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A.

OBLIGATIONS ARISING FROM LAW As a result of the evidence adduced by both parties, judgment was entered by the
court below on the 5th of April, 1907, whereby the defendants were absolved from
ARTURO PELAYO, plaintiff-appellant, vs. the former complaint, on account of the lack of sufficient evidence to establish a right
MARCELO LAURON, ET AL., defendants-appellees. of action against the defendants, with costs against the plaintiff, who excepted to the
G.R. No. L-4089 January 12, 1909 said judgment and in addition moved for a new trial on the ground that the judgment
was contrary to law; the motion was overruled and the plaintiff excepted and in due
J.H. Junquera, for appellant. course presented the corresponding bill of exceptions. The motion of the defendants
Filemon Sotto, for appellee. requesting that the declaration contained in the judgment that the defendants had
demanded therefrom, for the reason that, according to the evidence, no such request
had been made, was also denied, and to the decision the defendants excepted.
TORRES, J.:

Assuming that it is a real fact of knowledge by the defendants that the plaintiff, by
On the 23rd of November, 1906, Arturo Pelayo, a physician residing in Cebu, filed a
virtue of having been sent for by the former, attended a physician and rendered
complaint against Marcelo Lauron and Juana Abella setting forth that on or about the
professional services to a daughter-in-law of the said defendants during a difficult
13th of October of said year, at night, the plaintiff was called to the house of the
and laborious childbirth, in order to decide the claim of the said physician regarding
defendants, situated in San Nicolas, and that upon arrival he was requested by them
the recovery of his fees, it becomes necessary to decide who is bound to pay the bill,
to render medical assistance to their daughter-in-law who was about to give birth to
whether the father and mother-in-law of the patient, or the husband of the latter.
a child; that therefore, and after consultation with the attending physician, Dr.
Escaño, it was found necessary, on account of the difficult birth, to remove the fetus
by means of forceps which operation was performed by the plaintiff, who also had to According to article 1089 of the Civil Code, obligations are created by law, by
remove the afterbirth, in which services he was occupied until the following morning, contracts, by quasi-contracts, and by illicit acts and omissions or by those in which
and that afterwards, on the same day, he visited the patient several times; that the any kind of fault or negligence occurs.
just and equitable value of the services rendered by him was P500, which the
defendants refuse to pay without alleging any good reason therefor; that for said Obligations arising from law are not presumed. Those expressly determined in the
reason he prayed that the judgment be entered in his favor as against the code or in special laws, etc., are the only demandable ones. Obligations arising from
defendants, or any of them, for the sum of P500 and costs, together with any other contracts have legal force between the contracting parties and must be fulfilled in
relief that might be deemed proper. accordance with their stipulations. (Arts. 1090 and 1091.)

In answer to the complaint counsel for the defendants denied all of the allegation The rendering of medical assistance in case of illness is comprised among the mutual
therein contained and alleged as a special defense, that their daughter-in-law had obligations to which the spouses are bound by way of mutual support. (Arts. 142 and
died in consequence of the said childbirth, and that when she was alive she lived with 143.)
her husband independently and in a separate house without any relation whatever
with them, and that, if on the day when she gave birth she was in the house of the If every obligation consists in giving, doing or not doing something (art. 1088), and
defendants, her stay their was accidental and due to fortuitous circumstances; spouses are mutually bound to support each other, there can be no question but
therefore, he prayed that the defendants be absolved of the complaint with costs that, when either of them by reason of illness should be in need of medical
against the plaintiff. assistance, the other is under the unavoidable obligation to furnish the necessary
services of a physician in order that health may be restored, and he or she may be
The plaintiff demurred to the above answer, and the court below sustained the freed from the sickness by which life is jeopardized; the party bound to furnish such
demurrer, directing the defendants, on the 23rd of January, 1907, to amend their support is therefore liable for all expenses, including the fees of the medical expert
answer. In compliance with this order the defendants presented, on the same date, for his professional services. This liability originates from the above-cited mutual
their amended answer, denying each and every one of the allegations contained in obligation which the law has expressly established between the married couple.
the complaint, and requesting that the same be dismissed with costs.
1
In the face of the above legal precepts it is unquestionable that the person bound to Therefore, in view of the consideration hereinbefore set forth, it is our opinion that
pay the fees due to the plaintiff for the professional services that he rendered to the the judgment appealed from should be affirmed with the costs against the appellant.
daughter-in-law of the defendants during her childbirth, is the husband of the patient So ordered.
and not her father and mother- in-law, the defendants herein. The fact that it was not
the husband who called the plaintiff and requested his assistance for his wife is no Mapa and Tracey, JJ., concur.
bar to the fulfillment of the said obligation, as the defendants, in view of the Arellano, C.J., and Carson, J., concurs in the result.
imminent danger, to which the life of the patient was at that moment exposed, Willard, J., dissents.
considered that medical assistance was urgently needed, and the obligation of the
husband to furnish his wife in the indispensable services of a physician at such critical
moments is specially established by the law, as has been seen, and compliance
DOMINGO DE LA CRUZ, plaintiff-appellant, vs. NORTHERN THEATRICAL
therewith is unavoidable; therefore, the plaintiff, who believes that he is entitled to
ENTERPRISES INC., ET AL., defendants-appellees.
recover his fees, must direct his action against the husband who is under obligation
G.R. No. L-7089 August 31, 1954
to furnish medical assistance to his lawful wife in such an emergency.
Conrado Rubio for appellant.
From the foregoing it may readily be understood that it was improper to have
Ruiz, Ruiz, Ruiz, Ruiz, and Benjamin Guerrero for appellees.
brought an action against the defendants simply because they were the parties who
called the plaintiff and requested him to assist the patient during her difficult
MONTEMAYOR, J.:
confinement, and also, possibly, because they were her father and mother-in-law and
the sickness occurred in their house. The defendants were not, nor are they now,
The facts in this case based on an agreed statement of facts are simple. In the year
under any obligation by virtue of any legal provision, to pay the fees claimed, nor in
1941 the Northern Theatrical Enterprises Inc., a domestic corporation operated a
consequence of any contract entered into between them and the plaintiff from which
movie house in Laoag, Ilocos Norte, and among the persons employed by it was the
such obligation might have arisen.
plaintiff DOMINGO DE LA CRUZ, hired as a special guard whose duties were to guard
the main entrance of the cine, to maintain peace and order and to report the
In applying the provisions of the Civil Code in an action for support, the supreme
commission of disorders within the premises. As such guard he carried a revolver. In
court of Spain, while recognizing the validity and efficiency of a contract to furnish
the afternoon of July 4, 1941, one Benjamin Martin wanted to crash the gate or
support wherein a person bound himself to support another who was not his relative,
entrance of the movie house. Infuriated by the refusal of plaintiff De la Cruz to let him
established the rule that the law does impose the obligation to pay for the support of
in without first providing himself with a ticket, Martin attacked him with a bolo. De la
a stranger, but as the liability arose out of a contract, the stipulations of the
Cruz defendant himself as best he could until he was cornered, at which moment to
agreement must be held. (Decision of May 11, 1897.)
save himself he shot the gate crasher, resulting in the latter's death.

Within the meaning of the law, the father and mother-in-law are strangers with
For the killing, De la Cruz was charged with homicide in Criminal Case No. 8449 of the
respect to the obligation that devolves upon the husband to provide support, among
Court of First Instance of Ilocos Norte. After a re-investigation conducted by the
which is the furnishing of medical assistance to his wife at the time of her
Provincial Fiscal the latter filed a motion to dismiss the complaint, which was granted
confinement; and, on the other hand, it does not appear that a contract existed
by the court in January 1943. On July 8, 1947, De la Cruz was again accused of the
between the defendants and the plaintiff physician, for which reason it is obvious
same crime of homicide, in Criminal Case No. 431 of the same Court. After trial, he
that the former can not be compelled to pay fees which they are under no liability to
was finally acquitted of the charge on January 31, 1948. In both criminal cases De la
pay because it does not appear that they consented to bind themselves.
Cruz employed a lawyer to defend him. He demanded from his former employer
reimbursement of his expenses but was refused, after which he filed the present
The foregoing suffices to demonstrate that the first and second errors assigned to the action against the movie corporation and the three members of its board of directors,
judgment below are unfounded, because, if the plaintiff has no right of action against to recover not only the amounts he had paid his lawyers but also moral damages said
the defendants, it is needless to declare whether or not the use of forceps is a to have been suffered, due to his worry, his neglect of his interests and his family as
surgical operation. well in the supervision of the cultivation of his land, a total of P15,000. On the basis of
2
the complaint and the answer filed by defendants wherein they asked for the inflicts physical injuries on or causes the death of a pedestrian; and such driver is later
dismissal of the complaint, as well as the agreed statement of facts, the Court of First charged criminally in court, one can imagine that it would be to the interest of the
Instance of Ilocos Norte after rejecting the theory of the plaintiff that he was an agent employer to give legal help to and defend its employee in order to show that the
of the defendants and that as such agent he was entitled to reimbursement of the latter was not guilty of any crime either deliberately or through negligence, because
expenses incurred by him in connection with the agency (Arts. 1709-1729 of the old should the employee be finally held criminally liable and he is found to be insolvent,
Civil Code), found that plaintiff had no cause of action and dismissed the complaint the employer would be subsidiarily liable. That is why, we repeat, it is to the interest
without costs. De la Cruz appealed directly to this Tribunal for the reason that only of the employer to render legal assistance to its employee. But we are not prepared
questions of law are involved in the appeal. to say and to hold that the giving of said legal assistance to its employees is a legal
obligation. While it might yet and possibly be regarded as a normal obligation, it does
We agree with the trial court that the relationship between the movie corporation not at present count with the sanction of man-made laws.
and the plaintiff was not that of principal and agent because the principle of
representation was in no way involved. Plaintiff was not employed to represent the If the employer is not legally obliged to give, legal assistance to its employee and
defendant corporation in its dealings with third parties. He was a mere employee provide him with a lawyer, naturally said employee may not recover the amount he
hired to perform a certain specific duty or task, that of acting as special guard and may have paid a lawyer hired by him.
staying at the main entrance of the movie house to stop gate crashers and to
maintain peace and order within the premises. The question posed by this appeal is Viewed from another angle it may be said that the damage suffered by the plaintiff
whether an employee or servant who in line of duty and while in the performance of by reason of the expenses incurred by him in remunerating his lawyer, is not caused
the task assigned to him, performs an act which eventually results in his incurring in by his act of shooting to death the gate crasher but rather by the filing of the charge
expenses, caused not directly by his master or employer or his fellow servants or by of homicide which made it necessary for him to defend himself with the aid of
reason of his performance of his duty, but rather by a third party or stranger not in counsel. Had no criminal charge been filed against him, there would have been no
the employ of his employer, may recover said damages against his employer. expenses incurred or damage suffered. So the damage suffered by plaintiff was
caused rather by the improper filing of the criminal charge, possibly at the instance of
The learned trial court in the last paragraph of its decision dismissing the complaint the heirs of the deceased gate crasher and by the State through the Fiscal. We say
said that "after studying many laws or provisions of law to find out what law is improper filing, judging by the results of the court proceedings, namely, acquittal. In
applicable to the facts submitted and admitted by the parties, has found none and it other words, the plaintiff was innocent and blameless. If despite his innocence and
has no other alternative than to dismiss the complaint." The trial court is right. We despite the absence of any criminal responsibility on his part he was accused of
confess that we are not aware of any law or judicial authority that is directly homicide, then the responsibility for the improper accusation may be laid at the door
applicable to the present case, and realizing the importance and far-reaching effect of of the heirs of the deceased and the State, and so theoretically, they are the parties
a ruling on the subject-matter we have searched, though vainly, for judicial that may be held responsible civilly for damages and if this is so, we fail to see now
authorities and enlightenment. All the laws and principles of law we have found, as this responsibility can be transferred to the employer who in no way intervened,
regards master and servants, or employer and employee, refer to cases of physical much less initiated the criminal proceedings and whose only connection or relation to
injuries, light or serious, resulting in loss of a member of the body or of any one of the the whole affairs was that he employed plaintiff to perform a special duty or task,
senses, or permanent physical disability or even death, suffered in line of duty and in which task or duty was performed lawfully and without negligence.
the course of the performance of the duties assigned to the servant or employee, and
these cases are mainly governed by the Employer's Liability Act and the Workmen's Still another point of view is that the damages incurred here consisting of the
Compensation Act. But a case involving damages caused to an employee by a payment of the lawyer's fee did not flow directly from the performance of his duties
stranger or outsider while said employee was in the performance of his duties, but only indirectly because there was an efficient, intervening cause, namely, the
presents a novel question which under present legislation we are neither able nor filing of the criminal charges. In other words, the shooting to death of the deceased
prepared to decide in favor of the employee. by the plaintiff was not the proximate cause of the damages suffered but may be
regarded as only a remote cause, because from the shooting to the damages suffered
In a case like the present or a similar case of say a driver employed by a there was not that natural and continuous sequence required to fix civil
transportation company, who while in the course of employment runs over and responsibility.
3
In view of the foregoing, the judgment of the lower court is affirmed. No costs.
Amount (Per
Years Covered
Hectare)
Bengzon, Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion, and Reyes, J.B.L.,
JJ., concur. 1998 – 2002 P1,865.00

2003 – 2006 P2,365.00

2007 – 2011 P2,865.00


OBLIGATION ARISING FROM CONTRACTS
2012 – 2016 P3,365.00

NGEI MULTI-PURPOSE COOPERATIVE INC. AND HERNANCITO 2017 – 2021 P3,865.00


RONQUILLO, Petitioners, vs. FILIPINAS PALMOIL PLANTATION INC. AND DENNIS
VILLAREAL, Respondents. 2022 – 2026 P4,365.00
G.R. No. 184950 October 11, 2012
2027 – 2031 P4,865.00
MENDOZA, J.: 2032 P5,365.00 4

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing
On June 20, 2002, NGEI Coop and petitioner Hernancito Ronquillo (Ronquillo) filed a
the May 9, 2008 Decision 1 of the Court of Appeals (CA) in CA-G.R. SP No. 99552 and
complaint for the Nullification of the Lease Agreement and the Addendum to the
its October 3, 2008 Resolution2 denying the motion for reconsideration thereof.
Lease Agreement before the Department of Agrarian Reform Adjudication Board
(DARAB) Regional Adjudicator of San Francisco, Agusan del Sur (Regional
The Facts
Adjudicator). The case was docketed as DARAB Case No. XIII (03)–176. The petitioners
alleged, among others, that the Addendum was null and void because Antonio
On December 2, 1988, the petitioner NGEI Multi-Purpose Cooperative Inc. (NGEI Dayday had no authority to enter into the agreement; that said Addendum was
Coop), a duly-registered agrarian reform workers’ cooperative, was awarded by the approved neither by the farm worker-beneficiaries nor by the Presidential Agrarian
Department of Agrarian Reform (DAR) 3,996.6940 hectares of agricultural land for Reform Council (PARC) Executive Committee, as required by DAR Administrative
palm oil plantations located in Rosario and San Francisco, Agusan del Sur. Order (A.O.) No. 5, Series of 1997; that the annual rental and the package of
economic benefits were onerous and unjust to them; and that the lease agreement
On March 7, 1990, NGEI Coop entered into a lease agreement with respondent and the Addendum unjustly deprived them of their right to till their own land for an
Filipinas Palmoil Plantation, Inc. (FPPI), formerly known as NDC Gutrie Plantation, Inc., exceedingly long period of time, contrary to the intent of Republic Act (R.A.) No.
over the subject property commencing on September 27, 1988 and ending on 6657, as amended by R.A. No. 7905.
December 31, 2007. Under the lease agreement, FPPI (as lessee) shall pay NGEI Coop
(as lessor) a yearly fixed rental of ₱635.00 per hectare plus a variable component In its Decision,5 dated February 3, 2004, the Regional Adjudicator declared the
equivalent to 1% of net sales from 1988 to 1996, and ½% from 1997 to 2007.3 Addendum as null and void for having been entered into by Antonio Dayday without
the express authority of NGEI Coop, and for having been executed in violation of the
On January 29, 1998, the parties executed an Addendum to the Lease Agreement Rules under A.O. No. 5, Series of 1997.
(Addendum) which provided for the extension of the lease contract for another 25
years from January 1, 2008 to December 2032. The Addendum was signed by Antonio FPPI filed a motion for reconsideration. The Regional Adjudicator, finding merit in the
Dayday, Chairman of the NGEI Coop, and respondent Dennis Villareal (Villareal), the said motion, reversed his earlier decision in an Order, dated March 22, 2004. He
President of FPPI, and witnessed by DAR Undersecretary Artemio Adasa. The annual dismissed the complaint for the nullification of the Addendum on the grounds of
lease rental remained at ₱635.00 per hectare, but the package of economic benefits prescription and lack of cause of action. The Regional Adjudicator further opined that
for the bona fide members of NGEI Coop was amended and increased, as follows:
4
the Addendum was valid and binding on both the NGEI Coop and FPPI and, the
petitioners having enjoyed the benefits under the Addendum for more than four (4) (I)
years before filing the complaint, were considered to have waived their rights to THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING
assail the agreement. THAT THE ASSAILED ADDENDUM IS VOID AB-INITIO, THE SAME HAVING
BEEN EXECUTED WITHOUT THE CONSENT OF ONE OF THE PARTIES THERETO
The petitioners moved for a reconsideration of the said order but the Regional (Petitioner NGEI-MPC), BY REASON OF THE ABSENCE OF AUTHORITY TO
Adjudicator denied it in the Order dated April 28, 2004. EXECUTE THE SAME GIVEN BY SAID PARTY TO THE SUBSCRIBING INDIVIDUAL
(Dayday) AND THE FACT THAT THE ADDENDUM WAS NEVER RATIFIED BY
On appeal, the DARAB Central Office rendered the October 9, 2006 Decision.6 It found THE GENERAL MEMBERSHIP OF NGEI-MPC.
no reversible error on the findings of fact and law by the Regional Adjudicator and (II)
disposed the case as follows: THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
ADDENDUM TO LEASE AGREEMENT IS NULL AND VOID FOR BEING
CONTRARY TO LAW, MORALS, GOOD CUSTOMS, AND PUBLIC POLICY.
WHEREFORE, premises considered, the instant Appeal is DENIED for lack of merit and
(III)
the assailed Order dated March 22, 2004 is hereby affirmed.
THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION, SERIOUSLY ERRED IN
SO ORDERED.7
HOLDING THAT THE DECISION OF THE DARAB IS SUPPORTED BY
SUBSTANTIAL EVIDENCE.
After their motion for reconsideration was denied, the petitioners appealed to the CA (IV)
via a petition for review under Rule 43 of the Rules of Court. WHETHER OR NOT PETITIONERS’ CAUSE OF ACTION HAS PRESCRIBED.9

On May 9, 2008, the CA rendered the assailed decision upholding the validity and The sole issue for the Court’s resolution is whether the CA committed reversible error
binding effect of the Addendum as it was freely and voluntarily executed between of law when it affirmed the decision of the DARAB which upheld the order of the
the parties, devoid of any vices of consent. The CA sustained its validity on the basis Regional Adjudicator dismissing the petitioners’ complaint for the nullification of the
of the civil law principle of mutuality of contracts that the parties were bound by the Addendum.
terms and conditions unequivocally expressed in the addendum which was the law
between them.
The Court finds the petition bereft of merit.

In dismissing the petition, the CA ratiocinated that the findings of fact of the Regional
The petitioners contend that the CA gravely erred in upholding the validity of the
Adjudicator and the DARAB were supported by substantial evidence. Citing the case
Addendum. They allege that the yearly lease rental of P635.00 per hectare stipulated
of Sps. Joson v. Mendoza,8 the CA held that such findings of the agrarian court being
in the Addendum was unconscionable because it violated the prescribed minimum
supported by substantial evidence were conclusive and binding on it.
rental rates under DAR A.O. No. 5, Series of 1997 and R.A. No. 3844 which mandate
that the lease rental should not be less than the yearly amortization and taxes. They
The petitioners filed a motion for reconsideration of the said decision on the grounds, also argue that it constitutes an infringement on the policy of the State to promote
among others, that the findings of fact of the Regional Adjudicator were in conflict social justice for the welfare and dignity of farmers and farm workers.
with those of the DARAB and were not supported by the evidence on record; and that
the conclusions of law were not in accordance with applicable law and existing
Relying on the same A.O. No. 5, the petitioners further argue that the Addendum
jurisprudence. The motion, however, was denied for lack of merit by the CA in its
with another 25 years of extension period was invalid for lack of approval by the
Resolution, dated October 3, 2008.
PARC Executive Committee; that Antonio Dayday had no authority to enter into the
Addendum on behalf of NGEI Coop; that the authority given, if any, was merely for a
Hence, NGEI Coop and Ronquillo interpose the present petition before this Court review of the lease agreement and to negotiate with FPPI on the specific issue of land
anchored on the following GROUNDS lease rental through a negotiating panel or committee, to which Dayday was a
5
member; that Dayday’s act of signing for, and in behalf of, NGEI Coop being ultra Thus, only questions of law may be brought by the parties and passed upon by this
vires was null and void; that it was Vicente Flora who was authorized to sign the Court in the exercise of its power to review. Also, judicial review by this Court does
Addendum as shown in Resolution No. 1, Series of 1998; that the Addendum was not not extend to a reevaluation of the sufficiency of the evidence upon which the proper
ratified through the use of attendance sheets for meal and transportation allowance; x x x tribunal has based its determination.
that neither did NGEI Coop and its members ratify the Addendum by their receipt of
its so-called economic benefits; and that their acceptance of the benefits under the It is aphoristic that a re-examination of factual findings cannot be done through a
agreement was not an indication of waiver of their right to pursue their claims petition for review on certiorari under Rule 45 of the Rules of Court because as earlier
against FPPI considering their consistent actions to contest the subject Addendum. stated, this Court is not a trier of facts; it reviews only questions of law. The Supreme
Court is not duty-bound to analyze and weigh again the evidence considered in the
The respondents, on the other hand, posit in their Comment 10 and reiterated in their proceedings below.14
Memorandum11 that by raising factual issues, the petitioners were seeking a review
of the factual findings of the Regional Adjudicator and the DARAB which is proscribed In the present case, the Court finds no cogent reason to depart from the
in a petition for review under Rule 45 of the Rules of Court. They add that the findings aforementioned settled rule. The DARAB made the following findings, viz:
of the said administrative agencies, having been sustained by the CA in the assailed
decision and supported by substantial evidence, should be respected. This Board finds that the said "Addendum to the Lease Agreement" is valid and
binding to both parties. While the complainant impugns the validity of the
The respondents further state that the CA correctly ruled that the Addendum was a "Addendum" based on the ground that Chairman Dayday was not authorized by the
valid and binding contract. They claim that the package of economic benefits under Cooperative to enter into the Agreement, based on the records, a series of Resolution
the Addendum was not unconscionable or contrary to public policy. was made authorizing the Chairman to enter into the said "Addendum." Granting en
arguendo that Chairman Dayday was not authorized to enter into the said
Indeed, the issues raised in this petition are mainly factual in nature. Factual issues Agreement, the fact remains that the terms and stipulations in the Addendum had
are not proper subjects of the Court’s power of judicial review. Well-settled is the been observed and enforced by the parties for several years. Both parties have
rule that only questions of law can be raised in a petition for review under Rule 45 of benefited from the said contract. If indeed Chairman Dayday was not authorized to
the Rules of Civil Procedure.12 It is, thus, beyond the Court’s jurisdiction to review the enter into said Agreement, why does the Cooperative have to wait for four (4) years
factual findings of the Regional Adjudicator, the DARAB and the CA as regards the to impugn the validity of the Contract. Thus, the Adjudicator a quo is correct in his
validity and the binding effect of the Addendum. Whether or not the person who findings that:
signed the Addendum on behalf of the NGEI Coop was authorized to do so; whether
or not the NGEI Coop members ratified the Addendum; whether or not the rental As already discussed in the assailed Order, whatever procedural defects that may
rates prescribed in the Addendum were unconscionably low so as to be illegal, and have attended the final execution of the addendum, these are considered waived
whether or not the NGEI Coop had consistently assailed the validity of the Addendum and/or impliedly accepted or consented to by Complainants when its General
even prior to the filing of the complaint with the Regional Adjudicator, are issues of assembly ratified its execution and lived with for the next four (4) years.
fact which cannot be passed upon by the Court for the simple reason that the Court is
not a trier of facts. Further the Adjudicator a quo is correct in his findings that:

As held in the recent case of Carpio v. Sebastian,13 thus: It has to be impressed once more, that the Complaint is really one for the
cancellation of the Addendum to the original lease agreement. The negotiations that
x x x It bears stressing that in a petition for review on certiorari, the scope of this led to its execution is in fact a re-negotiation of the old lease contract, and not a
Court’s judicial review of decisions of the Court of Appeals is generally confined only negotiated original lease requiring the approval of the PARC Executive Committee.
to errors of law, and questions of fact are not entertained. We elucidated on our The re-negotiation that culminated in the execution of the addendum requires only
fidelity to this rule, and we said: the recommendation of the PARCCOM and the DAR, (AO No. 5, S-1997). It cannot be
gainsaid, therefore, that both PARCCOM and the DAR after a long and tedious re-
negotiation had no knowledge of such re-negotiation, but for reasons unknown, both
6
have kept their peace, thus, allowing the addendum to be ratified, enforced and when the findings are grounded on speculation; (3) when the inference made is
implemented. On the other hand, the arguments, that said addendum being void ab manifestly mistaken; (4) when the judgment of the Court of Appeals is based on a
initio may be assailed at anytime cannot be conceded. First, because said addendum misapprehension of facts; (5) when the factual findings are conflicting; (6) when the
has not been officially or legally declared as a nullity. It is not nullified just because a Court of Appeals went beyond the issues of the case and its findings are contrary to
subsequent resolution of the the admissions of the parties; (7) when the Court of Appeals overlooked undisputed
facts which, if properly considered, would justify a different conclusion; (8) when the
Coop Board abrogated the Addendum. To annul a Contract cannot be done facts set forth by the petitioner are not disputed by the respondent; and (9) when the
unilaterally, in fact the reason why this case was filed. On the contrary, having been findings of the Court of Appeals are premised on the absence of evidence and are
forged in 1998, complainants waited until 2002 to assail its validity, and in the contradicted by the evidence on record.18 None of these circumstances is obtaining in
meantime, their action to do so had prescribed pursuant to Section 28 of RA 3844, this case.
the law governing leasehold. The other assigned alleged errors having been fully
discussed in the assailed Order of March 22, 2004, the same need no longer be The Court understands the predicament of these farmer-beneficiaries of NGEI Coop.
traversed. Under the prevailing circumstances, however, it cannot save them from the
consequences of the binding lease agreement, the Addendum. The petitioners,
Finding no reversible error on the finding of facts and law made by the Adjudicator a having freely and willingly entered into the Addendum with FPPI, cannot and should
quo this Board hereby affirms the Order dated March 22, 2004. 15 not now be permitted to renege on their compliance under it, based on the
supposition that its terms are unconscionable. The contract must bind both
It is well to emphasize that the above-quoted factual findings and conclusions of the contracting parties; its validity or compliance cannot be left to the will of one of
DARAB affirming those of the Regional Adjudicator were sustained by the CA in the them.19
assailed decision. The Court is in accord with the CA when it wrote:
It is basic that a contract is the law between the parties. Obligations arising from
In appeals in agrarian cases, the only function of this Court is to determine whether contracts have the force of law between the contracting parties and should be
the findings of fact of the Department of Agrarian Reform Adjudication Board complied with in good faith. Unless the stipulations in a contract are contrary to law,
(DARAB) are supported by substantial evidence – it cannot make its own findings of morals, good customs, public order or public policy, the same are binding as between
fact and substitute the same for the findings of the DARAB. And substantial evidence the parties.20The Court quotes with approval the ruling of the CA on this matter, to
has been defined to be such relevant evidence as a reasonable mind might accept as wit:
adequate to support a conclusion and its absence is not shown by stressing that there
is contrary evidence on record, direct or circumstantial; and where the findings of the Indeed, the terms and conditions between the parties unequivocally expressed in the
agrarian court are supported by substantial evidence, such findings are conclusive Addendum must govern their contractual relations for these serve as the terms of the
and binding on the appellate court.16 agreement, which are binding and conclusive on them.

Considering that the findings of the Regional Adjudicator and the DARAB are uniform Consequently, petitioners cannot unilaterally change the tenor of the terms and
in all material respects, these findings should not be disturbed. More so in this case conditions of the Addendum or cancel it altogether after having gone through the
where such findings were sustained by the CA for being supported by substantial solemnities and formalities for its perfection. In fact, the Addendum had been
evidence and in accord with law and jurisprudence. consummated upon performance by the parties of the prestations and after they had
already reaped the mutual benefits arising from the contract. Mutuality is one of the
Verily, the factual findings of administrative officials and agencies that have acquired characteristics of a contract, and its validity or performance or compliance cannot be
expertise in the performance of their official duties and the exercise of their primary left to the will of only one of the parties. It is a long established doctrine that the law
jurisdiction are generally accorded not only respect but, at times, even finality if such does not relieve a party from the effects of an unwise, foolish, or disastrous contract,
findings are supported by substantial evidence. 17 The factual findings of these quasi- entered into with all the required formalities and with full awareness of what he was
judicial agencies, especially when affirmed by the CA, are binding on the Court. The doing.21 (Underscoring supplied)
recognized exceptions to this rule are: (1) when there is grave abuse of discretion; (2)
7
It must be stressed that the Addendum was found to be a valid and binding contract. the Civil Code on imprescriptibility of actions for declaration of inexistence of
The petitioners failed to show that the Addendum’s stipulated rental rates and contracts, relied upon by the petitioners, is not applicable.1âwphi1
economic benefits violated any law or public policy. The Addendum should,
therefore, be given full force and effect, without prejudice to a renegotiation of the On a final note, the petitioners faulted the CA for failure to re-assess the facts of the
terms of the leasehold agreement in accordance with the provisions of Administrative case despite the conflicting findings of the Regional Adjudicator and the DARAB. Such
Order No. 5, Series of 1997, governing their Addendum, as regards the contracting imputation of error deserves no merit because, in truth and in fact, no such conflict
procedures and fixing of lease rental in lands planted to palm oil trees, specifically: exists. Contrary to the petitioners' claim, both tribunals declared the validity of the
Addendum being in existence for several years and on the basis that the petitioners
IV. POLICIES AND GOVERNING PRINCIPLES had enjoyed the benefits accorded under it, and both raised the ground of
prescription of the petitioners' cause of action pursuant to Section 38, R.A. No. 3844.
xxx
All told, the Court, after a careful review of the records, finds no reversible error in
D. Renegotiation of the amount of lease rental shall be undertaken by the parties the assailed decision of the CA .
every five (5) years, subject to the recommendation of the PARCCOM and review by
the DAR. WHEREFORE, the petition is DENIED.

Lease rental on the leased lands may be renegotiated by the contracting parties even SO ORDERED.
prior to the termination of the contract on the following grounds: (a) domestic
inflation rate of seven percent (7%) or more; (b) drop in the world prices of the
commodity by at least twenty percent (20%); and (c) other valid reasons.
THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner, vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.
E. Any conflict that may arise from the implementation of the lease contract shall be G.R. No. 183204 January 13, 2014
referred to the PARCCOM by any of the contracting parties for mediation and
resolution. In the event of failure to resolve the issue, any of the parties may file an
DEL CASTILLO, J.:
action with the Department of Agrarian Reform Adjudication Board (DARAB) for
adjudication pursuant to Section 50 of R.A. No. 6657.
Bank deposits, which are in the nature of a simple loan or mutuum, 1 must be paid
upon demand by the depositor.2
Anent the issue of prescription, Section 38 of R.A. No. 3844 (The Agricultural Land
Reform Code), the applicable law to agricultural leasehold relations, provides:
This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails the
April 2, 2008 Decision4 and the May 30, 2008 Resolution5 of he Court of Appeals CA)
Section 38. Statute of Limitations - An action to enforce any cause of action under this in CA-G.R. CV No. 89086.
Code shall be barred if not commenced within three years after such cause of action
accrued. (Underscoring supplied)
Factual Antecedents
On the basis of the aforequoted provision, the petitioners' cause of action to have the
Petitioner Metropolitan Bank and Trust Company is a domestic banking corporation
Addendum, an agricultural leasehold arrangement between NGEI Coop and FPPI,
duly organized and existing under the laws of the Philippines. 6 Respondent Ana Grace
declared null and void has already prescribed. To recall, the Addendum was executed
Rosales (Rosales) is the owner of China Golden Bridge Travel Services,7 a travel
on January 29, 1998 and the petitioners tiled their complaint with the Regional
agency.8 Respondent Yo Yuk To is the mother of respondent Rosales.9
Adjudicator on June 20, 2002, or more than four years after the cause of action
accrued. Evidently, prescription has already set in. Inasmuch as the validity of the
Addendum was sustained by the CA as devoid of any vice or defect, Article 1410 of
8
In 2000, respondents opened a Joint Peso Account10 with petitioner’s Pritil-Tondo track of her.30 Respondent Rosales’ version of the events that transpired thereafter is
Branch.11 As of August 4, 2004, respondents’ Joint Peso Account showed a balance of as follows:
₱2,515,693.52.12
On February 6, 2003, she received a call from Gutierrez informing her that Liu Chiu
In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a Taiwanese Fang was at the bank to close her account.31 At noon of the same day, respondent
National applying for a retiree’s visa from the Philippine Leisure and Retirement Rosales went to the bank to make a transaction.32 While she was transacting with the
Authority (PLRA), to petitioner’s branch in Escolta to open a savings account, as teller, she caught a glimpse of a woman seated at the desk of the Branch Operating
required by the PLRA.13 Since Liu Chiu Fang could speak only in Mandarin, respondent Officer, Melinda Perez (Perez).33 After completing her transaction, respondent
Rosales acted as an interpreter for her.14 Rosales approached Perez who informed her that Liu Chiu Fang had closed her
account and had already left.34 Perez then gave a copy of the Withdrawal Clearance
On March 3, 2003, respondents opened with petitioner’s Pritil-Tondo Branch a Joint issued by the PLRA to respondent Rosales.35 On June 16, 2003, respondent Rosales
Dollar Account15 with an initial deposit of US$14,000.00.16 received a call from Liu Chiu Fang inquiring about the extension of her PLRA Visa and
her dollar account.36 It was only then that Liu Chiu Fang found out that her account
On July 31, 2003, petitioner issued a "Hold Out" order against respondents’ had been closed without her knowledge. 37 Respondent Rosales then went to the bank
accounts.17 to inform Gutierrez and Perez of the unauthorized withdrawal. 38 On June 23, 2003,
respondent Rosales and Liu Chiu Fang went to the PLRA Office, where they were
informed that the Withdrawal Clearance was issued on the basis of a Special Power of
On September 3, 2003, petitioner, through its Special Audit Department Head
Attorney (SPA) executed by Liu Chiu Fang in favor of a certain Richard So. 39 Liu Chiu
Antonio Ivan Aguirre, filed before the Office of the Prosecutor of Manila a criminal
Fang, however, denied executing the SPA. 40 The following day, respondent Rosales,
case for Estafa through False Pretences, Misrepresentation, Deceit, and Use of
Liu Chiu Fang, Gutierrez, and Perez met at the PLRA Office to discuss the
Falsified Documents, docketed as I.S. No. 03I-25014,18 against respondent
unauthorized withdrawal.41 During the conference, the bank officers assured Liu Chiu
Rosales.19 Petitioner accused respondent Rosales and an unidentified woman as the
Fang that the money would be returned to her.42
ones responsible for the unauthorized and fraudulent withdrawal of US$75,000.00
from Liu Chiu Fang’s dollar account with petitioner’s Escolta Branch. 20Petitioner
alleged that on February 5, 2003, its branch in Escolta received from the PLRA a On December 15, 2003, the Office of the City Prosecutor of Manila issued a
Withdrawal Clearance for the dollar account of Liu Chiu Fang;21 that in the afternoon Resolution dismissing the criminal case for lack of probable cause. 43 Unfazed,
of the same day, respondent Rosales went to petitioner’s Escolta Branch to inform its petitioner moved for reconsideration.
Branch Head, Celia A. Gutierrez (Gutierrez), that Liu Chiu Fang was going to withdraw
her dollar deposits in cash;22 that Gutierrez told respondent Rosales to come back the On September 10, 2004, respondents filed before the Regional Trial Court (RTC) of
following day because the bank did not have enough dollars; 23 that on February 6, Manila a Complaint44 for Breach of Obligation and Contract with Damages, docketed
2003, respondent Rosales accompanied an unidentified impostor of Liu Chiu Fang to as Civil Case No. 04110895 and raffled to Branch 21, against petitioner. Respondents
the bank;24 that the impostor was able to withdraw Liu Chiu Fang’s dollar deposit in alleged that they attempted several times to withdraw their deposits but were
the amount of US$75,000.00;25 that on March 3, 2003, respondents opened a dollar unable to because petitioner had placed their accounts under "Hold Out" status. 45 No
account with petitioner; and that the bank later discovered that the serial numbers of explanation, however, was given by petitioner as to why it issued the "Hold Out"
the dollar notes deposited by respondents in the amount of US$11,800.00 were the order.46 Thus, they prayed that the "Hold Out" order be lifted and that they be
same as those withdrawn by the impostor. 26 allowed to withdraw their deposits.47 They likewise prayed for actual, moral, and
exemplary damages, as well as attorney’s fees. 48
Respondent Rosales, however, denied taking part in the fraudulent and unauthorized
withdrawal from the dollar account of Liu Chiu Fang.27 Respondent Rosales claimed Petitioner alleged that respondents have no cause of action because it has a valid
that she did not go to the bank on February 5, 2003. 28Neither did she inform reason for issuing the "Hold Out" order.49 It averred that due to the fraudulent
Gutierrez that Liu Chiu Fang was going to close her account. 29 Respondent Rosales scheme of respondent Rosales, it was compelled to reimburse Liu Chiu Fang the
further claimed that after Liu Chiu Fang opened an account with petitioner, she lost amount of US$75,000.0050 and to file a criminal complaint for Estafa against
respondent Rosales.51
9
While the case for breach of contract was being tried, the City Prosecutor of Manila SO ORDERED.61
issued a Resolution dated February 18, 2005, reversing the dismissal of the criminal
complaint.52 An Information, docketed as Criminal Case No. 05-236103,53 was then Petitioner sought reconsideration but the same was denied by the CA in its May 30,
filed charging respondent Rosales with Estafa before Branch 14 of the RTC of 2008 Resolution.62
Manila.54
Issues
Ruling of the Regional Trial Court Hence, this recourse by petitioner raising the following issues:

