred and conveyed all its rights, titles, and interests in favor of the
national government in accordance with Administrative Order No. 14. In
line with that, Asset Privatization Trust was constituted as trustee of the
assets transferred to the national government to effect privatization of
these assets, including respondent Sterling Shipping Lines,
Inc.32 Respondent Asset Privatization Trust also filed a compulsory
counterclaim against petitioner and its co-respondents Sterling Shipping
Lines, Inc., Ruperto V. Tankeh, and Vicente L. Arenas, Jr. for the amount
of ₱264,386,713.84.
Respondent Arenas did not file an Answer to any of the Complaints of
petitioner but filed a Motion to Dismiss that the Regional Trial Court
denied. Respondent Asset Privatization Trust filed a Cross Claim against
Arenas. In his Answer33 to Asset Privatization Trust’s Cross Claim, Arenas
claimed that he had been released from any further obligation to
Development Bank of the Philippines and its successor Asset Privatization
Trust because an extension had been granted by the Development Bank of
the Philippines to the debtors of Sterling Shipping Lines, Inc. and/or
Ruperto V. Tankeh, which had been secured without Arenas’ consent.
The trial proceeded with the petitioner serving as a sole witness for his
case. In a January 4, 1996 Decision,34 the Regional Trial Court ruled:
Here, we find –
1. Plaintiff being promised by his younger brother, Ruperto V.
Tankeh, 1,000 shares with par value of ₱1 Million with all the perks
and privileges of being stockholder and director of SSLI, a new
international shipping line;
2. That plaintiff will be part of the administration and operation of
the business, so with his son who is with the law firm Romulo
Ozaeta Law Offices;
3. But this was merely the come-on or appetizer for the Real
McCoy or the primordial end of congregating the incorporators
proposed - - that he sign the promissory note (Exhibit "C"), the
mortgage contract (Exhibit "A"), and deed of assignment so SSLI
could get the US $3.5 M loan from DBP to partially finance the
importation of vessel M.V. "Golden Lilac" renamed M.V. "Sterling
ACE";
4. True it is, plaintiff was made a stockholder and director and
Vice-President in 1979 but he was never notified of any meeting of
the Board except only once, and only to be introduced to the two
(2) directors representing no less than 67% of the total subscribed
and outstanding voting shares of the company. Thereafter, he was
excluded from any board meeting, shorn of his powers and duties
as director or Vice-President, and was altogether deliberately
demeaned as an outsider.
5. What kind of a company is SSLI who treated one of their
incorporators, one of their Directors and their paper Vice-President
in 1979 by preventing him access to corporate books, to corporate
earnings, or losses, and to any compensation or remuneration
whatsoever? Whose President and Treasurer did not submit the
required SEC yearly report? Who did not remit to DBP the proceeds
on charter mortgage contracts on M/V Sterling Ace?
6. The M/V Sterling Ace was already in the Davao Port when it was
then diverted to Singapore to be disposed on negotiated sale, and
not by public bidding contrary to COA Circular No. 86-264 and
without COA’s approval. Sterling Ace was seaworthy but was sold
as scrap in Singapore. No foreclosure with public bidding was
made in contravention of the Promissory Note to recover any
deficiency should DBP seeks [sic] to recover it on the outstanding
mortgage loan. Moreover the sale was done after the account and
asset (nay, now only a liability) were transferred to APT. No
approval of SSLI Board of Directors to the negotiated sale was
given.
7. Plaintiff’s letter to his brother President, Ruperto V. Tankeh,
dated June 15, 1983 (Exhibit "D") his letter thru his lawyer to DBP
(Exhibit "J") and another letter to it (Exhibit "K") show no estoppel
on his part as he consistently and continuously assailed the several
injurious acts of defendants while assailing the Promissory Note
itself x x x (Citations omitted) applying the maxim: Rencintiatio
non praesumitur. By this Dr. Tankeh never waived the right to
question the Promissory Note contract terms. He did not ratify, by
concurring acts, express or tacit, after the reasons had surfaced
entitling him to render the contract voidable, defendants’ acts in
implementing or not the conditions of the mortgage, the
promissory note, the deed of assignment, the lack of audit and
accounting, and the negotiated sale of MV Sterling Ace. He did not
ratify defendants [sic] defective acts (Art. 1396, New Civil Code
(NCC).
The foregoing and the following essays, supported by evidence, the fraud
committed by plaintiff’s brother before the several documents were signed
(SEC documents, Promissory Note, Mortgage (MC) Contract, assignment
(DA)), namely:
1. Ruperto V. Tankeh approaches his brother Alejandro to tell the
latter of his new shipping business. The project was good business
proposal [sic].
2. Ruperto tells Alejandro he’s giving him shares worth ₱1 Million
and he’s going to be a Director.
3. He tells his brother that he will be part of the company’s
Administration and Operations and his eldest son will be in it, too.
4. Ruperto tells his brother they need a ship, they need to buy one
for the business, and they therefore need a loan, and they could
secure a loan from DBP with the vessel brought to have a first
mortgage with DBP but anyway the other two directors and
comptroller will be from DBP with a 67% SSLI shares voting rights.
Without these insidious, devastating and alluring words, without the
machinations used by defendant Ruperto V. Tankeh upon the doctor,
without the inducement and promise of ownership of shares and the
exercise of administrative and operating functions, and the partial
financing by one of the best financial institutions, the DBP, plaintiff would
not have agreed to join his brother; and the safeguarding of the Bank’s
interest by its nominated two (2) directors in the Board added to his
agreeing to the new shipping business. His consent was vitiated by the
fraud before the several contracts were consummated.
This alone convenes [sic] this Court to annul the Promissory Note as it
relates to plaintiff himself.
Plaintiff also pleads annulment on ground of equity. Article 19, NCC,
provides him the way as it requires every person, in the exercise of his
rights and performance of his duties, to act with justice, give everyone his
due, and observe honesty and good faith (Velayo vs. Shell Co. of the
Phils., G.R. L-7817, October 31, 1956). Not to release him from the clutch
of the Promissory Note when he was never made a part of the operation of
the SSLI, when he was not notified of the Board Meetings, when the
corporation nary remitted earnings of M/V Sterling Ace from charter or
shipping contracts to DBP, when the SSLI did not comply with the deed of
assignment and mortgage contract, and when the vessel was sold in
Singapore (he, learning of the sale only from the newspapers) in
contravention of the Promissory Note, and which he questioned, will be an
injustice, inequitable, and even iniquitous to plaintiff. SSLI and the private
defendants did not observe honesty and good faith to one of their
incorporators and directors. As to DBP, the Court cannot put demerits on
what plaintiff’s memorandum has pointed out:
While defendant DBP did not exercise the caution and prudence in the
discharge of their functions to protect its interest as expected of them and
worst, allowed the perpetuation of the illegal acts committed in contrast to
the virtues they publicly profess, namely: "palabra de honor, delicadeza,
katapatan, kaayusan, pagkamasinop at kagalingan" Where is the vision
banking they have for our country?
Had DBP listened to a cry in the wilderness – that of the voice of the
doctor – the doctor would not have allowed the officers and board
members to defraud DBP and he would demand of them to hew and align
themselves to the deed of assignment.
Prescinding from the above, plaintiff’s consent to be with SSLI was vitiated
by fraud. The fact that defendant Ruperto Tankeh has not questioned his
liability to DBP or that Jose Maria Vargas has been declared in default do
not detract from the fact that there was attendant fraud and that there
was continuing fraud insofar as plaintiff is concerned.
Ipinaglaban lang ni Doctor ang karapatan niya. Kung wala siyang sense of
righteous indignation and fairness, tatahimik na lang siya, sira naman ang
pinangangalagaan niyang pangalan, honor and family prestige [sic]
(Emphasis provided).35
xxxx
All of the defendants’ counterclaims and cross-claims x x x including
plaintiff’s and the other defendants’ prayer for damages are not, for the
moment, sourced and proven by substantial evidence, and must perforce
be denied and dismissed.
WHEREFORE, this Court, finding and declaring the Promissory Note
(Exhibit "C") and the Mortgage Contract (Exhibit "A") null and void insofar
as plaintiff DR. ALEJANDRO V. TANKEH is concerned, hereby ANNULS and
VOIDS those documents as to plaintiff, and it is hereby further ordered
that he be released from any obligation or liability arising therefrom.
All the defendants’ counterclaims and cross-claims and plaintiff’s and
defendants’ prayer for damages are hereby denied and dismissed, without
prejudice.
SO ORDERED.36
Respondents Ruperto V. Tankeh, Asset Privatization Trust, and Arenas
immediately filed their respective Notices of Appeal with the Regional Trial
Court. The petitioner filed a Motion for Reconsideration with regard to the
denial of his prayer for damages. After this Motion had been denied, he
then filed his own Notice of Appeal.