On January 15, 2007, the RTC rendered a Decision 55 finding petitioner liable for A. THE [CA] ERRED IN RULING THAT THE "HOLD-OUT" PROVISION IN THE
damages for breach of contract.56The RTC ruled that it is the duty of petitioner to APPLICATION AND AGREEMENT FOR DEPOSIT ACCOUNT DOES NOT APPLY IN
release the deposit to respondents as the act of withdrawal of a bank deposit is an THIS CASE.
act of demand by the creditor.57 The RTC also said that the recourse of petitioner is B. THE [CA] ERRED WHEN IT RULED THAT PETITIONER’S EMPLOYEES WERE
against its negligent employees and not against respondents.58 The dispositive NEGLIGENT IN RELEASING LIU CHIU FANG’S FUNDS.
portion of the Decision reads: C. THE [CA] ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES,
EXEMPLARY DAMAGES, AND ATTORNEY’S FEES.63
WHEREFORE, premises considered, judgment is hereby rendered ordering
[petitioner] METROPOLITAN BANK & TRUST COMPANY to allow [respondents] ANA Petitioner’s Arguments
GRACE ROSALES and YO YUK TO to withdraw their Savings and Time Deposits with Petitioner contends that the CA erred in not applying the "Hold Out" clause stipulated
the agreed interest, actual damages of ₱50,000.00, moral damages of ₱50,000.00, in the Application and Agreement for Deposit Account.64 It posits that the said clause
exemplary damages of ₱30,000.00 and 10% of the amount due [respondents] as and applies to any and all kinds of obligation as it does not distinguish between
for attorney’s fees plus the cost of suit. obligations arising ex contractu or ex delictu.65 Petitioner also contends that the fraud
committed by respondent Rosales was clearly established by evidence; 66 thus, it was
The counterclaim of [petitioner] is hereby DISMISSED for lack of merit. justified in issuing the "Hold-Out" order.67 Petitioner likewise denies that its
employees were negligent in releasing the dollars.68 It claims that it was the
SO ORDERED.59 deception employed by respondent Rosales that caused petitioner’s employees to
release Liu Chiu Fang’s funds to the impostor.69
Ruling of the Court of Appeals
Lastly, petitioner puts in issue the award of moral and exemplary damages and
attorney’s fees. It insists that respondents failed to prove that it acted in bad faith or
Aggrieved, petitioner appealed to the CA.
in a wanton, fraudulent, oppressive or malevolent manner. 70
On April 2, 2008, the CA affirmed the ruling of the RTC but deleted the award of
Respondents’ Arguments
actual damages because "the basis for [respondents’] claim for such damages is the
professional fee that they paid to their legal counsel for [respondent] Rosales’
defense against the criminal complaint of [petitioner] for estafa before the Office of Respondents, on the other hand, argue that there is no legal basis for petitioner to
the City Prosecutor of Manila and not this case."60 Thus, the CA disposed of the case withhold their deposits because they have no monetary obligation to
in this wise: petitioner.71 They insist that petitioner miserably failed to prove its accusations
against respondent Rosales.72 In fact, no documentary evidence was presented to
show that respondent Rosales participated in the unauthorized withdrawal.73 They
WHEREFORE, premises considered, the Decision dated January 15, 2007 of the RTC,
also question the fact that the list of the serial numbers of the dollar notes
Branch 21, Manila in Civil Case No. 04-110895 is AFFIRMED with MODIFICATION that
fraudulently withdrawn on February 6, 2003, was not signed or acknowledged by the
the award of actual damages to [respondents] Rosales and Yo Yuk To is hereby
alleged impostor.74Respondents likewise maintain that what was established during
DELETED.
10

the trial was the negligence of petitioner’s employees as they allowed the withdrawal
of the funds without properly verifying the identity of the depositor. 75Furthermore, The Bank may, at any time in its discretion and with or without notice to all of the
respondents contend that their deposits are in the nature of a loan; thus, petitioner Depositors, assert a lien on any balance of the Account and apply all or any part
had the obligation to return the deposits to them upon demand. 76 Failing to do so thereof against any indebtedness, matured or unmatured, that may then be owing to
makes petitioner liable to pay respondents moral and exemplary damages, as well as the Bank by any or all of the Depositors. It is understood that if said indebtedness is
attorney’s fees.77 only owing from any of the Depositors, then this provision constitutes the consent by
all of the depositors to have the Account answer for the said indebtedness to the
Our Ruling extent of the equal share of the debtor in the amount credited to the Account.78
The Petition is bereft of merit.
Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for
At the outset, the relevant issues in this case are (1) whether petitioner breached its Deposit Account is misplaced.
contract with respondents, and (2) if so, whether it is liable for damages. The issue of
whether petitioner’s employees were negligent in allowing the withdrawal of Liu Chiu The "Hold Out" clause applies only if there is a valid and existing obligation arising
Fang’s dollar deposits has no bearing in the resolution of this case. Thus, we find no from any of the sources of obligation enumerated in Article 1157 79 of the Civil Code,
need to discuss the same. to wit: law, contracts, quasi-contracts, delict, and quasi-delict. In this case, petitioner
failed to show that respondents have an obligation to it under any law, contract,
The "Hold Out" clause does not apply quasi-contract, delict, or quasi-delict. And although a criminal case was filed by
petitioner against respondent Rosales, this is not enough reason for petitioner to
to the instant case. issue a "Hold Out" order as the case is still pending and no final judgment of
conviction has been rendered against respondent Rosales. In fact, it is significant to
note that at the time petitioner issued the "Hold Out" order, the criminal complaint
Petitioner claims that it did not breach its contract with respondents because it has a
had not yet been filed. Thus, considering that respondent Rosales is not liable under
valid reason for issuing the "Hold Out" order. Petitioner anchors its right to withhold
any of the five sources of obligation, there was no legal basis for petitioner to issue
respondents’ deposits on the Application and Agreement for Deposit Account, which
the "Hold Out" order. Accordingly, we agree with the findings of the RTC and the CA
reads:
that the "Hold Out" clause does not apply in the instant case.
Authority to Withhold, Sell and/or Set Off:
In view of the foregoing, we find that petitioner is guilty of breach of contract when it
unjustifiably refused to release respondents’ deposit despite demand. Having
The Bank is hereby authorized to withhold as security for any and all obligations with breached its contract with respondents, petitioner is liable for damages.
the Bank, all monies, properties or securities of the Depositor now in or which may
hereafter come into the possession or under the control of the Bank, whether left
Respondents are entitled to moral and exemplary damages and attorney’s fees.
with the Bank for safekeeping or otherwise, or coming into the hands of the Bank in
any way, for so much thereof as will be sufficient to pay any or all obligations
incurred by Depositor under the Account or by reason of any other transactions In cases of breach of contract, moral damages may be recovered only if the
between the same parties now existing or hereafter contracted, to sell in any public defendant acted fraudulently or in bad faith, 80 or is "guilty of gross negligence
or private sale any of such properties or securities of Depositor, and to apply the amounting to bad faith, or in wanton disregard of his contractual obligations."81
proceeds to the payment of any Depositor’s obligations heretofore mentioned.
In this case, a review of the circumstances surrounding the issuance of the "Hold Out"
xxxx order reveals that petitioner issued the "Hold Out" order in bad faith. First of all, the
order was issued without any legal basis. Second, petitioner did not inform
respondents of the reason for the "Hold Out."82 Third, the order was issued prior to
JOINT ACCOUNT
the filing of the criminal complaint. Records show that the "Hold Out" order was
issued on July 31, 2003,83 while the criminal complaint was filed only on September 3,
xxxx
11

2003.84 All these taken together lead us to conclude that petitioner acted in bad faith
when it breached its contract with respondents. As we see it then, respondents are MANILA ELECTRIC COMPANY, Petitioner, vs.
entitled to moral damages. MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS,
ROSEMARIE RAMOY, OFELIA DURIAN and CYRENE PANADO, Respondents.
As to the award of exemplary damages, Article 222985 of the Civil Code provides that G.R. No. 158911 March 4, 2008
exemplary damages may be imposed "by way of example or correction for the public
good, in addition to the moral, temperate, liquidated or compensatory damages." AUSTRIA-MARTINEZ, J.:
They are awarded only if the guilty party acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.86 This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court,
praying that the Decision 1 of the Court of Appeals (CA) dated December 16, 2002,
In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless, ordering petitioner Manila Electric Company (MERALCO) to pay Leoncio
oppressive or malevolent manner when it refused to release the deposits of Ramoy2 moral and exemplary damages and attorney's fees, and the CA
respondents without any legal basis. We need not belabor the fact that the banking Resolution3 dated July 1, 2003, denying petitioner's motion for reconsideration, be
industry is impressed with public interest.87 As such, "the highest degree of diligence reversed and set aside.
is expected, and high standards of integrity and performance are even required of
it."88 It must therefore "treat the accounts of its depositors with meticulous care and The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the
always to have in mind the fiduciary nature of its relationship with them." 89 For failing facts as culled from the records, thus:
to do this, an award of exemplary damages is justified to set an example.
The evidence on record has established that in the year 1987 the National Power
The award of attorney's fees is likewise proper pursuant to paragraph 1, Article Corporation (NPC) filed with the MTC Quezon City a case for ejectment against
220890 of the Civil Code. several persons allegedly illegally occupying its properties in Baesa, Quezon City.
Among the defendants in the ejectment case was Leoncio Ramoy, one of the
In closing, it must be stressed that while we recognize that petitioner has the right to plaintiffs in the case at bar. On April 28, 1989 after the defendants failed to file an
protect itself from fraud or suspicions of fraud, the exercise of his right should be answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered
done within the bounds of the law and in accordance with due process, and not in judgment for the plaintiff [MERALCO] and "ordering the defendants to demolish or
bad faith or in a wanton disregard of its contractual obligation to respondents. remove the building and structures they built on the land of the plaintiff and to
vacate the premises." In the case of Leoncio Ramoy, the Court found that he was
WHEREFORE, the Petition is hereby DENIED. The assailed April 2, 2008 Decision and occupying a portion of Lot No. 72-B-2-B with the exact location of his apartments
the May 30, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 89086 are indicated and encircled in the location map as No. 7. A copy of the decision was
hereby AFFIRMED. SO ORDERED. furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2,
1993, p. 5).
MARIANO C. DEL CASTILLO
Associate Justice On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of
electric power supply to all residential and commercial establishments beneath the
NPC transmission lines along Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to
the letter was a list of establishments affected which included plaintiffs Leoncio and
Matilde Ramoy (Exh. 9), as well as a copy of the court decision (Exh. 2). After
deliberating on NPC's letter, Meralco decided to comply with NPC's request (Exhibits
6, 6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all
establishments affected including plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C),
Matilde Ramoy/Matilde Macabagdal (Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-
F), Ofelia Durian (Exh. 3-G), Jose Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I).
12
In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to Hence, herein petition for review on certiorari on the following grounds:
determine all the establishments which are considered under NPC property in view of
the fact that "the houses in the area are very close to each other" (Exh. 12). Shortly I
thereafter, a joint survey was conducted and the NPC personnel pointed out the THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT
electric meters to be disconnected (Exh. 13; TSN, October 8, 1993, p. 7; TSN, July WHEN IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.
1994, p. 8). II
THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND
In due time, the electric service connection of the plaintiffs [herein respondents] was EXEMPLARY DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO UNDER THE
disconnected (Exhibits D to G, with submarkings, pp. 86-87, Record). CIRCUMSTANCES THAT THE LATTER ACTED IN GOOD FAITH IN THE DISCONNECTION
OF THE ELECTRIC SERVICES OF THE RESPONDENTS. 5
Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a
parcel of land covered by TCT No. 326346, a portion of which was occupied by The petition is partly meritorious.
plaintiffs Rosemarie Ramoy, Ofelia Durian, Jose Valiza and Cyrene S. Panado as
lessees. When the Meralco employees were disconnecting plaintiffs' power MERALCO admits6 that respondents are its customers under a Service Contract
connection, plaintiff Leoncio Ramoy objected by informing the Meralco foreman that whereby it is obliged to supply respondents with electricity. Nevertheless, upon
his property was outside the NPC property and pointing out the monuments showing request of the NPC, MERALCO disconnected its power supply to respondents on the
the boundaries of his property. However, he was threatened and told not to interfere ground that they were illegally occupying the NPC's right of way. Under the Service
by the armed men who accompanied the Meralco employees. After the electric Contract, "[a] customer of electric service must show his right or proper interest over
power in Ramoy's apartment was cut off, the plaintiffs-lessees left the premises. the property in order that he will be provided with and assured a continuous electric
service."7 MERALCO argues that since there is a Decision of the Metropolitan Trial
During the ocular inspection ordered by the Court and attended by the parties, it was Court (MTC) of Quezon City ruling that herein respondents were among the illegal
found out that the residence of plaintiffs-spouses Leoncio and Matilde Ramoy was occupants of the NPC's right of way, MERALCO was justified in cutting off service to
indeed outside the NPC property. This was confirmed by defendant's witness R.P. respondents.
Monsale III on cross-examination (TSN, October 13, 1993, pp. 10 and 11). Monsale
also admitted that he did not inform his supervisor about this fact nor did he Clearly, respondents' cause of action against MERALCO is anchored on culpa
recommend re-connection of plaintiffs' power supply (Ibid., p. 14). contractual or breach of contract for the latter's discontinuance of its service to
respondents under Article 1170 of the Civil Code which provides:
The record also shows that at the request of NPC, defendant Meralco re-connected
the electric service of four customers previously disconnected none of whom was any Article 1170. Those who in the performance of their obligations are guilty of fraud,
of the plaintiffs (Exh. 14).4 negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages.
The RTC decided in favor of MERALCO by dismissing herein respondents' claim for
moral damages, exemplary damages and attorney's fees. However, the RTC ordered In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on
MERALCO to restore the electric power supply of respondents. the nature of culpa contractual, thus:

Respondents then appealed to the CA. In its Decision dated December 16, 2002, the "In culpa contractual x x x the mere proof of the existence of the contract and the
CA faulted MERALCO for not requiring from National Power Corporation (NPC) a writ failure of its compliance justify, prima facie, a corresponding right of relief. The law,
of execution or demolition and in not coordinating with the court sheriff or other recognizing the obligatory force of contracts, will not permit a party to be set free
proper officer before complying with the NPC's request. Thus, the CA held MERALCO from liability for any kind of misperformance of the contractual undertaking or a
liable for moral and exemplary damages and attorney's fees. MERALCO's motion for contravention of the tenor thereof. A breach upon the contract confers upon the
reconsideration of the Decision was denied per Resolution dated July 1, 2003. injured party a valid cause for recovering that which may have been lost or
13

suffered. The remedy serves to preserve the interests of the promissee that may
include his "expectation interest," which is his interest in having the benefit of his [B]eing a public utility vested with vital public interest, MERALCO is impressed with
bargain by being put in as good a position as he would have been in had the contract certain obligations towards its customers and any omission on its part to perform
been performed, or his "reliance interest," which is his interest in being reimbursed such duties would be prejudicial to its interest. For in the final analysis, the bottom
for loss caused by reliance on the contract by being put in as good a position as he line is that those who do not exercise such prudence in the discharge of their duties
would have been in had the contract not been made; or his "restitution interest," shall be made to bear the consequences of such oversight. 13
which is his interest in having restored to him any benefit that he has conferred on
the other party. Indeed, agreements can accomplish little, either for their makers or This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.
for society, unless they are made the basis for action. The effect of every infraction is
to create a new duty, that is, to make recompense to the one who has been injured The next question is: Are respondents entitled to moral and exemplary damages and
by the failure of another to observe his contractual obligation unless he can show attorney's fees?
extenuating circumstances, like proof of his exercise of due diligence x x x or of
the attendance of fortuitous event, to excuse him from his ensuing
Article 2220 of the Civil Code provides:
liability.9 (Emphasis supplied)
Article 2220. Willful injury to property may be a legal ground for awarding moral
Article 1173 also provides that the fault or negligence of the obligor consists in the
damages if the court should find that, under the circumstances, such damages are
omission of that diligence which is required by the nature of the obligation and
justly due. The same rule applies to breaches of contract where the defendant acted
corresponds with the circumstances of the persons, of the time and of the place. The
fraudulently or in bad faith.
Court emphasized in Ridjo Tape & Chemical Corporation v. Court of Appeals 10 that "as
a public utility, MERALCO has the obligation to discharge its functions with utmost
In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding
care and diligence."11
from him and his tenants the supply of electricity to which they were entitled under
the Service Contract. This is contrary to public policy because, as discussed above,
The Court agrees with the CA that under the factual milieu of the present case,
MERALCO, being a vital public utility, is expected to exercise utmost care and
MERALCO failed to exercise the utmost degree of care and diligence required of it. To
diligence in the performance of its obligation. It was incumbent upon MERALCO to do
repeat, it was not enough for MERALCO to merely rely on the Decision of the MTC
everything within its power to ensure that the improvements built by respondents
without ascertaining whether it had become final and executory. Verily, only upon
are within the NPC’s right of way before disconnecting their power supply. The Court
finality of said Decision can it be said with conclusiveness that respondents have no
emphasized in Samar II Electric Cooperative, Inc. v. Quijano14 that:
right or proper interest over the subject property, thus, are not entitled to the
services of MERALCO.
Electricity is a basic necessity the generation and distribution of which is imbued with
public interest, and its provider is a public utility subject to strict regulation by the
Although MERALCO insists that the MTC Decision is final and executory, it never
State in the exercise of police power. Failure to comply with these regulations will
showed any documentary evidence to support this allegation. Moreover, if it were
give rise to the presumption of bad faith or abuse of right. 15 (Emphasis supplied)
true that the decision was final and executory, the most prudent thing for MERALCO
to have done was to coordinate with the proper court officials in determining which
structures are covered by said court order. Likewise, there is no evidence on record Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the
to show that this was done by MERALCO. performance of its obligation to Leoncio Ramoy, its customer, is tantamount to bad
faith. Leoncio Ramoy testified that he suffered wounded feelings because of
MERALCO's actions.16 Furthermore, due to the lack of power supply, the lessees of his
The utmost care and diligence required of MERALCO necessitates such great degree
four apartments on subject lot left the premises.17 Clearly, therefore, Leoncio Ramoy
of prudence on its part, and failure to exercise the diligence required means that
is entitled to moral damages in the amount awarded by the CA.
MERALCO was at fault and negligent in the performance of its obligation. In Ridjo
Tape,12 the Court explained:
Leoncio Ramoy, the lone witness for respondents, was the only one who testified
regarding the effects on him of MERALCO's electric service disconnection. His co-
14
respondents Matilde Ramoy, Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may
not present any evidence of damages they suffered. be awarded moral damages.20

It is a hornbook principle that damages may be awarded only if proven. In Mahinay v. With regard to exemplary damages, Article 2232 of the Civil Code provides that in
Velasquez, Jr.,18 the Court held thus: contracts and quasi-contracts, the court may award exemplary damages if the
defendant, in this case MERALCO, acted in a wanton, fraudulent, reckless, oppressive,
In order that moral damages may be awarded, there must be pleading and proof of or malevolent manner, while Article 2233 of the same Code provides that such
moral suffering, mental anguish, fright and the like. While respondent alleged in his damages cannot be recovered as a matter of right and the adjudication of the same
complaint that he suffered mental anguish, serious anxiety, wounded feelings and is within the discretion of the court.1avvphi1
moral shock, he failed to prove them during the trial. Indeed, respondent should
have taken the witness stand and should have testified on the mental anguish, The Court finds that MERALCO fell short of exercising the due diligence required, but
serious anxiety, wounded feelings and other emotional and mental suffering he its actions cannot be considered wanton, fraudulent, reckless, oppressive or
purportedly suffered to sustain his claim for moral damages. Mere allegations do not malevolent. Records show that MERALCO did take some measures, i.e., coordinating
suffice; they must be substantiated by clear and convincing proof. No other person with NPC officials and conducting a joint survey of the subject area, to verify which
could have proven such damages except the respondent himself as they were electric meters should be disconnected although these measures are not sufficient,
extremely personal to him. considering the degree of diligence required of it. Thus, in this case, exemplary
damages should not be awarded.
In Keirulf vs. Court of Appeals, we held:
Since the Court does not deem it proper to award exemplary damages in this case,
"While no proof of pecuniary loss is necessary in order that moral damages may be then the CA's award for attorney's fees should likewise be deleted, as Article 2208 of
awarded, the amount of indemnity being left to the discretion of the court, it is the Civil Code states that in the absence of stipulation, attorney's fees cannot be
nevertheless essential that the claimant should satisfactorily show the existence of recovered except in cases provided for in said Article, to wit:
the factual basis of damages and its causal connection to defendant’s acts. This is so
because moral damages, though incapable of pecuniary estimation, are in the Article 2208. In the absence of stipulation, attorney’s fees and expenses of litigation,
category of an award designed to compensate the claimant for actual injury suffered other than judicial costs, cannot be recovered, except:
and not to impose a penalty on the wrongdoer. In Francisco vs. GSIS, the Court held
that there must be clear testimony on the anguish and other forms of mental (1) When exemplary damages are awarded;
suffering. Thus, if the plaintiff fails to take the witness stand and testify as to his/her (2) When the defendant’s act or omission has compelled the plaintiff to
social humiliation, wounded feelings and anxiety, moral damages cannot be awarded. litigate with third persons or to incur expenses to protect his interest;
In Cocoland Development Corporation vs. National Labor Relations Commission, the (3) In criminal cases of malicious prosecution against the plaintiff;
Court held that "additional facts must be pleaded and proven to warrant the grant of (4) In case of a clearly unfounded civil action or proceeding against the
moral damages under the Civil Code, these being, x x x social humiliation, wounded plaintiff;
feelings, grave anxiety, etc. that resulted therefrom." (5) Where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiff’s plainly valid, just and demandable claim;
x x x The award of moral damages must be anchored to a clear showing that (6) In actions for legal support;
respondent actually experienced mental anguish, besmirched reputation, sleepless (7) In actions for the recovery of wages of household helpers, laborers and
nights, wounded feelings or similar injury. There was no better witness to this skilled workers;
experience than respondent himself. Since respondent failed to testify on the (8) In actions for indemnity under workmen’s compensation and employer’s
witness stand, the trial court did not have any factual basis to award moral liability laws;
damages to him.19 (Emphasis supplied) (9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
15
(11) In any other case where the court deems it just and equitable that Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
attorney’s fees and expenses of litigation should be recovered. Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
In all cases, the attorney’s fees and expenses of litigation must be reasonable. coverage on "book debts in connection with ready-made clothing materials which
have been sold or delivered to various customers and dealers of the Insured
None of the grounds for recovery of attorney's fees are present. anywhere in the Philippines."2 The policies defined book debts as the "unpaid
account still appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy."3 The policies also provide for the following
WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals
conditions:
is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's
fees is DELETED.
1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
No costs.
outstanding at the date of loss for a period in excess of six (6) months from
the date of the covering invoice or actual delivery of the merchandise
SO ORDERED.
whichever shall first occur.

MA. ALICIA AUSTRIA-MARTINEZ


2. Warranted that the Insured shall submit to the Company within twelve
Associate Justice
(12) days after the close of every calendar month all amount shown in their
books of accounts as unpaid and thus become receivable item from their
customers and dealers. x x x4
NATURE AND EFFRECTS OF OBLIGATIONS
OBLIGATION TO GIVE A DETERMINATE THING vs. A GENERIC xxxx
THING
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
GAISANO CAGAYAN, INC. Petitioner, vs. was consumed by fire. Included in the items lost or destroyed in the fire were stocks
INSURANCE COMPANY OF NORTH AMERICA, Respondent. of ready-made clothing materials sold and delivered by IMC and LSPI.
G.R. No. 147839 June 8, 2006
On February 4, 1992, respondent filed a complaint for damages against petitioner. It
AUSTRIA-MARTINEZ, J.: alleges that IMC and LSPI filed with respondent their claims under their respective
fire insurance policies with book debt endorsements; that as of February 25, 1991,
Before the Court is a petition for review on certiorari of the Decision 1 dated October the unpaid accounts of petitioner on the sale and delivery of ready-made clothing
11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was
in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance subrogated to their rights against petitioner; that respondent made several demands
Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner); for payment upon petitioner but these went unheeded.5
and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration. In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could
not be held liable because the property covered by the insurance policies were
The factual background of the case is as follows: destroyed due to fortuities event or force majeure; that respondent's right of
16

subrogation has no basis inasmuch as there was no breach of contract committed by


it since the loss was due to fire which it could not prevent or foresee; that IMC and loss under the principle of res perit domino; that petitioner's obligation to IMC and
LSPI never communicated to it that they insured their properties; that it never LSPI is not the delivery of the lost goods but the payment of its unpaid account and as
consented to paying the claim of the insured.6 such the obligation to pay is not extinguished, even if the fire is considered a
fortuitous event; that by subrogation, the insurer has the right to go against
At the pre-trial conference the parties failed to arrive at an amicable petitioner; that, being a fire insurance with book debt endorsements, what was
settlement.7 Thus, trial on the merits ensued. insured was the vendor's interest as a creditor.11

On August 31, 1998, the RTC rendered its decision dismissing respondent's Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
complaint.8 It held that the fire was purely accidental; that the cause of the fire was Resolution dated April 11, 2001.13
not attributable to the negligence of the petitioner; that it has not been established
that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that Hence, the present petition for review on certiorari anchored on the following
"it is further agreed that merely for purpose of securing the payment of purchase Assignment of Errors:
price, the above-described merchandise remains the property of the vendor until the
purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
and must bear the loss. CASE WAS ONE OVER CREDIT.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
decision setting aside the decision of the RTC. The dispositive portion of the decision GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
reads: THEREOF.

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
to pay:
Anent the first error, petitioner contends that the insurance in the present case
1. the amount of P2,119,205.60 representing the amount paid by the cannot be deemed to be over credit since an insurance "on credit" belies not only the
plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus nature of fire insurance but the express terms of the policies; that it was not credit
legal interest from the time of demand until fully paid; that was insured since respondent paid on the occasion of the loss of the insured
goods to fire and not because of the non-payment by petitioner of any obligation;
2. the amount of P535,613.00 representing the amount paid by the plaintiff- that, even if the insurance is deemed as one over credit, there was no loss as the
appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the accounts were not yet due since no prior demands were made by IMC and LSPI
time of demand until fully paid. against petitioner for payment of the debt and such demands came from respondent
only after it had already paid IMC and LSPI under the fire insurance policies. 15
With costs against the defendant-appellee.
As to the second error, petitioner avers that despite delivery of the goods, petitioner-
SO ORDERED.10 buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies
over the goods.
The CA held that the sales invoices are proofs of sale, being detailed statements of
the nature, quantity and cost of the thing sold; that loss of the goods in the fire must Concerning the third ground, petitioner submits that there is no subrogation in favor
be borne by petitioner since the proviso contained in the sales invoices is an of respondent as no valid insurance could be maintained thereon by IMC and LSPI
exception under Article 1504 (1) of the Civil Code, to the general rule that if the thing since all risk had transferred to petitioner upon delivery of the goods; that petitioner
is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the was not privy to the insurance contract or the payment between respondent and its
17
insured nor was its consent or approval ever secured; that this lack of privity covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of
forecloses any real interest on the part of respondent in the obligation to pay, limiting the ready-made clothing materials sold and delivered to petitioner.
its interest to keeping the insured goods safe from fire.
The Court disagrees with petitioner's stand.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable It is well-settled that when the words of a contract are plain and readily understood,
interest over said goods as creditors who stand to suffer direct pecuniary loss from its there is no room for construction.22 In this case, the questioned insurance policies
destruction by fire; that petitioner is liable for loss of the ready-made clothing provide coverage for "book debts in connection with ready-made clothing materials
materials since it failed to overcome the presumption of liability under Article which have been sold or delivered to various customers and dealers of the Insured
126516 of the Civil Code; that the fire was caused through petitioner's negligence in anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
failing to provide stringent measures of caution, care and maintenance on its appearing in the Book of Account of the Insured 45 days after the time of the loss
property because electric wires do not usually short circuit unless there are defects in covered under this Policy."24 Nowhere is it provided in the questioned insurance
their installation or when there is lack of proper maintenance and supervision of the policies that the subject of the insurance is the goods sold and delivered to the
property; that petitioner is guilty of gross and evident bad faith in refusing to pay customers and dealers of the insured.
respondent's valid claim and should be liable to respondent for contracted lawyer's
fees, litigation expenses and cost of suit.17 Indeed, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are to
As a general rule, in petitions for review, the jurisdiction of this Court in cases be understood literally just as they appear on the face of the contract. 25 Thus, what
brought before it from the CA is limited to reviewing questions of law which involves were insured against were the accounts of IMC and LSPI with petitioner which
no examination of the probative value of the evidence presented by the litigants or remained unpaid 45 days after the loss through fire, and not the loss or destruction of
any of them.18 The Supreme Court is not a trier of facts; it is not its function to the goods delivered.
analyze or weigh evidence all over again.19 Accordingly, findings of fact of the
appellate court are generally conclusive on the Supreme Court. 20 Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed
Nevertheless, jurisprudence has recognized several exceptions in which factual issues that merely for purpose of securing the payment of the purchase price the above
may be resolved by this Court, such as: (1) when the findings are grounded entirely described merchandise remains the property of the vendor until the purchase price
on speculation, surmises or conjectures; (2) when the inference made is manifestly thereof is fully paid."26
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts The Court is not persuaded.
are conflicting; (6) when in making its findings the CA went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
appellee; (7) when the findings are contrary to the trial court; (8) when the findings
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 ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
briefs are not disputed by the respondent; (10) when the findings of fact are
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
premised on the supposed absence of evidence and contradicted by the evidence on
been made or not, except that:
record; and (11) when the CA manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition. (1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his obligations
At issue is the proper interpretation of the questioned insurance policy. Petitioner
18

claims that the CA erred in construing a fire insurance policy on book debts as one
under the contract, the goods are at the buyer's risk from the time of such delivery; Moreover, it must be stressed that the insurance in this case is not for loss of goods
(Emphasis supplied) by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days
after the fire. Accordingly, petitioner's obligation is for the payment of money. As
xxxx correctly stated by the CA, where the obligation consists in the payment of money,
the failure of the debtor to make the payment even by reason of a fortuitous event
Thus, when the seller retains ownership only to insure that the buyer will pay its shall not relieve him of his liability.33 The rationale for this is that the rule that an
debt, the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of obligor should be held exempt from liability when the loss occurs thru a fortuitous
loss of the goods delivered. event only holds true when the obligation consists in the delivery of a determinate
thing and there is no stipulation holding him liable even in case of fortuitous event. It
does not apply when the obligation is pecuniary in nature. 34
IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
bears the risk of loss, in property insurance, one's interest is not determined by loss or destruction of anything of the same kind does not extinguish the obligation." If
concept of title, but whether insured has substantial economic interest in the the obligation is generic in the sense that the object thereof is designated merely by
property.28 its class or genus without any particular designation or physical segregation from all
others of the same class, the loss or destruction of anything of the same kind even
without the debtor's fault and before he has incurred in delay will not have the effect
Section 13 of our Insurance Code defines insurable interest as "every interest in
of extinguishing the obligation.35 This rule is based on the principle that the genus of
property, whether real or personal, or any relation thereto, or liability in respect
a thing can never perish. Genus nunquan perit. 36 An obligation to pay money is
thereof, of such nature that a contemplated peril might directly damnify the insured."
generic; therefore, it is not excused by fortuitous loss of any specific property of the
Parenthetically, under Section 14 of the same Code, an insurable interest in property
debtor.37
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which
the expectancy arises. Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an With respect to IMC, the respondent has adequately established its claim. Exhibits
interest, it is sufficient that the insured is so situated with reference to the property "C" to "C-22"38 show that petitioner has an outstanding account with IMC in the
that he would be liable to loss should it be injured or destroyed by the peril against amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to
which it is insured.29 Anyone has an insurable interest in property who derives a IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent
benefit from its existence or would suffer loss from its destruction. 30Indeed, a vendor upon receipt of the insurance proceeds. All these documents have been properly
or seller retains an insurable interest in the property sold so long as he has any identified, presented and marked as exhibits in court. The subrogation receipt, by
interest therein, in other words, so long as he would suffer by its destruction, as itself, is sufficient to establish not only the relationship of respondent as insurer and
where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI IMC as the insured, but also the amount paid to settle the insurance claim. The right
pertain to the unpaid accounts appearing in their Books of Account 45 days after the of subrogation accrues simply upon payment by the insurance company of the
time of the loss covered by the policies. insurance claim.41 Respondent's action against petitioner is squarely sanctioned by
Article 2207 of the Civil Code which provides:
The next question is: Is petitioner liable for the unpaid accounts?
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
Petitioner's argument that it is not liable because the fire is a fortuitous event under
of contract complained of, the insurance company shall be subrogated to the rights of
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
19

the insured against the wrongdoer or the person who has violated the contract. x x x
under Article 1504 (1) of the Civil Code.
Petitioner failed to refute respondent's evidence. On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr.
and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same
As to LSPI, respondent failed to present sufficient evidence to prove its cause of day, her daughter Sofia C. Crouch, who was then vacationing in the Philippines,
action. No evidentiary weight can be given to Exhibit "F Levi Strauss", 42 a letter dated addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg,
April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted
not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of by the defendant in its Dagupan office, for transmission, after payment of the
Levi's products in the amount of P535,613.00 in the fire that razed petitioner's required fees or charges.
building on February 25, 1991.
The telegram never reached its addressee. Consolacion was interred with only her
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no daughter Sofia in attendance. Neither the husband nor any of the other children of
subrogation receipt was offered in evidence. Thus, there is no evidence that the deceased, then all residing in the United States, returned for the burial.
respondent has been subrogated to any right which LSPI may have against petitioner.
Failure to substantiate the claim of subrogation is fatal to petitioner's case for When Sofia returned to the United States, she discovered that the wire she had
recovery of the amount of P535,613.00. caused the defendant to send, had not been received. She and the other plaintiffs
thereupon brought action for damages arising from defendant's breach of contract.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October The case was filed in the Court of First Instance of Pangasinan and docketed therein
11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV as Civil Case No. 15356. The only defense of the defendant was that it was unable to
No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the amount transmit the telegram because of "technical and atmospheric factors beyond its
of P535,613.00 to respondent is DELETED for lack of factual basis. control." 1 No evidence appears on record that defendant ever made any attempt to
advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.
No pronouncement as to costs.
The Court of First Instance of Pangasinan, after trial, ordered the defendant (now
SO ORDERED. petitioner) to pay the plaintiffs (now private respondents) damages, as follows, with
interest at 6% per annum:
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice 1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and
P20,000.00 as moral damages.
2. Ignacio Castro Sr., P20,000.00 as moral damages.
3. Ignacio Castro Jr., P20,000.00 as moral damages.
FAILURE OF PERFORMANCE – ART. 1169, ART. 1170 4. Aurora Castro, P10,000.00 moral damages.
5. Salvador Castro, P10,000.00 moral damages.
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs. IGNACIO 6. Mario Castro, P10,000.00 moral damages.
CASTRO, SR., SOFIA C. CROUCHet al. 7. Conrado Castro, P10,000 moral damages.
G.R. No. 73867 February 29, 1988 8. Esmeralda C. Floro, P20,000.00 moral damages.
9. Agerico Castro, P10,000.00 moral damages.
PADILLA, J.: 10. Rolando Castro, P10,000.00 moral damages.
Petition for review on certiorari of the decision * of the Intermediate Appellate Court, 11. Virgilio Castro, P10,000.00 moral damages.
dated 11 February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al., 12. Gloria Castro, P10,000.00 moral damages.
Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc.,
Defendant-Appellant." Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in
the amount of P1,000.00 to each of the plaintiffs and costs. 2
20

The facts of the case are as follows:


On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's Here, petitioner's act or omission, which amounted to gross negligence, was precisely
decision but eliminated the award of P16,000.00 as compensatory damages to Sofia the cause of the suffering private respondents had to undergo.
C. Crouch and the award of P1,000.00 to each of the private respondents as
exemplary damages. The award of P20,000.00 as moral damages to each of Sofia C. As the appellate court properly observed:
Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P120,000. 00
for each. 3 [Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother
Petitioner appeals from the judgment of the appellate court, contending that the after she had already been interred, without being given the opportunity to even
award of moral damages should be eliminated as defendant's negligent act was not make a choice on whether they wanted to pay her their last respects? There is no
motivated by "fraud, malice or recklessness." doubt that these emotional sufferings were proximately caused by appellant's
omission and substantive law provides for the justification for the award of moral
In other words, under petitioner's theory, it can only be held liable for P 31.92, the damages. 4
fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the
addressee thereof. We also sustain the trial court's award of P16,000.00 as compensatory damages to
Sofia C. Crouch representing the expenses she incurred when she came to the
Petitioner's contention is without merit. Philippines from the United States to testify before the trial court. Had petitioner not
been remiss in performing its obligation, there would have been no need for this suit
Art. 1170 of the Civil Code provides that "those who in the performance of their or for Mrs. Crouch's testimony.
obligations are guilty of fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages." Art. 2176 also provides that The award of exemplary damages by the trial court is likewise justified and, therefore,
"whoever by act or omission causes damage to another, there being fault or sustained in the amount of P1,000.00 for each of the private respondents, as a
negligence, is obliged to pay for the damage done." warning to all telegram companies to observe due diligence in transmitting the
messages of their customers.
In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a
contract whereby, for a fee, petitioner undertook to send said private respondent's WHEREFORE, the petition is DENIED. The decision appealed from is modified so that
message overseas by telegram. This, petitioner did not do, despite performance by petitioner is held liable to private respondents in the following amounts:
said private respondent of her obligation by paying the required charges. Petitioner
was therefore guilty of contravening its obligation to said private respondent and is (1) P10,000.00 as moral damages, to each of private respondents;
thus liable for damages. (2) P1,000.00 as exemplary damages, to each of private respondents;
(3) P16,000.00 as compensatory damages, to private respondent Sofia C.
This liability is not limited to actual or quantified damages. To sustain petitioner's Crouch;
contrary position in this regard would result in an inequitous situation where (4) P5,000.00 as attorney's fees; and
petitioner will only be held liable for the actual cost of a telegram fixed thirty (30) (5) Costs of suit.
years ago.
SO ORDERED.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral
damages include physical suffering, mental anguish, fright, serious anxiety, Yap (Chairman), Paras and Sarmiento, JJ., concur.
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
21
SPOUSES CARMEN S. TONGSON and JOSE C. TONGSON substituted by his children When presented for payment, the PNB check was dishonored for the reason "Drawn
namely: JOSE TONGSON, JR., RAUL TONGSON, TITA TONGSON, GLORIA TONGSON Against Insufficient Funds." Despite the Spouses Tongson's repeated demands to
ALMA TONGSON, Petitioners, vs. EMERGENCY PAWNSHOP BULA, INC. and DANILO either pay the full value of the check or to return the subject parcel of land, Napala
R. NAPALA, Respondents failed to do either. Left with no other recourse, the Spouses Tongson filed with the
G.R. No. 167874 January 15, 2010 Regional Trial Court, Branch 16, Davao City a Complaint for Annulment of Contract
and Damages with a Prayer for the Issuance of a Temporary Restraining Order and a
CARPIO, J.: Writ of Preliminary Injunction.11

The Case In their Answer, respondents countered that Napala had already delivered to the
Spouses Tongson the amount of ₱2,800,000 representing the face value of the PNB
Before the Court is a petition for review 1 of the 31 August 2004 Decision2 and 10 check, as evidenced by a receipt issued by the Spouses Tongson. Respondents
March 2005 Resolution3 of the Court of Appeals in CA-G.R. CV No. 58242. In the 31 pointed out that the Spouses Tongson never returned the PNB check claiming that it
August 2004 Decision, the Court of Appeals partially granted the appeal filed by was misplaced. Respondents asserted that the payment they made rendered the
Emergency Pawnshop Bula, Inc. (EPBI) and Danilo R. Napala (Napala) by modifying filing of the complaint baseless.12
the decision of the trial court. In the 10 March 2005 Resolution, the Court of Appeals
denied the motion for partial reconsideration filed by the Spouses Jose C. Tongson At the pre-trial, Napala admitted, among others, issuing the postdated PNB check in
and Carmen S. Tongson (Spouses Tongson). the sum of ₱2,800,000.13 The Spouses Tongson, on the other hand, admitted issuing a
receipt which showed that they received the PNB check from Napala. Thereafter, trial
The Facts ensued.