In a Decision37 promulgated on October 25, 2005, the Third Division of the
Court of Appeals reversed the trial court’s findings. The Court of Appeals
held that petitioner had no cause of action against public respondent Asset
Privatization Trust. This was based on the Court of Appeals’ assessment of
the case records and its findings that Asset Privatization Trust did not
commit any act violative of the right of petitioner or constituting a breach
of Asset Privatization Trust’s obligations to petitioner. The Court of Appeals
found that petitioner’s claim for damages against Asset Privatization Trust
was based merely on his own self-serving allegations.38
As to the finding of fraud, the Court of Appeals held that:
xxxx
In all the complaints from the original through the first, second and third
amendments, the plaintiff imputes fraud only to defendant Ruperto, to wit:
4. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto
V. Tankeh, plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria
Vargas signed a promissory note in favor of the defendant, DBP, wherein
plaintiff bound himself to jointly and severally pay the DBP the amount of
the mortgage loan. This document insofar as plaintiff is concerned is a
simulated document considering that plaintiff was never a real stockholder
of Sterling Shipping Lines, Inc. (Emphasis provided)
More allegations of deceit were added in the Second Amended Complaint,
but they are also attributed against Ruperto:
6. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY
THE FACT THAT when the Sterling Shipping Lines, Inc. was organized in
1980, Ruperto V. Tankeh promised plaintiff that he would be a part of the
administration staff so that he could oversee the operation of the
company. He was also promised that his son, a lawyer, would be given a
position in the company. None of these promsies [sic] was complied with.
In fact he was not even allowed to find out the data about the income and
expenses of the company.
7. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE
FACT THAT PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING OF
THE STERLING SHIPPING LINES INC. ONLY ONCE, WHICH WAS FOR THE
SOLE PURPOSE OF INTRODUCING HIM TO THE TWO DIRECTORS OF THE
DBP IN THE BOARD OF THE STERLING SHIPPING LINES, INC., NAMELY,
MR. JESUS MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS
NEVER INVITED AGAIN. PLAINTIFF WAS NEVER COMPENSATED BY THE
STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-CALLED DIRECTOR
AND STOCKHOLDER.
xxxx
8-A THAT A WEEK AFTER SENDING THE ABOVE LETTER PLAINTIFF MADE
EARNEST EFFORTS TOWARDS A COMPROMISE BETWEEN HIM AND HIS
BROTHER RUPERTO V. TANKEH, WHICH EFFORTS WERE SPURNED BY
RUPERTO V. TANKEH, AND ALSO AFTER THE NEWS OF THE SALE OF THE
‘STERLING ACE’ WAS PUBLISHED AT THE NEWSPAPER, PLAINTIFF TRIED
ALL EFFORTS TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE OF
ARRIVING AT SOME COMPROMISE, BUT DEFENDANT RUPERTO V. TANKEH
AVOIDED ALL CONTACTS WITH THE PLAINTIFF UNTIL HE WAS FORCED TO
SEEK LEGAL ASSISTANCE FROM HIS LAWYER.
In the absence of any allegations of fraud and/or deceit against the other
defendants, namely, the DBP, Vicente Arenas, Sterling Shipping Lines,
Inc., and the Asset Privatization Trust, the plaintiff’s evidence thereon
should only be against Ruperto, since a plaintiff is bound to prove only the
allegations of his complaint. In any case, no evidence of fraud or deceit
was ever presented against defendants DBP, Arenas, SSLI and APT.
As to the evidence against Ruperto, the same consists only of the
testimony of the plaintiff. None of his documentary evidence would prove
that Ruperto was guilty of fraud or deceit in causing him to sign the
subject promissory note.39
xxxx
Analyzing closely the foregoing statements, we find no evidence of fraud or
deceit. The mention of a new shipping lines business and the promise of a
free 1,000-share and directorship in the corporation do not amount to
insidious words or machinations. In any case, the shipping business was
indeed established, with the plaintiff himself as one of the incorporators
and stockholders with a share of 4,000, worth ₱4,000,000.00 of which
₱1,000,000.00 was reportedly paid up. As such, he signed the Articles of
Incorporation and the corporation’s By-Laws which were registered with
the Securities and Exchange Commission in April 1979. It was not until
May 12, 1981 that he signed the questioned promissory note. From his
own declaration at the witness stand, the plaintiff signed the promissory
note voluntarily. No pressure, force or intimidation was made to bear upon
him. In fact, according to him, only a messenger brought the paper to him
for signature. The promised shares of stock were given and recorded in the
plaintiff’s name. He was made a director and Vice-President of SSLI.
Apparently, only the promise that his son would be given a position in the
company remained unfulfilled. However, the same should have been
threshed out between the plaintiff and his brother, defendant Ruperto, and
its non-fulfillment did not amount to fraud or deceit, but was only an
unfulfilled promise.
It should be pointed out that the plaintiff is a doctor of medicine and a
seasoned businessman. It cannot be said that he did not understand the
import of the documents he signed. Certainly he knew what he was
signing. He should have known that being an officer of SSLI, his signing of
the promissory note together with the other officers of the corporation was
expected, as the other officers also did. It cannot therefore be said that
the promissory note was simulated. The same is a contract validly entered
into, which the parties are obliged to comply with.40 (Citations omitted)
The Court of Appeals ruled that in the absence of any competent proof,
Ruperto V. Tankeh did not commit any fraud. Petitioner Alejandro V.
Tankeh was unable to prove by a preponderance of evidence that fraud or
deceit had been employed by Ruperto to make him sign the promissory
note. The Court of Appeals reasoned that:
Fraud is never presumed but must be proved by clear and convincing
evidence, mere preponderance of evidence not even being adequate.
Contentions must be proved by competent evidence and reliance must be
had on the strength of the party’s evidence and not upon the weakness of
the opponent’s defense. The plaintiff clearly failed to discharge such
burden.41 (Citations omitted)
With that, the Court of Appeals reversed and set aside the judgment and
ordered that plaintiff’s Complaint be dismissed. Petitioner filed a Motion for
Reconsideration dated October 25, 2005 that was denied in a
Resolution42promulgated on February 9, 2006.
Hence, this Petition was filed.
In this Petition, Alejandro V. Tankeh stated that the Court of Appeals
seriously erred and gravely abused its discretion in acting and deciding as
if the evidence stated in the Decision of the Regional Trial Court did not
exist. He averred that the ruling of lack of cause of action had no leg to
stand on, and the Court of Appeals had unreasonably, whimsically, and
capriciously ignored the ample evidence on record proving the fraud and
deceit perpetrated on the petitioner by the respondent. He stated that the
appellate court failed to appreciate the findings of fact of the lower court,
which are generally binding on appellate courts. He also maintained that
he is entitled to damages and attorney's fees due to the deceit and
machinations committed by the respondent.
In his Memorandum, respondent Ruperto V. Tankeh averred that petitioner
had chosen the wrong remedy. He ought to have filed a special civil action
of certiorari and not a Petition for Review. Petitioner raised questions of
fact, and not questions of law, and this required the review or evaluation
of evidence. However, this is not the function of this Court, as it is not a
trier of facts. He also contended that petitioner had voluntarily entered
into the loan agreement and the position with Sterling Shipping Lines, Inc.
and that he did not fraudulently induce the petitioner to enter into the
contract.
Respondents Development Bank of the Philippines and Asset Privatization
Trust also contended that petitioner's mode of appeal had been wrong, and
he had actually sought a special civil action of certiorari. This alone
merited its dismissal.
The main issue in this case is whether the Court of Appeals erred in finding
that respondent Rupert V. Tankeh did not commit fraud against the
petitioner.
The Petition is partly granted.
Before disposing of the main issue in this case, this Court needs to address
a procedural issue raised by respondents. Collectively, respondents argue
that the Petition is actually one of certiorari under Rule 65 of the Rules of
Court43 and not a Petition for Review on Certiorari under Rule 45. 44 Thus,
petitioner’s failure to show that there was neither appeal nor any other
plain, speedy or adequate remedy merited the dismissal of the Complaint.
Contrary to respondent’s imputation, the remedy contemplated by
petitioner is clearly that of a Rule 45 Petition for Review. In Tagle v.
Equitable PCI Bank,45 this Court made the distinction between a Rule 45
Petition for Review on Certiorari and a Rule 65 Petition for Certiorari:
Certiorari is a remedy designed for the correction of errors of jurisdiction,
not errors of judgment.1âwphi1 In Pure Foods Corporation v. NLRC, we
explained the simple reason for the rule in this light: When a court
exercises its jurisdiction, an error committed while so engaged does not
deprive it of the jurisdiction being exercised when the error is committed x
x x. Consequently, an error of judgment that the court may commit in the
exercise of its jurisdiction is not correctable through the original civil action
of certiorari.
xxxx
Even if the findings of the court are incorrect, as long as it has jurisdiction
over the case, such correction is normally beyond the province of
certiorari. Where the error is not one of jurisdiction, but of an error of law
or fact a mistake of judgment, appeal is the remedy.
In this case, what petitioner seeks to rectify may be construed as errors of
judgment of the Court of Appeals. These errors pertain to the petitioner’s
allegation that the appellate court failed to uphold the findings of facts of
the lower court. He does not impute any error with respect to the Court of
Appeals’ exercise of jurisdiction. As such, this Petition is simply a
continuation of the appellate process where a case is elevated from the
trial court of origin, to the Court of Appeals, and to this Court via Rule 45.
Contrary to respondents’ arguments, the allegations of petitioner that the
Court of Appeals "committed grave abuse of discretion"46 did not ipso facto
render the intended remedy that of certiorari under Rule 65 of the Rules of
Court.47
In any case, even if the Petition is one for the special civil action of
certiorari, this Court has the discretion to treat a Rule 65 Petition for
Certiorari as a Rule 45 Petition for Review on Certiorari. This is allowed if
(1) the Petition is filed within the reglementary period for filing a Petition
for review; (2) when errors of judgment are averred; and (3) when there
is sufficient reason to justify the relaxation of the rules.48 When this Court
exercises this discretion, there is no need to comply with the requirements
provided for in Rule 65.
In this case, petitioner filed his Petition within the reglementary period of
filing a Petition for Review.49 His Petition assigns errors of judgment and
appreciation of facts and law on the part of the Court of Appeals. Thus,
even if the Petition was designated as one that sought the remedy of
certiorari, this Court may exercise its discretion to treat it as a Petition for
Review in the interest of substantial justice.
We now proceed to the substantive issue, that of petitioner’s imputation of
fraud on the part of respondents. We are required by the circumstances of
this case to review our doctrines of fraud that are alleged to be present in
contractual relations.
Types of Fraud in Contracts
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.
This is followed by the articles which provide legal examples and
illustrations of fraud.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confidential relations, constitutes fraud. (n)
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former's special
knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the
same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n)
The distinction between fraud as a ground for rendering a contract
voidable or as basis for an award of damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
(1270)
There are two types of fraud contemplated in the performance of
contracts: dolo incidente or incidental fraud and dolo causante or fraud
serious enough to render a contract voidable.
In Geraldez v. Court of Appeals,50 this Court held that:
This fraud or dolo which is present or employed at the time of birth or
perfection of a contract may either be dolo causante or dolo incidente. The
first, or causal fraud referred to in Article 1338, are those deceptions or
misrepresentations of a serious character employed by one party and
without which the other party would not have entered into the contract.
Dolo incidente, or incidental fraud which is referred to in Article 1344, are
those which are not serious in character and without which the other party
would still have entered into the contract. Dolo causante determines or is
the essential cause of the consent, while dolo incidente refers only to some
particular or accident of the obligation. The effects of dolo causante are
the nullity of the contract and the indemnification of damages, and dolo
incidente also obliges the person employing it to pay damages.51
In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al., 52 this
Court elaborated on the distinction between dolo causante and dolo
incidente:
Fraud refers to all kinds of deception -- whether through insidious
machination, manipulation, concealment or misrepresentation -- that
would lead an ordinarily prudent person into error after taking the
circumstances into account. In contracts, a fraud known as dolo causante
or causal fraud is basically a deception used by one party prior to or
simultaneous with the contract, in order to secure the consent of the
other. Needless to say, the deceit employed must be serious. In
contradistinction, only some particular or accident of the obligation is
referred to by incidental fraud or dolo incidente, or that which is not
serious in character and without which the other party would have entered
into the contract anyway.53
Under Article 1344, the fraud must be serious to annul or avoid a contract
and render it voidable. This fraud or deception must be so material that
had it not been present, the defrauded party would not have entered into
the contract. In the recent case of Spouses Carmen S. Tongson and Jose
C. Tongson, et al., v. Emergency Pawnshop Bula, Inc.,54 this Court
provided some examples of what constituted dolo causante or causal
fraud:
Some of the instances where this Court found the existence of causal fraud
include: (1) when the seller, who had no intention to part with her
property, was "tricked into believing" that what she signed were papers
pertinent to her application for the reconstitution of her burned certificate
of title, not a deed of sale; (2) when the signature of the authorized
corporate officer was forged; or (3) when the seller was seriously ill, and
died a week after signing the deed of sale raising doubts on whether the
seller could have read, or fully understood, the contents of the documents
he signed or of the consequences of his act.55 (Citations omitted)
However, Article 1344 also provides that if fraud is incidental, it follows
that this type of fraud is not serious enough so as to render the original
contract voidable.
A classic example of dolo incidente is Woodhouse v. Halili. 56 In this case,
the plaintiff Charles Woodhouse entered into a written agreement with the
defendant Fortunato Halili to organize a partnership for the bottling and
distribution of soft drinks. However, the partnership did not come into
fruition, and the plaintiff filed a Complaint in order to execute the
partnership. The defendant filed a Counterclaim, alleging that the plaintiff
had defrauded him because the latter was not actually the owner of the
franchise of a soft drink bottling operation. Thus, defendant sought the
nullification of the contract to enter into the partnership. This Court
concluded that:
x x x from all the foregoing x x x plaintiff did actually represent to
defendant that he was the holder of the exclusive franchise. The defendant
was made to believe, and he actually believed, that plaintiff had the
exclusive franchise. x x x The record abounds with circumstances
indicative that the fact that the principal consideration, the main cause
that induced defendant to enter into the partnership agreement with
plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle
and distribute for the defendant or for the partnership. x x x The
defendant was, therefore, led to the belief that plaintiff had the exclusive
franchise, but that the same was to be secured for or transferred to the
partnership. The plaintiff no longer had the exclusive franchise, or the
option thereto, at the time the contract was perfected. But while he had
already lost his option thereto (when the contract was entered into), the
principal obligation that he assumed or undertook was to secure said
franchise for the partnership, as the bottler and distributor for the Mission
Dry Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the principal
inducement, that led plaintiff to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise
was actually the consideration or price plaintiff gave in exchange for the
share of 30 percent granted him in the net profits of the partnership
business. Defendant agreed to give plaintiff 30 per cent share in the net
profits because he was transferring his exclusive franchise to the
partnership. x x x.
Plaintiff had never been a bottler or a chemist; he never had experience in
the production or distribution of beverages. As a matter of fact, when the
bottling plant being built, all that he suggested was about the toilet
facilities for the laborers.
We conclude from the above that while the representation that plaintiff
had the exclusive franchise did not vitiate defendant's consent to the
contract, it was used by plaintiff to get from defendant a share of 30 per
cent of the net profits; in other words, by pretending that he had the
exclusive franchise and promising to transfer it to defendant, he obtained
the consent of the latter to give him (plaintiff) a big slice in the net profits.
This is the dolo incidente defined in article 1270 of the Spanish Civil Code,
because it was used to get the other party's consent to a big share in the
profits, an incidental matter in the agreement.57
Thus, this Court held that the original agreement may not be declared null
and void. This Court also said that the plaintiff had been entitled to
damages because of the refusal of the defendant to enter into the
partnership. However, the plaintiff was also held liable for damages to the
defendant for the misrepresentation that the former had the exclusive
franchise to soft drink bottling operations.
To summarize, if there is fraud in the performance of the contract, then
this fraud will give rise to damages. If the fraud did not compel the
imputing party to give his or her consent, it may not serve as the basis to
annul the contract, which exhibits dolo causante. However, the party
alleging the existence of fraud may prove the existence of dolo incidente.
This may make the party against whom fraud is alleged liable for
damages.
Quantum of Evidence to Prove the Existence of Fraud and the Liability of
the Parties
The Civil Code, however, does not mandate the quantum of evidence
required to prove actionable fraud, either for purposes of annulling a
contract (dolo causante) or rendering a party liable for damages (dolo
incidente). The definition of fraud is different from the quantum of
evidence needed to prove the existence of fraud. Article 1338 provides the
legal definition of fraud. Articles 1339 to 1343 constitute the behavior and
actions that, when in conformity with the legal provision, may constitute
fraud.
Jurisprudence has shown that in order to constitute fraud that provides
basis to annul contracts, it must fulfill two conditions. First, the fraud must
be dolo causante or it must be fraud in obtaining the consent of the party.
Second, this fraud must be proven by clear and convincing evidence. In
Viloria v. Continental Airlines,58 this Court held that:
Under Article 1338 of the Civil Code, there is fraud when, through insidious
words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have
agreed to. In order that fraud may vitiate consent, it must be the causal
(dolo causante), not merely the incidental (dolo incidente), inducement to
the making of the contract. In Samson v. Court of Appeals, causal fraud
was defined as "a deception employed by one party prior to or
simultaneous to the contract in order to secure the consent of the other."
Also, fraud must be serious and its existence must be established by clear
and convincing evidence. (Citations omitted)59
In Viloria, this Court cited Sierra v. Court of Appeals60 stating that mere
preponderance of evidence will not suffice in proving fraud.
Fraud must also be discounted, for according to the Civil Code:
Art. 1338. There is fraud when, through insidious words or machinations of
one of the contracting parties, the other is induced to enter into a contract
which without them, he would not have agreed to.
Art. 1344. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties.