In May 1992, Napala offered to purchase from the Spouses Tongson their 364-square The Ruling of the Trial Court
meter parcel of land, situated in Davao City and covered by Transfer Certificate of
Title (TCT) No. 143020, for ₱3,000,000. Finding the offer acceptable, the Spouses The trial court found that the purchase price of the subject property has not been
Tongson executed with Napala a Memorandum of Agreement 4 dated 8 May 1992. fully paid and that Napala’s assurance to the Spouses Tongson that the PNB check
would not bounce constituted fraud that induced the Spouses Tongson to enter into
On 2 December 1992, respondents’ lawyer Atty. Petronilo A. Raganas, Jr. prepared a the sale. Without such assurance, the Spouses Tongson would not have agreed to the
Deed of Absolute Sale5indicating the consideration as only ₱400,000. When Carmen contract of sale. Accordingly, there was fraud within the ambit of Article 1338 of the
Tongson "noticed that the consideration was very low, she [complained] and called Civil Code,14 justifying the annulment of the contract of sale, the award of damages
the attention of Napala but the latter told her not to worry as he would be the one to and attorney’s fees, and payment of costs.
pay for the taxes and she would receive the net amount of ₱3,000,000."6
The dispositive portion of the 9 December 1996 Decision of the trial court reads:
To conform with the consideration stated in the Deed of Absolute Sale, the parties
executed another Memorandum of Agreement, which allegedly replaced the first WHEREFORE, judgment is hereby rendered –
Memorandum of Agreement,7 showing that the selling price of the land was only
₱400,000.8 I Annulling the contract entered into by the plaintiffs with the defendants;
II Declaring the writs of preliminary injunctions issued permanent;
Upon signing the Deed of Absolute Sale, Napala paid ₱200,000 in cash to the Spouses III Ordering defendants to:
Tongson and issued a postdated Philippine National Bank (PNB) check in the amount 1) reconvey the property subject matter of the case to the plaintiffs;
of ₱2,800,000,9 representing the remaining balance of the purchase price of the 2) pay plaintiffs:
subject property. Thereafter, TCT No. 143020 was cancelled and TCT No. T-186128 a) ₱100,000 as moral damages;
was issued in the name of EPBI.10 b) ₱50,000 as exemplary damages;
22

c) ₱20,000 as attorney’s fees; and


d) ₱35,602.50 cost of suit broken down as follows: a) the sum of ₱2,800,000.00 representing the balance of the purchase price
₱70.00 bond fee of the subject parcel of land, plus interest at the legal rate of 6% per annum
₱60.00 lis pendens fee computed from the date of filing of the complaint on 11 February 1993, until
₱902.00 docket fee the finality of the assailed decision; thereafter, the interest due shall be at
₱390.00 docket fee the legal rate of 12% per annum until fully paid;
₱8.00 summons fee b) ₱50,000 as moral damages;
₱12.00 SDF c) ₱25,000 as exemplary damages;
₱178.50 Xerox d) ₱20,000 as attorney’s fees; and
₱9,000 Sidcor Insurance Bond fee e) The costs of suit in the total amount of ₱35,602.50.
₱25,000 Sidcor Insurance Bond fee
or the total sum of ₱205,602.50. It is understood, however, that plaintiffs’ entitlement to items a to d, is subject to the
condition that they have not received the same or equivalent amounts in criminal
It is further ordered that the monetary award be offsetted [sic] to defendants’ case for Violation of Batas Pambansa Bilang 22, docketed as Criminal Case No. 30508-
downpayment of ₱200,000 thereby leaving a balance of ₱5,602.50. 15 93, before the Regional Trial Court of Davao City, Branch 12, instituted against the
defendant Danilo R. Napala by plaintiff Carmen S. Tongson.
Respondents appealed to the Court of Appeals.
SO ORDERED.16
The Ruling of the Court of Appeals
The Spouses Tongson filed a partial motion for reconsideration which was denied by
The Court of Appeals agreed with the trial court’s finding that Napala employed fraud the Court of Appeals in its Resolution dated 10 March 2005.
when he misrepresented to the Spouses Tongson that the PNB check in the amount
of ₱2,800,000 would be properly funded at its maturity. However, the Court of The Issues
Appeals found that the issuance and delivery of the PNB check and fraudulent
representation made by Napala could not be considered as the determining cause for The Spouses Tongson raise the following issues:
the sale of the subject parcel of land. Hence, such fraud could not be made the basis
for annulling the contract of sale. Nevertheless, the fraud employed by Napala is a 1. WHETHER THE CONTRACT OF SALE CAN BE ANNULLED BASED ON THE
proper and valid basis for the entitlement of the Spouses Tongson to the balance of FRAUD EMPLOYED BY NAPALA; and
the purchase price in the amount of ₱2,800,000 plus interest at the legal rate of 6% 2. WHETHER THE COURT OF APPEALS ERRED IN REDUCING THE AMOUNT OF
per annum computed from the date of filing of the complaint on 11 February 1993. DAMAGES AWARDED BY THE TRIAL COURT.

Finding the trial court’s award of damages unconscionable, the Court of Appeals The Ruling of the Court
reduced the moral damages from ₱100,000 to ₱50,000 and the exemplary damages
from ₱50,000 to ₱25,000.
The petition has merit.

The dispositive portion of the 31 August 2004 Decision of the Court of Appeals reads:
On the existence of fraud

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The assailed decision of the
A contract is a meeting of the minds between two persons, whereby one is bound to
Regional Trial Court, 11th Judicial Region, Branch 16, Davao City, in Civil Case No.
give something or to render some service to the other. 17 A valid contract requires the
21,858-93, is hereby MODIFIED, to read:
concurrence of the following essential elements: (1) consent or meeting of the minds,
that is, consent to transfer ownership in exchange for the price; (2) determinate
WHEREFORE, judgment is hereby rendered ordering defendants to pay plaintiffs: subject matter; and (3) price certain in money or its equivalent.18
23
In the present case, there is no question that the subject matter of the sale is the 364- contrary, they willingly accepted Napala’s offer to purchase the property at
square meter Davao lot owned by the Spouses Tongson and the selling price agreed ₱3,000,000. In short, there was a meeting of the minds as to the object of the sale as
upon by the parties is ₱3,000,000. Thus, there is no dispute as regards the presence of well as the consideration therefor.
the two requisites for a valid sales contract, namely, (1) a determinate subject matter
and (2) a price certain in money. 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
The problem lies with the existence of the remaining element, which is consent of the believing" that what she signed were papers pertinent to her application for the
contracting parties, specifically, the consent of the Spouses Tongson to sell the reconstitution of her burned certificate of title, not a deed of sale; 21 (2) when the
property to Napala. Claiming that their consent was vitiated, the Spouses Tongson signature of the authorized corporate officer was forged; 22 or (3) when the seller was
point out that Napala’s fraudulent representations of sufficient funds to pay for the seriously ill, and died a week after signing the deed of sale raising doubts on whether
property induced them into signing the contract of sale. Such fraud, according to the the seller could have read, or fully understood, the contents of the documents he
Spouses Tongson, renders the contract of sale void. signed or of the consequences of his act. 23 Suffice it to state that nothing analogous
to these badges of causal fraud exists in this case.
On the contrary, Napala insists that the Spouses Tongson willingly consented to the
sale of the subject property making the contract of sale valid. Napala maintains that However, while no causal fraud attended the execution of the sales contract, there is
no fraud attended the execution of the sales contract. fraud in its general sense, which involves a false representation of a fact, 24 when
Napala inveigled the Spouses Tongson to accept the postdated PNB check on the
The trial and appellate courts had conflicting findings on the question of whether the representation that the check would be sufficiently funded at its maturity. In other
consent of the Spouses Tongson was vitiated by fraud. While the Court of Appeals words, the fraud surfaced when Napala issued the worthless check to the Spouses
agreed with the trial court’s finding that Napala employed fraud when he assured the Tongson, which is definitely not during the negotiation and perfection stages of the
Spouses Tongson that the postdated PNB check was fully funded when it fact it was sale. Rather, the fraud existed in the consummation stage of the sale when the
not, the Court of Appeals disagreed with the trial court’s ruling that such fraud could parties are in the process of performing their respective obligations under the
be the basis for the annulment of the contract of sale between the parties. perfected contract of sale. In Swedish Match, AB v. Court of Appeals,25 the Court
explained the three stages of a contract, thus:
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 I n general, contracts undergo three distinct stages, to wit: negotiation; perfection or
contract which, without them, he would not have agreed to. In order that fraud may birth; and consummation. Negotiation begins from the time the prospective
vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo contracting parties manifest their interest in the contract and ends at the moment of
incidente), inducement to the making of the contract.19 Additionally, the fraud must agreement of the parties. Perfection or birth of the contract takes place when the
be serious.20 parties agree upon the essential elements of the contract. Consummation occurs
when the parties fulfill or perform the terms agreed upon in the contract, culminating
We find no causal fraud in this case to justify the annulment of the contract of sale in the extinguishment thereof.
between the parties. It is clear from the records that the Spouses Tongson agreed to
sell their 364-square meter Davao property to Napala who offered to pay ₱3,000,000 Indisputably, the Spouses Tongson as the sellers had already performed their
as purchase price therefor. Contrary to the Spouses Tongson’s belief that the fraud obligation of executing the Deed of Sale, which led to the cancellation of their title in
employed by Napala was "already operational at the time of the perfection of the favor of EPBI. Respondents as the buyers, on the other hand, failed to perform their
contract of sale," the misrepresentation by Napala that the postdated PNB check correlative obligation of paying the full amount of the contract price. While Napala
would not bounce on its maturity hardly equates to dolo causante. Napala’s paid ₱200,000 cash to the Spouses Tongson as partial payment, Napala issued an
assurance that the check he issued was fully funded was not the principal inducement insufficiently funded PNB check to pay the remaining balance of ₱2.8 million. Despite
for the Spouses Tongson to sign the Deed of Absolute Sale. Even before Napala issued repeated demands and the filing of the complaint, Napala failed to pay the ₱2.8
the check, the parties had already consented and agreed to the sale transaction. The million until the present. Clearly, respondents committed a substantial breach of their
24

Spouses Tongson were never tricked into selling their property to Napala. On the
reciprocal obligation, entitling the Spouses Tongson to the rescission of the sales The Court notes that the selling price indicated in the Deed of Absolute Sale was only
contract. The law grants this relief to the aggrieved party, thus: ₱400,000, instead of the true purchase price of ₱3,000,000. The undervaluation of
the selling price operates to defraud the government of the taxes due on the basis of
Article 1191 of the Civil Code provides: the correct purchase price. Under the law,29 the sellers have the obligation to pay the
capital gains tax. In this case, Napala undertook to "advance" the capital gains tax,
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case among other fees, under the Memorandum of Agreement, thus:
one of the obligors should not comply with what is incumbent upon him.
ATTY. ALABASTRO:
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even Q Is it not a fact that you were the one who paid for the capital gains tax?
after he has chosen fulfillment, if the latter should become impossible. A No, I only advanced the money.
Q To whom?
Article 1385 of the Civil Code provides the effects of rescission, viz: A To BIR.
COURT:
Q You were the one who went to the BIR to pay the capital gains tax?
ART. 1385. Rescission creates the obligation to return the things which were the
A It is embodied in the memorandum agreement.30
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
While Carmen Tongson protested against the "very low consideration," she
whatever he may be obliged to restore.
eventually agreed to the "reduced" selling price indicated in the Deed of
Absolute since Napala assured her not to worry about the taxes and
Neither shall rescission take place when the things which are the object of the
expenses, as he had allegedly made arrangements with the Bureau of
contract are legally in the possession of third persons who did not act in bad faith.
Internal Revenue (BIR) regarding the payment of the taxes, thus:

While they did not file an action for the rescission of the sales contract, the Spouses Q What is the amount in the Deed of Absolute Sale?
Tongson specifically prayed in their complaint for the annulment of the sales A It was only Four Hundred Thousand. And he told me not to worry because
contract, for the immediate execution of a deed of reconveyance, and for the return x x x the BIR and not to worry because he will pay me what was agreed – the
of the subject property to them.26 The Spouses Tongson likewise prayed "for such amount of Three Million and he will be paying all these expenses so I was
other reliefs which may be deemed just and equitable in the premises." In view of thinking, if that is the case, anyway he paid me the Two Hundred Thousand
such prayer, and considering respondents’ substantial breach of their obligation cash and a subsequent Two Point Eight Million downpayment check so I
under the sales contract, the rescission of the sales contract is but proper and really thought that he was paying the whole amount.
justified. Accordingly, respondents must reconvey the subject property to the
Spouses Tongson, who in turn shall refund the initial payment of ₱200,000 less the
COURT:
costs of suit.
Proceed.
Napala’s claims that rescission is not proper and that he should be given more time to
pay for the unpaid remaining balance of ₱2,800,000 cannot be countenanced. Having
ATTY. LIZA:
acted fraudulently in performing his obligation, Napala is not entitled to more time to
pay the remaining balance of ₱2,800,000, and thereby erase the default or breach
that he had deliberately incurred.27 To do otherwise would be to sanction a Q So you eventually agreed that this consideration be reduced to Four
deliberate and reiterated infringement of the contractual obligations incurred by Hundred Thousand Pesos and to be reflected in the Deed of Absolute Sale?
Napala, an attitude repugnant to the stability and obligatory force of contracts. 28 A Yes, but when I was complaining to him why it is so because I was worried
why that was like that but Mr. Napala told me don’t worry because [he] can
25

remedy this. And I asked him how can [he] remedy this? And he told me we
can make another Memorandum of Agreement. Article 2234. When the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
COURT: before the court may consider the question of whether or not exemplary damages
would be awarded. In case liquidated damages have been agreed upon, although no
Q Before you signed the Deed of Absolute Sale, you found out the amount? proof of loss is necessary in order that such liquidated damages may be recovered,
A Yes, sir. nevertheless, before the court may consider the question of granting exemplary in
Q And you complained? addition to the liquidated damages, the plaintiff must show that he would be entitled
A Yes.31 to moral, temperate or compensatory damages were it not for the stipulation for
liquidated damages. (Emphasis supplied)
Considering that the undervaluation of the selling price of the subject property,
initiated by Napala, operates to defraud the government of the correct amount of Accordingly, we affirm the Court of Appeals’ awards of moral and exemplary
taxes due on the sale, the BIR must therefore be informed of this Decision for its damages, which we find equitable under the circumstances in this case.
appropriate action.
WHEREFORE, we PARTIALLY GRANT the petition. We SET ASIDE the 31 August 2004
On the award of damages Decision and 10 March 2005 Resolution of the Court of Appeals in CA-G.R. CV No.
58242, except as to the award of moral and exemplary damages, and ORDER the
rescission of the contract of sale between the Spouses Tongson and Emergency
Citing Article 1338 of the Civil Code, the trial court awarded ₱100,000 moral damages
Pawnshop Bula, Inc.
and ₱50,000 exemplary damages to the Spouses Tongson. While agreeing with the
trial court on the Spouses Tongson’s entitlement to moral and exemplary damages,
the Court of Appeals reduced such awards for being unconscionable. Thus, the moral Let a copy of this Decision be forwarded to the Bureau of Internal Revenue for its
damages was reduced from ₱100,000 to ₱50,000, and the exemplary damages was appropriate action. SO ORDERED.
reduced from ₱50,000 to ₱25,000.
ANTONIO T. CARPIO
As discussed above, Napala defrauded the Spouses Tongson in his acts of issuing a Associate Justice
worthless check and representing to the Spouses Tongson that the check was funded,
committing in the process a substantial breach of his obligation as a buyer. For such DELAY (Mora)
fraudulent acts, the law, specifically the Civil Code, awards moral damages to the
injured party, thus: GENERAL MILLING CORPORATION, Petitioner, vs.
SPS. LIBRADO RAMOS and REMEDIOS RAMOS, Respondents.
ART. 2220. Willful injury to property may be a legal ground for awarding moral 9. G.R. No. 193723 July 20, 2011
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted VELASCO, JR., J.:
fraudulently or in bad faith. (Emphasis supplied)
The Case
Considering that the Spouses Tongson are entitled to moral damages, the Court may
also award exemplary damages, thus:
This is a petition for review of the April 15, 2010 Decision of the Court of Appeals (CA)
in CA-G.R. CR-H.C. No. 85400 entitled Spouses Librado Ramos & Remedios Ramos v.
ART. 2232. In contracts and quasi-contracts, the court may award exemplary damages General Milling Corporation, et al., which affirmed the May 31, 2005 Decision of the
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent Regional Trial Court (RTC), Branch 12 in Lipa City, in Civil Case No. 00-0129 for
manner. Annulment and/or Declaration of Nullity of Extrajudicial Foreclosure Sale with
26

Damages.
The Facts On March 3, 2000, Spouses Ramos filed a Complaint for Annulment and/or
Declaration of Nullity of the Extrajudicial Foreclosure Sale with Damages. They
On August 24, 1989, General Milling Corporation (GMC) entered into a Growers contended that the extrajudicial foreclosure sale on June 10, 1997 was null and void,
Contract with spouses Librado and Remedios Ramos (Spouses Ramos). Under the since there was no compliance with the requirements of posting and publication of
contract, GMC was to supply broiler chickens for the spouses to raise on their land in notices under Act No. 3135, as amended, or An Act to Regulate the Sale of Property
Barangay Banaybanay, Lipa City, Batangas.1 To guarantee full compliance, the under Special Powers Inserted in or Annexed to Real Estate Mortgages. They likewise
Growers Contract was accompanied by a Deed of Real Estate Mortgage over a piece claimed that there was no sheriff’s affidavit to prove compliance with the
of real property upon which their conjugal home was built. The spouses further requirements on posting and publication of notices. It was further alleged that the
agreed to put up a surety bond at the rate of PhP 20,000 per 1,000 chicks delivered Deed of Real Estate Mortgage had no fixed term. A prayer for moral and exemplary
by GMC. The Deed of Real Estate Mortgage extended to Spouses Ramos a maximum damages and attorney’s fees was also included in the complaint.8 Librado Ramos
credit line of PhP 215,000 payable within an indefinite period with an interest of alleged that, when the property was foreclosed, GMC did not notify him at all of the
twelve percent (12%) per annum.2 foreclosure.9

The Deed of Real Estate Mortgage contained the following provision: During the trial, the parties agreed to limit the issues to the following: (1) the validity
of the Deed of Real Estate Mortgage; (2) the validity of the extrajudicial foreclosure;
WHEREAS, the MORTGAGOR/S has/have agreed to guarantee and secure the full and and (3) the party liable for damages.10
faithful compliance of [MORTGAGORS’] obligation/s with the MORTGAGEE by a First
Real Estate Mortgage in favor of the MORTGAGEE, over a 1 parcel of land and the In its Answer, GMC argued that it repeatedly reminded Spouses Ramos of their
improvements existing thereon, situated in the Barrio/s of -Banaybanay, Municipality liabilities under the Growers Contract. It argued that it was compelled to foreclose
of Lipa City, Province of Batangas, Philippines, his/her/their title/s thereto being the mortgage because of Spouses Ramos’ failure to pay their obligation. GMC insisted
evidenced by Transfer Certificate/s No./s T-9214 of the Registry of Deeds for the that it had observed all the requirements of posting and publication of notices under
Province of Batangas in the amount of TWO HUNDRED FIFTEEN THOUSAND (P Act No. 3135.11
215,000.00), Philippine Currency, which the maximum credit line payable within a x x
x day term and to secure the payment of the same plus interest of twelve percent The Ruling of the Trial Court
(12%) per annum.
Holding in favor of Spouses Ramos, the trial court ruled that the Deed of Real Estate
Spouses Ramos eventually were unable to settle their account with GMC. They Mortgage was valid even if its term was not fixed. Since the duration of the term was
alleged that they suffered business losses because of the negligence of GMC and its made to depend exclusively upon the will of the debtors-spouses, the trial court cited
violation of the Growers Contract.3 jurisprudence and said that "the obligation is not due and payable until an action is
commenced by the mortgagee against the mortgagor for the purpose of having the
On March 31, 1997, the counsel for GMC notified Spouses Ramos that GMC would court fix the date on and after which the instrument is payable and the date of
institute foreclosure proceedings on their mortgaged property.4 maturity is fixed in pursuance thereto."12

On May 7, 1997, GMC filed a Petition for Extrajudicial Foreclosure of Mortgage. On The trial court held that the action of GMC in moving for the foreclosure of the
June 10, 1997, the property subject of the foreclosure was subsequently sold by spouses’ properties was premature, because the latter’s obligation under their
public auction to GMC after the required posting and publication.5 It was foreclosed contract was not yet due.
for PhP 935,882,075, an amount representing the losses on chicks and feeds exclusive
of interest at 12% per annum and attorney’s fees.6 To complicate matters, on The trial court awarded attorney’s fees because of the premature action taken by
October 27, 1997, GMC informed the spouses that its Agribusiness Division had GMC in filing extrajudicial foreclosure proceedings before the obligation of the
closed its business and poultry operations.7 spouses became due.
27

The RTC ruled, thus:


WHEREFORE, premises considered, judgment is rendered as follows: WHEREFORE, and in view of the foregoing considerations, the Decision of the
Regional Trial Court of Lipa City, Branch 12, dated May 21, 2005 is hereby AFFIRMED
1. The Extra-Judicial Foreclosure Proceedings under docket no. 0107-97 is hereby with MODIFICATION by deleting the award of attorney’s fees to plaintiffs-appellees
declared null and void; spouses Librado Ramos and Remedios Ramos.16
2. The Deed of Real Estate Mortgage is hereby declared valid and legal for all intents
and puposes; Hence, We have this appeal.
3. Defendant-corporation General Milling Corporation is ordered to pay Spouses
Librado and Remedios Ramos attorney’s fees in the total amount of P 57,000.00 The Issues
representing acceptance fee of P30,000.00 and P3,000.00 appearance fee for nine (9) A. WHETHER [THE CA] MAY CONSIDER ISSUES NOT ALLEGED AND DISCUSSED IN THE
trial dates or a total appearance fee of P 27,000.00; LOWER COURT AND LIKEWISE NOT RAISED BY THE PARTIES ON APPEAL, THEREFORE
4. The claims for moral and exemplary damages are denied for lack of merit. HAD DECIDED THE CASE NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF
IT IS SO ORDERED.13 THE SUPREME COURT.
B. WHETHER [THE CA] ERRED IN RULING THAT PETITIONER GMC MADE NO DEMAND
The Ruling of the Appellate Court TO RESPONDENT SPOUSES FOR THE FULL PAYMENT OF THEIR OBLIGATION
CONSIDERING THAT THE LETTER DATED MARCH 31, 1997 OF PETITIONER GMC TO
On appeal, GMC argued that the trial court erred in: (1) declaring the extrajudicial RESPONDENT SPOUSES IS TANTAMOUNT TO A FINAL DEMAND TO PAY, THEREFORE IT
foreclosure proceedings null and void; (2) ordering GMC to pay Spouses Ramos DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS.17
attorney’s fees; and (3) not awarding damages in favor of GMC.
The Ruling of this Court
The CA sustained the decision of the trial court but anchored its ruling on a different
ground. Contrary to the findings of the trial court, the CA ruled that the requirements Can the CA consider matters not alleged?
of posting and publication of notices under Act No. 3135 were complied with. The CA,
however, still found that GMC’s action against Spouses Ramos was premature, as GMC asserts that since the issue on the existence of the demand letter was not raised
they were not in default when the action was filed on May 7, 1997.14 in the trial court, the CA, by considering such issue, violated the basic requirements of
fair play, justice, and due process.18
The CA ruled:
In their Comment,19 respondents-spouses aver that the CA has ample authority to
In this case, a careful scrutiny of the evidence on record shows that defendant- rule on matters not assigned as errors on appeal if these are indispensable or
appellant GMC made no demand to spouses Ramos for the full payment of their necessary to the just resolution of the pleaded issues.
obligation. While it was alleged in the Answer as well as in the Affidavit constituting
the direct testimony of Joseph Dominise, the principal witness of defendant-appellant In Diamonon v. Department of Labor and Employment,20 We explained that an
GMC, that demands were sent to spouses Ramos, the documentary evidence proves appellate court has a broad discretionary power in waiving the lack of assignment of
otherwise. A perusal of the letters presented and offered as evidence by defendant- errors in the following instances:
appellant GMC did not "demand" but only request spouses Ramos to go to the office
of GMC to "discuss" the settlement of their account.15 (a) Grounds not assigned as errors but affecting the jurisdiction of the court over the
subject matter;
According to the CA, however, the RTC erroneously awarded attorney’s fees to (b) Matters not assigned as errors on appeal but are evidently plain or clerical errors
Spouses Ramos, since the presumption of good faith on the part of GMC was not within contemplation of law;
overturned. (c) Matters not assigned as errors on appeal but consideration of which is necessary
in arriving at a just decision and complete resolution of the case or to serve the
The CA disposed of the case as follows: interests of a justice or to avoid dispensing piecemeal justice;
28
(d) Matters not specifically assigned as errors on appeal but raised in the trial court first made a demand on the spouses before proceeding to foreclose the real estate
and are matters of record having some bearing on the issue submitted which the mortgage.
parties failed to raise or which the lower court ignored;
(e) Matters not assigned as errors on appeal but closely related to an error assigned; Development Bank of the Philippines v. Licuanan finds application to the instant case:
(f) Matters not assigned as errors on appeal but upon which the determination of a
question properly assigned, is dependent. The issue of whether demand was made before the foreclosure was effected is
essential.1avvphi1 If demand was made and duly received by the respondents and
Paragraph (c) above applies to the instant case, for there would be a just and the latter still did not pay, then they were already in default and foreclosure was
complete resolution of the appeal if there is a ruling on whether the Spouses Ramos proper. However, if demand was not made, then the loans had not yet become due
were actually in default of their obligation to GMC. and demandable. This meant that respondents had not defaulted in their payments
and the foreclosure by petitioner was premature. Foreclosure is valid only when the
Was there sufficient demand? debtor is in default in the payment of his obligation.22

In turn, whether or not demand was made is a question of fact.23 This petition filed
We now go to the second issue raised by GMC. GMC asserts error on the part of the
under Rule 45 of the Rules of Court shall raise only questions of law. For a question to
CA in finding that no demand was made on Spouses Ramos to pay their obligation. On
be one of law, it must not involve an examination of the probative value of the
the contrary, it claims that its March 31, 1997 letter is akin to a demand.
evidence presented by the litigants or any of them. The resolution of the issue must
rest solely on what the law provides on the given set of circumstances. Once it is clear
We disagree.
that the issue invites a review of the evidence presented, the question posed is one
of fact.24 It need not be reiterated that this Court is not a trier of facts.25 We will
There are three requisites necessary for a finding of default. First, the obligation is defer to the factual findings of the trial court, because petitioner GMC has not shown
demandable and liquidated; second, the debtor delays performance; and third, the any circumstances making this case an exception to the rule.
creditor judicially or extrajudicially requires the debtor’s performance.21
WHEREFORE, the petition is DENIED. The CA Decision in CA-G.R. CR-H.C. No. 85400 is
According to the CA, GMC did not make a demand on Spouses Ramos but merely AFFIRMED.
requested them to go to GMC’s office to discuss the settlement of their account. In SO ORDERED.
spite of the lack of demand made on the spouses, however, GMC proceeded with the PRESBITERO J. VELASCO, JR.
foreclosure proceedings. Neither was there any provision in the Deed of Real Estate Associate Justice
Mortgage allowing GMC to extrajudicially foreclose the mortgage without need of
demand.
SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs.
Indeed, Article 1169 of the Civil Code on delay requires the following: ERNESTO V. SANTOS and RIVERLAND, INC., respondents.
G.R. No. 153004 November 5, 2004
Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfilment of their obligation. QUISUMBING, J.:
However, the demand by the creditor shall not be necessary in order that delay may
exist: Subject of the present petition for review on certiorari is the Decision, 1 dated January
30, 2002, as well as the April 12, 2002, Resolution 2 of the Court of Appeals in CA-G.R.
(1) When the obligation or the law expressly so declares; x x x CV No. 55122. The appellate court reversed the Decision, 3dated October 4, 1996, of
As the contract in the instant case carries no such provision on demand not being the Regional Trial Court of Makati City, Branch 148, in Civil Case No. 95-811, and
necessary for delay to exist, We agree with the appellate court that GMC should have likewise denied petitioner's Motion for Reconsideration.
29
The facts of this case are undisputed. 5. Failure of compliance of any of the foregoing terms and conditions by
either or both parties to this agreement shall ipso facto and ipso jure
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the automatically entitle the aggrieved party to a writ of execution for the
plaintiff and defendant, respectively, in several civil cases filed in different courts in enforcement of this agreement. [Emphasis supplied] 5
the Philippines. On October 26, 1990, the parties executed a Compromise
Agreement4 which amicably ended all their pending litigations. The pertinent portions In compliance with the Compromise Agreement, respondent Santos moved for the
of the Agreement read as follows: dismissal of the aforesaid civil cases. He also caused the lifting of the notices of lis
pendens on the real properties involved. For its part, petitioner SVHFI, paid P1.5
1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the million to respondent Santos, leaving a balance of P13 million.
following manner:
Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation
a. P1.5 Million immediately upon the execution of this agreement; two real properties, which were previously subjects of lis pendens. Discovering the
b. The balance of P13 Million shall be paid, whether in one lump disposition made by the petitioner, respondent Santos sent a letter to the petitioner
sum or in installments, at the discretion of the Foundation, within a demanding the payment of the remaining P13 million, which was ignored by the
period of not more than two (2) years from the execution of this latter. Meanwhile, on September 30, 1991, the Regional Trial Court of Makati City,
agreement; provided, however, that in the event that the Branch 62, issued a Decision6approving the compromise agreement.
Foundation does not pay the whole or any part of such balance, the
same shall be paid with the corresponding portion of the land or On October 28, 1992, respondent Santos sent another letter to petitioner inquiring
real properties subject of the aforesaid cases and previously when it would pay the balance of P13 million. There was no response from petitioner.
covered by the notices of lis pendens, under such terms and Consequently, respondent Santos applied with the Regional Trial Court of Makati City,
conditions as to area, valuation, and location mutually acceptable Branch 62, for the issuance of a writ of execution of its compromise judgment dated
to both parties; but in no case shall the payment of such balance be September 30, 1991. The RTC granted the writ. Thus, on March 10, 1993, the Sheriff
later than two (2) years from the date of this agreement; otherwise, levied on the real properties of petitioner, which were formerly subjects of the lis
payment of any unpaid portion shall only be in the form of land pendens. Petitioner, however, filed numerous motions to block the enforcement of
aforesaid; the said writ. The challenge of the execution of the aforesaid compromise judgment
even reached the Supreme Court. All these efforts, however, were futile.
2. Immediately upon the execution of this agreement (and [the] receipt of
the P1.5 Million), plaintiff Santos shall cause the dismissal with prejudice of On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga
Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366 and 18166 and voluntarily were auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12
withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88- million and it was issued a Certificate of Sale covering the real properties subject of
45366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting of the the auction sale. Subsequently, another auction sale was held on February 8, 1995,
aforesaid various notices of lis pendens on the real properties for the sale of real properties of petitioner in Bacolod City. Again, Riverland, Inc. was
aforementioned (by signing herein attached corresponding documents, for the highest bidder. The Certificates of Sale issued for both properties provided for the
such lifting); provided, however, that in the event that defendant right of redemption within one year from the date of registration of the said
Foundation shall sell or dispose of any of the lands previously subject of lis properties.
pendens, the proceeds of any such sale, or any part thereof as may be
required, shall be partially devoted to the payment of the Foundation's On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief
obligations under this agreement as may still be subsisting and payable at and Damages7 alleging that there was delay on the part of petitioner in paying the
the time of any such sale or sales; balance of P13 million. They further alleged that under the Compromise Agreement,
the obligation became due on October 26, 1992, but payment of the remaining P12
... million was effected only on November 22, 1994. Thus, respondents prayed that
30

petitioner be ordered to pay legal interest on the obligation, penalty, attorney's fees
and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING
final and not subject to legal redemption. PAYMENT OF INTEREST BY REASON OF THE WAIVER PROVISION IN THE
COMPROMISE AGREEMENT, WHICH BECAME THE LAW AMONG THE
In its Answer,8 petitioner countered that respondents have no cause of action against PARTIES10
it since it had fully paid its obligation to the latter. It further claimed that the alleged
delay in the payment of the balance was due to its valid exercise of its rights to The only issue to be resolved is whether the respondents are entitled to legal
protect its interests as provided under the Rules. Petitioner counterclaimed for interest.
attorney's fees and exemplary damages.
Petitioner SVHFI alleges that where a compromise agreement or compromise
On October 4, 1996, the trial court rendered a Decision 9 dismissing herein judgment does not provide for the payment of interest, the legal interest by way of
respondents' complaint and ordering them to pay attorney's fees and exemplary penalty on account of fault or delay shall not be due and payable, considering that
damages to petitioner. Respondents then appealed to the Court of Appeals. The the obligation or loan, on which the payment of legal interest could be based, has
appellate court reversed the ruling of the trial court: been superseded by the compromise agreement.11 Furthermore, the petitioner
argues that the respondents are barred by res judicata from seeking legal interest on
WHEREFORE, finding merit in the appeal, the appealed Decision is hereby account of the waiver clause in the duly approved compromise agreement.12 Article 4
REVERSED and judgment is hereby rendered ordering appellee SVHFI to pay of the compromise agreement provides:
appellants Santos and Riverland, Inc.: (1) legal interest on the principal
amount of P13 million at the rate of 12% per annum from the date of Plaintiff Santos waives and renounces any and all other claims that he and
demand on October 28, 1992 up to the date of actual payment of the whole his family may have on the defendant Foundation arising from and in
obligation; and (2) P20,000 as attorney's fees and costs of suit. connection with the aforesaid civil cases, and defendant Foundation, on the
other hand, also waives and renounces any and all claims that it may have
SO ORDERED. against plaintiff Santos in connection with such cases. 13 [Emphasis supplied.]