To quote Tolentino again, the "misrepresentation constituting the fraud
must be established by full, clear, and convincing evidence, and not
merely by a preponderance thereof. The deceit must be serious. The fraud
is serious when it is sufficient to impress, or to lead an ordinarily prudent
person into error; that which cannot deceive a prudent person cannot be a
ground for nullity. The circumstances of each case should be considered,
taking into account the personal conditions of the victim."61
Thus, to annul a contract on the basis of dolo causante, the following must
happen: First, the deceit must be serious or sufficient to impress and lead
an ordinarily prudent person to error. If the allegedly fraudulent actions do
not deceive a prudent person, given the circumstances, the deceit here
cannot be considered sufficient basis to nullify the contract. In order for
the deceit to be considered serious, it is necessary and essential to obtain
the consent of the party imputing fraud. To determine whether a person
may be sufficiently deceived, the personal conditions and other factual
circumstances need to be considered.
Second, the standard of proof required is clear and convincing evidence.
This standard of proof is derived from American common law. It is less
than proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability is
higher than that of an ordinary civil case. Civil cases only require a
preponderance of evidence to meet the required burden of proof. However,
when fraud is alleged in an ordinary civil case involving contractual
relations, an entirely different standard of proof needs to be satisfied. The
imputation of fraud in a civil case requires the presentation of clear and
convincing evidence. Mere allegations will not suffice to sustain the
existence of fraud. The burden of evidence rests on the part of the plaintiff
or the party alleging fraud. The quantum of evidence is such that fraud
must be clearly and convincingly shown.
The Determination of the Existence of Fraud in the Present Case
We now determine the application of these doctrines regarding fraud to
ascertain the liability, if any, of the respondents.
Neither law nor jurisprudence distinguishes whether it is dolo incidente or
dolo causante that must be proven by clear and convincing evidence. It
stands to reason that both dolo incidente and dolo causante must be
proven by clear and convincing evidence. The only question is whether this
fraud, when proven, may be the basis for making a contract voidable (dolo
causante), or for awarding damages (dolo incidente), or both.
Hence, there is a need to examine all the circumstances thoroughly and to
assess the personal circumstances of the party alleging fraud. This may
require a review of the case facts and the evidence on record.
In general, this Court is not a trier of facts. It makes its rulings based on
applicable law and on standing jurisprudence. The findings of the Court of
Appeals are generally binding on this Court provided that these are
supported by the evidence on record. In the recent case of Medina v. Court
of Appeals,62 this Court held that:
It is axiomatic that a question of fact is not appropriate for a petition for
review on certiorari under Rule 45. This rule provides that the parties may
raise only questions of law, because the Supreme Court is not a trier of
facts. Generally, we are not duty-bound to analyze again and weigh the
evidence introduced in and considered by the tribunals below. When
supported by substantial evidence, the findings of fact of the Court of
Appeals are conclusive and binding on the parties and are not reviewable
by this Court, unless the case falls under any of the following recognized
exceptions: (1) When the conclusion is a finding grounded entirely on
speculation, surmises and conjectures; (2) When the inference made is
manifestly mistaken, absurd or impossible; (3) Where there is a grave
abuse of discretion; (4) When the judgment is based on a
misapprehension of facts; (5) When the findings of fact are conflicting; (6)
When the Court of Appeals, in making its findings, went beyond the issues
of the case and the same is contrary to the admissions of both appellant
and appellee; (7) When the findings are contrary to those of the trial
court; (8) When the findings of fact are conclusions without citation of
specific evidence on which they are based; (9) When the facts set forth in
the petition as well as in the petitioner’s main and reply briefs are not
disputed by the respondents; and (10) When the findings of fact of the
Court of Appeals are premised on the supposed absence of evidence and
contradicted by the evidence on record. (Emphasis provided)63
The trial court and the Court of Appeals had appreciated the facts of this
case differently.
The Court of Appeals was not correct in saying that petitioner could only
raise fraud as a ground to annul his participation in the contract as against
respondent Rupert V. Tankeh, since the petitioner did not make any
categorical allegation that respondents Development Bank of the
Philippines, Sterling Shipping Lines, Inc., and Asset Privatization Trust had
acted fraudulently. Admittedly, it was only in the Petition before this Court
that the petitioner had made the allegation of a "well-orchestrated
fraud"64 by the respondents. However, Rule 10, Section 5 of the Rules of
Civil Procedure provides that:
Amendment to conform to or authorize presentation of evidence. — When
issues not raised by the pleadings are tried with the express or implied
consent of the parties they shall be treated in all respects as if they had
been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after
judgment; but failure to amend does not effect the result of the trial of
these issues. If evidence is objected to at the trial on the ground that it is
not within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so with liberality if the presentation
of the merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable the
amendment to be made. (5a)
In this case, the commission of fraud was an issue that had been tried with
the implied consent of the respondents, particularly Sterling Shipping
Lines, Inc., Asset Privatization Trust, Development Bank of the Philippines,
and Arenas. Hence, although there is a lack of a categorical allegation in
the pleading, the courts may still be allowed to ascertain fraud.
The records will show why and how the petitioner agreed to enter into the
contract with respondent Ruperto V. Tankeh:
ATTY. VELAYO: How did you get involved in the business of the Sterling
Shipping Lines, Incorporated" [sic]
DR. TANKEH: Sometime in the year 1980, I was approached by Ruperto
Tankeh mentioning to me that he is operating a new shipping lines
business and he is giving me free one thousand shares (1,000) to be a
director of this new business which is worth one million pesos
(₱1,000,000.00.),
ATTY. VELAYO: Are you related to Ruperto V. Tankeh?
DR. TANKEH: Yes, sir. He is my younger brother.
ATTY. VELAYO: Did you accept the offer?
DR. TANKEH: I accepted the offer based on his promise to me that I will
be made a part of the administration staff so that I can oversee the
operation of the business plus my son, the eldest one who is already a
graduate lawyer with a couple of years of experience in the law firm of
Romulo Ozaeta Law Offices (TSN, April 28, 1988, pp. 10-11.).65
The Second Amended Complaint of petitioner is substantially reproduced
below to ascertain the claim:
xxxx
2. That on May 12, 1981, due to the deceit and fraud exercised by
Ruperto V. Tankeh, plaintiff, together with Vicente L. Arenas, Jr.
and Jose Maria Vargas, signed a promissory note in favor of the
defendant DBP, wherein plaintiff bound himself to jointly and
severally pay the DBP the amount of the mortgage loan. This
document insofar as plaintiff is concerned is a simulated document
considering that plaintiff was never a real stockholder of the
Sterling Shipping Lines, Inc.
3. That although plaintiff’s name appears in the records of Sterling
Shipping Lines, Inc. as one of its incorporators, the truth is that he
had never invested any amount in said corporation and that he
had never been an actual member of said corporation. All the
money supposedly invested by him were put by defendant Ruperto
V. Tankeh. Thus, all the shares of stock under his name in fact
belongs to Ruperto V. Tankeh. Plaintiff was invited to attend the
board meeting of the Sterling Shipping Lines, Inc. only once, which
was for the sole purpose of introducing him to the two directors of
the DBP, namely, Mr. Jesus Macalinag and Mr. Gil Corpus.
Thereafter he was never invited again. Plaintiff was never
compensated by the Sterling Shipping Lines, Inc. for his being a
so-called director and stockholder. It is clear therefore that the
DBP knew all along that plaintiff was not a true stockholder of the
company.
4. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS
SHOWN BY THE FACT THAT when the Sterling Shipping Lines, Inc.
was organized in 1980, Ruperto V. Tankeh promised plaintiff that
he would be a part of the administration staff so that he could
oversee the operation of the company. He was also promised that
his son, a lawyer, would be given a position in the company. None
of these promises was complied with. In fact, he was not even
allowed to find out the data about the income and expenses of the
company.
5. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY
THE FACT THAT PLAINTIFF WAS INVITED TO ATTEND THE BOARD
MEETING OF THE STERLING SHIPPING LINES, INC. ONLY ONCE,
WHICH WAS FOR THE SOLE PUPOSE OF INTRODUCING HIM TO
THE TWO DIRECTORS OF THE DBP IN THE BOARD OF THE
STERLING SHIPPING LINES, INC., NAMELY, MR. JESUS
MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS NEVER
INVITED AGAIN. PLAINTIFF WAS NEVER COMPENSATED BY THE
STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-CALLED
DIRECTOR AND STOCKHOLDER.
6. That in 1983, upon realizing that he was only being made a tool
to realize the purposes of Ruperto V. Tankeh, plaintiff officially
informed the company by means of a letter dated June 15, 1983
addressed to the company that he has severed his connection with
the company, and demanded among others, that the company
board of directors pass a resolution releasing him from any
liabilities especially with reference to the loan mortgage contract
with the DBP and to notify the DBP of his severance from the
Sterling Shipping Lines, Inc.
8-A. THAT A WEEK AFTER SENDING THE ABOVE LETTER,
PLAINTIFF MADE EARNEST EFFORTS TOWARDS A COMPROMISE
BETWEEN HIM AND HIS BROTHER RUPERTO V. TANKEH, WHICH
EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO
AFTER THE NEWS OF THE SALE OF THE "STERLING ACE" WAS
PUBLISHED AT THE NEWSPAPER [sic], PLAINTIFF TRIED ALL
EFFORTS TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE
OF ARRIVING AT SOME COMPROMISE, BUT DEFENDANT RUPERTO
V. TANKEH AVOIDED ALL CONTACTS [sic] WITH THE PLAINTIFF
UNTIL HE WAS FORCED TO SEEK LEGAL ASSISTANCE FROM HIS
LAWYER.66
In his Answer, respondent Ruperto V. Tankeh stated that:
COMES NOW defendant RUPERTO V. TANKEH, through the undersigned
counsel, and to the Honorable Court, most respectfully alleges:
xxxx
3. That paragraph 4 is admitted that herein answering defendant
together with the plaintiff signed the promissory note in favor of
DBP but specifically denied that the same was done through deceit
and fraud of herein answering defendant the truth being that
plaintiff signed said promissory note voluntarily and with full
knowledge of the consequences thereof; it is further denied that
said document is a simulated document as plaintiff was never a
real stockholder of the company, the truth being those alleged in
the special and affirmative defenses;
 4. That paragraphs 5,6,7,8 and 8-A are specifically denied specially
the imputation of deceit and fraud against herein answering
defendant, the truth being those alleged in the special and
affirmative defenses;
xxxx
SPECIAL AND AFFIRMATIVE DEFENSES x x x
8. The complaint states no cause of action as against herein
answering defendant;
9. The Sterling Shipping Lines, Inc. was a legitimate company
organized in accordance with the laws of the Republic of the
Philippines with the plaintiff as one of the incorporators;
10. Plaintiff as one of the incorporators and directors of the board
was fully aware of the by-laws of the company and if he attended
the board meeting only once as alleged, the reason thereof was
known only to him;
11. The Sterling Shipping Lines, Inc. being a corporation acting
through its board of directors, herein answering defendant could
not have promised plaintiff that he would be a part of the
administration staff;
12. As member of the board, plaintiff had all the access to the data
and records of the company; further, as alleged in the complaint,
plaintiff has a son who is a lawyer who could have advised him;
13. Assuming plaintiff wrote a letter to the company to sever his
connection with the company, he should have been aware that all
he had to do was sell all his holdings in the company;
14. Herein answering defendant came to know only of plaintiff’s
alleged predicament when he received the summons and copy of
the complaint; x x x.67
An assessment of the allegations in the pleadings and the findings of fact
of both the trial court and appellate court based on the evidence on record
led to the conclusion that there had been no dolo causante committed
against the petitioner by Ruperto V. Tankeh.
The petitioner had given his consent to become a shareholder of the
company without contributing a single peso to pay for the shares of stock
given to him by Ruperto V. Tankeh. This fact was admitted by both
petitioner and respondent in their respective pleadings submitted to the
lower court.
In his Amended Complaint,68 the petitioner admitted that "he had never
invested any amount in said corporation and that he had never been an
actual member of said corporation. All the money supposedly invested by
him were put up by defendant Ruperto V. Tankeh."69 This fact alone should
have already alerted petitioner to the gravity of the obligation that he
would be undertaking as a member of the board of directors and the
attendant circumstances that this undertaking would entail. It also does
not add any evidentiary weight to strengthen petitioner’s claim of fraud. If
anything, it only strengthens the position that petitioner’s consent was not
obtained through insidious words or deceitful machinations.
Article 1340 of the Civil Code recognizes the reality of some exaggerations
in trade which negates fraud. It reads:
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.
Given the standing and stature of the petitioner, he was in a position to
ascertain more information about the contract.
Songco v. Sellner70 serves as one of the key guidelines in ascertaining
whether a party is guilty of fraud in obtaining the consent of the party
claiming that fraud existed. The plaintiff Lamberto Songco sought to
recover earnings from a promissory note that defendant George Sellner
had made out to him for payment of Songco’s sugar cane production.
Sellner claimed that he had refused to pay because Songco had promised
that the crop would yield 3,000 piculs of sugar, when in fact, only 2,017
piculs of sugar had been produced. This Court held that Sellner would still
be liable to pay the promissory note, as follows:
Notwithstanding the fact that Songco's statement as to the probable
output of his crop was disingenuous and uncandid, we nevertheless think
that Sellner was bound and that he must pay the price stipulated. The
representation in question can only be considered matter of opinion as the
cane was still standing in the field, and the quantity of the sugar it would
produce could not be known with certainty until it should be harvested and
milled. Undoubtedly Songco had better experience and better information
on which to form an opinion on this question than Sellner. Nevertheless
the latter could judge with his own eyes as to the character of the cane,
and it is shown that he measured the fields and ascertained that they
contained 96 1/2 hectares.
xxxx
The law allows considerable latitude to seller's statements, or dealer's talk;
and experience teaches that it is exceedingly risky to accept it at its face
value. The refusal of the seller to warrant his estimate should have
admonished the purchaser that that estimate was put forth as a mere
opinion; and we will not now hold the seller to a liability equal to that
which would have been created by a warranty, if one had been given.
xxxx
It is not every false representation relating to the subject matter of a
contract which will render it void. It must be as to matters of fact
substantially affecting the buyer's interest, not as to matters of opinion,
judgment, probability, or expectation. (Long vs. Woodman, 58 Me., 52;
Hazard vs. Irwin, 18 Pick. [Mass.], 95; Gordon vs. Parmelee, 2 Allen
[Mass.], 212; Williamson vs. McFadden, 23 Fla., 143, 11 Am. St. Rep.,
345.) When the purchaser undertakes to make an investigation of his own,
and the seller does nothing to prevent this investigation from being as full
as he chooses to make it, the purchaser cannot afterwards allege that the
seller made misrepresentations. (National Cash Register Co. vs. Townsend,
137 N. C., 652, 70 L. R. A., 349; Williamson vs. Holt, 147 N. C., 515.)
We are aware that where one party to a contract, having special or expert
knowledge, takes advantage of the ignorance of another to impose upon
him, the false representation may afford ground for relief, though
otherwise the injured party would be bound. But we do not think that the
fact that Songco was an experienced farmer, while Sellner was, as he
claims, a mere novice in the business, brings this case within that
exception.71
The following facts show that petitioner was fully aware of the magnitude
of his undertaking:
First, petitioner was fully aware of the financial reverses that Sterling
Shipping Lines, Inc. had been undergoing, and he took great pains to
release himself from the obligation.
Second, his background as a doctor, as a bank organizer, and as a
businessman with experience in the textile business and real estate should
have apprised him of the irregularity in the contract that he would be
undertaking. This meant that at the time petitioner gave his consent to
become a part of the corporation, he had been fully aware of the
circumstances and the risks of his participation. Intent is determined by
the acts.
Finally, the records showed that petitioner had been fully aware of the
effect of his signing the promissory note. The bare assertion that he was
not privy to the records cannot counteract the fact that petitioner himself
had admitted that after he had severed ties with his brother, he had
written a letter seeking to reach an amicable settlement with respondent
Rupert V. Tankeh. Petitioner’s actions defied his claim of a complete lack of
awareness regarding the circumstances and the contract he had been
entering.
The required standard of proof – clear and convincing evidence – was not
met. There was no dolo causante or fraud used to obtain the petitioner’s
consent to enter into the contract. Petitioner had the opportunity to
become aware of the facts that attended the signing of the promissory
note. He even admitted that he has a lawyer-son who the petitioner had
hoped would assist him in the administration of Sterling Shipping Lines,
Inc. The totality of the facts on record belies petitioner’s claim that fraud
was used to obtain his consent to the contract given his personal
circumstances and the applicable law.
However, in refusing to allow petitioner to participate in the management
of the business, respondent Ruperto V. Tankeh was liable for the
commission of incidental fraud. In Geraldez, this Court defined incidental
fraud as "those which are not serious in character and without which the
other party would still have entered into the contract."72
Although there was no fraud that had been undertaken to obtain
petitioner’s consent, there was fraud in the performance of the contract.
The records showed that petitioner had been unjustly excluded from
participating in the management of the affairs of the corporation. This
exclusion from the management in the affairs of Sterling Shipping Lines,
Inc. constituted fraud incidental to the performance of the obligation.
This can be concluded from the following circumstances.
First, respondent raised in his Answer that petitioner "could not have
promised plaintiff that he would be a part of the administration
staff"73 since petitioner had been fully aware that, as a corporation,
Sterling Shipping Lines, Inc. acted through its board of directors.
Respondent admitted that petitioner had been "an incorporator and
member of the board of directors"74 and that petitioner "was fully aware of
the by-laws of the company."75 It was incumbent upon respondent to act
in good faith and to ensure that petitioner would not be excluded from the
affairs of Sterling Shipping Lines, Inc. After all, respondent asserted that
petitioner had entered into the contract voluntarily and with full consent.