Hence this petition for review on certiorari where petitioner assigns the following Lastly, petitioner alleges that since the compromise agreement did not provide for a
issues: period within which the obligation will become due and demandable, it is incumbent
upon respondent Santos to ask for judicial intervention for purposes of fixing the
WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR period. It is only when a fixed period exists that the legal interests can be computed.
WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR.
SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT Respondents profer that their right to damages is based on delay in the payment of
NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE the obligation provided in the Compromise Agreement. The Compromise Agreement
JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF provides that payment must be made within the two-year period from its execution.
INTEREST TO THE RESPONDENT This was approved by the trial court and became the law governing their contract.
II Respondents posit that petitioner's failure to comply entitles them to damages, by
WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL way of interest.14
IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND,
INC., NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE The petition lacks merit.
PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN
CONVERTED TO AN OBLIGATION TO PAY IN KIND – DELIVERY OF REAL A compromise is a contract whereby the parties, by making reciprocal concessions,
PROPERTIES OWNED BY THE PETITIONER – WHICH HAD BEEN FULLY avoid a litigation or put an end to one already commenced. 15 It is an agreement
PERFORMED between two or more persons, who, for preventing or putting an end to a lawsuit,
III adjust their difficulties by mutual consent in the manner which they agree on, and
31
which everyone of them prefers in the hope of gaining, balanced by the danger of Article 1169 of the New Civil Code provides:
losing.16
Those obliged to deliver or to do something incur in delay from the time the
The general rule is that a compromise has upon the parties the effect and authority of obligee judicially or extrajudicially demands from them the fulfillment of
res judicata, with respect to the matter definitely stated therein, or which by their obligation. [Emphasis supplied]
implication from its terms should be deemed to have been included therein. 17 This
holds true even if the agreement has not been judicially approved. 18 Delay as used in this article is synonymous to default or mora which means delay in
the fulfillment of obligations. It is the non-fulfillment of the obligation with respect to
In the case at bar, the Compromise Agreement was entered into by the parties on time.23
October 26, 1990.19 It was judicially approved on September 30, 1991. 20 Applying
existing jurisprudence, the compromise agreement as a consensual contract became In order for the debtor to be in default, it is necessary that the following requisites be
binding between the parties upon its execution and not upon its court approval. From present: (1) that the obligation be demandable and already liquidated; (2) that the
the time a compromise is validly entered into, it becomes the source of the rights and debtor delays performance; and (3) that the creditor requires the performance
obligations of the parties thereto. The purpose of the compromise is precisely to judicially or extrajudicially.24
replace and terminate controverted claims.21
In the case at bar, the obligation was already due and demandable after the lapse of
In accordance with the compromise agreement, the respondents asked for the the two-year period from the execution of the contract. The two-year period ended
dismissal of the pending civil cases. The petitioner, on the other hand, paid the initial on October 26, 1992. When the respondents gave a demand letter on October 28,
P1.5 million upon the execution of the agreement. This act of the petitioner showed 1992, to the petitioner, the obligation was already due and demandable.
that it acknowledges that the agreement was immediately executory and enforceable Furthermore, the obligation is liquidated because the debtor knows precisely how
upon its execution. much he is to pay and when he is to pay it.

As to the remaining P13 million, the terms and conditions of the compromise The second requisite is also present. Petitioner delayed in the performance. It was
agreement are clear and unambiguous. It provides: able to fully settle its outstanding balance only on February 8, 1995, which is more
than two years after the extra-judicial demand. Moreover, it filed several motions
... and elevated adverse resolutions to the appellate court to hinder the execution of a
final and executory judgment, and further delay the fulfillment of its obligation.
b. The balance of P13 Million shall be paid, whether in one lump sum or in
installments, at the discretion of the Foundation, within a period of not more Third, the demand letter sent to the petitioner on October 28, 1992, was in
than two (2) years from the execution of this agreement… 22[Emphasis accordance with an extra-judicial demand contemplated by law.
supplied.]
Verily, the petitioner is liable for damages for the delay in the performance of its
... obligation. This is provided for in Article 117025 of the New Civil Code.

The two-year period must be counted from October 26, 1990, the date of execution When the debtor knows the amount and period when he is to pay, interest as
of the compromise agreement, and not on the judicial approval of the compromise damages is generally allowed as a matter of right. 26 The complaining party has been
agreement on September 30, 1991. When respondents wrote a demand letter to deprived of funds to which he is entitled by virtue of their compromise agreement.
petitioner on October 28, 1992, the obligation was already due and demandable. The goal of compensation requires that the complainant be compensated for the loss
When the petitioner failed to pay its due obligation after the demand was made, it of use of those funds. This compensation is in the form of interest. 27 In the absence of
incurred delay. agreement, the legal rate of interest shall prevail. 28 The legal interest for loan as
forbearance of money is 12% per annum29 to be computed from default, i.e., from
32
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of then demanded petitioner to remove the boxes from the factory and to pay the
the Civil Code.30 balance of US$15,400.00 for the additional boxes and ₱132,000.00 as storage fee.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, On August 17, 2001, petitioner filed a Complaint for sum of money and damages
2002 of the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. against respondent. The Complaint averred that the parties agreed that the boxes will
55122 are AFFIRMED. Costs against petitioner. be delivered within 30 days from payment but respondent failed to manufacture and
deliver the boxes within such time. It further alleged
SO ORDERED.
6. That repeated follow-up was made by the plaintiff for the immediate production of
Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur. the ordered boxes, but every time, defendant [would] only show samples of boxes
Azcuna, J., on leave. and ma[k]e repeated promises to deliver the said ordered boxes.

7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff
SOLAR HARVEST, INC., Petitioner, vs.
ha[d] to cancel the same and demand payment and/or refund from the defendant
DAVAO CORRUGATED CARTON CORPORATION, Respondent.
but the latter refused to pay and/or refund the US$40,150.00 payment made by the
G.R. No. 176868 July 26, 2010
former for the ordered boxes.41avvphi1
NACHURA, J.:
In its Answer with Counterclaim,5 respondent insisted that, as early as April 3, 1998, it
had already completed production of the 36,500 boxes, contrary to petitioner’s
Petitioner seeks a review of the Court of Appeals (CA) Decision 1 dated September 21,
allegation. According to respondent, petitioner, in fact, made an additional order of
2006 and Resolution2 dated February 23, 2007, which denied petitioner’s motion for
24,000 boxes, out of which, 14,000 had been completed without waiting for
reconsideration. The assailed Decision denied petitioner’s claim for reimbursement
petitioner’s payment. Respondent stated that petitioner was to pick up the boxes at
for the amount it paid to respondent for the manufacture of corrugated carton boxes.
the factory as agreed upon, but petitioner failed to do so. Respondent averred that,
on October 8, 1998, petitioner’s representative, Bobby Que (Que), went to the
The case arose from the following antecedents: factory and saw that the boxes were ready for pick up. On February 20, 1999, Que
visited the factory again and supposedly advised respondent to sell the boxes as
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement rejects to recoup the cost of the unpaid 14,000 boxes, because petitioner’s
with respondent, Davao Corrugated Carton Corporation, for the purchase of transaction to ship bananas to China did not materialize. Respondent claimed that
corrugated carton boxes, specifically designed for petitioner’s business of exporting the boxes were occupying warehouse space and that petitioner should be made to
fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To get pay storage fee at ₱60.00 per square meter for every month from April 1998. As
the production underway, petitioner deposited, on March 31, 1998, US$40,150.00 in counterclaim, respondent prayed that judgment be rendered ordering petitioner to
respondent’s US Dollar Savings Account with Westmont Bank, as full payment for the pay $15,400.00, plus interest, moral and exemplary damages, attorney’s fees, and
ordered boxes. costs of the suit.

Despite such payment, petitioner did not receive any boxes from respondent. On In reply, petitioner denied that it made a second order of 24,000 boxes and that
January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount respondent already completed the initial order of 36,500 boxes and 14,000 boxes out
paid.3 On February 19, 2001, respondent replied that the boxes had been completed of the second order. It maintained that
as early as April 3, 1998 and that petitioner failed to pick them up from the former’s
warehouse 30 days from completion, as agreed upon. Respondent mentioned that respondent only manufactured a sample of the ordered boxes and that respondent
petitioner even placed an additional order of 24,000 boxes, out of which, 14,000 had could not have produced 14,000 boxes without the required pre-payments.6
been manufactured without any advanced payment from petitioner. Respondent
33
During trial, petitioner presented Que as its sole witness. Que testified that he ordered DISMISSED without pronouncement as to cost. Defendant’s counterclaims
ordered the boxes from respondent and deposited the money in respondent’s are similarly dismissed for lack of merit.
account.7 He specifically stated that, when he visited respondent’s factory, he saw
that the boxes had no print of petitioner’s logo. 8 A few months later, he followed-up SO ORDERED.14
the order and was told that the company had full production, and thus, was promised
that production of the order would be rushed. He told respondent that it should Petitioner filed a notice of appeal with the CA.
indeed rush production because the need for the boxes was urgent. Thereafter, he
asked his partner, Alfred Ong, to cancel the order because it was already late for
On September 21, 2006, the CA denied the appeal for lack of merit. 15 The appellate
them to meet their commitment to ship the bananas to China. 9 On cross-
court held that petitioner failed to discharge its burden of proving what it claimed to
examination, Que further testified that China Zero Food, the Chinese company that
be the parties’ agreement with respect to the delivery of the boxes. According to the
ordered the bananas, was sending a ship to Davao to get the bananas, but since there
CA, it was unthinkable that, over a period of more than two years, petitioner did not
were no cartons, the ship could not proceed. He said that, at that time, bananas from
even demand for the delivery of the boxes. The CA added that even assuming that
Tagum Agricultural Development Corporation (TADECO) were already there. He
the agreement was for respondent to deliver the boxes, respondent would not be
denied that petitioner made an additional order of 24,000 boxes. He explained that it
liable for breach of contract as petitioner had not yet demanded from it the delivery
took three years to refer the matter to counsel because respondent promised to
of the boxes.16
pay.10
Petitioner moved for reconsideration,17 but the motion was denied by the CA in its
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in Davao
Resolution of February 23, 2007.18
in October 1998 to inspect the boxes and that the latter got samples of them. In
February 2000, they inspected the boxes again and Que got more samples. Estanislao
In this petition, petitioner insists that respondent did not completely manufacture the
said that petitioner did not pick up the boxes because the ship did not arrive. 11 Jaime
boxes and that it was respondent which was obliged to deliver the boxes to TADECO.
Tan (Tan), president of respondent, also testified that his company finished
production of the 36,500 boxes on April 3, 1998 and that petitioner made a second
order of 24,000 boxes. He said that the agreement was for respondent to produce We find no reversible error in the assailed Decision that would justify the grant of this
the boxes and for petitioner to pick them up from the warehouse. 12 He also said that petition.
the reason why petitioner did not pick up the boxes was that the ship that was to
carry the bananas did not arrive.13 According to him, during the last visit of Que and Petitioner’s claim for reimbursement is actually one for rescission (or resolution) of
Estanislao, he asked them to withdraw the boxes immediately because they were contract under Article 1191 of the Civil Code, which reads:
occupying a big space in his plant, but they, instead, told him to sell the cartons as
rejects. He was able to sell 5,000 boxes at ₱20.00 each for a total of ₱100,000.00. Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
They then told him to apply the said amount to the unpaid balance. of the obligors should not comply with what is incumbent upon him.

In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did The injured party may choose between the fulfillment and the rescission of the
not commit any breach of faith that would justify rescission of the contract and the obligation, with the payment of damages in either case. He may also seek rescission,
consequent reimbursement of the amount paid by petitioner. The RTC said that even after he has chosen fulfillment, if the latter should become impossible.
respondent was able to produce the ordered boxes but petitioner failed to obtain
possession thereof because its ship did not arrive. It thus dismissed the complaint and The court shall decree the rescission claimed, unless there be just cause authorizing
respondent’s counterclaims, disposing as follows: the fixing of a period.

WHEREFORE, premises considered, judgment is hereby rendered in favor of This is understood to be without prejudice to the rights of third persons who have
defendant and against the plaintiff and, accordingly, plaintiff’s complaint is hereby acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
34
The right to rescind a contract arises once the other party defaults in the was sent to respondent. Without a previous demand for the fulfillment of the
performance of his obligation. In determining when default occurs, Art. 1191 should obligation, petitioner would not have a cause of action for rescission against
be taken in conjunction with Art. 1169 of the same law, which provides: respondent as the latter would not yet be considered in breach of its contractual
obligation.
Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their Even assuming that a demand had been previously made before filing the present
obligation. case, petitioner’s claim for reimbursement would still fail, as the circumstances would
show that respondent was not guilty of breach of contract.
However, the demand by the creditor shall not be necessary in order that delay may
exist: The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.20 The Court, in petitions for review, limits its
(1) When the obligation or the law expressly so declares; or inquiry only to questions of law. After all, it is not a trier of facts, and findings of fact
(2) When from the nature and the circumstances of the obligation it appears made by the trial court, especially when reiterated by the CA, must be given great
that the designation of the time when the thing is to be delivered or the respect if not considered as final.21 In dealing with this petition, we will not veer away
service is to be rendered was a controlling motive for the establishment of from this doctrine and will thus sustain the factual findings of the CA, which we find
the contract; or to be adequately supported by the evidence on record.
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform. As correctly observed by the CA, aside from the pictures of the finished boxes and the
production report thereof, there is ample showing that the boxes had already been
In reciprocal obligations, neither party incurs in delay if the other does not comply or manufactured by respondent. There is the testimony of Estanislao who accompanied
is not ready to comply in a proper manner with what is incumbent upon him. From Que to the factory, attesting that, during their first visit to the company, they saw the
the moment one of the parties fulfills his obligation, delay by the other begins. pile of petitioner’s boxes and Que took samples thereof. Que, petitioner’s witness,
himself confirmed this incident. He testified that Tan pointed the boxes to him and
In reciprocal obligations, as in a contract of sale, the general rule is that the that he got a sample and saw that it was blank. Que’s absolute assertion that the
fulfillment of the parties’ respective obligations should be simultaneous. Hence, no boxes were not manufactured is, therefore, implausible and suspicious.
demand is generally necessary because, once a party fulfills his obligation and the
other party does not fulfill his, the latter automatically incurs in delay. But when In fact, we note that respondent’s counsel manifested in court, during trial, that his
different dates for performance of the obligations are fixed, the default for each client was willing to shoulder expenses for a representative of the court to visit the
obligation must be determined by the rules given in the first paragraph of the present plant and see the boxes.22 Had it been true that the boxes were not yet completed,
article,19 that is, the other party would incur in delay only from the moment the other respondent would not have been so bold as to challenge the court to conduct an
party demands fulfillment of the former’s obligation. Thus, even in reciprocal ocular inspection of their warehouse. Even in its Comment to this petition,
obligations, if the period for the fulfillment of the obligation is fixed, demand upon respondent prays that petitioner be ordered to remove the boxes from its factory
the obligee is still necessary before the obligor can be considered in default and site,23 which could only mean that the boxes are, up to the present, still in
before a cause of action for rescission will accrue. respondent’s premises.

Evident from the records and even from the allegations in the complaint was the lack We also believe that the agreement between the parties was for petitioner to pick up
of demand by petitioner upon respondent to fulfill its obligation to manufacture and the boxes from respondent’s warehouse, contrary to petitioner’s allegation. Thus, it
deliver the boxes. The Complaint only alleged that petitioner made a "follow-up" was due to petitioner’s fault that the boxes were not delivered to TADECO.
upon respondent, which, however, would not qualify as a demand for the fulfillment
of the obligation. Petitioner’s witness also testified that they made a follow-up of the Petitioner had the burden to prove that the agreement was, in fact, for respondent to
boxes, but not a demand. Note is taken of the fact that, with respect to their claim for deliver the boxes within 30 days from payment, as alleged in the Complaint. Its sole
35

reimbursement, the Complaint alleged and the witness testified that a demand letter witness, Que, was not even competent to testify on the terms of the agreement and,
therefore, we cannot give much credence to his testimony. It appeared from the its contractual obligation. As previously stated, the subject boxes are still within
testimony of Que that he did not personally place the order with Tan, thus: respondent’s premises. To put a rest to this dispute, we therefore relieve respondent
from the burden of having to keep the boxes within its premises and, consequently,
Q. No, my question is, you went to Davao City and placed your order there? give it the right to dispose of them, after petitioner is given a period of time within
A. I made a phone call. which to remove them from the premises.
Q. You made a phone call to Mr. Tan?
A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals
with Mr. Tan. Decision dated September 21, 2006 and Resolution dated February 23, 2007 are
Q. So, your first statement that you were the one who placed the order is AFFIRMED. In addition, petitioner is given a period of 30 days from notice within
not true? which to cause the removal of the 36,500
A. That’s true. The Solar Harvest made a contact with Mr. Tan and I
deposited the money in the bank. boxes from respondent’s warehouse. After the lapse of said period and petitioner
Q. You said a while ago [t]hat you were the one who called Mr. Tan and fails to effect such removal, respondent shall have the right to dispose of the boxes in
placed the order for 36,500 boxes, isn’t it? any manner it may deem fit.
A. First time it was Mr. Alfred Ong.
Q. It was Mr. Ong who placed the order[,] not you? SO ORDERED.
A. Yes, sir.24
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido
ANTONIO EDUARDO B. NACHURA
Estanislao?
Associate Justice
A. Yes, sir.25
Moreover, assuming that respondent was obliged to deliver the boxes, it
could not have complied with such obligation. Que, insisting that the boxes SOCIAL SECURITY SYSTEM, petitioner, vs. MOONWALK DEVELOPMENT & HOUSING
had not been manufactured, admitted that he did not give respondent the CORPORATION, et al
authority to deliver the boxes to TADECO: G.R. No. 73345. April 7, 1993.
Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the The Solicitor General for petitioner.
carton, the quantity and quality. But I have not seen a single carton. K.V. Faylona & Associates for private respondents.
Q. Are you trying to impress upon the [c]ourt that it is only after the boxes
are completed, will you give authority to Mr. Tan to deliver the boxes to CAMPOS, JR., J p:
TADECO[?] Before Us is a petition for review on certiorari of decision 1 of the then Intermediate
A. Sir, because when I checked the plant, I have not seen any carton. I asked Appellate Court affirming in toto the decision of the former Court of First Instance of
Mr. Tan to rush the carton but not…26 Rizal, Seventh Judicial District, Branch XXIX, Pasay City.
Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO?
A. Because I have not seen any of my carton. The facts as found by the Appellate Court are as follows:
Q. You don’t have any authority yet given to Mr. Tan?
A. None, your Honor.27 "On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in
the Court of First Instance of Rizal against Moonwalk Development & Housing
Surely, without such authority, TADECO would not have allowed respondent to Corporation, Moonwalk for short, alleging that the former had committed an error in
deposit the boxes within its premises. failing to compute the 12% interest due on delayed payments on the loan of
Moonwalk — resulting in a chain of errors in the application of payments made by
In sum, the Court finds that petitioner failed to establish a cause of action for Moonwalk and, in an unpaid balance on the principal loan agreement in the amount
rescission, the evidence having shown that respondent did not commit any breach of of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance
36
on the said penalties for delayed payments in the amount of P7,517,178.21 as of "9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had
October 10, 1979. completely paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A'
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to 'O' inclusive, of the Complaint and the letter dated December 21, 1979 of the
to ascertain the truth but failed to do so. defendant's counsel to the plaintiff are admitted.

The trial court set the case for pre-trial at which pre-trial conference, the court issued "Manila for Pasay City, September 2, 1980." 2
an order giving both parties thirty (30) days within which to submit a stipulation of
facts. On October 6, 1990, the trial court issued an order dismissing the complaint on the
ground that the obligation was already extinguished by the payment by Moonwalk of
The Order of October 6, 1980 dismissing the complaint followed the submission by its indebtedness to SSS and by the latter's act of cancelling the real estate mortgages
the parties on September 19, 1980 of the following stipulation of Facts: executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed
by SSS with the trial court was likewise dismissed by the latter.
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for
an interim loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the These orders were appealed to the Intermediate Appellate Court. Respondent Court
purpose of developing and constructing a housing project in the provinces of Rizal reduced the errors assigned by the SSS into this issue: ". . . are defendants-appellees,
and Cavite; namely, Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of U. Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by plaintiff-
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973; appellant or is their obligation extinguished?" 3 As We have stated earlier, the
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 respondent Court held that Moonwalk's obligation was extinguished and affirmed the
Annex `D' providing for restructuring of the payment of the released amount of trial court.
P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter Hence, this Petition wherein SSS raises the following grounds for review:
respectively, under paragraph 5 of the aforesaid Third Amended Deed of First
Mortgage substituted Associated Construction and Surveys Corporation, Philippine "First, in concluding that the penalties due from Moonwalk are "deemed waived
Model Homes Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, and/or barred," the appellate court disregarded the basic tenet that waiver of a right
as solidary obligors; must be express, made in a clear and unequivocal manner. There is no evidence in
"5. On July 23, 1974, after considering additional releases in the amount of the case at bar to show that SSS made a clear, positive waiver of the penalties, made
P2,659,700.00, made to defendant Moonwalk, defendant Moonwalk delivered to the with full knowledge of the circumstances.
plaintiff a promissory note for TWELVE MILLION TWO HUNDRED FIFTY FOUR
THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by Eusebio T. Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a
Ramos, and the said Rosita U. Alberto and Rosita U. Alberto; mere trustee, cannot perform acts affecting the same, including condonation of
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal penalties, that would diminish property rights of the owners and beneficiaries
of P12,254,700.00 released to it. The last payment made by Moonwalk in the amount thereof. (United Christian Missionary Society v. Social Security Commission, 30 SCRA
of P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by 982, 988 [1969]).
plaintiff SSS for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite
and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979 respectively.
Fourth, it ignored the principle that equity will cancel a release on the ground of
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by
mistake of fact." 4
another letter dated December 17, 1979, plaintiff alleged that it committed an honest
37

mistake in releasing defendant.


The same problem which confronted the respondent court is presented before Us: Is of the letter of plaintiff-appellant there was no demand for the payment of the
the penalty demandable even after the extinguishment of the principal obligation? penalty, hence the debtor was no in mora in the payment of the penalty.

The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in However, on October 1, 1979, plaintiff-appellant issued its statement of account
the negative. It reasoned, thus: (Exhibit F) showing the total obligation of Moonwalk as P15,004,905.74, and
forthwith demanded payment from defendant-appellee. Because of the demand for
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states payment, Moonwalk made several payments on September 29, October 9 and 19,
in its Brief, what is sought to be recovered in this case is not the 12% interest on the 1979 respectively, all in all totalling P15,004,905.74 which was a complete payment
loan but the 12% penalty for failure to pay on time the amortization. What is sought of its obligation as stated in Exhibit F. Because of this payment the obligation of
to be enforced therefore is the penal clause of the contract entered into between the Moonwalk was considered extinguished, and pursuant to said extinguishment, the
parties. real estate mortgages given by Moonwalk were released on October 9, 1979 and
October 10, 1979 (Exhibits G and H). For all purposes therefore the principal
Now, what is a penal clause. A penal clause has been defined as obligation of defendant-appellee was deemed extinguished as well as the accessory
obligation of real estate mortgage; and that is the reason for the release of all the
Real Estate Mortgages on October 9 and 10, 1979 respectively.
"an accessory obligation which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing on the debtor a special
presentation (generally consisting in the payment of a sum of money) in case the Now, besides the Real Estate Mortgages, the penal clause which is also an accessory
obligation is not fulfilled or is irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. obligation must also be deemed extinguished considering that the principal obligation
118). was considered extinguished, and the penal clause being an accessory obligation.
That being the case, the demand for payment of the penal clause made by plaintiff-
appellant in its demand letter dated November 28, 1979 and its follow up letter dated
Now an accessory obligation has been defined as that attached to a principal
December 17, 1979 (which parenthetically are the only demands for payment of the
obligation in order to complete the same or take its place in the case of breach (4
penalties) are therefore ineffective as there was nothing to demand. It would be
Puig Peña Part 1 p. 76). Note therefore that an accessory obligation is dependent for
otherwise, if the demand for the payment of the penalty was made prior to the
its existence on the existence of a principal obligation. A principal obligation may exist
extinguishment of the obligation because then the obligation of Moonwalk would
without an accessory obligation but an accessory obligation cannot exist without a
consist of: 1) the principal obligation 2) the interest of 12% on the principal obligation
principal obligation. For example, the contract of mortgage is an accessory obligation
and 3) the penalty of 12% for late payment for after demand, Moonwalk would be in
to enforce the performance of the main obligation of indebtedness. An indebtedness
mora and therefore liable for the penalty.
can exist without the mortgage but a mortgage cannot exist without the
indebtedness, which is the principal obligation. In the present case, the principal
obligation is the loan between the parties. The accessory obligation of a penal clause Let it be emphasized that at the time of the demand made in the letters of November
is to enforce the main obligation of payment of the loan. If therefore the principal 28, 1979 and December 17, 1979 as far as the penalty is concerned, the defendant-
obligation does not exist the penalty being accessory cannot exist. appellee was not in default since there was no mora prior to the demand. That being
the case, therefore, the demand made after the extinguishment of the principal
obligation which carried with it the extinguishment of the penal clause being merely
Now then when is the penalty demandable? A penalty is demandable in case of non
an accessory obligation, was an exercise in futility.
performance or late performance of the main obligation. In other words in order that
the penalty may arise there must be a breach of the obligation either by total or
partial non fulfillment or there is non fulfillment in point of time which is called mora 3. At the time of the payment made of the full obligation on October 10, 1979
or delay. The debtor therefore violates the obligation in point of time if there is mora together with the 12% interest by defendant-appellee Moonwalk, its obligation was
or delay. Now, there is no mora or delay unless there is a demand. It is noteworthy extinguished. It being extinguished, there was no more need for the penal clause.
that in the present case during all the period when the principal obligation was still Now, it is to be noted that penalty at anytime can be modified by the Court. Even
subsisting, although there were late amortizations there was no demand made by the substantial performance under Art. 1234 authorizes the Court to consider it as
38

creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time
complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines The penalty may be enforced only when it is demandable in accordance with the
provides: provisions of this Code." (Emphasis Ours.)

"ART. 1229. The judge shall equitably reduce the penalty when the principal A penal clause is an accessory undertaking to assume greater liability in case of
obligation has been partly or irregularly complied with by the debtor. Even if there breach. 6 It has a double function: (1) to provide for liquidated damages, and (2) to
has been no performance, the penalty may also be reduced by the courts if it is strengthen the coercive force of the obligation by the threat of greater responsibility
iniquitous or unconscionable." in the event of breach. 7 From the foregoing, it is clear that a penal clause is intended
to prevent the obligor from defaulting in the performance of his obligation. Thus, if
If the penalty can be reduced after the principal obligation has been partly or there should be default, the penalty may be enforced. One commentator of the Civil
irregularly complied with by the debtor, which is nonetheless a breach of the Code wrote:
obligation, with more reason the penal clause is not demandable when full obligation
has been complied with since in that case there is no breach of the obligation. In the "Now when is the penalty deemed demandable in accordance with the provisions of
present case, there has been as yet no demand for payment of the penalty at the the Civil Code? We must make a distinction between a positive and a negative
time of the extinguishment of the obligation, hence there was likewise an obligation. With regard to obligations which are positive (to give and to do), the
extinguishment of the penalty. penalty is demandable when the debtor is in mora; hence, the necessity of demand
by the debtor unless the same is excused . . ." 8
Let Us emphasize that the obligation of defendant-appellee was fully complied with
by the debtor, that is, the amount loaned together with the 12% interest has been When does delay arise? Under the Civil Code, delay begins from the time the obligee
fully paid by the appellee. That being so, there is no basis for demanding the penal judicially or extrajudicially demands from the obligor the performance of the
clause since the obligation has been extinguished. Here there has been a waiver of obligation.
the penal clause as it was not demanded before the full obligation was fully paid and
extinguished. Again, emphasis must be made on the fact that plaintiff-appellant has "Art. 1169. Those obliged to deliver or to do something incur in delay from the time
not lost anything under the contract since in got back in full the amount loan (sic) as the obligee judicially or extrajudicially demands from them the fulfillment of their
well as the interest thereof. The same thing would have happened if the obligation obligation."
was paid on time, for then the penal clause, under the terms of the contract would
not apply. Payment of the penalty does not mean gain or loss of plaintiff-appellant There are only three instances when demand is not necessary to render the obligor in
since it is merely for the purpose of enforcing the performance of the main obligation default. These are the following:
has been fully complied with and extinguished, the penal clause has lost its raison d'
entre." 5
"(1) When the obligation or the law expressly so declares;

We find no reason to depart from the appellate court's decision. We, however,
(2) When from the nature and the circumstances of the obligation it appears that the
advance the following reasons for the denial of this petition.
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
Article 1226 of the Civil Code provides:
(3) When the demand would be useless, as when the obligor has rendered it beyond
"Art. 1226. In obligations with a penal clause, he penalty shall substitute the his power to perform." 9
indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
This case does not fall within any of the established exceptions. Hence, despite the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
provision in the promissory note that "(a)ll amortization payments shall be made
obligation.
every first five (5) days of the calendar month until the principal and interest on the
loan or any portion thereof actually released has been fully paid," 10 petitioner is not
39
excused from making a demand. It has been established that at the time of payment We looked into the case and found out that it is not applicable to the present case as
of the full obligation, private respondent Moonwalk has long been delinquent in it dealt not with the right of the SSS to collect penalties which were provided for in
meeting its monthly arrears and in paying the full amount of the loan itself as the contracts which it entered into but with its right to collect premiums and its duty to
obligation matured sometime in January, 1977. But mere delinquency in payment collect the penalty for delayed payment or non-payment of premiums. The Supreme
does not necessarily mean delay in the legal concept. To be in default ". . . is different Court, in that case, stated:
from mere delay in the grammatical sense, because it involves the beginning of a
special condition or status which has its own peculiar effects or results." 11 In order "No discretion or alternative is granted respondent Commission in the enforcement
that the debtor may be in default it is necessary that the following requisites be of the law's mandate that the employer who fails to comply with his legal obligation
present: (1) that the obligation be demandable and already liquidated; (2) that the to remit the premiums to the System within the prescribed period shall pay a penalty
debtor delays performance; and (3) that the creditor requires the performance of three (3%) per month. The prescribed penalty is evidently of a punitive character,
judicially and extrajudicially. 12 Default generally begins from the moment the provided by the legislature to assure that employers do not take lightly the State's
creditor demands the performance of the obligation. 13 exercise of the police power in the implementation of the Republic's declared policy
"to develop, establish gradually and perfect a social security system which shall be
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment suitable to the needs of the people throughout the Philippines and (to) provide
of its monthly amortizations. Neither did it show that petitioner demanded the protection to employers against the hazards of disability, sickness, old age and death .
payment of the stipulated penalty upon the failure of Moonwalk to meet its monthly . ."
amortization. What the complaint itself showed was that SSS tried to enforce the
obligation sometime in September, 1977 by foreclosing the real estate mortgages Thus, We agree with the decision of the respondent court on the matter which We
executed by Moonwalk in favor of SSS. But this foreclosure did not push through quote, to wit:
upon Moonwalk's requests and promises to pay in full. The next demand for payment
happened on October 1, 1979 when SSS issued a Statement of Account to Moonwalk. "Note that the above case refers to the condonation of the penalty for the non
And in accordance with said statement, Moonwalk paid its loan in full. What is clear, remittance of the premium which is provided for by Section 22(a) of the Social
therefore, is that Moonwalk was never in default because SSS never compelled Security Act . . . In other words, what was sought to be condoned was the penalty
performance. Though it tried to foreclose the mortgages, SSS itself desisted from provided for by law for non remittance of premium for coverage under the Social
doing so upon the entreaties of Moonwalk. If the Statement of Account could Security Act.
properly be considered as demand for payment, the demand was complied with on
time. Hence, no delay occurred and there was, therefore, no occasion when the
The case at bar does not refer to any penalty provided for by law nor does it refer to
penalty became demandable and enforceable. Since there was no default in the
the non remittance of premium. The case at bar refers to a contract of loan entered
performance of the main obligation — payment of the loan — SSS was never entitled
into between plaintiff and defendant Moonwalk Development and Housing
to recover any penalty, not at the time it made the Statement of Account and
Corporation. Note, therefore, that no provision of law is involved in this case, nor is
certainly, not after the extinguishment of the principal obligation because then, all
there any penalty imposed by law nor a case about non-remittance of premium
the more that SSS had no reason to ask for the penalties. Thus, there could never be
required by law. The present case refers to a contract of loan payable in installments
any occasion for waiver or even mistake in the application for payment because there
not provided for by law but by agreement of the parties. Therefore, the ratio
was nothing for SSS to waive as its right to enforce the penalty did not arise.
decidendi of the case of United Christian Missionary Society vs. Social Security
Commission which plaintiff-appellant relies is not applicable in this case; clearly, the
SSS, however, in buttressing its claim that it never waived the penalties, argued that Social Security Commission, which is a creature of the Social Security Act cannot
the funds it held were trust funds and as trustee, the petitioner could not perform condone a mandatory provision of law providing for the payment of premiums and
acts affecting the funds that would diminish property rights of the owners and for penalties for non remittance. The life of the Social Security Act is in the premiums
beneficiaries thereof. To support its claim, SSS cited the case of United Christian because these are the funds from which the Social Security Act gets the money for its
Missionary Society v. Social Security Commission. 14 purposes and the non-remittance of the premiums is penalized not by the Social
Security Commission but by law.
40
xxx xxx xxx alternatively, they would pay the cost of Gruspe’s car amounting to ₱350,000.00,
with interest at
It is admitted that when a government created corporation enters into a contract
with private party concerning a loan, it descends to the level of a private person. 12% per month for any delayed payment after November 15, 1999, until fully
Hence, the rules on contract applicable to private parties are applicable to it. The paid.5 When Cruz and Leonardo failed to comply with their undertaking, Gruspe filed
argument therefore that the Social Security Commission cannot waive or condone a complaint for collection of sum of money against them on November 19, 1999
the penalties which was applied in the United Christian Missionary Society cannot before the RTC.
apply in this case. First, because what was not paid were installments on a loan but
premiums required by law to be paid by the parties covered by the Social Security In their answer, Cruz and Leonardo denied Gruspe’s allegation, claiming that Gruspe,
Act. Secondly, what is sought to be condoned or waived are penalties not imposed by a lawyer, prepared the Joint Affidavit of Undertaking and forced them to affix their
law for failure to remit premiums required by law, but a penalty for non payment signatures thereon, without explaining and informing them of its contents; Cruz
provided for by the agreement of the parties in the contract between them . . ." 15 affixed his signature so that his mini bus could be released as it was his only means of
income; Leonardo, a barangay official, accompanied Cruz to Gruspe’s office for the
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of release of the mini bus, but was also deceived into signing the Joint Affidavit of
the respondent court is AFFIRMED. LLpr Undertaking.