Second, respondent claimed that if petitioner was intent on severing his
connection with the company, all that petitioner had to do was to sell all
his holdings in the company. Clearly, the respondent did not consider the
fact that the sale of the shares of stock alone did not free petitioner from
his liability to Development Bank of the Philippines or Asset Privatization
Trust, since the latter had signed the promissory and had still been liable
for the loan. A sale of petitioners’ shares of stock would not have negated
the petitioner’s responsibility to pay for the loan.
Third, respondent Ruperto V. Tankeh did not rebuff petitioner’s claim that
the latter only received news about the sale of the vessel M/V Sterling Ace
through the media and not as one of the board members or directors of
Sterling Shipping Lines, Inc.
All in all, respondent Ruperto V. Tankeh’s bare assertion that petitioner
had access to the records cannot discredit the fact that the petitioner had
been effectively deprived of the opportunity to actually engage in the
operations of Sterling Shipping Lines, Inc. Petitioner had a reasonable
expectation that the same level of engagement would be present for the
duration of their working relationship. This would include an undertaking in
good faith by respondent Ruperto V. Tankeh to be transparent with his
brother that he would not automatically be made part of the company’s
administration.
However, this Court finds there is nothing to support the assertion that
Sterling Shipping Lines, Inc. and Arenas committed incidental fraud and
must be held liable. Sterling Shipping Lines, Inc. acted through its board of
directors, and the liability of respondent Tankeh cannot be imposed on
Sterling Shipping Lines, Inc. The shipping line has a separate and distinct
personality from its officers, and petitioner’s assertion that the corporation
conspired with the respondent Ruperto V. Tankeh to defraud him is not
supported by the evidence and the records of the case.
As for Arenas, in Lim Tanhu v. Remolete,76 this Court held that:
In all instances where a common cause of action is alleged against several
defendants, some of whom answer and the others do not, the latter or
those in default acquire a vested right not only to own the defense
interposed in the answer of their co-defendant or co-defendants not in
default but also to expect a result of the litigation totally common with
them in kind and in amount whether favorable or unfavorable. The
substantive unity of the plaintiffs’ cause against all the defendants is
carried through to its adjective phase as ineluctably demanded by the
homogeneity and indivisibility of justice itself.77
As such, despite Arenas’ failure to submit his Answer to the Complaint or
his declaration of default, his liability or lack thereof is concomitant with
the liability attributed to his co-defendants or co-respondents. However,
unlike respondent Ruperto V. Tankeh’s liability, there is no action or series
of actions that may be attributed to Arenas that may lead to an inference
that he was liable for incidental fraud. In so far as the required evidence
for both Sterling Shipping Lines, Inc. and Arenas is concerned, there is no
basis to justify the claim of incidental fraud.
In addition, respondents Development Bank of the Philippines and Asset
Privatization Trust or Privatization and Management Office cannot be held
liable for fraud. Incidental fraud cannot be attributed to the execution of
their actions, which were undertaken pursuant to their mandated functions
under the law. "Absent convincing evidence to the contrary, the
presumption of regularity in the performance of official functions has to be
upheld."78
The Obligation to Pay Damages
As such, respondent Ruperto V. Tankeh is liable to his older brother,
petitioner Alejandro, for damages. The obligation to pay damages to
petitioner is based on several provisions of the Civil Code.
Article 1157 enumerates the sources of obligations.
Article 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)
This enumeration does not preclude the possibility that a single action may
serve as the source of several obligations to pay damages in accordance
with the Civil Code. Thus, the liability of respondent Ruperto V. Tankeh is
based on the law, under Article 1344, which provides that the commission
of incidental fraud obliges the person employing it to pay damages.
In addition to this obligation as the result of the contract between
petitioner and respondents, there was also a patent abuse of right on the
part of respondent Tankeh. This abuse of right is included in Articles 19
and 21 of the Civil Code which provide that:
Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Article 21. Any person who willfully causes loss or injury to another in
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
Respondent Ruperto V. Tankeh abused his right to pursue undertakings in
the interest of his business operations. This is because of his failure to at
least act in good faith and be transparent with petitioner regarding Sterling
Shipping Lines, Inc.’s daily operations.
In National Power Corporation v. Heirs of Macabangkit Sangkay,79 this
Court held that:
When a right is exercised in a manner not conformable with the norms
enshrined in Article 19 and like provisions on human relations in the Civil
Code, and the exercise results to [sic] the damage of [sic] another, a legal
wrong is committed and the wrongdoer is held responsible.80
The damage, loss, and injury done to petitioner are shown by the following
circumstances.
First, petitioner was informed by Development Bank of the Philippines that
it would still pursue his liability for the payment of the promissory note.
This would not have happened if petitioner had allowed himself to be fully
apprised of Sterling Shipping Lines, Inc.’s financial straits and if he felt
that he could still participate in the company’s operations. There is no
evidence that respondent Ruperto V. Tankeh showed an earnest effort to
at least allow the possibility of making petitioner part of the administration
a reality. The respondent was the brother of the petitioner and was also
the primary party that compelled petitioner Alejandro Tankeh to be
solidarily bound to the promissory note. Ruperto V. Tankeh should have
done his best to ensure that he had exerted the diligence to comply with
the obligations attendant to the participation of petitioner.
Second, respondent Ruperto V. Tankeh’s refusal to enter into an
agreement or settlement with petitioner after the latter’s discovery of the
sale of the M/V Sterling Ace was an action that constituted bad faith. Due
to Ruperto’s refusal, his brother, petitioner Alejandro, became solidarily
liable for an obligation that the latter could have avoided if he had been
given an opportunity to participate in the operations of Sterling Shipping
Lines, Inc. The simple sale of all of petitioner’s shares would not have
solved petitioner’s problems, as it would not have negated his liability
under the terms of the promissory note.
Finally, petitioner is still bound to the creditors of Sterling Shipping Lines,
Inc., namely, public respondents Development Bank of the Philippines and
Asset Privatization Trust. This is an additional financial burden for
petitioner. Nothing in the records suggested the possibility that
Development Bank of the Philippines or Asset Privatization Trust through
the Privatization Management Office will not pursue or is precluded from
pursuing its claim against the petitioner. Although petitioner Alejandro
voluntarily signed the promissory note and became a stockholder and
board member, respondent should have treated him with fairness,
transparency, and consideration to minimize the risk of incurring grave
financial reverses.
In Francisco v. Ferrer,81 this Court ruled that moral damages may be
awarded on the following bases:
To recover moral damages in an action for breach of contract, the breach
must be palpably wanton, reckless, malicious, in bad faith, oppressive or
abusive.
Under the provisions of this law, in culpa contractual or breach of contract,
moral damages may be recovered when the defendant acted in bad faith
or was guilty of gross negligence (amounting to bad faith) or in wanton
disregard of his contractual obligation and, exceptionally, when the act of
breach of contract itself is constitutive of tort resulting in physical injuries.
Moral damages may be awarded in breaches of contracts where the
defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence, it imports
a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of known duty through some motive or interest or ill will
that partakes of the nature of fraud.
xxxx
The person claiming moral damages must prove the existence of bad faith
by clear and convincing evidence for the law always presumes good faith.
It is not enough that one merely suffered sleepless nights, mental anguish,
serious anxiety as the result of the actuations of the other party.
Invariably such action must be shown to have been willfully done in bad
faith or will ill motive. Mere allegations of besmirched reputation,
embarrassment and sleepless nights are insufficient to warrant an award
for moral damages. It must be shown that the proximate cause thereof
was the unlawful act or omission of the [private respondent] petitioners.
An award of moral damages would require certain conditions to be met, to
wit: (1) first, there must be an injury, whether physical, mental or
psychological, clearly sustained by the claimant; (2) second, there must be
culpable act or omission factually established; (3) third, the wrongful act
or omission of the defendant is the proximate cause of the injury sustained
by the claimant; and (4) fourth, the award of damages is predicated on
any of the cases stated in Article 2219 of the Civil Code. (Citations
omitted)82
In this case, the four elements cited in Francisco are present. First,
petitioner suffered an injury due to the mental duress of being bound to
such an onerous debt to Development Bank of the Philippines and Asset
Privatization Trust. Second, the wrongful acts of undue exclusion done by
respondent Ruperto V. Tankeh clearly fulfilled the same requirement.
Third, the proximate cause of his injury was the failure of respondent
Ruperto V. Tankeh to comply with his obligation to allow petitioner to
either participate in the business or to fulfill his fiduciary responsibilities
with candor and good faith. Finally, Article 221983 of the Civil Code
provides that moral damages may be awarded in case of acts and actions
referred to in Article 21, which, as stated, had been found to be attributed
to respondent Ruperto V. Tankeh.
In the Appellant’s Brief,84 petitioner asked the Court of Appeals to demand
from respondents, except from respondent Asset Privatization Trust, the
amount of five million pesos (₱5,000,000.00). This Court finds that the
amount of five hundred thousand pesos (₱500,000.00) is a sufficient
amount of moral damages.
In addition to moral damages, this Court may also impose the payment of
exemplary damages.1âwphi1 Exemplary damages are discussed in Article
2229 of the Civil Code, as follows:
ART. 2229. Exemplary or corrective damages are imposed, by way of
example or correction of the public good, in addition to moral, temperate,
liquidated or compensatory damages.
Exemplary damages are further discussed in Articles 2233 and 2234,
particularly regarding the pre-requisites of ascertaining moral damages
and the fact that it is discretionary upon this Court to award them or not:
ART. 2233. Exemplary damages cannot be recovered as a matter of right;
the court will decide whether or not they should be adjudicated.
ART. 2234. While the amount of the exemplary damages need not be
proven, the plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded x x x
The purpose of exemplary damages is to serve as a deterrent to future
and subsequent parties from the commission of a similar offense. The case
of People v. Rante85 citing People v. Dalisay86 held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective
damages are intended to serve as a deterrent to serious wrong doings,
and as a vindication of undue sufferings and wanton invasion of the rights
of an injured or a punishment for those guilty of outrageous conduct.
These terms are generally, but not always, used interchangeably. In
common law, there is preference in the use of exemplary damages when
the award is to account for injury to feelings and for the sense of indignity
and humiliation suffered by a person as a result of an injury that has been
maliciously and wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly reprehensible conduct of
the defendant—associated with such circumstances as willfulness,
wantonness, malice, gross negligence or recklessness, oppression, insult
or fraud or gross fraud—that intensifies the injury. The terms punitive or
vindictive damages are often used to refer to those species of damages
that may be awarded against a person to punish him for his outrageous
conduct. In either case, these damages are intended in good measure to
deter the wrongdoer and others like him from similar conduct in the
future.87
To justify an award for exemplary damages, the wrongful act must be
accompanied by bad faith, and an award of damages would be allowed
only if the guilty party acted in a wanton, fraudulent, reckless or
malevolent manner.88 In this case, this Court finds that respondent
Ruperto V. Tankeh acted in a fraudulent manner through the finding of
dolo incidente due to his failure to act in a manner consistent with
propriety, good morals, and prudence.
Since exemplary damages ensure that future litigants or parties are
enjoined from acting in a similarly malevolent manner, it is incumbent
upon this Court to impose the damages in such a way that will serve as a
categorical warning and will show that wanton actions will be dealt with in
a similar manner. This Court finds that the amount of two hundred
thousand pesos (₱200,000.00) is sufficient for this purpose.
In sum, this Court must act in the best interests of all future litigants by
establishing and applying clearly defined standards and guidelines to
ascertain the existence of fraud.
WHEREFORE, this Petition is PARTIALLY GRANTED. The Decision of the
Court of Appeals as to the assailed Decision in so far as the finding of fraud
is SUSTAINED with the MODIFICATION that respondent RUPERTO V.
TANKEH be ordered to pay moral damages in the amount of FIVE
HUNDRED THOUSAND PESOS (₱500,000.00) and the amount of TWO
HUNDRED THOUSAND PESOS (₱200,000.00) by way of exemplary
damages.
SO ORDERED.
G.R. No. 156038 October 11, 2010
SPOUSES VICTORIANO CHUNG and DEBBIE CHUNG, Petitioners,
vs.
ULANDAY CONSTRUCTION, INC.,* Respondent.
DECISION
BRION, J.:
We resolve the petition for review on certiorari1 filed by petitioners
Spouses Victoriano Chung and Debbie Chung (petitioners) to challenge the
decision2 and resolution3 of the Court of Appeals (CA) in CA-G.R. CV No.
61583.4
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized
below.
In February 1985, the petitioners contracted with respondent Ulanday
Construction, Inc. (respondent) to construct, within a 150-day period,5 the
concrete structural shell of the former’s two-storey residential house in
Urdaneta Village, Makati City at the contract price of ₱3,291,142.00.6
The Contract7 provided that: (a) the respondent shall supply all the
necessary materials, labor, and equipment indispensable for the
completion of the project, except for work to be done by other
contractors;8 (b) the petitioners shall pay a ₱987,342.609 downpayment,
with the balance to be paid in progress payments based on actual work
completed;10 (c) the Construction Manager or Architect shall check the
respondent’s request for progress payment and endorse it to the
petitioners for payment within 3 days from receipt;11 (d) the petitioners
shall pay the respondents within 7 days from receipt of the Construction
Manager’s or Architect’s certificate; (e) the respondent cannot change or
alter the plans, specifications, and works without the petitioners’ prior
written approval;12 (f) a penalty equal to 0.01% of the contract amount
shall be imposed for each day of delay in completion, but the respondent
shall be granted proportionate time extension for delays caused by the
petitioners;13 (g) the respondent shall correct, at its expense, defects
appearing during the 12-month warranty period after the petitioners’
issuance of final acceptance of work.14
Subsequently, the parties agreed to exclude from the contract the roofing
and flushing work, for ₱321,338.00,15reducing the contract price to
₱2,969,804.00. On March 17, 1995, the petitioners paid the ₱987,342.60
downpayment,16 with the balance of ₱1,982,461.40 to be paid based on
the progress billings. While the building permit was issued on April 10,
1995,17 actual construction started on March 7, 1995.18
As the actual construction went on, the respondent submitted 12 progress
billings.19 While the petitioners settled the first 7 progress billings,
amounting to ₱1,270,641.59,20 payment was made beyond the seven (7)-
day period provided in the contract. The petitioner subsequently granted
the respondent a ₱100,000.00 cash advance,21leaving the unpaid progress
billings at ₱445,922.13.22
During the construction, the respondent also effected 19 change orders
without the petitioners’ prior written approval, amounting to
₱912,885.91.23 The petitioners, however, paid ₱42,298.61 for Change
Order No. 124 and partially paid ₱130,000.00 for Change Order Nos. 16
and 17.25Petitioner Debbie Chung acknowledged in writing that the balance
for Change Order Nos. 16 and 17 would be paid upon completion of the
contract.26 The outstanding balance on the change orders totaled
₱740,587.30.
On July 4, 1995, the respondent notified the petitioners that the delay in
the payment of progress billings delays the accomplishment of the contract
work.27 The respondent made similar follow-up letters between July 1995
to February 1996.28 On March 28, 1996, the respondent demanded full
payment for progress billings and change orders.29 On April 8, 1996, the
respondent demanded payment of ₱1,310,670.56 as outstanding balance
on progress billings and change orders.30
In a letter dated April 16, 1996, the petitioners denied liability, asserting
that the respondent violated the contract provisions by, among others,
failing to finish the contract within the 150-day stipulated period, failing to
comply with the provisions on change orders, and overstating its billings.31
On May 8, 1996, the respondent filed a complaint with the Regional Trial
Court (RTC), Branch 145, Makati City, for collection of the unpaid balance
of the contract and the unpaid change orders, plus damages and
attorney’s fees.32
In their answer with counterclaim,33 the petitioners complained of the
respondent’s delayed and defective work. They demanded payment of
liquidated damages for delay in the completion, the construction errors,
loss or non-usage of specified construction materials, unconstructed and
non-completed works, plus damages and attorney’s fees.
THE RTC RULING
In a decision34 dated December 11, 1997, the RTC found that both parties
have not complied strictly with the requirements of the contract. It
observed that change orders were made without the parties’ prescribed
written agreement, and that each party should bear their respective costs.
It noted that the respondent could not demand from the petitioners the
payment for change orders undertaken upon instruction of the project
architect without the petitioners’ written approval. Applying Article 1724 of
the Civil Code, the RTC found that when the respondent performed the
change orders without the petitioners’ written agreement, it did so at its
own risk and it could not compel the petitioners to pay.
The RTC noted that the petitioners were nonetheless liable for
₱130,000.00 under Change Order Nos. 16 and 17, because petitioner
Debbie Chung ratified and acknowledged that such amount was still due
upon completion. It also noted that the respondent should not be faulted
or penalized for the delay in the completion of the contract within the 150-
day period due to the petitioners’ delay in the payment of the progress
billings. It found, however, that the petitioners are liable for the
construction defect on the roof leak traceable to the shallow concrete
gutter.
Thus, the RTC ordered the respondent to repair, at its expense, the
defective concrete gutter of the petitioners’ house and to restore other
affected structures according to the architectural plans and specifications.
It likewise ordered the petitioners to pay the respondent ₱629,819.84 as
unpaid balance on the progress billings and ₱130,000.00 as unpaid
balance on the ratified change orders.
Both parties elevated the case to the CA by way of ordinary appeal under
Rule 41 of the Rules of Court. The respondent averred that the RTC failed
to consider evidence of the petitioners’ bad faith in violating the contract,
while the petitioners argued that the RTC should have quantified the cost
of the repairs and simply ordered the respondent to reimburse the
petitioners’ expenses.
THE CA RULING
The CA decided the appeal on June 28, 2002. 35 It found Article 1724
inapplicable because the provision pertains to disputes arising from the
higher cost of labor and materials, while the respondent demands payment
of change order billings and there was no demand for increase in the costs
of labor and materials. Applying the principle of estoppel in pais, the
appellate court noted that the petitioners impliedly consented or tacitly
ratified the change orders by payment of several change order billings and
their inaction or non-objection to the construction of the projects covered
by the change orders.