SO ORDERED Leonardo died during the pendency of the case and was substituted by his widow,
Esperanza. Meanwhile, Gruspe sold the wrecked car for ₱130,000.00.
RODOLFO G. CRUZ and ESPERANZA IBIAS, Petitioners, vs. ATTY. DELFIN
GRUSPE, Respondent. In a decision dated September 27, 2004, the RTC ruled in favor of Gruspe and ordered
G.R. No. 191431 March 13, 2013 Cruz and Leonardo to pay ₱220,000.00,6 plus 15% per annum from November 15,
1999 until fully paid, and the cost of suit.
BRION, J.:
On appeal, the CA affirmed the RTC decision, but reduced the interest rate to 12% per
annum pursuant to the Joint Affidavit of Undertaking. 7 It declared that despite its
Before the Court is the petition for review on certiorari 1 filed under Rule 45 of the
title, the Joint Affidavit of Undertaking is a contract, as it has all the essential
Rules of Court, assailing the decision2 dated July 30, 2009 and the resolution 3 dated
elements of consent, object certain, and consideration required under Article 1318 of
February 19, 2010 of the Court of Appeals (CA) in CA-G.R. CV No. 86083. The CA
the Civil
rulings affirmed with modification the decision dated September 27, 2004 of the
Regional Trial Court (RTC) of Bacoor, Cavite, Branch 19, in Civil Case No. BCV-99-146
which granted respondent Atty. Delfin Grupe’s claim for payment of sum of money Code. The CA further said that Cruz and Leonardo failed to present evidence to
against petitioners Rodolfo G. Cruz and Esperanza Ibias.4 support their contention of vitiated consent. By signing the Joint Affidavit of
Undertaking, they voluntarily assumed the obligation for the damage they caused to
THE FACTUAL BACKGROUND Gruspe’s car; Leonardo, who was not a party to the incident, could have refused to
sign the affidavit, but he did not.
The claim arose from an accident that occurred on October 24, 1999, when the mini
THE PETITION
bus owned and operated by Cruz and driven by one Arturo Davin collided with the
Toyota Corolla car of Gruspe; Gruspe’s car was a total wreck. The next day, on
October 25, 1999, Cruz, along with Leonardo Q. Ibias went to Gruspe’s office, In their appeal by certiorari with the Court, Cruz and Esperanza assail the CA ruling,
apologized for the incident, and executed a Joint Affidavit of Undertaking promising contending that the Joint Affidavit of Undertaking is not a contract that can be the
jointly and severally to replace the Gruspe’s damaged car in 20 days, or until basis of an obligation to pay a sum of money in favor of Gruspe. They consider an
November 15, 1999, of the same model and of at least the same quality; or, affidavit as different from a contract: an affidavit’s purpose is simply to attest to facts
41
that are within his knowledge, while a contract requires that there be a meeting of There is also no merit to the argument of vitiated consent.1âwphi1 An allegation of
the minds between the two contracting parties. vitiated consent must be proven by preponderance of evidence; Cruz and Leonardo
failed to support their allegation.
Even if the Joint Affidavit of Undertaking was considered as a contract, Cruz and
Esperanza claim that it is invalid because Cruz and Leonardo’s consent thereto was Although the undertaking in the affidavit appears to be onerous and lopsided, this
vitiated; the contract was prepared by Gruspe who is a lawyer, and its contents were does not necessarily prove the alleged vitiation of consent. They, in fact, admitted the
never explained to them. Moreover, Cruz and Leonardo were simply forced to affix genuineness and due execution of the Joint Affidavit and Undertaking when they said
their signatures, otherwise, the mini van would not be released. that they signed the same to secure possession of their vehicle. If they truly believed
that the vehicle had been illegally impounded, they could have refused to sign the
Also, they claim that prior to the filing of the complaint for sum of money, Gruspe did Joint Affidavit of Undertaking and filed a complaint, but they did not. That the release
not make any demand upon them. Hence, pursuant to Article 1169 of the Civil Code, of their mini bus was conditioned on their signing the Joint Affidavit of Undertaking
they could not be considered in default. Without this demand, Cruz and Esperanza does not, by itself, indicate that their consent was forced – they may have given it
contend that Gruspe could not yet take any action. grudgingly, but it is not indicative of a vitiated consent that is a ground for the
annulment of a contract.
THE COURT’S RULING
Thus, on the issue of the validity and enforceability of the Joint Affidavit of
The Court finds the petition partly meritorious and accordingly modifies the judgment Undertaking, the CA did not commit any legal error that merits the reversal of the
of the CA. assailed decision.

Contracts are obligatory no matter what their forms may be, whenever the essential Nevertheless, the CA glossed over the issue of demand which is material in the
requisites for their validity are present. In determining whether a document is an computation of interest on the amount due. The RTC ordered Cruz and Leonardo to
affidavit or a contract, the Court looks beyond the title of the document, since the pay Gruspe "₱350,000.00 as cost of the car xxx plus fifteen percent (15%) per annum
denomination or title given by the parties in their document is not conclusive of the from November 15, 1999 until fully paid."11 The 15% interest (later modified by the
nature of its contents.8 In the construction or interpretation of an instrument, the CA to be 12%) was computed from November 15, 1999 – the date stipulated in the
intention of the parties is primordial and is to be pursued. If the terms of the Joint Affidavit of Undertaking for the payment of the value of Gruspe’s car. In the
document are clear and leave no doubt on the intention of the contracting parties, absence of a finding by the lower courts that Gruspe made a demand prior to the
the literal meaning of its stipulations shall control. If the words appear to be contrary filing of the complaint, the interest cannot be computed from November 15, 1999
to the parties’ evident intention, the latter shall prevail over the former. 9 because until a demand has been made, Cruz and Leonardo could not be said to be in
default.12 "In order that the debtor may be in default, it is necessary that the
following requisites be present: (1) that the obligation be demandable and already
A simple reading of the terms of the Joint Affidavit of Undertaking readily discloses
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires
that it contains stipulations characteristic of a contract. As quoted in the CA
the performance judicially and extrajudicially."13 Default generally begins from the
decision,10 the Joint Affidavit of Undertaking contained a stipulation where Cruz and
moment the creditor demands the performance of the obligation. In this case,
Leonardo promised to replace the damaged car of Gruspe, 20 days from October 25,
demand could be considered to have been made upon the filing of the complaint on
1999 or up to November 15, 1999, of the same model and of at least the same
November 19, 1999, and it is only from this date that the interest should be
quality. In the event that they cannot replace the car within the same period, they
computed.
would pay the cost of Gruspe’s car in the total amount of ₱350,000.00, with interest
at 12% per month for any delayed payment after November 15, 1999, until fully paid.
These, as read by the CA, are very simple terms that both Cruz and Leonardo could Although the CA upheld the Joint Affidavit of Undertaking, we note that it imposed
easily understand. interest rate on a per annum basis, instead of the per month basis that was stated in
the Joint Affidavit of Undertaking without explaining its reason for doing so. 14 Neither
party, however, questioned the change. Nonetheless, the Court affirms the change in
42
the interest rate from 12% per month to 12% per annum, as we find the interest rate We proceed to the facts.
agreed upon in the Joint Affidavit of Undertaking excessive. 15
The parties were friends of long standing having known each other since 1973: Rivera
WHEREFORE, we AFFIRM the decision dated July 30, 2009 and the resolution dated and Salvador are kumpadres, the former is the godfather of the Spouses Chua’s son.
February 19, 2010 of the Court of Appeals in CA-G.R. CV No. 86083, subject to the
Modification that the twelve percent (12%) per annum interest imposed on the On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
amount due shall accrue only from November 19, 1999, when judicial demand was
made. PROMISSORY NOTE

SO ORDERED. 120,000.00

ARTURO D. BRION FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C.
CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine
G.R. No. 184458 January 14, 2015 Currency (₱120,000.00) on December 31, 1995.
RODRIGO RIVERA, Petitioner, vs. SPOUSES SALVADOR CHUA AND VIOLETA S.
CHUA, Respondents. It is agreed and understood that failure on my part to pay the amount of (120,000.00)
x-----------------------x One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the
G.R. No. 184472 sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until
SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners, vs. RODRIGO the entire obligation is fully paid for.
RIVERA, Respondent.
Should this note be referred to a lawyer for collection, I agree to pay the further sum
PEREZ, J.: equivalent to twenty percent (20%) of the total amount due and payable as and for
attorney’s fees which in no case shall be less than ₱5,000.00 and to pay in addition
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the the cost of suit and other incidental litigation expense.
Rules of Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609
which affirmed with modification the separate rulings of the Manila City trial courts, Any action which may arise in connection with this note shall be brought in the
the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan proper Court of the City of Manila.
Trial Court (MeTC), Branch 30, in Civil Case No. 163661, 3 a case for collection of a sum
of money due a promissory note. While all three (3) lower courts upheld the validity Manila, February 24, 1995[.]
and authenticity of the promissory note as duly signed by the obligor, Rodrigo Rivera
(Rivera), petitioner in G.R. No. 184458, the appellate court modified the trial courts’ (SGD.) RODRIGO RIVERA4
consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to
twelve percent (12%) per annumcomputed from the date of judicial or extrajudicial
In October 1998, almost three years from the date of payment stipulated in the
demand, and (2) reinstatement of the award of attorney’s fees also in a reduced
promissory note, Rivera, as partial payment for the loan, issued and delivered to the
amount of ₱50,000.00.
SpousesChua, as payee, a check numbered 012467, dated 30 December 1998, drawn
against Rivera’s current account with the Philippine Commercial International Bank
In G.R. No. 184458, Rivera persists in his contention that there was no valid (PCIB) in the amount of ₱25,000.00.
promissory note and questions the entire ruling of the lower courts. On the other
hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses
On 21 December 1998, the Spouses Chua received another check presumably issued
Chua), take exception to the appellate court’s reduction of the stipulated interest
by Rivera, likewise drawn against Rivera’s PCIB current account, numbered 013224,
rate of sixty percent (60%) to twelve percent (12%) per annum.
43

duly signed and dated, but blank as to payee and amount. Ostensibly, as per
understanding by the parties, PCIB Check No. 013224 was issued in the amount of testified); registered criminologist; graduate of 18th Basic Training Course [i]n
₱133,454.00 with "cash" as payee. Purportedly, both checks were simply partial Questioned Document Examination conducted by the NBI; twice attended a seminar
payment for Rivera’s loan in the principal amount of ₱120,000.00. on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended
a seminar on Effective Methodology in Teaching and Instructional design conducted
Upon presentment for payment, the two checks were dishonored for the reason by the NBI Academy; seminar lecturer on Questioned Documents, Signature
"account closed." Verification and/or Detection; had examined more than a hundred thousand
questioned documents at the time he testified.
As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00
covering the principal of ₱120,000.00 plus five percent (5%) interest per month from Upon [order of the MeTC], Mr. Magbojos examined the purported signature of
1 January 1996 to 31 May 1999. [Rivera] appearing in the Promissory Note and compared the signature thereon with
the specimen signatures of [Rivera] appearing on several documents. After a
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera thorough study, examination, and comparison of the signature on the questioned
to no avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua were document (Promissory Note) and the specimen signatures on the documents
constrained to file a suit on 11 June 1999. The case was raffled before the MeTC, submitted to him, he concluded that the questioned signature appearing in the
Branch 30, Manila and docketed as Civil Case No. 163661. Promissory Note and the specimen signatures of [Rivera] appearing on the other
documents submitted were written by one and the same person. In connection with
his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never
January 2001, with the following conclusion: "The questioned and the standard
executed the subject Promissory Note; (2) in all instances when he obtained a loan
specimen signatures RODGRIGO RIVERA were written by one and the same person."
from the Spouses Chua, the loans were always covered by a security; (3) at the time
of the filing of the complaint, he still had an existing indebtedness to the Spouses
Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB Check No. [Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May
132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, 1998, he obtained a loan from [respondent] Salvador and executed a real estate
should have been issued in the amount of only 1,300.00, representing the amount he mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside
received from the Spouses Chua’s saleslady; (5) contrary to the supposed agreement, from this loan, in October, 1998 he borrowed ₱25,000.00 from Salvador and issued
the Spouses Chua presented the check for payment in the amount of ₱133,454.00; PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of
and (6) there was no demand for payment of the amount of ₱120,000.00 prior to the the Promissory Note dated 24 February 1995 and alleged that the signature
encashment of PCIB Check No. 0132224.5 appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB
Check No. 0132224 was partial payment for the Promissory Note was not true, the
truth being that he delivered the check to [respondent Salvador] with the space for
In the main, Rivera claimed forgery of the subject Promissory Note and denied his
amount left blank as he and [respondent] Salvador had agreed that the latter was to
indebtedness thereunder.
fill it in with the amount of ₱1,300.00 which amount he owed [the spouses Chua];
however, on 29 December 1998 [respondent] Salvador called him and told him that
The MeTC summarized the testimonies of both parties’ respective witnesses:
he had written ₱133,454.00 instead of ₱1,300.00; x x x. To rebut the testimony of NBI
Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the
[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence signature appearing on the Promissory Note was not his signature and that he did not
(consisting of the testimonies of [the spouses] Chua and NBI Senior Documents execute the Promissory Note.6
Examiner Antonio Magbojos). x x x
After trial, the MeTC ruled in favor of the Spouses Chua:
xxxx
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI stipulated interest at the rate of 5% per month from 1 January 1996, and legal
document examiner (1989); NBI Senior Document Examiner (1994 to the date he
44
interest at the rate of 12% percent per annum from 11 June 1999, as actual and [WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL
compensatory damages; 20% of the whole amount due as attorney’s fees. 7 ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST
RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED
MeTC, but deleted the award of attorney’s fees to the Spouses Chua: RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE,
INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11
WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the
rest of the Decision dated October 21, 2002 is hereby AFFIRMED.8 As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied
the petition, via a Minute Resolution, for failure to sufficiently show any reversible
Both trial courts found the Promissory Note as authentic and validly bore the error in the ruling of the appellate court specifically concerning the correct rate of
signature of Rivera. Undaunted, Rivera appealed to the Court of Appeals which interest on Rivera’s indebtedness under the Promissory Note.12
affirmed Rivera’s liability under the Promissory Note, reduced the imposition of
interest on the loan from 60% to 12% per annum, and reinstated the award of On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
attorney’s fees in favor of the Spouses Chua:
Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the questioning the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.
MODIFICATION that the interest rate of 60% per annum is hereby reduced to12% per
annum and the award of attorney’s fees is reinstated atthe reduced amount of Rivera continues to deny that heexecuted the Promissory Note; he claims that given
₱50,000.00 Costs against [Rivera].9 his friendship withthe Spouses Chua who were money lenders, he has been able to
maintain a loan account with them. However, each of these loan transactions was
Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. respectively "secured by checks or sufficient collateral."
184458 and the Spouses Chua in G.R. No. 184472, respectively raising the following
issues: Rivera points out that the Spouses Chua "never demanded payment for the loan nor
interest thereof (sic) from [Rivera] for almost four (4) years from the time of the
A. In G.R. No. 184458 alleged default in payment [i.e., after December 31, 1995]."13

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED On the issue of the supposed forgery of the promissory note, we are not inclined to
IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE depart from the lower courts’ uniform rulings that Rivera indeed signed it.
WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED Rivera offers no evidence for his asseveration that his signature on the promissory
IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN note was forged, only that the signature is not his and varies from his usual signature.
APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS He likewise makes a confusing defense of having previously obtained loans from the
LAW. Spouses Chua who were money lenders and who had allowed him a period of "almost
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED four (4) years" before demanding payment of the loan under the Promissory Note.
IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE
SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT First, we cannot give credence to such a naked claim of forgery over the testimony of
THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION the National Bureau of Investigation (NBI) handwriting expert on the integrity of the
OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10 promissory note. On that score, the appellate court aptly disabled Rivera’s
contention:
B. In G.R. No. 184472
45
[Rivera] failed to adduce clear and convincing evidence that the signature on the In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the
promissory note is a forgery. The fact of forgery cannot be presumed but must be testimony of a handwriting expert from the NBI. While it is true that resort to experts
proved by clear, positive and convincing evidence. Mere variance of signatures is not mandatory or indispensable to the examination or the comparison of
cannot be considered as conclusive proof that the same was forged. Save for the handwriting, the trial courts in this case, on its own, using the handwriting expert
denial of Rivera that the signature on the note was not his, there is nothing in the testimony only as an aid, found the disputed document valid.18
records to support his claim of forgery. And while it is true that resort to experts is
not mandatory or indispensable to the examination of alleged forged documents, the Hence, the MeTC ruled that:
opinions of handwriting experts are nevertheless helpful in the court’s determination
of a document’s authenticity. [Rivera] executed the Promissory Note after consideration of the following:
categorical statement of [respondent] Salvador that [Rivera] signed the Promissory
To be sure, a bare denial will not suffice to overcome the positive value of the Note before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents
promissory note and the testimony of the NBI witness. In fact, even a perfunctory Examiner that the questioned signature (appearing on the Promissory Note) and
comparison of the signatures offered in evidence would lead to the conclusion that standard specimen signatures "Rodrigo Rivera" "were written by one and the same
the signatures were made by one and the same person. person"; actual view at the hearing of the enlarged photographs of the questioned
signature and the standard specimen signatures.19
It is a basic rule in civil cases that the party having the burden of proof must establish
his case by preponderance of evidence, which simply means "evidence which is of Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond
greater weight, or more convincing than that which is offered in opposition to it." logic for a money lender to extend another loan on May 4, 1998 secured by a real
estate mortgage, when he was already in default and has not been paying any
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have interest for a loan incurred in February 1995."20
established a prima faciecase in their favor, hence, the burden of evidence has shifted
to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to We disagree.
substantiate his defense.14 Well-entrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the appellate court, are It is likewise likely that precisely because of the long standing friendship of the parties
accorded the highest degree of respect and are considered conclusive between the as "kumpadres," Rivera was allowed another loan, albeit this time secured by a real
parties.15 A review of such findings by this Court is not warranted except upon a estate mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is
showing of highly meritorious circumstances, such as: (1) when the findings of a trial nothing inconsistent with the Spouses Chua’s two (2) and successive loan
court are grounded entirely on speculation, surmises or conjectures; (2) when a lower accommodations to Rivera: one, secured by a real estate mortgage and the other,
court's inference from its factual findings is manifestly mistaken, absurd or secured by only a Promissory Note.
impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4)
when the findings of the appellate court go beyond the issues of the case, or fail to
Also completely plausible is thatgiven the relationship between the parties, Rivera
notice certain relevant facts which, if properly considered, will justify a different
was allowed a substantial amount of time before the Spouses Chua demanded
conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact
payment of the obligation due under the Promissory Note.
are conclusions without mention of the specific evidence on which they are based,
are premised on the absence of evidence, or are contradicted by evidence on
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery
record.16 None of these exceptions obtains in this instance. There is no reason to
and a discordant defense to assail the authenticity and validity of the Promissory
depart from the separate factual findings of the three (3) lower courts on the validity
Note. Although the burden of proof rested on the Spouses Chua having instituted the
of Rivera’s signature reflected in the Promissory Note.
civil case and after they established a prima facie case against Rivera, the burden of
evidence shifted to the latter to establish his defense. 21 Consequently, Rivera failed to
Indeed, Rivera had the burden ofproving the material allegations which he sets up in
discharge the burden of evidence, refute the existence of the Promissory Note duly
his Answer to the plaintiff’s claim or cause of action, upon which issue is joined,
signed by him and subsequently, that he did not fail to pay his obligation thereunder.
46

whether they relate to the whole case or only to certain issues in the case.17
On the whole, there was no question left on where the respective evidence of the
parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues Art. 1169. Those obliged to deliver or to do something incur in delay from the time
that even assuming the validity of the Promissory Note, demand was still necessary in the obligee judicially or extrajudicially demands from them the fulfillment of their
order to charge him liable thereunder. Rivera argues that it was grave error on the obligation.
part of the appellate court to apply Section 70 of the Negotiable Instruments Law
(NIL).22 However, the demand by the creditor shall not be necessary in order that delay may
exist:
We agree that the subject promissory note is not a negotiable instrument and the
provisions of the NIL do not apply to this case. Section 1 of the NIL requires the (1) When the obligation or the law expressly so declare; or
concurrence of the following elements to be a negotiable instrument: (2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the
(a) It must be in writing and signed by the maker or drawer; service is to be rendered was a controlling motive for the establishment of
(b) Must contain an unconditional promise or order to pay a sum certain in the contract; or
money; (3) When demand would be useless, as when the obligor has rendered it
(c) Must be payable on demand, or at a fixed or determinable future time; beyond his power to perform.
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or In reciprocal obligations, neither party incurs in delay if the other does not comply or
otherwise indicated therein with reasonable certainty. is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
On the other hand, Section 184 of the NIL defines what negotiable promissory note (Emphasis supplied)
is: SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person to There are four instances when demand is not necessary to constitute the debtor in
another, signed by the maker, engaging to pay on demand, or at a fixed or default: (1) when there is an express stipulation to that effect; (2) where the law so
determinable future time, a sum certain in money to order or to bearer. Where a provides; (3) when the period is the controlling motive or the principal inducement
note is drawn to the maker’s own order, it is not complete until indorsed by him. for the creation of the obligation; and (4) where demand would be useless. In the first
two paragraphs, it is not sufficient that the law or obligation fixes a date for
The Promissory Note in this case is made out to specific persons, herein respondents, performance; it must further state expressly that after the period lapses, default will
the Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua commence.
as payees. However, even if Rivera’s Promissory Note is not a negotiable instrument
and therefore outside the coverage of Section 70 of the NIL which provides that We refer to the clause in the Promissory Note containing the stipulation of interest:
presentment for payment is not necessary to charge the person liable on the
instrument, Rivera is still liable under the terms of the Promissory Note that he It is agreed and understood that failure on my part to pay the amount of
issued. (₱120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I
agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the
The Promissory Note is unequivocal about the date when the obligation falls due and date of default until the entire obligation is fully paid for.23
becomes demandable—31 December 1995. As of 1 January 1996, Rivera had already
incurred in delay when he failed to pay the amount of ₱120,000.00 due to the which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the
Spouses Chua on 31 December 1995 under the Promissory Note. "date of default" until the entire obligation is fully paid for. The parties evidently
agreed that the maturity of the obligation at a date certain, 31 December 1995, will
Article 1169 of the Civil Code explicitly provides: give rise to the obligation to pay interest. The Promissory Note expressly provided
that after 31 December 1995, default commences and the stipulation on payment of
interest starts.
47
The date of default under the Promissory Note is 1 January 1996, the day following 31 The penal clause is generally undertaken to insure performance and works as either,
December 1995, the due date of the obligation. On that date, Rivera became liable or both, punishment and reparation. It is an exception to the general rules on
for the stipulated interest which the Promissory Note says is equivalent to 5% a recovery of losses and damages. As an exception to the general rule, a penal clause
month. In sum, until 31 December 1995, demand was not necessary before Rivera must be specifically set forth in the obligation.25
could be held liable for the principal amount of ₱120,000.00. Thereafter, on 1 January
1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the In high relief, the stipulation in the Promissory Note is designated as payment of
form of stipulated interest. interest, not as a penal clause, and is simply an indemnity for damages incurred by
the Spouses Chua because Rivera defaulted in the payment of the amount of
The liability for damages of those who default, including those who are guilty of ₱120,000.00. The measure of damages for the Rivera’s delay is limited to the interest
delay, in the performance of their obligations is laid down on Article 1170 24 of the stipulated in the Promissory Note. In apt instances, in default of stipulation, the
Civil Code. interest is that provided by law.26

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as In this instance, the parties stipulated that in case of default, Rivera will pay interest
an indemnity for damages when the obligor incurs in delay: at the rate of 5% a month or 60% per annum. On this score, the appellate court ruled:

Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor It bears emphasizing that the undertaking based on the note clearly states the date of
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, payment tobe 31 December 1995. Given this circumstance, demand by the creditor
shall be the payment of the interest agreed upon, and in the absence of stipulation, isno longer necessary in order that delay may exist since the contract itself already
the legal interest, which is six percent per annum. (Emphasis supplied) expressly so declares. The mere failure of [Spouses Chua] to immediately demand or
collect payment of the value of the note does not exonerate [Rivera] from his liability
Article 2209 is specifically applicable in this instance where: (1) the obligation is for a therefrom. Verily, the trial court committed no reversible error when it imposed
sum of money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or interest from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved
before 31 December 1995; and (3) the Promissory Note provides for an indemnity for from making demand under Article 1169 of the Civil Code.
damages upon default of Rivera which is the payment of a 5%monthly interest from
the date of default. xxxx

We do not consider the stipulation on payment of interest in this case as a penal As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in
clause although Rivera, as obligor, assumed to pay additional 5% monthly interest on addition to legal interests and attorney’s fees is, indeed, highly iniquitous and
the principal amount of ₱120,000.00 upon default. unreasonable. Stipulated interest rates are illegal if they are unconscionable and the
Court is allowed to temper interest rates when necessary. Since the interest rate
Article 1226 of the Civil Code provides: agreed upon is void, the parties are considered to have no stipulation regarding the
interest rate, thus, the rate of interest should be 12% per annum computed from the
Art. 1226. In obligations with a penal clause, the penalty shall substitute the date of judicial or extrajudicial demand.27
indemnity for damages and the payment of interests in case of noncompliance, if
there isno stipulation to the contrary. Nevertheless, damages shall be paid if the The appellate court found the 5% a month or 60% per annum interest rate, on top of
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the the legal interest and attorney’s fees, steep, tantamount to it being illegal, iniquitous
obligation. and unconscionable. Significantly, the issue on payment of interest has been squarely
disposed of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to
The penalty may be enforced only when it is demandable in accordance with the sufficiently showany reversible error in the ruling of the appellate court, specifically
provisions of this Code. the reduction of the interest rate imposed on Rivera’s indebtedness under the
Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res
48
judicata in its concept of "bar by prior judgment" on whether the Court of Appeals From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to
correctly reduced the interest rate stipulated in the Promissory Note. the Spouses Chua could already be determined with reasonable certainty given the
wording of the Promissory Note.32
Res judicata applies in the concept of "bar by prior judgment" if the following
requisites concur: (1) the former judgment or order must be final; (2) the judgment or We cite our recent ruling in Nacar v. Gallery Frames:33
order must be on the merits; (3) the decision must have been rendered by a court
having jurisdiction over the subject matter and the parties; and (4) there must be, I. When an obligation, regardless of its source, i.e., law, contracts,
between the first and the second action, identity of parties, of subject matter and of quasicontracts, delicts or quasi-delicts is breached, the contravenor can be
causes of action.28 held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of II. With regard particularly to an award of interest in the concept of actual
parties and subject matter raising specifically errors in the Decision of the Court of and compensatory damages, the rate of interest, as well as the accrual
Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction of thereof, is imposed, as follows:
the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling 1. When the obligation is breached, and it consists in the payment
thereon affirming the Court of Appeals is a "bar by prior judgment." of a sum of money, i.e., a loan or for bearance of money, the
interest due should be that which may have been stipulated in
At the time interest accrued from 1 January 1996, the date of default under the writing. Furthermore, the interest due shall itself earn legal interest
Promissory Note, the then prevailing rate of legal interest was 12% per annum under from the time it is judicially demanded. In the absence of
Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance of stipulation, the rate of interest shall be 6% per annum to be
money.29 Thus, the legal interest accruing from the Promissory Note is 12% per computed from default, i.e., from judicial or extra judicial demand
annum from the date of default on 1 January 1996. However, the 12% per annumrate under and subject to the provisions ofArticle 1169 of the Civil Code.
of legal interest is only applicable until 30 June 2013, before the advent and 2. When an obligation, not constituting a loan or forbearance of
effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 money, is breached, an interest on the amount of damages
reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. awarded may be imposed at the discretion of the court at the rate
Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In of 6% per annum.1âwphi1 No interest, however, shall be adjudged
short, the applicable rate of legal interest from 1 January 1996, the date when Rivera on unliquidated claims or damages, except when or until the
defaulted, to date when this Decision becomes final and executor is divided into two demand can be established with reasonable certainty. Accordingly,
periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 where the demand is established with reasonable certainty, the
to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision interest shall begin to run from the time the claim is made judicially
becomes final and executory. or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is
As for the legal interest accruing from 11 June 1999, when judicial demand was made, the interest shall begin to run only from the date the
made, to the date when this Decision becomes final and executory, such is likewise judgment of the court is made (at which time the quantification of
divided into two periods: (1) 12% per annum from 11 June 1999, the date of judicial damages may be deemed to have been reasonably ascertained).
demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this The actual base for the computation of legal interest shall, in any
Decision becomes final and executor.31 We base this imposition of interest on interest case, be on the amount finally adjudged. 3. When the judgment of
due earning legal interest on Article 2212 of the Civil Code which provides that the court awarding a sum of money becomes final and executory,
"interest due shall earn legal interest from the time it is judicially demanded, the rate of legal interest, whether the case falls under paragraph 1
although the obligation may be silent on this point." or paragraph 2, above, shall be 6% per annum from such finality
until its satisfaction, this interim period being deemed to be by then
an equivalent to a for bearance of credit. And, in addition to the
above, judgments that have become final and executory prior to
49
July 1, 2013, shall not be disturbed and shall continue to be (1) the principal amount of ₱120,000.00;
implemented applying the rate of interest fixed therein. (Emphasis (2) legal interest of 12% per annumof the principal amount of ₱120,000.00
supplied) reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annumof the principal amount of ₱120,000.00
On the reinstatement of the award of attorney’s fees based on the stipulation in the form 1 July 2013 to date when this Decision becomes final and executory;
Promissory Note, weagree with the reduction thereof but not the ratiocination of the (4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June
appellate court that the attorney’s fees are in the nature of liquidated damages or 1999, date of judicial demand, to 30 June 2013, as interest due earning legal
penalty. The interest imposed in the Promissory Note already answers as liquidated interest;
damages for Rivera’s default in paying his obligation. We award attorney’s fees, albeit (5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1
in a reduced amount, in recognition that the Spouses Chua were compelled to litigate July 2013 to date when this Decision becomes final and executor, asinterest
and incurred expenses to protect their interests. 34 Thus, the award of ₱50,000.00 as due earning legal interest;
attorney’s fees is proper. (6) Attorney’s fees in the amount of ₱50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the
For clarity and to obviate confusion, we chart the breakdown of the total amount finality of this Decision until full payment thereof.
owed by Rivera to the Spouses Chua:
Costs against petitioner Rodrigo Rivera.
Face value Stipulated Interest A Interest due earning legal Attorney’s Total
of the & B interest A & B fees SO ORDERED.
Amount
Promissory
Note JOSE PORTUGAL PEREZ
Associate Justice
February A. January 1, 1996 to A. June 11, 1999 (date of Wholesale
24, 1995 to June 30, 2013 judicial demand) to June 30, Amount
December 2013 LORENZO SHIPPING CORP., petitioner, vs. BJ MARTHEL INTERNATIONAL,
31, 1995 B. July 1 2013 to date B. July 1, 2013 to date when INC., respondent.
when this Decision this Decision becomes final G.R. No. 145483 November 19, 2004
becomes final and and executory
executory
CHICO-NAZARIO, J.:
₱120,000.00 A. 12 % per annumon A. 12% per annumon the total ₱50,000.00 Total
the principal amount amount of column 2 amount This is a petition for review seeking to set aside the Decision 1 of the Court of Appeals
of ₱120,000.00 B. 6% per annumon the total of in CA-G.R. CV No. 54334 and its Resolution denying petitioner's motion for
B. 6% per annumon amount of column 235
Columns reconsideration.
the principal amount
1-4
of ₱120,000.00
The factual antecedents of this case are as follows:
The total amount owing to the Spouses Chua set forth in this Decision shall further
earn legal interest at the rate of 6% per annum computed from its finality until full
payment thereof, the interim period being deemed to be a forbearance of credit. Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in
coastwise shipping. It used to own the cargo vessel M/V Dadiangas Express.
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of
Upon the other hand, respondent BJ Marthel International, Inc. is a business entity
Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to
pay respondents Spouse Salvador and Violeta Chua the following: engaged in trading, marketing, and selling of various industrial commodities. It is also
an importer and distributor of different brands of engines and spare parts.
50
From 1987 up to the institution of this case, respondent supplied petitioner with
Very truly yours,
spare parts for the latter's marine engines. Sometime in 1989, petitioner asked
(SGD) HENRY PAJARILLO
respondent for a quotation for various machine parts. Acceding to this request,
Sales Manager
respondent furnished petitioner with a formal quotation,2 thus:
Petitioner thereafter issued to respondent Purchase Order No. 13839, 3 dated 02
November 1989, for the procurement of one set of cylinder liner, valued at P477,000,
May 31, 1989 to be used for M/V Dadiangas Express. The purchase order was co-signed by Jose Go,
MINQ-6093 Jr., petitioner's vice-president, and Henry Pajarillo. Quoted hereunder is the pertinent
LORENZO SHIPPING LINES portion of the purchase order:
Pier 8, North Harbor
Manila Name of Description Qty. Amount

SUBJECT: PARTS FOR ENGINE MODEL CYL. LINER M/E 1 SET P477,000.00
MITSUBISHI 6UET 52/60
NOTHING FOLLOW
Dear Mr. Go:
INV. #
We are pleased to submit our offer for your above subject requirements.
TERM OF PAYMENT: 25% DOWN PAYMENT

Description Qty. Unit Price Total Price 5 BI-MONTHLY INSTALLMENT[S]


Instead of paying the 25% down payment for the first cylinder liner, petitioner issued
Nozzle Tip 6 pcs. P 5,520.00 33,120.00
in favor of respondent ten postdated checks4 to be drawn against the former's
Plunger & Barrel 6 pcs. 27,630.00 165,780.00 account with Allied Banking Corporation. The checks were supposed to represent the
full payment of the aforementioned cylinder liner.
Cylinder Head 2 pcs. 1,035,000.00 2,070,000.00
Subsequently, petitioner issued Purchase Order No. 14011, 5 dated 15 January 1990,
Cylinder Liner 1 set 477,000.00 for yet another unit of cylinder liner. This purchase order stated the term of payment
to be "25% upon delivery, balance payable in 5 bi-monthly equal installment[s]."6 Like
TOTAL PRICE FOB P2,745,900.00 the purchase order of 02 November 1989, the second purchase order did not state
the date of the cylinder liner's delivery.
MANILA ___________
On 26 January 1990, respondent deposited petitioner's check that was postdated 18
January 1990, however, the same was dishonored by the drawee bank due to
insufficiency of funds. The remaining nine postdated checks were eventually returned
DELIVERY: Within 2 months after receipt of firm order. by respondent to petitioner.
TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal
Installment[s] not to exceed 90 days.
The parties presented disparate accounts of what happened to the check which was
We trust you find our above offer acceptable and look forward to your most
previously dishonored. Petitioner claimed that it replaced said check with a good one,
valued order.
the proceeds of which were applied to its other obligation to respondent. For its part,
respondent insisted that it returned said postdated check to petitioner.
51
Respondent thereafter placed the order for the two cylinder liners with its principal in In an Order dated 25 July 1991,14 the court a quo granted respondent's prayer for the
Japan, Daiei Sangyo Co. Ltd., by opening a letter of credit on 23 February 1990 under issuance of a preliminary attachment. On 09 August 1991, petitioner filed an Urgent
its own name with the First Interstate Bank of Tokyo. Ex-Parte Motion to Discharge Writ of Attachment 15attaching thereto a counter-bond
as required by the Rules of Court. On even date, the trial court issued an
On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioner's warehouse Order16lifting the levy on petitioner's properties and the garnishment of its bank
in North Harbor, Manila. The sales invoices 7 evidencing the delivery of the cylinder accounts.
liners both contain the notation "subject to verification" under which the signature of
Eric Go, petitioner's warehouseman, appeared. Petitioner afterwards filed its Answer17 alleging therein that time was of the essence
in the delivery of the cylinder liners and that the delivery on 20 April 1990 of said
Respondent thereafter sent a Statement of Account dated 15 November 1990 8 to items was late as respondent committed to deliver said items "within two (2) months
petitioner. While the other items listed in said statement of account were fully paid after receipt of firm order"18 from petitioner. Petitioner likewise sought counterclaims
by petitioner, the two cylinder liners delivered to petitioner on 20 April 1990 for moral damages, exemplary damages, attorney's fees plus appearance fees, and
remained unsettled. Consequently, Mr. Alejandro Kanaan, Jr., respondent's vice- expenses of litigation.
president, sent a demand letter dated 02 January 1991 9 to petitioner requiring the
latter to pay the value of the cylinder liners subjects of this case. Instead of heeding Subsequently, respondent filed a Second Amended Complaint with Preliminary
the demand of respondent for the full payment of the value of the cylinder liners, Attachment dated 25 October 1991. 19 The amendment introduced dealt solely with
petitioner sent the former a letter dated 12 March 199110 offering to pay only the number of postdated checks issued by petitioner as full payment for the first
P150,000 for the cylinder liners. In said letter, petitioner claimed that as the cylinder cylinder liner it ordered from respondent. Whereas in the first amended complaint,
liners were delivered late and due to the scrapping of the M/V Dadiangas Express, it only nine postdated checks were involved, in its second amended complaint,
(petitioner) would have to sell the cylinder liners in Singapore and pay the balance respondent claimed that petitioner actually issued ten postdated checks. Despite the
from the proceeds of said sale. opposition by petitioner, the trial court admitted respondent's Second Amended
Complaint with Preliminary Attachment.20
Shortly thereafter, another demand letter dated 27 March 199111 was furnished
petitioner by respondent's counsel requiring the former to settle its obligation to Prior to the commencement of trial, petitioner filed a Motion (For Leave To Sell
respondent together with accrued interest and attorney's fees. Cylinder Liners)21 alleging therein that "[w]ith the passage of time and with no
definite end in sight to the present litigation, the cylinder liners run the risk of
Due to the failure of the parties to settle the matter, respondent filed an action for obsolescence and deterioration"22 to the prejudice of the parties to this case. Thus,
sum of money and damages before the Regional Trial Court (RTC) of Makati City. In its petitioner prayed that it be allowed to sell the cylinder liners at the best possible
complaint,12 respondent (plaintiff below) alleged that despite its repeated oral and price and to place the proceeds of said sale in escrow. This motion, unopposed by
written demands, petitioner obstinately refused to settle its obligations. Respondent respondent, was granted by the trial court through the Order of 17 March 1991.23
prayed that petitioner be ordered to pay for the value of the cylinder liners plus
accrued interest of P111,300 as of May 1991 and additional interest of 14% per After trial, the court a quo dismissed the action, the decretal portion of the Decision
annum to be reckoned from June 1991 until the full payment of the principal; stating:
attorney's fees; costs of suits; exemplary damages; actual damages; and
compensatory damages. WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff,
which is ordered to pay P50,000.00 to the defendant as and by way of attorney's
On 25 July 1991, and prior to the filing of a responsive pleading, respondent filed an fees.24
amended complaint with preliminary attachment pursuant to Sections 2 and 3, Rule
57 of the then Rules of Court.13 Aside from the prayer for the issuance of writ of The trial court held respondent bound to the quotation it submitted to petitioner
preliminary attachment, the amendments also pertained to the issuance by particularly with respect to the terms of payment and delivery of the cylinder liners. It
petitioner of the postdated checks and the amounts of damages claimed. also declared that respondent had agreed to the cancellation of the contract of sale
52

when it returned the postdated checks issued by petitioner. Respondent's


counterclaims for moral, exemplary, and compensatory damages were dismissed for respondent's failure to deliver the cylinder liners within the two-month period stated
insufficiency of evidence. in the formal quotation dated 31 May 1989.