Thus, the CA affirmed the RTC decision, but increased the payment on the
unpaid balance of the change orders to ₱740,587.11. It likewise ordered
the petitioners to pay 6% interest on the unpaid amounts from the day of
formal demand and until the finality of the decision, and 12% interest after
finality of the decision, plus ₱50,000.00 as exemplary damages.
Both parties filed motions for reconsideration. On November 15, 2002, the
CA issued a resolution denying the petitioners’ motion for reconsideration,
but partially granting the respondent’s motion for reconsideration by
awarding it attorney’s fees equal to 10% of the total award. 36
Hence, the petitioners came to us through the present petition.
THE PETITION
The petitioners insist that the CA should have quantified the cost of the
repairs on the defective gutter and simply ordered the respondent to
reimburse the petitioners’ expenses because repairing the defective gutter
requires the demolition of the existing cement gutter, the removal of the
entire roofing and the dismantling of the second floor steel trusses; they
are entitled to liquidated damages for the unjust delay in the completion of
the construction within the 150-day contract period; the award of
₱629,819.84 for progress billings is unwarranted since only ₱545,920.00 is
supported by the respondent’s evidence; the respondent’s construction
errors should set-off or limit the petitioners’ liability, if any; the CA
misinterpreted Article 1724 of the Civil Code and misapplied the principle
of estoppel in pais since the contract specifically provides the petitioners’
prior written approval for change orders; the respondent is not entitled to
exemplary damages and attorney’s fees since the respondent was at fault
for the defective gutter.
THE CASE FOR THE RESPONDENT
The respondent submits that the petition is merely dilatory since it seeks
to review the lower courts’ factual findings and conclusions, and it raised
no legal issue cognizable by this Court. 37
THE ISSUE
The core issue is whether the CA erred in: (a) affirming the RTC decision
for payment of progress billings; (b) in increasing the amount due for
change orders; and, (c) in awarding exemplary damages and attorney’s
fees to the respondent.
OUR RULING
We find the petition meritorious.
This Court is not a trier of facts. However, when the inference drawn by
the CA from the facts is manifestly mistaken, as in the present case, we
can review the evidence to allow us to arrive at the correct factual
conclusions based on the record.38
Contract is the law between the parties
In contractual relations, the law allows the parties leeway and considers
their agreement as the law between them.39 Contract stipulations that are
not contrary to law, morals, good customs, public order or public policy
shall be binding40 and should be complied with in good faith.41 No party is
permitted to change his mind or disavow and go back upon his own acts,
or to proceed contrary thereto, to the prejudice of the other party. 42 In the
present case, we find that both parties failed to comply strictly with their
contractual stipulations on the progress billings and change orders that
caused the delays in the completion of the project.
Amount awarded for unpaid progress billings is unsupported by
evidence
There is no dispute that the petitioners failed to pay progress billings nos.
8 to 12. However, we find no basis to hold the petitioners liable for
₱629,819.84, the balance of the total contract price, without deducting the
discount of ₱18,000.00 granted by the respondent. The petitioners likewise
cannot be held liable for the balance of the total contract price because
that amount is clearly unsupported by the evidence; only ₱545,922.13 43 is
actually supported by progress billings nos. 8 to 12. Deducting the
respondent’s ₱100,000.00 cash advance,44 the unpaid progress billings
amount to only ₱445,922.13.
Article 1724 of the Civil Code applies
The CA erred in ruling that Article 1724 of the Civil Code does not apply
because the provision pertains to disputes arising from the higher cost of
labor and materials and there was no demand for increase in the costs of
labor and materials.
Article 172445 governs the recovery of additional costs in contracts for
a stipulated price (such as fixed lump-sum contracts), and the increase in
price for additional work due to change in plans and specifications. Such
added cost can only be allowed upon the: (a) written authority from the
developer or project owner ordering or allowing the written changes in
work, and (b) written agreement of parties with regard to the increase in
price or cost due to the change in work or design modification. Compliance
with these two requisites is a condition precedent for the recovery. The
absence of one or the other condition bars the recovery of additional costs.
Neither the authority for the changes made nor the additional price to be
paid therefor may be proved by any other evidence.46
In the present case, Article I, paragraph 6, of the Contract incorporates
this provision:
The CONTRACTOR shall make no change or alteration in the plans, and
specifications as well as in the works subject hereof without the prior
written approval of the OWNER. A mere act of tolerance shall not
constitute approval.47
Significantly, the respondent did not secure the required written approval
of the petitioners before making the changes in the plans, specifications
and works. Thus, for undertaking change orders without the stipulated
written approval of the petitioners, the respondent cannot claim the
additional costs it incurred, save for the change orders the petitioners
accepted and paid for as discussed below.
CA misapplied the principle of estoppel in pais
The petitioners’ payment of Change Order Nos. 1, 16, and 17 and their
non-objection to the other change orders effected by the respondent
cannot give rise to estoppel in pais that would render the petitioners liable
for the payment of all change orders.
Estoppel in pais, or equitable estoppel, arises when one, by his acts,
representations or admissions or by his silence when he ought to speak
out, intentionally or through culpable negligence, induces another to
believe certain facts to exist and the other rightfully relies and acts on
such beliefs so that he will be prejudiced if the former is permitted to deny
the existence of such facts.48 The real office of the equitable norm of
estoppel is limited to supplying deficiency in the law, but it should not
supplant positive law.49
In this case, the requirement for the petitioners’ written consent to any
change or alteration in the specifications, plans and works is explicit in
Article 1724 of the Civil Code and is deemed written in the contract
between the parties.50 The contract also expressly provides that a mere
act of tolerance does not constitute approval. Thus, the petitioners did not,
by accepting and paying for Change Order Nos. 1, 16, and 17, do away
with the contractual term on change orders nor with the application of
Article 1724. The payments for Change Order Nos. 1, 16, and 17 are, at
best, acts of tolerance on the petitioners’ part that could not modify the
contract.
Consistent with this ruling, the petitioners are still liable for the
₱130,000.00 balance on Change Order Nos. 16 and 17 that, to date,
remain unpaid.51
Accordingly, the petitioners’ outstanding liabilities amount to ₱445,922.13
for the unpaid progress billings and ₱130,000.00 for the ratified change
orders, or a total of ₱575,922.13.
Pursuant to our definitive ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals,60 we hold that the amount of ₱141, 601.87 is subject to the legal
interest of 6% per annum computed from the time the RTC rendered
judgment on December 11, 1997 since it was the respondent who filed the
complaint.61 After the finality of this decision, the judgment award
inclusive of interest shall bear interest at 12% per annum until full
satisfaction.

Award of exemplary damages and attorney’s fees is unwarranted. WHEREFORE, the petition is hereby GRANTED. The assailed decision and
resolution of the Court of Appeals in CA-G.R. CV Nos. 61583 are
REVERSED and SET ASIDE. The respondent is ORDERED to pay the
We cannot allow the award for exemplary damages and attorney’s fees. It
petitioners ₱141,601.87 representing the balance of the repair costs for
is a requisite in the grant of exemplary damages that the act of the
the defective gutter in the petitioners’ house, with interest at 6% per
offender must be accompanied by bad faith or done in a wanton,
annum to be computed from the date of the filing of the complaint until
fraudulent, or malevolent manner.52 On the other hand, attorney’s fees
finality of this decision and 12% per annum thereafter until full payment.
may be awarded only when a party is compelled to litigate or to incur
expenses to protect his interest by reason of an unjustified act of the other
party, as when the defendant acted in gross and evident bad faith in No pronouncement as to costs.
refusing the plaintiff’s plainly valid, just and demandable claim. 53 We do
not see the presence of these circumstances in the present case. As SO ORDERED.
previously discussed, the petitioners’ refusal to pay the change orders was
based on a valid ground – lack of their prior written approval. There, too,
is the matter of defective construction discussed below.

Petitioners’ liability is set-off by respondent’s construction defect

We cannot sustain the lower courts’ order to repair the defective concrete
gutter. The considerable lapse of time between the filing of the complaint
in May 1996 and the final resolution of the present case renders the order
to repair at this time highly impractical, if not manifestly absurd. Besides,
under the contract, the respondent’s repair of construction defects, at its
expense, pertains to the 12-month warranty period after the petitioners’
issuance of the final acceptance of work.54 This provision does not apply
since the petitioners have not even issued a certificate of completion and
final acceptance of work.

Under the circumstances, fairness and reason dictate that we simply order
the set-off of the petitioners’ contractual liabilities totaling ₱575,922.13
against the repair cost for the defective gutter, pegged at
₱717,524.00,55 leaving the amount of ₱141,601.87 still due from the
respondent. Support in law for this ruling for partial legal compensation
proceeds from Articles 1278,56 1279,57 1281,58 and 128359 of the Civil
Code. In short, both parties are creditors and debtors of each other,
although in different amounts that are already due and demandable.

Monetary award is subject to legal interest