Respondent moved for the reconsideration of the trial court's Decision but the The threshold question, then, is: Was there late delivery of the subjects of the
motion was denied for lack of merit.25 contract of sale to justify petitioner to disregard the terms of the contract considering
that time was of the essence thereof?
Aggrieved by the findings of the trial court, respondent filed an appeal with the Court
of Appeals26 which reversed and set aside the Decision of the court a quo. The In determining whether time is of the essence in a contract, the ultimate criterion is
appellate court brushed aside petitioner's claim that time was of the essence in the the actual or apparent intention of the parties and before time may be so regarded
contract of sale between the parties herein considering the fact that a significant by a court, there must be a sufficient manifestation, either in the contract itself or the
period of time had lapsed between respondent's offer and the issuance by petitioner surrounding circumstances of that intention.29 Petitioner insists that although its
of its purchase orders. The dispositive portion of the Decision of the appellate court purchase orders did not specify the dates when the cylinder liners were supposed to
states: be delivered, nevertheless, respondent should abide by the term of delivery
appearing on the quotation it submitted to petitioner. 30 Petitioner theorizes that the
WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE. quotation embodied the offer from respondent while the purchase order
The appellee is hereby ORDERED to pay the appellant the amount of represented its (petitioner's) acceptance of the proposed terms of the contract of
P954,000.00, and accrued interest computed at 14% per annum reckoned sale.31 Thus, petitioner is of the view that these two documents "cannot be taken
from May, 1991.27 separately as if there were two distinct contracts." 32 We do not agree.

The Court of Appeals also held that respondent could not have incurred delay in the It is a cardinal rule in interpretation of contracts that if the terms thereof are clear
delivery of cylinder liners as no demand, judicial or extrajudicial, was made by and leave no doubt as to the intention of the contracting parties, the literal meaning
respondent upon petitioner in contravention of the express provision of Article 1169 shall control.33 However, in order to ascertain the intention of the parties, their
of the Civil Code which provides: contemporaneous and subsequent acts should be considered. 34 While this Court
recognizes the principle that contracts are respected as the law between the
Those obliged to deliver or to do something incur in delay from the time the contracting parties, this principle is tempered by the rule that the intention of the
obligee judicially or extrajudicially demands from them the fulfillment of parties is primordial35 and "once the intention of the parties has been ascertained,
their obligation. that element is deemed as an integral part of the contract as though it has been
originally expressed in unequivocal terms."36
Likewise, the appellate court concluded that there was no evidence of the alleged
cancellation of orders by petitioner and that the delivery of the cylinder liners on 20 In the present case, we cannot subscribe to the position of petitioner that the
April 1990 was reasonable under the circumstances. documents, by themselves, embody the terms of the sale of the cylinder liners. One
can easily glean the significant differences in the terms as stated in the formal
quotation and Purchase Order No. 13839 with regard to the due date of the down
On 22 May 2000, petitioner filed a motion for reconsideration of the Decision of the
payment for the first cylinder liner and the date of its delivery as well as Purchase
Court of Appeals but this was denied through the resolution of 06 October
Order No. 14011 with respect to the date of delivery of the second cylinder liner.
2000.28 Hence, this petition for review which basically raises the issues of whether or
While the quotation provided by respondent evidently stated that the cylinder liners
not respondent incurred delay in performing its obligation under the contract of sale
were supposed to be delivered within two months from receipt of the firm order of
and whether or not said contract was validly rescinded by petitioner.
petitioner and that the 25% down payment was due upon the cylinder liners'
delivery, the purchase orders prepared by petitioner clearly omitted these significant
That a contract of sale was entered into by the parties is not disputed. Petitioner,
items. The petitioner's Purchase Order No. 13839 made no mention at all of the due
however, maintains that its obligation to pay fully the purchase price was
dates of delivery of the first cylinder liner and of the payment of 25% down payment.
extinguished because the adverted contract was validly terminated due to
53
Its Purchase Order No. 14011 likewise did not indicate the due date of delivery of the payment, now, it is stated in the purchase order the date of delivery, will you
second cylinder liner. explain to the court why the date of delivery of the cylinder liner was not
mentioned in the purchase order which is the contract between you and
In the case of Bugatti v. Court of Appeals, 37 we reiterated the principle that "[a] Lorenzo Shipping Corporation?
contract undergoes three distinct stages – preparation or negotiation, its perfection, A: When Lorenzo Shipping Corporation inquired from us for that cylinder
and finally, its consummation. Negotiation begins from the time the prospective liner, we have inquired [with] our supplier in Japan to give us the price and
contracting parties manifest their interest in the contract and ends at the moment of delivery of that item. When we received that quotation from our supplier it
agreement of the parties. The perfection or birth of the contract takes place when is stated there that they can deliver within two months but we have to get
the parties agree upon the essential elements of the contract. The last stage is the our confirmed order within June.
consummation of the contract wherein the parties fulfill or perform the terms agreed Q: But were you able to confirm the order from your Japanese supplier on
upon in the contract, culminating in the extinguishment thereof." June of that year?
A: No sir.
In the instant case, the formal quotation provided by respondent represented the Q: Why? Will you tell the court why you were not able to confirm your order
negotiation phase of the subject contract of sale between the parties. As of that time, with your Japanese supplier?
the parties had not yet reached an agreement as regards the terms and conditions of A: Because Lorenzo Shipping Corporation did not give us the purchase order
the contract of sale of the cylinder liners. Petitioner could very well have ignored the for that cylinder liner.
offer or tendered a counter-offer to respondent while the latter could have, under Q: And it was only on November 2, 1989 when they gave you the purchase
the pertinent provision of the Civil Code,38withdrawn or modified the same. The order?
parties were at liberty to discuss the provisions of the contract of sale prior to its A: Yes sir.
perfection. In this connection, we turn to the testimonies of Pajarillo and Kanaan, Jr., Q: So upon receipt of the purchase order from Lorenzo Shipping Lines in
that the terms of the offer were, indeed, renegotiated prior to the issuance of 1989 did you confirm the order with your Japanese supplier after receiving
Purchase Order No. 13839. the purchase order dated November 2, 1989?
A: Only when Lorenzo Shipping Corporation will give us the down payment
of 25%.39
During the hearing of the case on 28 January 1993, Pajarillo testified as follows:
For his part, during the cross-examination conducted by counsel for
petitioner, Kanaan, Jr., testified in the following manner:
Q: You testified Mr. Witness, that you submitted a quotation with defendant
WITNESS: This term said 25% upon delivery. Subsequently, in the final
Lorenzo Shipping Corporation dated rather marked as Exhibit A stating the
contract, what was agreed upon by both parties was 25% down payment.
terms of payment and delivery of the cylinder liner, did you not?
Q: When?
A: Yes sir.
A: Upon confirmation of the order.
Q: I am showing to you the quotation which is marked as Exhibit A there ...
appears in the quotation that the delivery of the cylinder liner will be made
Q: And when was the down payment supposed to be paid?
in two months' time from the time you received the confirmation of the
A: It was not stated when we were supposed to receive that. Normally, we
order. Is that correct?
expect to receive at the earliest possible time. Again, that would depend on
A: Yes sir.
the customers. Even after receipt of the purchase order which was what
Q: Now, after you made the formal quotation which is Exhibit A how long a
happened here, they re-negotiated the terms and sometimes we do accept
time did the defendant make a confirmation of the order?
that.
A: After six months.
Q: Was there a re-negotiation of this term?
Q: And this is contained in the purchase order given to you by Lorenzo
A: This offer, yes. We offered a final requirement of 25% down payment
Shipping Corporation?
upon delivery.
A: Yes sir.
Q: What was the re-negotiated term?
Q: Now, in the purchase order dated November 2, 1989 there appears only A: 25% down payment
54

the date the terms of payment which you required of them of 25% down
Q: To be paid when?
A: Supposed to be paid upon order.40 not merely relied on the quotation issued by the appellant considering the
lapse of time between the quotation issued by the appellant and the
The above declarations remain unassailed. Other than its bare assertion that the purchase orders of the appellee.
subject contracts of sale did not undergo further renegotiation, petitioner failed to
proffer sufficient evidence to refute the above testimonies of Pajarillo and Kanaan, Jr. In the instant case, the appellee should have provided for an allowance of
time and made the purchase order earlier if indeed the said cylinder liner
Notably, petitioner was the one who caused the preparation of Purchase Orders No. was necessary for the repair of the vessel scheduled on the first week of
13839 and No. 14011 yet it utterly failed to adduce any justification as to why said January, 1990. In fact, the appellee should have cancelled the first purchase
documents contained terms which are at variance with those stated in the quotation order when the cylinder liner was not delivered on the date it now says was
provided by respondent. The only plausible reason for such failure on the part of necessary. Instead it issued another purchase order for the second set of
petitioner is that the parties had, in fact, renegotiated the proposed terms of the cylinder liner. This fact negates appellee's claim that time was indeed of the
contract of sale. Moreover, as the obscurity in the terms of the contract between essence in the consummation of the contract of sale between the parties. 44
respondent and petitioner was caused by the latter when it omitted the date of
delivery of the cylinder liners in the purchase orders and varied the term with respect Finally, the ten postdated checks issued in November 1989 by petitioner and received
to the due date of the down payment,41 said obscurity must be resolved against it.42 by the respondent as full payment of the purchase price of the first cylinder liner
supposed to be delivered on 02 January 1990 fail to impress. It is not an indication of
Relative to the above discussion, we find the case of Smith, Bell & Co., Ltd. v. failure to honor a commitment on the part of the respondent. The earliest maturity
Matti,43 instructive. There, we held that – date of the checks was 18 January 1990. As delivery of said checks could produce the
effect of payment only when they have been cashed, 45 respondent's obligation to
When the time of delivery is not fixed or is stated in general and indefinite deliver the first cylinder liner could not have arisen as early as 02 January 1990 as
terms, time is not of the essence of the contract. . . . claimed by petitioner since by that time, petitioner had yet to fulfill its undertaking to
fully pay for the value of the first cylinder liner. As explained by respondent, it
In such cases, the delivery must be made within a reasonable time. proceeded with the placement of the order for the cylinder liners with its principal in
Japan solely on the basis of its previously harmonious business relationship with
petitioner.
The law implies, however, that if no time is fixed, delivery shall be made within a
reasonable time, in the absence of anything to show that an immediate delivery
intended. . . . As an aside, let it be underscored that "[e]ven where time is of the essence, a breach
of the contract in that respect by one of the parties may be waived by the other
party's subsequently treating the contract as still in force." 46Petitioner's receipt of the
We also find significant the fact that while petitioner alleges that the cylinder liners
cylinder liners when they were delivered to its warehouse on 20 April 1990 clearly
were to be used for dry dock repair and maintenance of its M/V Dadiangas Express
indicates that it considered the contract of sale to be still subsisting up to that time.
between the later part of December 1989 to early January 1990, the record is bereft
Indeed, had the contract of sale been cancelled already as claimed by petitioner, it no
of any indication that respondent was aware of such fact. The failure of petitioner to
longer had any business receiving the cylinder liners even if said receipt was "subject
notify respondent of said date is fatal to its claim that time was of the essence in the
to verification." By accepting the cylinder liners when these were delivered to its
subject contracts of sale.
warehouse, petitioner indisputably waived the claimed delay in the delivery of said
items.
In addition, we quote, with approval, the keen observation of the Court of Appeals:
We, therefore, hold that in the subject contracts, time was not of the essence. The
. . . It must be noted that in the purchase orders issued by the appellee,
delivery of the cylinder liners on 20 April 1990 was made within a reasonable period
dated November 2, 1989 and January 15, 1990, no specific date of delivery
of time considering that respondent had to place the order for the cylinder liners with
was indicated therein. If time was really of the essence as claimed by the
its principal in Japan and that the latter was, at that time, beset by heavy volume of
appellee, they should have stated the same in the said purchase orders, and
55

work.47
There having been no failure on the part of the respondent to perform its obligation, WHEREFORE, premises considered, the instant Petition for Review on Certiorari is
the power to rescind the contract is unavailing to the petitioner. Article 1191 of the DENIED. The Decision of the Court of Appeals, dated 28 April 2000, and its Resolution,
New Civil Code runs as follows: dated 06 October 2000, are hereby AFFIRMED. No costs.

The power to rescind obligations is implied in reciprocal ones, in case one of SO ORDERED.
the obligors should not comply with what is incumbent upon him.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
The law explicitly gives either party the right to rescind the contract only upon the
failure of the other to perform the obligation assumed thereunder. 48 The right,
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs.
however, is not an unbridled one. This Court in the case of University of the
IGNACIO CASTRO, SR., SOFIA C. CROUCH etal.
Philippines v. De los Angeles,49 speaking through the eminent civilist Justice J.B.L.
G.R. No. 73867 February 29, 1988
Reyes, exhorts:
PADILLA, J.:
Of course, it must be understood that the act of a party in treating a contract as
cancelled or resolved on account of infractions by the other contracting party must
Petition for review on certiorari of the decision * of the Intermediate Appellate Court,
be made known to the other and is always provisional, being ever subject to scrutiny
dated 11 February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al.,
and review by the proper court. If the other party denied that rescission is justified, it
Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc.,
is free to resort to judicial action in its own behalf, and bring the matter to court.
Defendant-Appellant."
Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity The facts of the case are as follows:
awarded to the party prejudiced. (Emphasis supplied)
On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr.
In other words, the party who deems the contract violated may consider it resolved and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same
or rescinded, and act accordingly, without previous court action, but it proceeds at its day, her daughter Sofia C. Crouch, who was then vacationing in the Philippines,
own risk. For it is only the final judgment of the corresponding court that will addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg,
conclusively and finally settle whether the action taken was or was not correct in law. Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted
But the law definitely does not require that the contracting party who believes itself by the defendant in its Dagupan office, for transmission, after payment of the
injured must first file suit and wait for a judgment before taking extrajudicial steps to required fees or charges.
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until The telegram never reached its addressee. Consolacion was interred with only her
the final judgment of rescission is rendered when the law itself requires that he daughter Sofia in attendance. Neither the husband nor any of the other children of
should exercise due diligence to minimize its own damages. 50 the deceased, then all residing in the United States, returned for the burial.

Here, there is no showing that petitioner notified respondent of its intention to When Sofia returned to the United States, she discovered that the wire she had
rescind the contract of sale between them. Quite the contrary, respondent's act of caused the defendant to send, had not been received. She and the other plaintiffs
proceeding with the opening of an irrevocable letter of credit on 23 February 1990 thereupon brought action for damages arising from defendant's breach of contract.
belies petitioner's claim that it notified respondent of the cancellation of the contract The case was filed in the Court of First Instance of Pangasinan and docketed therein
of sale. Truly, no prudent businessman would pursue such action knowing that the as Civil Case No. 15356. The only defense of the defendant was that it was unable to
contract of sale, for which the letter of credit was opened, was already rescinded by transmit the telegram because of "technical and atmospheric factors beyond its
the other party. control." 1 No evidence appears on record that defendant ever made any attempt to
56

advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.
The Court of First Instance of Pangasinan, after trial, ordered the defendant (now "whoever by act or omission causes damage to another, there being fault or
petitioner) to pay the plaintiffs (now private respondents) damages, as follows, with negligence, is obliged to pay for the damage done."
interest at 6% per annum:
In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a
1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 contract whereby, for a fee, petitioner undertook to send said private respondent's
as moral damages. message overseas by telegram. This, petitioner did not do, despite performance by
2. Ignacio Castro Sr., P20,000.00 as moral damages. said private respondent of her obligation by paying the required charges. Petitioner
3. Ignacio Castro Jr., P20,000.00 as moral damages. was therefore guilty of contravening its obligation to said private respondent and is
4. Aurora Castro, P10,000.00 moral damages. thus liable for damages.
5. Salvador Castro, P10,000.00 moral damages.
6. Mario Castro, P10,000.00 moral damages. This liability is not limited to actual or quantified damages. To sustain petitioner's
7. Conrado Castro, P10,000 moral damages. contrary position in this regard would result in an inequitous situation where
8. Esmeralda C. Floro, P20,000.00 moral damages. petitioner will only be held liable for the actual cost of a telegram fixed thirty (30)
9. Agerico Castro, P10,000.00 moral damages. years ago.
10. Rolando Castro, P10,000.00 moral damages.
11. Virgilio Castro, P10,000.00 moral damages. We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral
12. Gloria Castro, P10,000.00 moral damages. damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in similar injury. Though incapable of pecuniary computation, moral damages may be
the amount of P1,000.00 to each of the plaintiffs and costs. 2 recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's
decision but eliminated the award of P16,000.00 as compensatory damages to Sofia Here, petitioner's act or omission, which amounted to gross negligence, was precisely
C. Crouch and the award of P1,000.00 to each of the private respondents as the cause of the suffering private respondents had to undergo.
exemplary damages. The award of P20,000.00 as moral damages to each of Sofia C.
Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P120,000. 00 As the appellate court properly observed:
for each. 3
[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
Petitioner appeals from the judgment of the appellate court, contending that the overseas children must have suffered upon learning of the death of their mother
award of moral damages should be eliminated as defendant's negligent act was not after she had already been interred, without being given the opportunity to even
motivated by "fraud, malice or recklessness." make a choice on whether they wanted to pay her their last respects? There is no
doubt that these emotional sufferings were proximately caused by appellant's
In other words, under petitioner's theory, it can only be held liable for P 31.92, the omission and substantive law provides for the justification for the award of moral
fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the damages. 4
addressee thereof.
We also sustain the trial court's award of P16,000.00 as compensatory damages to
Petitioner's contention is without merit. Sofia C. Crouch representing the expenses she incurred when she came to the
Philippines from the United States to testify before the trial court. Had petitioner not
Art. 1170 of the Civil Code provides that "those who in the performance of their been remiss in performing its obligation, there would have been no need for this suit
obligations are guilty of fraud, negligence or delay, and those who in any manner or for Mrs. Crouch's testimony.
contravene the tenor thereof, are liable for damages." Art. 2176 also provides that
57
The award of exemplary damages by the trial court is likewise justified and, therefore, On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the
sustained in the amount of P1,000.00 for each of the private respondents, as a chattel mortgage to petitioner Rizal Commercial Banking Corporation (RCBC).
warning to all telegram companies to observe due diligence in transmitting the
messages of their customers. All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and
debited by RCBC from private respondent's account, except for RCBC Check No.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that 279805 representing the payment for August 10, 1991, which was unsigned.
petitioner is held liable to private respondents in the following amounts: Previously, the amount represented by RCBC Check No. 279805 was debited from
private respondent's account but was later recalled and re-credited, to him. Because
(1) P10,000.00 as moral damages, to each of private respondents; of the recall, the last two checks, dated February 10, 1993 and March 10, 1993, were
(2) P1,000.00 as exemplary damages, to each of private respondents; no longer presented for payment. This was purportedly in conformity with petitioner
(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch; bank's procedure that once a client's account was forwarded to its account
(4) P5,000.00 as attorney's fees; and representative, all remaining checks outstanding as of the date the account was
(5) Costs of suit. forwarded were no longer presented for patent.

SO ORDERED. On the theory that respondent defaulted in his payments, the check representing the
payment for August 10, 1991 being unsigned, petitioner, in a letter dated January 21,
Yap (Chairman), Paras and Sarmiento, JJ., concur. 1993, demanded from private respondent the payment of the balance of the debt,
including liquidated damages. The latter refused, prompting petitioner to file an
action for replevin and damages before the Pasay City Regional Trial Court (RTC).
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. COURT OF APPEALS Private respondent, in his Answer, interposed a counterclaim for damages.
and FELIPE LUSTRE, respondents.
G.R. No. 133107 March 25, 1999
After trial, the. RTC 3 rendered a decision disposing of the case as follows:

KAPUNAN, J.:
WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:

A simple telephone call and an ounce of good faith on the part of petitioner could
I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is
have prevented the present controversy.
hereby ordered,

On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota
A. To accept the payment equivalent to the three checks amounting to a total of
Corolla from Toyota Shaw, Inc. for which he made a down payment of P164,620.00,
P44,938.00, without interest.
the balance of the purchase price to be paid in 24 equal monthly installments. Private
B. To release/cancel the mortgage on the car . . . upon payment of the amount of
respondent thus issued 24 postdated checks for the amount of P14,976.00 each. The
P44,938.00, without interest.
first was dated April 10, 1991; subsequent checks were dated every 10th day of each
C. To pay the cost of suit.
succeeding month.
II. On The Counterclaim.
To secure the balance, private respondent executed a promissory note 1 and a
contract of chattel mortgage 2 over the vehicle in favor of Toyota Shaw, Inc. The
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral damages.
contract of chattel mortgage, in paragraph 11 thereof, provided for an acceleration
B. RCBC to pay P100,000.00 as exemplary damages.
clause stating that should the mortgagor default in the payment of any installment,
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is not entitled
the whole amount remaining unpaid shall become due. In addition, the mortgagor
shall be liable for 25% of the principal due as liquidated damages. to any fee for lawyering for himself.
58
All awards for damages are subject to payment of fees to be assessed by the Clerk of We take exception to the application by both the trial and appellate courts of Article
Court, RTC, Pasay City. 1377 of the Civil Code, which states:

SO ORDERED. The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:
It bears stressing that a contract of adhesion is just as binding as ordinary
We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a contracts. 5 It is true that we have, on occasion, struck down such contracts as void
contract of adhesion — that is, one wherein a party, usually a corporation, prepares when the weaker party is imposed upon in dealing with the dominant bargaining
the stipulations in the contract, while the other party merely affixes his signature or party and is reduced to the alternative of taking it or leaving it, completely deprived
his "adhesion" thereto . . . — is to be strictly construed against appellant bank which of the opportunity to bargain on equal footing. 6 Nevertheless, contracts of adhesion
prepared the form Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage are not invalid per se; 7 they are not entirely prohibited. 8 The one who adheres to the
contract [containing the acceleration clause] should be construed to cover only contract is in reality free to reject it entirely; if he adheres, he gives his consent. 9
deliberate and advertent failure on the part of the mortgagor to pay an amortization
as it became due in line with the consistent holding of the Supreme Court construing While ambiguities in a contract of adhesion are to be construed against the party that
obscurities and ambiguities in the restrictive sense against the drafter thereof . . . in prepared the same, 10 this rule applies only if the stipulations in such contract are
the light of Article 1377 of the Civil Code. obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee control. 11 In the latter case, there would be no need for construction. 12
rested solely on the fact that the 5th check issued by appellee . . . was recalled for
lack of signature. However, the check was recalled only after the amount covered Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13 are clear. Said
thereby had been deducted from defendant-appellee's account, as shown by the paragraph states:
testimony of plaintiff's own witness Francisco Bulatao who was in charge of the
preparation of the list and trial balances of bank customers . . . . The "default" was 11. In case the MORTGAGOR fails to pay any of the installments, or to pay the
therefore not a case of failure to pay, the check being sufficiently funded, and which interest that may be due as provided in the said promissory note, the whole amount
amount was in fact already debited [sic] from appellee's account by the appellant remaining unpaid therein shall immediately become due and payable and the
bank which subsequently re-credited the amount to defendant-appelle's account for mortgage on the property (ies) herein-above described may be foreclosed by the
lack of signature. All these actions RCBC did on its own without notifying defendant MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce
until sixteen (16) months later when it wrote its demand letter dated January 21, collection of the obligation hereby secured, and in either case the MORTGAGOR
1993. further agrees to pay the MORTGAGEE an additional sum of 25% of the principal due
and unpaid, as liquidated damages, which said sum shall become part thereof. The
Clearly, appellant bank was remiss in the performance, of its functions for it could MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it
have easily called the defendant's attention to the lack of signature on the check and to the MORTGAGEE.
sent the check to or summoned, the latter to affix his signature. It is also to be noted
that the demand letter contains no explanation as to how defendant-appellee The above terms leave no room for construction. All that is required is the application
incurred arrearages in the amount of P66,255.70, which is why defendant-appellee thereof.
made a protest notation thereon.
Petitioner claims that private respondent's check representing the fifth installment
Notably, all the other checks issued by the appellee dated subsequent to August 10, was "not encashed," 14 such that the installment for August 1991 was not paid. By
1991 and dated earlier than the demand letter, were duly encashed. This fact should virtue of paragraph 11 above, petitioner submits that it "was justified in treating the
have already prompted the appellant bank to review its action relative to the entire balance of the obligation as due and
59

unsigned check. . . . 4 demandable." 15 Despite demand by petitioner, however, private respondent refused
to pay the balance of the debt. Petitioner, in sum imputes delay on the part of private Failing thus, petitioner is liable for damages caused to private respondent. 20 These
respondent. include moral damages for the mental anguish, serious anxiety, besmirched
reputation, wounded feelings and social humiliation suffered by the latter. 21 The trial
We do not subscribe to petitioner's theory. court found that private respondent was:

Art. 170 of the Civil Code states that those who in the performance of their [a] client who has shared transactions for over twenty years with a bank . . ..The
obligations are guilty of delay are liable for damages. The delay in the performance of shabby treatment given the defendant is unpardonable since he was put to shame
the obligation, however, must be either malicious or negligent. 16 Thus, assuming that and embarrassment after the case was filed in Court. He is a lawyer in his own right,
private respondent was guilty of delay in the payment of the value of unsigned check, married to another member of the bar. He sired children who are all professionals in
private respondent cannot be held liable for damages. There is no imputation, much their chosen field. He is known to the community of golfers with whom he gravitates.
less evidence, that private respondent acted with malice or negligence in failing to Surely the filing of the case made defendant feel so bad and bothered.
sign the check. Indeed, we agree with the Court of Appeals finding that such omission
was mere "in advertence" on the part of private respondent. Toyota salesperson To deter others from emulating petitioner's callous example, we affirm the award of
Jorge Geronimo testified that he even verified whether private respondent had exemplary damages. 22 As exemplary damages are warranted, so are attorney's
signed all the checks and in fact returned three or four unsigned checks to him for fees. 23
signing:
We, however, find excessive the amount of damages awarded by the trial court in
Atty. Obispo: favor of private respondent with respect to his counterclaims and, accordingly,
After these receipts were issued, what else did you do about the transaction? reduce the same as follows:
A: During our transaction with Atty. Lustre, I found out when he issued to me the 24
checks, I found out 3 to 4 checks are unsigned and I asked him to signed these checks. (a) Moral damages — from P200,000.00 to P100,000.00
(b) Exemplary damages — from P100,000.00 to P75,000.00
Atty. Obispo: (c) Attorney's fees — from P50,000.00 to P 30,000.00
Even when the checks were delivered to petitioner, it did not object to the unsigned
check. In view of the lack of malice or negligence on the part of private respondent, WHEREFORE, subject to these modifications, the decision of the Court of Appeals is
petitioner's blind and mechanical invocation of paragraph 11 of the contract of AFFIRMED.
chattel mortgage was unwarranted.
SO ORDERED.
Petitioner's conduct, in the light of the circumstances of this case, can only be
described as mercenary. Petitioner had already debited the value of the unsigned
Davide, Jr., C.J., Melo and Pardo, JJ., concur.
check from private respondent's account only to re-credit it much later to him.

Thereafter, petitioner encashed checks subsequently dated, then abruptly refused to


encash the last two. More than a year after the date of the unsigned check,
petitioner, claiming delay and invoking paragraph 11, demanded from private
respondent payment of the value of said check and that of the last two checks,
including liquidated damages. As pointed out by the trial court, this whole
controversy could have been avoided if only petitioner bothered to call up private
respondent and ask him to sign the check. Good faith not only in compliance with its
contractual obligations, 18 but also in observance of the standard in human relations,
for every person "to act with justice, give everyone his due, and observe honesty and
60

good faith." 19 behooved the bank to do so.


NEGLIGENCE Petitioner Roberto Juntilla filed Civil Case No. R-17378 for breach of contract
with damages before the City Court of Cebu City, Branch I against Clemente
FORTUITOUS EVENT
Fontanar, Fernando Banzon and Berfol Camoro.
G.R. No. L-45637 May 31, 1985
ROBERTO JUNTILLA, petitioner, vs. CLEMENTE FONTANAR, FERNANDO
BANZON and BERFOL CAMORO, respondents. The respondents filed their answer, alleging inter alia that the accident that
Valentin A. Zozobrado for petitioner. caused losses to the petitioner was beyond the control of the respondents
Ruperto N. Alfarara for respondents. taking into account that the tire that exploded was newly bought and was
only slightly used at the time it blew up.
GUTIERREZ, JR., J.:
After trial, Judge Romulo R. Senining of the Civil Court of Cebu rendered
judgment in favor of the petitioner and against the respondents. The
This is a petition for review, on questions of law, of the decision of the Court
dispositive portion of the decision reads:
of First Instance of Cebu which reversed the decision of the City Court of
Cebu and exonerated the respondents from any liability arising from a
vehicular accident. WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants and the latter are hereby ordered, jointly and
severally, to pay the plaintiff the sum of P750.00 as reimbursement for the
The background facts which led to the filing of a complaint for breach of
lost Omega wrist watch, the sum of P246.64 as unrealized salary of the
contract and damages against the respondents are summarized by the Court
plaintiff from his employer, the further sum of P100.00 for the doctor's fees
of First Instance of Cebu as follows:
and medicine, an additional sum of P300.00 for attorney's fees and the
costs.
The facts established after trial show that the plaintiff was a passenger of
the public utility jeepney bearing plate No. PUJ-71-7 on the course of the trip
The respondents appealed to the Court of First Instance of Cebu, Branch XIV.
from Danao City to Cebu City. The jeepney was driven by defendant Berfol
Camoro. It was registered under the franchise of defendant Clemente
Fontanar but was actually owned by defendant Fernando Banzon. When the Judge Leonardo B. Canares reversed the judgment of the City Court of Cebu
jeepney reached Mandaue City, the right rear tire exploded causing the upon a finding that the accident in question was due to a fortuitous event.
vehicle to turn turtle. In the process, the plaintiff who was sitting at the front The dispositive portion of the decision reads:
seat was thrown out of the vehicle. Upon landing on the ground, the plaintiff
momentarily lost consciousness. When he came to his senses, he found that WHEREFORE, judgment is hereby rendered exonerating the defendants from
he had a lacerated wound on his right palm. Aside from this, he suffered any liability to the plaintiff without pronouncement as to costs.
injuries on his left arm, right thigh and on his back. (Exh. "D"). Because of his
shock and injuries, he went back to Danao City but on the way, he A motion for reconsideration was denied by the Court of First Instance.
discovered that his "Omega" wrist watch was lost. Upon his arrival in Danao
City, he immediately entered the Danao City Hospital to attend to his The petitioner raises the following alleged errors committed by the Court of
injuries, and also requested his father-in-law to proceed immediately to the First Instance of Cebu on appeal—
place of the accident and look for the watch. In spite of the efforts of his
father-in-law, the wrist watch, which he bought for P 852.70 (Exh. "B") could a. The Honorable Court below committed grave abuse of discretion in failing
no longer be found. to take cognizance of the fact that defendants and/or their employee failed
to exercise "utmost and/or extraordinary diligence" required of common
xxx xxx xxx carriers contemplated under Art. 1755 of the Civil Code of the Philippines.
61
b. The Honorable Court below committed grave abuse of discretion by 1954, and People v. Palapad, CA-G.R. No. 18480, June 27, 1958. These
deciding the case contrary to the doctrine laid down by the Honorable rulings, however, not only are not binding on this Court but were based on
Supreme Court in the case of Necesito et al. v. Paras, et al. considerations quite different from those that obtain in the case at bar. The
appellate court there made no findings of any specific acts of negligence on
We find the petition impressed with merit. the part of the defendants and confined itself to the question of whether or
not a tire blow-out, by itself alone and without a showing as to the causative
The City Court and the Court of First Instance of Cebu found that the right factors, would generate liability. ...
rear tire of the passenger jeepney in which the petitioner was riding blew up
causing the vehicle to fall on its side. The petitioner questions the conclusion In the case at bar, there are specific acts of negligence on the part of the
of the respondent court drawn from this finding of fact. respondents. The records show that the passenger jeepney turned turtle and
jumped into a ditch immediately after its right rear tire exploded. The
The Court of First Instance of Cebu erred when it absolved the carrier from evidence shows that the passenger jeepney was running at a very fast speed
any liability upon a finding that the tire blow out is a fortuitous event. The before the accident. We agree with the observation of the petitioner that a
Court of First Instance of Cebu ruled that: public utility jeep running at a regular and safe speed will not jump into a
ditch when its right rear tire blows up. There is also evidence to show that
the passenger jeepney was overloaded at the time of the accident. The
After reviewing the records of the case, this Court finds that the accident in
petitioner stated that there were three (3) passengers in the front seat and
question was due to a fortuitous event. A tire blow-out, such as what
fourteen (14) passengers in the rear.
happened in the case at bar, is an inevitable accident that exempts the
carrier from liability, there being absence of a showing that there was
misconduct or negligence on the part of the operator in the operation and While it may be true that the tire that blew-up was still good because the
maintenance of the vehicle involved. The fact that the right rear tire grooves of the tire were still visible, this fact alone does not make the
exploded, despite being brand new, constitutes a clear case of caso fortuito explosion of the tire a fortuitous event. No evidence was presented to show
which can be a proper basis for exonerating the defendants from liability. ... that the accident was due to adverse road conditions or that precautions
were taken by the jeepney driver to compensate for any conditions liable to
cause accidents. The sudden blowing-up, therefore, could have been caused
The Court of First Instance relied on the ruling of the Court of Appeals
by too much air pressure injected into the tire coupled by the fact that the
in Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29,
jeepney was overloaded and speeding at the time of the accident.
1954, where the Court of Appeals ruled that:

In Lasam v. Smith (45 Phil. 657), we laid down the following essential
A tire blow-out does not constitute negligence unless the tire was already
characteristics of caso fortuito:
old and should not have been used at all. Indeed, this would be a clear case
of fortuitous event.
xxx xxx xxx
The foregoing conclusions of the Court of First Instance of Cebu are based on
a misapprehension of overall facts from which a conclusion should be drawn. ... In a legal sense and, consequently, also in relation to contracts, a caso
The reliance of the Court of First Instance on the Rodriguez case is not in fortuito presents the following essential characteristics: (1) The cause of the
order. In La Mallorca and Pampanga Bus Co. v. De Jesus, et al. (17 SCRA 23), unforeseen and unexpected occurrence, or of the failure of the debtor to
we held that: comply with his obligation, must be independent of the human will. (2) It
must be impossible to foresee the event which constitutes the caso fortuito,
or if it can be foreseen, it must be impossible to avoid. (3) The occurrence
Petitioner maintains that a tire blow-out is a fortuitous event and gives rise
must be such as to render it impossible for the debtor to fulfill his obligation
to no liability for negligence, citing the rulings of the Court of Appeals in
in a normal manner. And (4) the obligor (debtor) must be free from any
Rodriguez v. Red Line Transportation Co., CA G.R. No. 8136, December 29,
62
participation in the aggravation of the injury resulting to the creditor. The respondents likewise argue that the petitioner cannot recover any amount for
(5 Encyclopedia Juridica Espanola, 309.) failure to prove such damages during the trial. The respondents submit that if the
petitioner was really injured, why was he treated in Danao City and not in Mandaue
In the case at bar, the cause of the unforeseen and unexpected occurrence City where the accident took place. The respondents argue that the doctor who
was not independent of the human will. The accident was caused either issued the medical certificate was not presented during the trial, and hence not
through the negligence of the driver or because of mechanical defects in the cross-examined. The respondents also claim that the petitioner was not wearing
tire. Common carriers should teach their drivers not to overload their any wrist watch during the accident.
vehicles, not to exceed safe and legal speed limits, and to know the correct
measures to take when a tire blows up thus insuring the safety of passengers It should be noted that the City Court of Cebu found that the petitioner had a
at all times. Relative to the contingency of mechanical defects, we held lacerated wound on his right palm aside from injuries on his left arm, right thigh
in Necesito, et al. v. Paras, et al. (104 Phil. 75), that: and on his back, and that on his way back to Danao City, he discovered that his
"Omega" wrist watch was lost. These are findings of facts of the City Court of Cebu
... The preponderance of authority is in favor of the doctrine that a which we find no reason to disturb. More so when we consider the fact that the
passenger is entitled to recover damages from a carrier for an injury Court of First Instance of Cebu impliedly concurred in these matters when it
resulting from a defect in an appliance purchased from a manufacturer, confined itself to the question of whether or not the tire blow out was a fortuitous
whenever it appears that the defect would have been discovered by the event.
carrier if it had exercised the degree of care which under the circumstances
was incumbent upon it, with regard to inspection and application of the WHEREFORE, the decision of the Court of First Instance of Cebu, Branch IV
necessary tests. For the purposes of this doctrine, the manufacturer is appealed from is hereby REVERSED and SET ASIDE, and the decision of the City
considered as being in law the agent or servant of the carrier, as far as Court of Cebu, Branch I is REINSTATED, with the modification that the damages
regards the work of constructing the appliance. According to this theory, the shall earn interest at 12% per annum and the attorney's fees are increased to SIX
good repute of the manufacturer will not relieve the carrier from liability' (10 HUNDRED PESOS (P600.00). Damages shall earn interests from January 27, 1975.
Am. Jur. 205, s, 1324; see also Pennsylvania R. Co. v. Roy, 102 U.S. 451; 20 L.
Ed. 141; Southern R. Co. v. Hussey, 74 ALR 1172; 42 Fed. 2d 70; and Ed Note, SO ORDERED.
29 ALR 788.: Ann. Cas. 1916E 929).
Teehankee (Chairman), Melencio-Herrera, Plana, Relova, De la Fuente and
The rationale of the carrier's liability is the fact that the passenger has Alampay, JJ., concur.
neither choice nor control over the carrier in the selection and use of the
equipment and appliances in use by the carrier. Having no privity whatever
19. G.R. No. L-47379 May 16, 1988
with the manufacturer or vendor of the defective equipment, the passenger
has no remedy against him, while the carrier usually has. It is but logical,
therefore, that the carrier, while not an insurer of the safety of his NATIONAL POWER CORPORATION, petitioner, vs.
passengers, should nevertheless be held to answer for the flaws of his HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION,
equipment if such flaws were at all discoverable. ... INC., respondents.
G.R. No. L-47481 May 16, 1988
ENGINEERING CONSTRUCTION, INC., petitioner, vs.
It is sufficient to reiterate that the source of a common carrier's legal liability
COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents.
is the contract of carriage, and by entering into the said contract, it binds
Raymundo A. Armovit for private respondent in L-47379.
itself to carry the passengers safely as far as human care and foresight can
The Solicitor General for petitioner.
provide, using the utmost diligence of a very cautious person, with a due
regard for all the circumstances. The records show that this obligation was
not met by the respondents.
63
GUTIERREZ, JR., J.: danger height of 212 meters above sea level, the defendant corporation caused the
opening of the spillway gates." (pp. 45-46, L-47379, Rollo)
These consolidated petitions seek to set aside the decision of the respondent Court of
Appeals which adjudged the National Power Corporation liable for damages against The appellate court sustained the findings of the trial court that the evidence
Engineering Construction, Inc. The appellate court, however, reduced the amount of preponlderantly established the fact that due to the negligent manner with which the
damages awarded by the trial court. Hence, both parties filed their respective spillway gates of the Angat Dam were opened, an extraordinary large volume of
petitions: the National Power Corporation (NPC) in G.R. No. 47379, questioning the water rushed out of the gates, and hit the installations and construction works of ECI
decision of the Court of Appeals for holding it liable for damages and the Engineering at the lpo site with terrific impact, as a result of which the latter's stockpile of
Construction, Inc. (ECI) in G.R. No. 47481, questioning the same decision for reducing materials and supplies, camp facilities and permanent structures and accessories
the consequential damages and attorney's fees and for eliminating the exemplary either washed away, lost or destroyed.
damages.
The appellate court further found that:
The facts are succinctly summarized by the respondent Court of Appeals, as follows:
It cannot be pretended that there was no negligence or that the appellant exercised
On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful bidder, extraordinary care in the opening of the spillway gates of the Angat Dam. Maintainers
executed a contract in Manila with the National Waterworks and Sewerage Authority of the dam knew very well that it was far more safe to open them gradually. But the
(NAWASA), whereby the former undertook to furnish all tools, labor, equipment, and spillway gates were opened only when typhoon Welming was already at its height, in
materials (not furnished by Owner), and to construct the proposed 2nd lpo-Bicti a vain effort to race against time and prevent the overflow of water from the dam as
Tunnel, Intake and Outlet Structures, and Appurtenant Structures, and Appurtenant it 'was rising dangerously at the rate of sixty centimeters per hour. 'Action could have
Features, at Norzagaray, Bulacan, and to complete said works within eight hundred been taken as early as November 3, 1967, when the water in the reservoir was still
(800) calendar days from the date the Contractor receives the formal notice to low. At that time, the gates of the dam could have been opened in a regulated
proceed (Exh. A). manner. Let it be stressed that the appellant knew of the coming of the typhoon four
days before it actually hit the project area. (p. 53, L-47379, Rollo)
The project involved two (2) major phases: the first phase comprising, the tunnel
work covering a distance of seven (7) kilometers, passing through the mountain, from As to the award of damages, the appellate court held:
the Ipo river, a part of Norzagaray, Bulacan, where the Ipo Dam of the defendant
National Power Corporation is located, to Bicti; the other phase consisting of the We come now to the award of damages. The appellee submitted a list of estimated
outworks at both ends of the tunnel. losses and damages to the tunnel project (Ipo side) caused by the instant flooding of
the Angat River (Exh. J-1). The damages were itemized in four categories, to wit:
By September 1967, the plaintiff corporation already had completed the first major Camp Facilities P55,700.00; Equipment, Parts and Plant — P375,659.51; Materials
phase of the work, namely, the tunnel excavation work. Some portions of the P107,175.80; and Permanent Structures and accessories — P137,250.00, with an
outworks at the Bicti site were still under construction. As soon as the plaintiff aggregate total amount of P675,785.31. The list is supported by several vouchers
corporation had finished the tunnel excavation work at the Bicti site, all the which were all submitted as Exhibits K to M-38 a, N to O, P to U-2 and V to X- 60-a
equipment no longer needed there were transferred to the Ipo site where some (Vide: Folders Nos. 1 to 4). The appellant did not submit proofs to traverse the
projects were yet to be completed. aforementioned documentary evidence. We hold that the lower court did not
commit any error in awarding P 675,785.31 as actual or compensatory damages.
The record shows that on November 4,1967, typhoon 'Welming' hit Central Luzon,
passing through defendant's Angat Hydro-electric Project and Dam at lpo, However, We cannot sustain the award of P333,200.00 as consequential damages.
Norzagaray, Bulacan. Strong winds struck the project area, and heavy rains This amount is broken down as follows: P213,200.00 as and for the rentals of a crane
intermittently fell. Due to the heavy downpour, the water in the reservoir of the to temporarily replace the one "destroyed beyond repair," and P120,000.00 as one
Angat Dam was rising perilously at the rate of sixty (60) centimeters per hour. To month bonus which the appellee failed to realize in accordance with the contract
64

prevent an overflow of water from the dam, since the water level had reached the which the appellee had with NAWASA. Said rental of the crane allegedly covered the
period of one year at the rate of P40.00 an hour for 16 hours a day. The evidence, bonus for earlier completion and liquidated damages for delayed performance; and in
however, shows that the appellee bought a crane also a crawler type, on November either case at the rate of P4,000.00 daily. Thus, since NPC's negligence compelled
10, 1967, six (6) days after the incident in question (Exh N) And according to the lower work stoppage for a period of one month, the said award of P120,000.00 is justified.
court, which finding was never assailed, the appellee resumed its normal construction ECI further assailes the reduction of attorney's fees and the total elimination of
work on the Ipo- Bicti Project after a stoppage of only one month. There is no exemplary damages.
evidence when the appellee received the crane from the seller, Asian Enterprise
Limited. But there was an agreement that the shipment of the goods would be Both petitions are without merit.
effected within 60 days from the opening of the letter of credit (Exh.
N).<äre||anº•1àw> It appearing that the contract of sale was consummated, We It is clear from the appellate court's decision that based on its findings of fact and
must conclude or at least assume that the crane was delivered to the appellee within that of the trial court's, petitioner NPC was undoubtedly negligent because it opened
60 days as stipulated. The appellee then could have availed of the services of another the spillway gates of the Angat Dam only at the height of typhoon "Welming" when it
crane for a period of only one month (after a work stoppage of one month) at the knew very well that it was safer to have opened the same gradually and earlier, as it
rate of P 40.00 an hour for 16 hours a day or a total of P 19,200.00 as rental. was also undeniable that NPC knew of the coming typhoon at least four days before it
actually struck. And even though the typhoon was an act of God or what we may call
But the value of the new crane cannot be included as part of actual damages because force majeure, NPC cannot escape liability because its negligence was the proximate
the old was reactivated after it was repaired. The cost of the repair was P 77,000.00 cause of the loss and damage. As we have ruled in Juan F. Nakpil & Sons v. Court of
as shown in item No. 1 under the Equipment, Parts and Plants category (Exh. J-1), Appeals, (144 SCRA 596, 606-607):
which amount of repair was already included in the actual or compensatory damages.
(pp. 54-56, L-47379, Rollo) Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of
The appellate court likewise rejected the award of unrealized bonus from NAWASA in the tenor of the obligation as provided for in Article 1170 of the Civil Code, which
the amount of P120,000.00 (computed at P4,000.00 a day in case construction is results in loss or damage, the obligor cannot escape liability.
finished before the specified time, i.e., within 800 calendar days), considering that
the incident occurred after more than three (3) years or one thousand one hundred The principle embodied in the act of God doctrine strictly requires that the act must
seventy (1,170) days. The court also eliminated the award of exemplary damages as be one occasioned exclusively by the violence of nature and human agencies are to
there was no gross negligence on the part of NPC and reduced the amount of be excluded from creating or entering into the cause of the mischief. When the
attorney's fees from P50,000.00 to P30,000.00. effect, the cause of which is to be considered, is found to be in part the result of the
participation of man, whether it be from active intervention or neglect, or failure to
In these consolidated petitions, NPC assails the appellate court's decision as being act, the whole occurrence is thereby humanized, as it was, and removed from the
erroneous on the ground that the destruction and loss of the ECI's equipment and rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
facilities were due to force majeure. It argues that the rapid rise of the water level in
the reservoir of its Angat Dam due to heavy rains brought about by the typhoon was Thus, it has been held that when the negligence of a person concurs with an act of
an extraordinary occurrence that could not have been foreseen, and thus, the God in producing a loss, such person is not exempt from liability by showing that the
subsequent release of water through the spillway gates and its resultant effect, if any, immediate cause of the damage was the act of God. To be exempt from liability for
on ECI's equipment and facilities may rightly be attributed to force majeure. loss because of an act of God, he must be free from any previous negligence or
misconduct by which the loss or damage may have been occasioned. (Fish & Elective
On the other hand, ECI assails the reduction of the consequential damages from Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan 49 O.G. 4379; Limpangco & Sons v.
P333,200.00 to P19,000.00 on the grounds that the appellate court had no basis in Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
concluding that ECI acquired a new Crawler-type crane and therefore, it only can
claim rentals for the temporary use of the leased crane for a period of one month; Furthermore, the question of whether or not there was negligence on the part of NPC
and that the award of P4,000.00 a day or P120,000.00 a month bonus is justified is a question of fact which properly falls within the jurisdiction of the Court of Appeals
65

since the period limitation on ECI's contract with NAWASA had dual effects, i.e.,
and will not be disturbed by this Court unless the same is clearly unfounded. Thus, point in time. The supposed liquidated damages for failure to finish the project within
in Tolentino v. Court of appeals, (150 SCRA 26, 36) we ruled: the stipulated period or the opposite of the claim for bonus is not clearly presented in
the records of these petitions. It is not shown that NAWASA imposed them.
Moreover, the findings of fact of the Court of Appeals are generally final and
conclusive upon the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA 890 As to the question of exemplary damages, we sustain the appellate court in
[1983]. In fact it is settled that the Supreme Court is not supposed to weigh evidence eliminating the same since it found that there was no bad faith on the part of NPC
but only to determine its substantially (Nuñez v. Sandiganbayan, 100 SCRA 433 [1982] and that neither can the latter's negligence be considered gross. In Dee Hua Liong
and will generally not disturb said findings of fact when supported by substantial Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled:
evidence (Aytona v. Court of Appeals, 113 SCRA 575 [1985]; Collector of Customs of
Manila v. Intermediate Appellate Court, 137 SCRA 3 [1985]. On the other hand Neither may private respondent recover exemplary damages since he is not entitled
substantial evidence is defined as such relevant evidence as a reasonable mind might to moral or compensatory damages, and again because the petitioner is not shown to
accept as adequate to support a conclusion (Philippine Metal Products, Inc. v. Court have acted in a wanton, fraudulent, reckless or oppressive manner (Art. 2234, Civil
of Industrial Relations, 90 SCRA 135 [1979]; Police Commission v. Lood, 127 SCRA 757 Code; Yutuk v. Manila Electric Co., 2 SCRA 377; Francisco v. Government Service
[1984]; Canete v. WCC, 136 SCRA 302 [1985]) Insurance System, 7 SCRA 577; Gutierrez v. Villegas, 8 SCRA 527; Air France v.
Carrascoso, 18 SCRA 155; Pan Pacific (Phil.) v. Phil. Advertising Corp., 23 SCRA 977;
Therefore, the respondent Court of Appeals did not err in holding the NPC liable for Marchan v. Mendoza, 24 SCRA 888).
damages.
We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There
Likewise, it did not err in reducing the consequential damages from P333,200.00 to are no compelling reasons why we should set aside the appellate court's finding that
P19,000.00. As shown by the records, while there was no categorical statement or the latter amount suffices for the services rendered by ECI's counsel.
admission on the part of ECI that it bought a new crane to replace the damaged one,
a sales contract was presented to the effect that the new crane would be delivered to WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED
it by Asian Enterprises within 60 days from the opening of the letter of credit at the for LACK OF MERIT. The decision appealed from is AFFIRMED.
cost of P106,336.75. The offer was made by Asian Enterprises a few days after the
flood. As compared to the amount of P106,336.75 for a brand new crane and paying SO ORDERED.
the alleged amount of P4,000.00 a day as rental for the use of a temporary crane,
which use petitioner ECI alleged to have lasted for a period of one year, thus, totalling
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur
P120,000.00, plus the fact that there was already a sales contract between it and
Asian Enterprises, there is no reason why ECI should opt to rent a temporary crane
for a period of one year. The appellate court also found that the damaged crane was 20. G.R. No. 138123 March 12, 2002
subsequently repaired and reactivated and the cost of repair was P77,000.00. MINDEX RESOURCES DEVELOPMENT, petitioner, vs.
Therefore, it included the said amount in the award of of compensatory damages, but EPHRAIM MORILLO, respondent.
not the value of the new crane. We do not find anything erroneous in the decision of
the appellate court that the consequential damages should represent only the service PANGANIBAN, J.:
of the temporary crane for one month. A contrary ruling would result in the unjust
enrichment of ECI. Attorney’s fees cannot be granted simply because one was compelled to sue to
protect and enforce one’s right. The grant must be proven by facts; it cannot depend
The P120,000.00 bonus was also properly eliminated as the same was granted by the on mere speculation or conjecture -- its basis must be stated in the text of the
trial court on the premise that it represented ECI's lost opportunity "to earn the one decision.
month bonus from NAWASA ... ." As stated earlier, the loss or damage to ECI's
equipment and facilities occurred long after the stipulated deadline to finish the The Case
66

construction. No bonus, therefore, could have been possibly earned by ECI at that
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the "Upon learning of the burning incident, Morillo offered to sell the truck to MINDEX
March 26, 1999 Decision1 of the Court of Appeals (CA) in CA-GR CV No. 46967. The but the latter refused. Instead, it replaced the vehicle’s burned tires and had it towed
dispositive portion of the challenged Decision reads as follows: to a shop for repair and overhauling.

"WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION that the legal "On April 15, 1991, Morillo sent a letter to Mr. Arni Isberg, the Finance Manager of
interest to be paid on the rentals of P76,000.00 and costs of repair in the amount MINDEX, thru Mr. Ramoncito Gozar, Project Manager, proposing the following:
of P132,750.00 is six (6%) percent per annumfrom June 22, 1994, the date of the
decision of the court a quo to the date of its finality. Thereafter, if the amounts ‘x x x xxx xxx
adjudged remain unpaid, the interest rate shall be twelve (12%) percent per
annum from the date of finality of the decision until fully paid."2 ‘I have written to let you know that I am entrusting to you the said vehicle in the
amount of P275,000.00 which is its cost price. I will not charge your company for the
The Facts encumbrance of P76,800+ since you used it as my friendly gesture on account of the
unforeseen adversity.
The factual antecedents of the case are summarized by the CA in this wise:
‘In view of the tragic happening, I am asking you to pay us, in a way which will not be
"On February 1991, a verbal agreement was entered into between Ephraim Morillo hard for you to settle to pay us in four installment monthly as follows:
and Mindex Resources Corporation (MINDEX for brevity) for the lease of the former’s
6 x 6 ten-wheeler cargo truck for use in MINDEX’s mining operations in Binaybay,
Bigaan, San Teodoro, Oriental Mindoro, at the stipulated rental of ‘P300.00 per hour ‘First payment - April 25/91 P[1]50,000.00
for a minimum of eight hours a day or a total of P2,400.00 daily.’ MINDEX had been
paying the rentals until April 10, 1991.1âwphi1.nêt ‘Second payment - May 15/91 50,000.00

‘Third payme(n)t - June 15/91 50,000.00


"Unknown to Morillo, on April 11, 1991, the truck was burned by unidentified
persons while it was parked unattended at Sitio Aras, Bigaan, San Teodoro, Oriental ‘Fourth payme(n)t - July 15/91 25,000.00
Mindoro, due to mechanical trouble. The findings of the Mindoro Oriental Integrated
National Police in their investigation report read: TOTAL P275,000.00

‘3. On 121005H April 1991, Mr Alexander Roxas, project coordinator of MINDEX


MINING CORP. reported to this office that on the morning of 12 April 1991 while he ‘I promise to relinquish all the necessary documents upon full payment of said
was supposed to report for his Work at their office at Sitio Tibonbon, Bigaan, San account.
Teodoro, Oriental Mindoro, he x x x noticed that their hired 6 x 6 Ten wheeler Cargo
Truck temporarily parked at Sitio Aras, Bigaan, San Teodoro, Oriental Mindoro for ‘x x x xxx xxx
aplha Engine Trouble was burned on the night of April 11, 1991 by still unidentified
person. "Through Mr. Gozar, MINDEX responded by a handwritten letter to his cousin Malou
(wife of Ephraim Morillo), expressing their reservations on the above demands due to
‘x x x xxx xxx their tight financial situation. However, he made the following counter offers:

‘5. x x x Based also on the facts gathered and incident scene searched it was also ‘a) Pay the rental of the 6 x 6 truck (actual) in the amount of P76,000.00.
found out that said 6 x 6 Ten Wheeler Cargo Truck was burned by means of using ‘b) Repair and overhaul the truck on our own expenses and;
coconut leaves and as a result of which said 6 x 6 was totally burned excluding the ‘c) Return it to you on (A1) good running condition after repair.’
engine which was partially damaged by still undetermined amount.’
67
"Morillo replied on April 18, 1991, (1) that he will relinquish to MINDEX the damaged appellee was forced to pull out the truck and had it repaired at his own expense.
truck; (2) that he is amenable to receive the rental in the amount of P76,000.00; and Since under the law, the ‘lessee shall return the thing leased, upon the termination of
(3) that MINDEX will pay fifty thousand pesos (P50,000.00) monthly until the balance the lease, just as he receive it, ‘the appellant stands liable for the expenses incurred
of P275,000.00 is fully paid. It is noteworthy that except for his acceptance of the for the repair in the aggregate amount of P132,750.00."4
proffered P76,000.00 unpaid rentals, Morillo’s stand has virtually not been changed
as he merely lowered the first payment on the P275,000.00 valuation of the truck Nevertheless, the appellate court modified the Decision of the trial court. The 12
from P150,000.00 to P50,000.00. percent interest rate on the P76,000 rentals and the P132,750 repair costs, imposed
by the RTC, was changed by the CA to 6 percent per annum from June 22, 1994 to the
"The parties had since remained intransigent and so on August 1991, Morillo pulled date of finality of the said Decision; and 12 percent per annum thereafter, if the
out the truck from the repair shop of MINDEX and had it repaired elsewhere for amounts adjudged would remain unpaid from such date of finality until the rentals
which he spent the total amount of P132,750.00."3(Citations omitted) and the repair costs were fully paid. It affirmed the award of attorney’s fees.

Ruling of the Trial Court Hence, this Petition.5

After evaluating the evidence adduced by both parties, the Regional Trial Court (RTC) Issues
found petitioner responsible for the destruction or loss of the leased 6 x 6 truck and
ordered it to pay respondent (1) P76,000 as balance of the unpaid rental for the 6 x 6 In its Memorandum, petitioner raises the following issues for the Court’s
truck with interest of 12 percent from June 22, 1994 (the rendition of the judgment) consideration:
up to the payment of the amount; (2) P132,750 representing the costs of repair and
overhaul of the said truck, with interest rate of 12 percent until fully paid; and "4.1. Whether or not the Court of Appeals gravely erred in finding that petitioner
(3) P20,000 as attorney’s fees for compelling respondent to secure the services of failed to overcome the presumption of negligence against it considering that the facts
counsel in filing his Complaint. show, as admitted by the respondent, that the burning of the truck was a fortuitous
event.
Ruling of the Court of Appeals "4.2. Whether or not the Court of Appeals gravely erred in affirming the decision of
the trial court finding petitioner liable to pay unpaid rentals and cost of repairs.
The appellate court sustained the RTC’s finding that petitioner was not without fault "4.3. Whether or not the Court of Appeals also erred in affirming the decision of the
for the loss and destruction of the truck and, thus, liable therefor. The CA said: trial court finding petitioner liable to pay attorney’s fees." 6

"The burning of the subject truck was impossible to foresee, but not impossible to This Court’s Ruling
avoid. MINDEX could have prevented the incident by immediately towing the truck to
a motor shop for the needed repair or by having it guarded day and night. Instead, The Petition is partly meritorious; the award of attorney’s fees should be deleted.
the appellant just left the vehicle where its transfer case broke down. The place was
about twelve (12) kilometers away from the camp site of the appellant corporation First Issue:
and was sparsely populated. It was guarded only during daytime. It stayed in that
place for two (2) weeks until it was burned on April 11, 1991 while its transfer case
Petitioner’s Negligence
was being repaired elsewhere. It was only after it had been burned that the appellant
had it towed to a repair shop.
Petitioner claims that the burning of the truck was a fortuitous event, for which it
should not be held liable pursuant to Article 11747 of the Civil Code. Moreover, the
"The appellant [respondent] was thus not free from fault for the burning of the truck.
letter of respondent dated April 15, 1991, stating that the burning of the truck was an
It miserably failed to overcome the presumption of negligence against it. Neither did
"unforeseen adversity," was an admission that should exculpate the former from
it rescind the lease over the truck upon its burning. On the contrary, it offered to
liability.
68

pay P76,000.00 as rentals. It did not also complete the needed repair. Hence, the
We are not convinced. Both the RTC and the CA found petitioner negligent and thus situation. Witness Alexander Roxas testified how petitioner fell short of ordinary
liable for the loss or destruction of the leased truck. True, both parties may have diligence in safeguarding the leased truck against the accident, which could have
suffered from the burning of the truck; however, as found by both lower courts, the been avoided in the first place. Pertinent portions of his testimony are reproduced
negligence of petitioner makes it responsible for the loss. Well-settled is the rule that hereunder:
factual findings of the trial court, particularly when affirmed by the Court of Appeals,
are binding on the Supreme Court. Contrary to its allegations, petitioner has not "ATTY. ACERON
adequately shown that the RTC and the CA overlooked or disregarded significant facts Q Now, this Barangay Aras where the 6 x 6 truck had transmission trouble, how
and circumstances that, when considered, would alter the outcome of the far is it from the camp site of the defendant corporation?
disposition.8 Article 1667 of the Civil Code9 holds lessees responsible for the ALEXANDER ROXAS
deterioration or loss of the thing leased, unless they prove that it took place without A Twelve (12) kilometers, more or less, sir.
their fault. Q Is this Barangay Aras populated?
A Not so many, sir.
Fortuitous Event Q The place where the 6 x 6 truck had transmission trouble, how far is the nearest
house from it?
In order for a fortuitous event to exempt one from liability, it is necessary that one A Perhaps three hundred meters, sir.
has committed no negligence or misconduct that may have occasioned the loss. 10 An Q And how many houses are within the three hundred meter radius from the
act of God cannot be invoked to protect a person who has failed to take steps to place where the truck had engine trouble?
forestall the possible adverse consequences of such a loss. One’s negligence may A Ten, more or less, in scattered.
have concurred with an act of God in producing damage and injury to another; Q You said that after hauling several sand to be used in the camp site the 6 x 6
nonetheless, showing that the immediate or proximate cause of the damage or injury truck had transmission trouble, what did the company do after the truck had that
was a fortuitous event would not exempt one from liability. When the effect is found engine trouble?
to be partly the result of a person’s participation -- whether by active intervention, A For at least two weeks the truck was installed in the place where the said truck
neglect or failure to act -- the whole occurrence is humanized and removed from the had engine trouble.
rules applicable to acts of God.11 Q Meaning in Barangay Aras?
A Yes, sir.
This often-invoked doctrine of "fortuitous event" or "caso fortuito" has become a Q Was there any guard in that place by the company during the time that the
convenient and easy defense to exculpate an obligor from liability. To constitute a truck was in that place?
fortuitous event, the following elements must concur: (a) the cause of the unforeseen A Yes, sir, during daytime but at nighttime, there was no guard.
and unexpected occurrence or of the failure of the debtor to comply with obligations Q What happened to that 6 x 6 truck?
must be independent of human will; (b) it must be impossible to foresee the event A In the month of March, 1991, the company dismissed thirteen (13) to seventeen
that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to (17) employees and these employees came from Barangays Aras, Botolan, Calsapa,
avoid; (c) the occurrence must be such as to render it impossible for the debtor to Camatis and Tibonbon and on Aril 11, 1991, the 6 x 6 truck was burned.
fulfill obligations in a normal manner; and (d) the obligor must be free from any Q How did you come to know that the 6 x 6 truck was burned on April 11, 1991?
participation in the aggravation of the injury or loss.12 A I together with my daughter, I met the service of the company near the
ORMECO and I was informed by the Project Engineer that the 6 x 6 truck was burned,
so, we returned to San Teodoro and have the incident blottered at the police station.
Article 1174 of the Civil Code states that no person shall be responsible for a
Q Aside from that, what other action did you undertake in connection with the
fortuitous event that could not be foreseen or, though foreseen, was inevitable. In
burning of the 6 x 6 truck?
other words, there must be an exclusion of human intervention from the cause of
A When we were at the police station, the Project Manager of the company
injury or loss.13
arrived and from the police station we proceeded to the place where the 6 x 6 truck
was burned and the Project Manager took pictures of the 6 x 6 truck.
A review of the records clearly shows that petitioner failed to exercise reasonable
69

care and caution that an ordinarily prudent person would have used in the same
Q Now, did you come to know who was responsible or who were responsible for "Q During that time when the 6 x 6 truck was already burned and when you went
the burning of the 6 x 6 truck? to the Petron Gasoline Station to inform plaintiff about the burning, was the plaintiff
A The responsible is the Mindex Resources Development Corporation, and as far paid any amount for the rental of the 6 x 6 truck?
as I know, the persons who actually burned the said 6 x 6 truck were the dismissed A: Before the burning of the 6 x 6 truck, the plaintiff Morillo was already paid
employees of the Mindex Resources Development Corporation. partially and there was a balance of P76,000.00."18
Q These dismissed employees of the corporation, why were they employed by the
corporation? The P132,750 repair and overhaul costs was correctly granted by the lower courts.
A Because we have to make a road going to the mining site and in the process of Article 1667 of the Civil Code holds the lessee responsible for the deterioration or loss
opening the road these dismissed employees happened to be the owners of the land of the thing leased. In addition, Article 1665 of the same Code provides that "the
where the road will pass, so, we paid the land. The corporation likewise gave jobs to lessee shall return the thing leased, upon the termination of the lease, just as he
the owners of the land."14 received it, save what has been lost or impaired by the lapse of time, or by ordinary
wear and tear, or from an inevitable cause."
As can be gleaned from the foregoing testimony, petitioner failed to employ
reasonable foresight, diligence and care that would have exempted it from liability Courts begin with the assumption that compensatory damages are for pecuniary
resulting from the burning of the truck. Negligence, as commonly understood, is that losses that result from an act or omission of the defendant. Having been found to be
conduct that naturally or reasonably creates undue risk or harm to others. It may be a negligent in safeguarding the leased truck, petitioner must shoulder its repair and
failure to observe that degree of care, precaution or vigilance that the circumstances overhaul costs to make it serviceable again. Such expenses are duly supported by
justly demand;15 or to do any other act that would be done by a prudent and receipts; thus, the award of P132,750 is definitely in order.
reasonable person, who is guided by considerations that ordinarily regulate the
conduct of human affairs.16 Third Issue:

Second Issue: Attorney’s Fees

Unpaid Rentals and Cost of Repairs We find the award of attorney’s fees to be improper. The reason which the RTC gave
-- because petitioner had compelled respondent to file an action against it -- falls
Petitioner proceeds to argue that "it should be deemed to have already paid the short of our requirement in Scott Consultants and Resource Development v.
unpaid rentals in the amount of P76,000.00," and that it should not be made to pay CA,19 from which we quote:
the P132,750 repair and overhaul costs. Nothing in the records, not even in the
documentary evidence it presented, would show that it already paid the aforesaid "It is settled that the award of attorney’s fees is the exception rather than the rule
amounts. In fact, it seeks to avoid payment of the rental by alleging that respondent and counsel’s fees are not to be awarded every time a party wins suit. The power of
already condoned it in his letter dated April 15, 1991. However, a perusal of the letter the court to award attorney’s fees under Article 2208 of the Civil Code demands
would show that his offer not to charge petitioner for the P76,000 rental was factual, legal, and equitable justification; its basis cannot be left to speculation or
premised on the condition that it would buy the truck.17 conjecture. Where granted, the court must explicitly state in the body of the decision,
and not only in the dispositive portion thereof, the legal reason for the award of
Moreover, the RTC based the P76,000 rental and the costs of repair and overhaul on attorney’s fees."
Exhibit "B," wherein Chito Gozar, the Project Manager of Mindex Resources
Development Corporation, proposed through a letter dated April 17, 1991, the Moreover, a recent case20 ruled that "in the absence of stipulation, a winning party
following: (1) to pay the P76,000 rental, (2) to repair the truck at the expense of may be awarded attorney’s fees only in case plaintiff’s action or defendant’s stand is
petitioner, and (3) to return the truck in good running condition after the repair. so untenable as to amount to gross and evident bad faith."

Likewise, the nonpayment of the said amount was corroborated by Roxas thus:
70
Indeed, respondent was compelled to file this suit to vindicate his rights. However, May 24, 1996 Trust Receipt No. 96-9605249 ₱4,602,648.08
such fact by itself will not justify an award of attorney’s fees, when there is no March 21, 1997 Trust Receipt No. 97-20472410 ₱7,289,757.79
sufficient showing of petitioner’s bad faith in refusing to pay the said rentals as well June 7, 1996 Trust Receipt No. 96-20328011 ₱17,340,360.73
as the repair and overhaul costs.21 July 26, 1995 Trust Receipt No. 95-20194312 ₱670,709.24
August 31, 1995 Trust Receipt No. 95-20205313 ₱313,797.41
WHEREFORE, the Petition is DENIED, but the assailed CA Decision November 16, 1995 Trust Receipt No. 96-20243914 ₱13,015,109.87
is MODIFIED by DELETING the award of attorney’s fees. Costs against petitioner. July 3, 1996 Trust Receipt No. 96-20355215 ₱401,608.89
June 20, 1995 Trust Receipt No. 95-20171016 ₱750,089.25
SO ORDERED. December 13, 1995 Trust Receipt No. 96-37908917 ₱92,919.00
December 13, 1995 Trust Receipt No. 96/20258118 ₱224,713.58
Melo, Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.
The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per
G.R. No. 177921 December 4, 2013 annum (p.a.), with penalty charge of 3% per month in case of default; while the
METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a. and 1%
YAN, SPOUSES GUILLERMO AND MERCEDES DYCHIAO, AND SPOUSES VICENTE AND penalty charge. By way of security, the individual petitioners executed several
FILOMENA DYCHIAO, Petitioners, vs. ALLIED BANK CORPORATION, Respondent. Continuing Guaranty/Comprehensive Surety Agreements 19 in favor of Allied Bank.
Petitioners failed to settle their obligations under the aforementioned promissory
PERLAS-BERNABE, J.: note and trust receipts, hence, Allied Bank, through counsel, sent them demand
letters,20 all dated December 10, 1998, seeking payment of the total amount of
₱51,064,093.62, but to no avail. Thus, Allied Bank was prompted to file a complaint
Assailed in this petition for review on certiorari1 are the Decision2 dated February 12,
for collection of sum of money21 (subject complaint) against petitioners before the
2007 and the Resolution3dated May 10, 2007 of the Court of Appeals (CA) in CA-G.R.
RTC, docketed as Civil Case No. 00-1563. In their second22 Amended
CV No. 86896 which reversed and set aside the Decision 4 dated January 17, 2006 of
Answer,23petitioners admitted their indebtedness to Allied Bank but denied liability
the Regional Trial Court of Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby
for the interests and penalties charged, claiming to have paid the total sum of
ordering petitioners Metro Concast Steel Corporation (Metro Concast), Spouses Jose
₱65,073,055.73 by way of interest charges for the period covering 1992 to 1997.24
S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and Spouses
Vicente and Filomena Duchiao (individual petitioners) to solidarily pay respondent
Allied Bank Corporation (Allied Bank) the aggregate amount of ₱51,064,094.28, with They also alleged that the economic reverses suffered by the Philippine economy in
applicable interests and penalty charges. 1998 as well as the devaluation of the peso against the US dollar contributed greatly
to the downfall of the steel industry, directly affecting the business of Metro Concast
and eventually leading to its cessation. Hence, in order to settle their debts with
The Facts
Allied Bank, petitioners offered the sale of Metro Concast’s remaining assets,
On various dates and for different amounts, Metro Concast, a corporation duly
consisting of machineries and equipment, to Allied Bank, which the latter, however,
organized and existing under and by virtue of Philippine laws and engaged in the
refused. Instead, Allied Bank advised them to sell the equipment and apply the
business of manufacturing steel,5 through its officers, herein individual petitioners,
proceeds of the sale to their outstanding obligations. Accordingly, petitioners offered
obtained several loans from Allied Bank. These loan transactions were covered by a
the equipment for sale, but since there were no takers, the equipment was reduced
promissory note and separate letters of credit/trust receipts, the details of which are
into ferro scrap or scrap metal over the years. In 2002, Peakstar Oil Corporation
as follows:
(Peakstar), represented by one Crisanta Camiling (Camiling), expressed interest in
buying the scrap metal. During the negotiations with Peakstar, petitioners claimed
Date Document Amount
that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal department, acted
December 13, 1996 Promissory Note No. 96-213016 ₱2,000,000.00 as the latter’s agent. Eventually, with the alleged conformity of Allied Bank, through
November 7, 1995 Trust Receipt No. 96-2023657 ₱608,603.04 Atty. Saw, a Memorandum of Agreement25 dated November 8, 2002 (MoA) was
May 13, 1996 Trust Receipt No. 96-9605228 ₱3,753,777.40
71

drawn between Metro Concast, represented by petitioner Jose Dychiao, and


Peakstar, through Camiling, under which Peakstar obligated itself to purchase the (c) was apprised of developments regarding the sale and disposition of the scrap
scrap metal for a total consideration of ₱34,000,000.00, payable as follows: metal – then it stands to reason that the MoA between Metro Concast and Peakstar
was binding upon said bank.
(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid in cash and
the other ₱2,000,000.00 to be paid in two (2) post-dated checks of ₱1,000,000.00 The CA Ruling
each;26 and
(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly installments of Allied Bank appealed to the CA which, in a Decision 32 dated February 12, 2007,
₱3,000,000.00, secured by bank guarantees from Bankwise, Inc. (Bankwise) in the reversed and set aside the ruling of the RTC, ratiocinating that there was "no legal
form of separate post-dated checks.27 basis in fact and in law to declare that when Bankwise reneged its guarantee under
the [MoA], herein [petitioners] should be deemed to be discharged from their
Unfortunately, Peakstar reneged on all its obligations under the MoA.1âwphi1 In this obligations lawfully incurred in favor of [Allied Bank]."33
regard, petitioners asseverated that:
The CA examined the MoA executed between Metro Concast, as seller of the ferro
(a) their failure to pay their outstanding loan obligations to Allied Bank must be scrap, and Peakstar, as the buyer thereof, and found that the same did not indicate
considered as force majeure ; and that Allied Bank intervened or was a party thereto. It also pointed out the fact that
(b) since Allied Bank was the party that accepted the terms and conditions of the post-dated checks pursuant to the MoA were issued in favor of Jose Dychiao.
payment proposed by Peakstar, petitioners must therefore be deemed to have Likewise, the CA found no sufficient evidence on record showing that Atty. Saw was
settled their obligations to Allied Bank. To bolster their defense, petitioner Jose duly and legally authorized to act for and on behalf of Allied Bank, opining that the
Dychiao (Jose Dychiao) testified28 during trial that it was Atty. Saw himself who RTC was "indulging in hypothesis and speculation"34 when it made a contrary
drafted the MoA and subsequently received29 the ₱2,000,000.00 cash and the two (2) pronouncement. While Atty. Saw received the earnest money from Peakstar, the
Bankwise post-dated checks worth ₱1,000,000.00 each from Camiling. However, Atty. receipt was signed by him on behalf of Jose Dychiao.35
Saw turned over only the two (2) checks and ₱1,500,000.00 in cash to the wife of Jose
Dychiao.30 It also added that "[i]n the final analysis, the aforesaid checks and receipts were
signed by [Atty.] Saw either as representative of [petitioners] or as partner of the
Claiming that the subject complaint was falsely and maliciously filed, petitioners latter’s legal counsel, and not in anyway as representative of [Allied Bank]." 36
prayed for the award of moral damages in the amount of ₱20,000,000.00 in favor of
Metro Concast and at least ₱25,000,000.00 for each individual petitioner, Consequently, the CA granted the appeal and directed petitioners to solidarily pay
₱25,000,000.00 as exemplary damages, ₱1,000,000.00 as attorney’s fees, Allied Bank their corresponding obligations under the aforementioned promissory
₱500,000.00 for other litigation expenses, including costs of suit. note and trust receipts, plus interests, penalty charges and attorney’s fees.
Petitioners sought reconsideration37 which was, however, denied in a
The RTC Ruling Resolution38 dated May 10, 2007. Hence, this petition.

After trial on the merits, the RTC, in a Decision 31 dated January 17, 2006, dismissed The Issue Before the Court
the subject complaint, holding that the "causes of action sued upon had been paid or
otherwise extinguished." It ruled that since Allied Bank was duly represented by its At the core of the present controversy is the sole issue of whether or not the loan
agent, Atty. Saw, in all the negotiations and transactions with Peakstar – considering obligations incurred by the petitioners under the subject promissory note and various
that Atty. Saw trust receipts have already been extinguished.

(a) drafted the MoA, The Court’s Ruling


(b) accepted the bank guarantee issued by Bankwise, and
72
Article 1231 of the Civil Code states that obligations are extinguished either by the obligor must be free from any participation in the aggravation of the injury or
payment or performance, the loss of the thing due, the condonation or remission of loss.40(Emphases supplied)
the debt, the confusion or merger of the rights of creditor and debtor, compensation
or novation. While it may be argued that Peakstar’s breach of the MoA was unforseen by
petitioners, the same us clearly not "impossible"to foresee or even an event which is
In the present case, petitioners essentially argue that their loan obligations to Allied independent of human will." Neither has it been shown that said occurrence
Bank had already been extinguished due to Peakstar’s failure to perform its own rendered it impossible for petitioners to pay their loan obligations to Allied Bank and
obligations to Metro Concast pursuant to the MoA. Petitioners classify Peakstar’s thus, negates the former’s force majeure theory altogether. In any case, as earlier
default as a form of force majeure in the sense that they have, beyond their control, stated, the performance or breach of the MoA bears no relation to the performance
lost the funds they expected to have received from the Peakstar (due to the MoA) or breach of the subject loan transactions, they being separate and distinct sources of
which they would, in turn, use to pay their own loan obligations to Allied Bank. They obligations. The fact of the matter is that petitioners’ loan obligations to Allied Bank
further state that Allied Bank was equally bound by Metro Concast’s MoA with remain subsisting for the basic reason that the former has not been able to prove
Peakstar since its agent, Atty. Saw, actively represented it during the negotiations and that the same had already been paid41 or, in any way, extinguished. In this regard,
execution of the said agreement. Petitioners’ arguments are untenable. At the outset, petitioners’ liability, as adjudged by the CA, must perforce stand. Considering,
the Court must dispel the notion that the MoA would have any relevance to the however, that Allied Bank’s extra-judicial demand on petitioners appears to have
performance of petitioners’ obligations to Allied Bank. The MoA is a sale of assets been made only on December 10, 1998, the computation of the applicable interests
contract, while petitioners’ obligations to Allied Bank arose from various loan and penalty charges should be reckoned only from such date.
transactions. Absent any showing that the terms and conditions of the latter
transactions have been, in any way, modified or novated by the terms and conditions WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and
in the MoA, said contracts should be treated separately and distinctly from each Resolution dated May 10, 2007 of the Court of Appeals in CA-G.R. CV No. 86896 are
other, such that the existence, performance or breach of one would not depend on hereby AFFIRMED with MODIFICATION reckoning the applicable interests and penalty
the existence, performance or breach of the other. In the foregoing respect, the issue charges from the date of the extrajudicial demand or on December 10, 1998. The rest
on whether or not Allied Bank expressed its conformity to the assets sale transaction of the appellate court’s dispositions stand.
between Metro Concast and Peakstar (as evidenced by the MoA) is actually irrelevant
to the issues related to petitioners’ loan obligations to the bank. Besides, as the CA SO ORDERED.
pointed out, the fact of Allied Bank’s representation has not been proven in this case
and hence, cannot be deemed as a sustainable defense to exculpate petitioners from
ESTELA M. PERLAS-BERNABE
their loan obligations to Allied Bank. Now, anent petitioners’ reliance on force
Associate Justice
majeure, suffice it to state that Peakstar’s breach of its obligations to Metro Concast
arising from the MoA cannot be classified as a fortuitous event under jurisprudential
formulation. As discussed in Sicam v. Jorge:39 22. G.R. No. L-47851 October 3, 1986
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, vs. THE COURT OF
Fortuitous events by definition are extraordinary events not foreseeable or APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the
avoidable.1âwphi1 It is therefore, not enough that the event should not have been PHILIPPINE BAR ASSOCIATION, respondents.
foreseen or anticipated, as is commonly believed but it must be one impossible to
foresee or to avoid. The mere difficulty to foresee the happening is not impossibility G.R. No. L-47863 October 3, 1986
to foresee the same. To constitute a fortuitous event, the following elements must THE UNITED CONSTRUCTION CO., INC., petitioner, vs. COURT OF APPEALS, ET AL.,
concur: (a) the cause of the unforeseen and unexpected occurrence or of the failure respondents.
of the debtor to comply with obligations must be independent of human will; (b) it
must be impossible to foresee the event that constitutes the caso fortuito or, if it can G.R. No. L-47896 October 3, 1986
be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, vs. COURT OF APPEALS, ET AL.,
render it impossible for the debtor to fulfill obligations in a normal manner; and (d) respondents.
73
PARAS, J.: Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and
Juan J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals,
These are petitions for review on certiorari of the November 28, 1977 decision of the among other things, for exoneration from liability while petitioner Philippine Bar
Court of Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Association in L-47896 seeks the modification of aforesaid decision to obtain an
Instance of Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as award of P1,830,000.00 for the loss of the PBA building plus four (4) times such
modified by the Order of the lower court dated December 8, 1971. The Court of amount as damages resulting in increased cost of the building, P100,000.00 as
Appeals in modifying the decision of the lower court included an award of an exemplary damages; and P100,000.00 as attorney's fees.
additional amount of P200,000.00 to the Philippine Bar Association to be paid jointly
and severally by the defendant United Construction Co. and by the third-party These petitions arising from the same case filed in the Court of First Instance of
defendants Juan F. Nakpil and Sons and Juan F. Nakpil. Manila were consolidated by this Court in the resolution of May 10, 1978 requiring
the respective respondents to comment. (Rollo, L-47851, p. 172).
The dispositive portion of the modified decision of the lower court reads:
The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal,
WHEREFORE, judgment is hereby rendered: pp. 269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of
Appeals are as follows:
(a) Ordering defendant United Construction Co., Inc. and third-party defendants
(except Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated
P989,335.68 with interest at the legal rate from November 29, 1968, the date of the under the Corporation Law, decided to construct an office building on its 840 square
filing of the complaint until full payment; meters lot located at the comer of Aduana and Arzobispo Streets, Intramuros,
(b) Dismissing the complaint with respect to defendant Juan J. Carlos; Manila. The construction was undertaken by the United Construction, Inc. on an
(c) Dismissing the third-party complaint; "administration" basis, on the suggestion of Juan J. Carlos, the president and general
(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of manager of said corporation. The proposal was approved by plaintiff's board of
merit; directors and signed by its president Roman Ozaeta, a third-party defendant in this
(e) Ordering defendant United Construction Co., Inc. and third-party defendants case. The plans and specifications for the building were prepared by the other third-
(except Roman Ozaeta) to pay the costs in equal shares. party defendants Juan F. Nakpil & Sons. The building was completed in June, 1966.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169). In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and
its environs and the building in question sustained major damage. The front columns
The dispositive portion of the decision of the Court of Appeals reads: of the building buckled, causing the building to tilt forward dangerously. The tenants
vacated the building in view of its precarious condition. As a temporary remedial
measure, the building was shored up by United Construction, Inc. at the cost of
WHEREFORE, the judgment appealed from is modified to include an award of
P13,661.28.
P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at
the legal rate from November 29, 1968 until full payment to be paid jointly and
severally by defendant United Construction Co., Inc. and third party defendants On November 29, 1968, the plaintiff commenced this action for the recovery of
(except Roman Ozaeta). In all other respects, the judgment dated September 21, damages arising from the partial collapse of the building against United Construction,
1971 as modified in the December 8, 1971 Order of the lower court is hereby Inc. and its President and General Manager Juan J. Carlos as defendants. Plaintiff
affirmed with COSTS to be paid by the defendant and third party defendant (except alleges that the collapse of the building was accused by defects in the construction,
Roman Ozaeta) in equal shares. the failure of the contractors to follow plans and specifications and violations by the
defendants of the terms of the contract.
SO ORDERED.
Defendants in turn filed a third-party complaint against the architects who prepared
74

the plans and specifications, alleging in essence that the collapse of the building was
due to the defects in the said plans and specifications. Roman Ozaeta, the then (b) The deviations, if any, made by the defendants from said plans and specifications
president of the plaintiff Bar Association was included as a third-party defendant for and how said deviations contributed to the damage sustained;
damages for having included Juan J. Carlos, President of the United Construction Co., (c) The alleged failure of defendants to observe the requisite quality of materials and
Inc. as party defendant. workmanship in the construction of the building;
(d) The alleged failure to exercise the requisite degree of supervision expected of the
On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and architect, the contractor and/or the owner of the building;
Juan F. Nakpil presented a written stipulation which reads: (e) An act of God or a fortuitous event; and
(f) Any other cause not herein above specified.
1. That in relation to defendants' answer with counterclaims and third- party
complaints and the third-party defendants Nakpil & Sons' answer thereto, the 2. If the cause of the damage suffered by the building arose from a combination of
plaintiff need not amend its complaint by including the said Juan F. Nakpil & Sons and the above-enumerated factors, the degree or proportion in which each individual
Juan F. Nakpil personally as parties defendant. factor contributed to the damage sustained;

2. That in the event (unexpected by the undersigned) that the Court should find after 3. Whether the building is now a total loss and should be completely demolished or
the trial that the above-named defendants Juan J. Carlos and United Construction whether it may still be repaired and restored to a tenantable condition. In the latter
Co., Inc. are free from any blame and liability for the collapse of the PBA Building, and case, the determination of the cost of such restoration or repair, and the value of any
should further find that the collapse of said building was due to defects and/or remaining construction, such as the foundation, which may still be utilized or availed
inadequacy of the plans, designs, and specifications p by the third-party defendants, of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).
or in the event that the Court may find Juan F. Nakpil and Sons and/or Juan F. Nakpil
contributorily negligent or in any way jointly and solidarily liable with the defendants, Thus, the issues of this case were divided into technical issues and non-technical
judgment may be rendered in whole or in part. as the case may be, against Juan F. issues. As aforestated the technical issues were referred to the Commissioner. The
Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes non-technical issues were tried by the Court.
as if plaintiff's complaint has been duly amended by including the said Juan F. Nakpil
& Sons and Juan F. Nakpil as parties defendant and by alleging causes of action Meanwhile, plaintiff moved twice for the demolition of the building on the ground
against them including, among others, the defects or inadequacy of the plans, that it may topple down in case of a strong earthquake. The motions were opposed
designs, and specifications prepared by them and/or failure in the performance of by the defendants and the matter was referred to the Commissioner. Finally, on April
their contract with plaintiff. 30, 1979 the building was authorized to be demolished at the expense of the plaintiff,
but not another earthquake of high intensity on April 7, 1970 followed by other
3. Both parties hereby jointly petition this Honorable Court to approve this strong earthquakes on April 9, and 12, 1970, caused further damage to the property.
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169). The actual demolition was undertaken by the buyer of the damaged building. (Record
on Appeal, pp. 278-280; Ibid.)
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during
which among others, the parties agreed to refer the technical issues involved in the After the protracted hearings, the Commissioner eventually submitted his report on
case to a Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the September 25, 1970 with the findings that while the damage sustained by the PBA
trial court, assumed his office as Commissioner, charged with the duty to try the building was caused directly by the August 2, 1968 earthquake whose magnitude was
following issues: estimated at 7.3 they were also caused by the defects in the plans and specifications
prepared by the third-party defendants' architects, deviations from said plans and
1. Whether the damage sustained by the PBA building during the August 2, 1968 specifications by the defendant contractors and failure of the latter to observe the
earthquake had been caused, directly or indirectly, by: requisite workmanship in the construction of the building and of the contractors,
architects and even the owners to exercise the requisite degree of supervision in the
(a) The inadequacies or defects in the plans and specifications prepared by third- construction of subject building.
75

party defendants;
All the parties registered their objections to aforesaid findings which in turn were In their respective briefs petitioners, among others, raised the following assignments
answered by the Commissioner. of errors: Philippine Bar Association claimed that the measure of damages should not
be limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6)
The trial court agreed with the findings of the Commissioner except as to the holding months for loss of rentals while United Construction Co., Inc. and the Nakpils claimed
that the owner is charged with full nine supervision of the construction. The Court that it was an act of God that caused the failure of the building which should exempt
sees no legal or contractual basis for such conclusion. (Record on Appeal, pp. 309- them from responsibility and not the defective construction, poor workmanship,
328; Ibid). deviations from plans and specifications and other imperfections in the case of
United Construction Co., Inc. or the deficiencies in the design, plans and specifications
Thus, on September 21, 1971, the lower court rendered the assailed decision which prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils object
was modified by the Intermediate Appellate Court on November 28, 1977. to the payment of the additional amount of P200,000.00 imposed by the Court of
Appeals. UCCI also claimed that it should be reimbursed the expenses of shoring the
building in the amount of P13,661.28 while the Nakpils opposed the payment of
All the parties herein appealed from the decision of the Intermediate Appellate Court.
damages jointly and solidarity with UCCI.
Hence, these petitions.

The pivotal issue in this case is whether or not an act of God-an unusually strong
On May 11, 1978, the United Architects of the Philippines, the Association of Civil
earthquake-which caused the failure of the building, exempts from liability, parties
Engineers, and the Philippine Institute of Architects filed with the Court a motion to
who are otherwise liable because of their negligence.
intervene as amicus curiae. They proposed to present a position paper on the liability
of architects when a building collapses and to submit likewise a critical analysis with
computations on the divergent views on the design and plans as submitted by the The applicable law governing the rights and liabilities of the parties herein is Article
experts procured by the parties. The motion having been granted, the amicus 1723 of the New Civil Code, which provides:
curiae were granted a period of 60 days within which to submit their position.
Art. 1723. The engineer or architect who drew up the plans and specifications for a
After the parties had all filed their comments, We gave due course to the petitions in building is liable for damages if within fifteen years from the completion of the
Our Resolution of July 21, 1978. structure the same should collapse by reason of a defect in those plans and
specifications, or due to the defects in the ground. The contractor is likewise
responsible for the damage if the edifice fags within the same period on account of
The position papers of the amicus curiae (submitted on November 24, 1978) were
defects in the construction or the use of materials of inferior quality furnished by him,
duly noted.
or due to any violation of the terms of the contract. If the engineer or architect
supervises the construction, he shall be solidarily liable with the contractor.
The amicus curiae gave the opinion that the plans and specifications of the Nakpils
were not defective. But the Commissioner, when asked by Us to comment, reiterated
Acceptance of the building, after completion, does not imply waiver of any of the
his conclusion that the defects in the plans and specifications indeed existed.
causes of action by reason of any defect mentioned in the preceding paragraph.
Using the same authorities availed of by the amicus curiae such as the Manila Code
The action must be brought within ten years following the collapse of the building.
(Ord. No. 4131) and the 1966 Asep Code, the Commissioner added that even if it can
be proved that the defects in the constructionalone (and not in the plans and design)
caused the damage to the building, still the deficiency in the original design and jack On the other hand, the general rule is that no person shall be responsible for events
of specific provisions against torsion in the original plans and the overload on the which could not be foreseen or which though foreseen, were inevitable (Article 1174,
ground floor columns (found by an the experts including the original designer) New Civil Code).
certainly contributed to the damage which occurred. (Ibid, p. 174).
An act of God has been defined as an accident, due directly and exclusively to natural
causes without human intervention, which by no amount of foresight, pains or care,
76

reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an the proximate causes that rendered the PBA building unable to withstand the
act of God. earthquake of August 2, 1968. For this reason the defendant and third-party
defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp. 30-
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach 31).
of an obligation due to an "act of God," the following must concur: (a) the cause of
the breach of the obligation must be independent of the will of the debtor; (b) the It is well settled that the findings of facts of the Court of Appeals are conclusive on
event must be either unforseeable or unavoidable; (c) the event must be such as to the parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar
render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is
the debtor must be free from any participation in, or aggravation of the injury to the a finding grounded entirely on speculation, surmise and conjectures; (2) the inference
creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment
423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon is based on misapprehension of facts; (5) the findings of fact are conflicting , (6) the
Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657). Court of Appeals went beyond the issues of the case and its findings are contrary to
the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co.,
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648,
corresponding fraud, negligence, delay or violation or contravention in any manner of 651); (7) the findings of facts of the Court of Appeals are contrary to those of the trial
the tenor of the obligation as provided for in Article 1170 of the Civil Code, which court; (8) said findings of facts are conclusions without citation of specific evidence
results in loss or damage, the obligor cannot escape liability. on which they are based; (9) the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondents (Garcia vs. CA,
The principle embodied in the act of God doctrine strictly requires that the act must June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA
be one occasioned exclusively by the violence of nature and all human agencies are 322, 366); (10) the finding of fact of the Court of Appeals is premised on the supposed
to be excluded from creating or entering into the cause of the mischief. When the absence of evidence and is contradicted by evidence on record (Salazar vs. Gutierrez,
effect, the cause of which is to be considered, is found to be in part the result of the May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan,
participation of man, whether it be from active intervention or neglect, or failure to July 10, 1986).
act, the whole occurrence is thereby humanized, as it were, and removed from the
rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175). It is evident that the case at bar does not fall under any of the exceptions above-
mentioned. On the contrary, the records show that the lower court spared no effort
Thus it has been held that when the negligence of a person concurs with an act of in arriving at the correct appreciation of facts by the referral of technical issues to a
God in producing a loss, such person is not exempt from liability by showing that the Commissioner chosen by the parties whose findings and conclusions remained
immediate cause of the damage was the act of God. To be exempt from liability for convincingly unrebutted by the intervenors/amicus curiae who were allowed to
loss because of an act of God, he must be free from any previous negligence or intervene in the Supreme Court.
misconduct by which that loss or damage may have been occasioned. (Fish & Elective
Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. In any event, the relevant and logical observations of the trial court as affirmed by the
Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). Court of Appeals that "while it is not possible to state with certainty that the building
would not have collapsed were those defects not present, the fact remains that
The negligence of the defendant and the third-party defendants petitioners was several buildings in the same area withstood the earthquake to which the building of
established beyond dispute both in the lower court and in the Intermediate Appellate the plaintiff was similarly subjected," cannot be ignored.
Court. Defendant United Construction Co., Inc. was found to have made substantial
deviations from the plans and specifications. and to have failed to observe the The next issue to be resolved is the amount of damages to be awarded to the PBA for
requisite workmanship in the construction as well as to exercise the requisite degree the partial collapse (and eventual complete collapse) of its building.
of supervision; while the third-party defendants were found to have inadequacies or
defects in the plans and specifications prepared by them. As correctly assessed by The Court of Appeals affirmed the finding of the trial court based on the report of the
77

both courts, the defects in the construction and in the plans and specifications were Commissioner that the total amount required to repair the PBA building and to
restore it to tenantable condition was P900,000.00 inasmuch as it was not initially a The record is replete with evidence of defects and deficiencies in the designs and
total loss. However, while the trial court awarded the PBA said amount as damages, plans, defective construction, poor workmanship, deviation from plans and
plus unrealized rental income for one-half year, the Court of Appeals modified the specifications and other imperfections. These deficiencies are attributable to
amount by awarding in favor of PBA an additional sum of P200,000.00 representing negligent men and not to a perfect God.
the damage suffered by the PBA building as a result of another earthquake that
occurred on April 7, 1970 (L-47896, Vol. I, p. 92). The act-of-God arguments of the defendants- appellants and third party defendants-
appellants presented in their briefs are premised on legal generalizations or
The PBA in its brief insists that the proper award should be P1,830,000.00 speculations and on theological fatalism both of which ignore the plain facts. The
representing the total value of the building (L-47896, PBA's No. 1 Assignment of Error, lengthy discussion of United on ordinary earthquakes and unusually strong
p. 19), while both the NAKPILS and UNITED question the additional award of earthquakes and on ordinary fortuitous events and extraordinary fortuitous events
P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's leads to its argument that the August 2, 1968 earthquake was of such an
Brief as Petitioner, p. 25). The PBA further urges that the unrealized rental income overwhelming and destructive character that by its own force and independent of the
awarded to it should not be limited to a period of one-half year but should be particular negligence alleged, the injury would have been produced. If we follow this
computed on a continuing basis at the rate of P178,671.76 a year until the judgment line of speculative reasoning, we will be forced to conclude that under such a
for the principal amount shall have been satisfied L- 47896, PBA's No. 11 Assignment situation scores of buildings in the vicinity and in other parts of Manila would have
of Errors, p. 19). toppled down. Following the same line of reasoning, Nakpil and Sons alleges that the
designs were adequate in accordance with pre-August 2, 1968 knowledge and appear
The collapse of the PBA building as a result of the August 2, 1968 earthquake was inadequate only in the light of engineering information acquired after the
only partial and it is undisputed that the building could then still be repaired and earthquake. If this were so, hundreds of ancient buildings which survived the
restored to its tenantable condition. The PBA, however, in view of its lack of needed earthquake better than the two-year old PBA building must have been designed and
funding, was unable, thru no fault of its own, to have the building repaired. UNITED, constructed by architects and contractors whose knowledge and foresight were
on the other hand, spent P13,661.28 to shore up the building after the August 2, unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more
1968 earthquake (L-47896, CA Decision, p. 46). Because of the earthquake on April 7, down to earth explanation of the collapse. The failure of the PBA building, as a unique
1970, the trial court after the needed consultations, authorized the total demolition and distinct construction with no reference or comparison to other buildings, to
of the building (L-47896, Vol. 1, pp. 53-54). weather the severe earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The theological
There should be no question that the NAKPILS and UNITED are liable for the damage allusion of appellant United that God acts in mysterious ways His wonders to perform
resulting from the partial and eventual collapse of the PBA building as a result of the impresses us to be inappropriate. The evidence reveals defects and deficiencies in
earthquakes. design and construction. There is no mystery about these acts of negligence. The
collapse of the PBA building was no wonder performed by God. It was a result of the
imperfections in the work of the architects and the people in the construction
We quote with approval the following from the erudite decision penned by Justice
company. More relevant to our mind is the lesson from the parable of the wise man
Hugo E. Gutierrez (now an Associate Justice of the Supreme Court) while still an
in the Sermon on the Mount "which built his house upon a rock; and the rain
Associate Justice of the Court of Appeals:
descended and the floods came and the winds blew and beat upon that house; and it
fen not; for it was founded upon a rock" and of the "foolish upon the sand. And the
There is no question that an earthquake and other forces of nature such as cyclones,
rain descended and man which built his house the floods came, and the winds blew,
drought, floods, lightning, and perils of the sea are acts of God. It does not necessarily
and beat upon that house; and it fell and great was the fall of it. (St. Matthew 7: 24-
follow, however, that specific losses and suffering resulting from the occurrence of
27)." The requirement that a building should withstand rains, floods, winds,
these natural force are also acts of God. We are not convinced on the basis of the
earthquakes, and natural forces is precisely the reason why we have professional
evidence on record that from the thousands of structures in Manila, God singled out
experts like architects, and engineers. Designs and constructions vary under varying
the blameless PBA building in Intramuros and around six or seven other buildings in
circumstances and conditions but the requirement to design and build well does not
various parts of the city for collapse or severe damage and that God alone was
change.
78

responsible for the damages and losses thus suffered.


The findings of the lower Court on the cause of the collapse are more rational and 6. Slab at the corner column D7 sagged by 38 cm.
accurate. Instead of laying the blame solely on the motions and forces generated by
the earthquake, it also examined the ability of the PBA building, as designed and The Commissioner concluded that there were deficiencies or defects in the design,
constructed, to withstand and successfully weather those forces. plans and specifications of the PBA building which involved appreciable risks with
respect to the accidental forces which may result from earthquake shocks. He
The evidence sufficiently supports a conclusion that the negligence and fault of both conceded, however, that the fact that those deficiencies or defects may have arisen
United and Nakpil and Sons, not a mysterious act of an inscrutable God, were from an obsolete or not too conservative code or even a code that does not require a
responsible for the damages. The Report of the Commissioner, Plaintiff's Objections design for earthquake forces mitigates in a large measure the responsibility or liability
to the Report, Third Party Defendants' Objections to the Report, Defendants' of the architect and engineer designer.
Objections to the Report, Commissioner's Answer to the various Objections, Plaintiffs'
Reply to the Commissioner's Answer, Defendants' Reply to the Commissioner's The Third-party defendants, who are the most concerned with this portion of the
Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to Commissioner's report, voiced opposition to the same on the grounds that (a) the
the Commissioner's Report not to mention the exhibits and the testimonies show finding is based on a basic erroneous conception as to the design concept of the
that the main arguments raised on appeal were already raised during the trial and building, to wit, that the design is essentially that of a heavy rectangular box on stilts
fully considered by the lower Court. A reiteration of these same arguments on appeal with shear wan at one end; (b) the finding that there were defects and a deficiency in
fails to convince us that we should reverse or disturb the lower Court's factual the design of the building would at best be based on an approximation and,
findings and its conclusions drawn from the facts, among them: therefore, rightly belonged to the realm of speculation, rather than of certainty and
could very possibly be outright error; (c) the Commissioner has failed to back up or
The Commissioner also found merit in the allegations of the defendants as to the support his finding with extensive, complex and highly specialized computations and
physical evidence before and after the earthquake showing the inadequacy of design, analyzes which he himself emphasizes are necessary in the determination of such a
to wit: highly technical question; and (d) the Commissioner has analyzed the design of the
PBA building not in the light of existing and available earthquake engineering
Physical evidence before the earthquake providing (sic) inadequacy of design; knowledge at the time of the preparation of the design, but in the light of recent and
current standards.
1. inadequate design was the cause of the failure of the building.
2. Sun-baffles on the two sides and in front of the building; The Commissioner answered the said objections alleging that third-party defendants'
a. Increase the inertia forces that move the building laterally toward the objections were based on estimates or exhibits not presented during the hearing that
Manila Fire Department. the resort to engineering references posterior to the date of the preparation of the
b. Create another stiffness imbalance. plans was induced by the third-party defendants themselves who submitted
3. The embedded 4" diameter cast iron down spout on all exterior columns reduces computations of the third-party defendants are erroneous.
the cross-sectional area of each of the columns and the strength thereof.
4. Two front corners, A7 and D7 columns were very much less reinforced. The issue presently considered is admittedly a technical one of the highest degree. It
Physical Evidence After the Earthquake, Proving Inadequacy of design; involves questions not within the ordinary competence of the bench and the bar to
1. Column A7 suffered the severest fracture and maximum sagging. Also D7. resolve by themselves. Counsel for the third-party defendants has aptly remarked
2. There are more damages in the front part of the building than towards the that "engineering, although dealing in mathematics, is not an exact science and that
rear, not only in columns but also in slabs. the present knowledge as to the nature of earthquakes and the behaviour of forces
3. Building leaned and sagged more on the front part of the building. generated by them still leaves much to be desired; so much so "that the experts of
4. Floors showed maximum sagging on the sides and toward the front corner the different parties, who are all engineers, cannot agree on what equation to use, as
parts of the building. to what earthquake co-efficients are, on the codes to be used and even as to the type
5. There was a lateral displacement of the building of about 8", Maximum sagging of structure that the PBA building (is) was (p. 29, Memo, of third- party defendants
occurs at the column A7 where the floor is lower by 80 cm. than the highest slab before the Commissioner).
79

level.
The difficulty expected by the Court if tills technical matter were to be tried and (6) Contraband construction joints,
inquired into by the Court itself, coupled with the intrinsic nature of the questions
involved therein, constituted the reason for the reference of the said issues to a (7) Absence, or omission, or over spacing of spiral hoops,
Commissioner whose qualifications and experience have eminently qualified him for
the task, and whose competence had not been questioned by the parties until he (8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,
submitted his report. Within the pardonable limit of the Court's ability to
comprehend the meaning of the Commissioner's report on this issue, and the
(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,
objections voiced to the same, the Court sees no compelling reasons to disturb the
findings of the Commissioner that there were defects and deficiencies in the design,
(10) Undergraduate concrete is evident,
plans and specifications prepared by third-party defendants, and that said defects
and deficiencies involved appreciable risks with respect to the accidental forces which
may result from earthquake shocks. (11) Big cavity in core of Column 2A-4, second floor,

(2) (a) The deviations, if any, made by the defendants from the plans and (12) Columns buckled at different planes. Columns buckled worst where there are no
specifications, and how said deviations contributed to the damage sustained by the spirals or where spirals are cut. Columns suffered worst displacement where the
building. eccentricity of the columnar reinforcement assembly is more acute.

(b) The alleged failure of defendants to observe the requisite quality of materials and b. Summary of alleged defects as reported by Engr. Antonio Avecilla.
workmanship in the construction of the building.
Columns are first (or ground) floor, unless otherwise stated.
These two issues, being interrelated with each other, will be discussed together.
(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,
The findings of the Commissioner on these issues were as follows: (2) Column D5 — No spiral up to a height of 22" from the ground floor,
(3) Column D6 — Spacing of spiral over 4 l/2,
(4) Column D7 — Lack of lateral ties,
We now turn to the construction of the PBA Building and the alleged deficiencies or
(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals
defects in the construction and violations or deviations from the plans and
are at 2" from the exterior column face and 6" from the inner column face,
specifications. All these may be summarized as follows:
(6) Column B6 — Lack of spiral on 2 feet below the floor beams,
(7) Column B5 — Lack of spirals at a distance of 26' below the beam,
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.
(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to
4",
(1) Wrongful and defective placing of reinforcing bars. (9) Column A3 — Lack of lateral ties,
(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,
(2) Absence of effective and desirable integration of the 3 bars in the cluster. (11) Column A4 — (second floor Column is completely hollow to a height of 30"
(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel
(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger beam to a height of 6 feet,
than 1 inch. (13) Column A6 — No spirals up to a height of 30' above the ground floor level,
(14) Column A7— Lack of lateralties or spirals,
(4) Reinforcement assembly is not concentric with the column, eccentricity being 3"
off when on one face the main bars are only 1 1/2' from the surface. c. Summary of alleged defects as reported by the experts of the Third-Party
defendants.
80

(5) Prevalence of honeycombs,


Ground floor columns. precisely this plastic range or ductility which is desirable and needed for earthquake-
resistant strength.
(1) Column A4 — Spirals are cut,
(2) Column A5 — Spirals are cut, There is no excuse for the cavity or hollow portion in the column A4, second floor,
(3) Column A6 — At lower 18" spirals are absent, and although this column did not fail, this is certainly an evidence on the part of the
(4) Column A7 — Ties are too far apart, contractor of poor construction.
(5) Column B5 — At upper fourth of column spirals are either absent or improperly
spliced, The effect of eccentricities in the columns which were measured at about 2 1/2
(6) Column B6 — At upper 2 feet spirals are absent, inches maximum may be approximated in relation to column loads and column and
(7) Column B7 — At upper fourth of column spirals missing or improperly spliced. beam moments. The main effect of eccentricity is to change the beam or girder span.
(8) Column C7— Spirals are absent at lowest 18" The effect on the measured eccentricity of 2 inches, therefore, is to increase or
(9) Column D5 — At lowest 2 feet spirals are absent, diminish the column load by a maximum of about 1% and to increase or diminish the
(10) Column D6 — Spirals are too far apart and apparently improperly spliced, column or beam movements by about a maximum of 2%. While these can certainly
(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers. be absorbed within the factor of safety, they nevertheless diminish said factor of
safety.
There is merit in many of these allegations. The explanations given by the engineering
experts for the defendants are either contrary to general principles of engineering The cutting of the spirals in column A5, ground floor is the subject of great contention
design for reinforced concrete or not applicable to the requirements for ductility and between the parties and deserves special consideration.
strength of reinforced concrete in earthquake-resistant design and construction.
The proper placing of the main reinforcements and spirals in column A5, ground
We shall first classify and consider defects which may have appreciable bearing or floor, is the responsibility of the general contractor which is the UCCI. The burden of
relation to' the earthquake-resistant property of the building. proof, therefore, that this cutting was done by others is upon the defendants. Other
than a strong allegation and assertion that it is the plumber or his men who may have
As heretofore mentioned, details which insure ductility at or near the connections done the cutting (and this was flatly denied by the plumber) no conclusive proof was
between columns and girders are desirable in earthquake resistant design and presented. The engineering experts for the defendants asserted that they could have
construction. The omission of spirals and ties or hoops at the bottom and/or tops of no motivation for cutting the bar because they can simply replace the spirals by
columns contributed greatly to the loss of earthquake-resistant strength. The plans wrapping around a new set of spirals. This is not quite correct. There is evidence to
and specifications required that these spirals and ties be carried from the floor level show that the pouring of concrete for columns was sometimes done through the
to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970, beam and girder reinforcements which were already in place as in the case of column
Reference 11). There were several clear evidences where this was not done especially A4 second floor. If the reinforcement for the girder and column is to subsequently
in some of the ground floor columns which failed. wrap around the spirals, this would not do for the elasticity of steel would prevent
the making of tight column spirals and loose or improper spirals would result. The
There were also unmistakable evidences that the spacings of the spirals and ties in proper way is to produce correct spirals down from the top of the main column bars,
the columns were in many cases greater than those called for in the plans and a procedure which can not be done if either the beam or girder reinforcement is
specifications resulting again in loss of earthquake-resistant strength. The assertion of already in place. The engineering experts for the defendants strongly assert and
the engineering experts for the defendants that the improper spacings and the apparently believe that the cutting of the spirals did not materially diminish the
cutting of the spirals did not result in loss of strength in the column cannot be strength of the column. This belief together with the difficulty of slipping the spirals
maintained and is certainly contrary to the general principles of column design and on the top of the column once the beam reinforcement is in place may be a sufficient
construction. And even granting that there be no loss in strength at the yield point motivation for the cutting of the spirals themselves. The defendants, therefore,
(an assumption which is very doubtful) the cutting or improper spacings of spirals will should be held responsible for the consequences arising from the loss of strength or
certainly result in the loss of the plastic range or ductility in the column and it is ductility in column A5 which may have contributed to the damages sustained by the
81

building.
The lack of proper length of splicing of spirals was also proven in the visible spirals of tolerable margin of safety; and that the cutting of the spirals in column A5, ground
the columns where spalling of the concrete cover had taken place. This lack of proper floor, was done by the plumber or his men, and not by the defendants.
splicing contributed in a small measure to the loss of strength.
Answering the said objections, the Commissioner stated that, since many of the
The effects of all the other proven and visible defects although nor can certainly be defects were minor only the totality of the defects was considered. As regards the
accumulated so that they can contribute to an appreciable loss in earthquake- objection as to failure to state the number of cases where the spirals and ties were
resistant strength. The engineering experts for the defendants submitted an estimate not carried from the floor level to the bottom reinforcement, the Commissioner
on some of these defects in the amount of a few percent. If accumulated, therefore, specified groundfloor columns B-6 and C-5 the first one without spirals for 03 inches
including the effect of eccentricity in the column the loss in strength due to these at the top, and in the latter, there were no spirals for 10 inches at the bottom. The
minor defects may run to as much as ten percent. Commissioner likewise specified the first storey columns where the spacings were
greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5,
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the D-5 and B-7. The objection to the failure of the Commissioner to specify the number
top of some of the ground floor columns contributed greatly to the collapse of the of columns where there was lack of proper length of splicing of spirals, the
PBA building since it is at these points where the greater part of the failure occurred. Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were
The liability for the cutting of the spirals in column A5, ground floor, in the considered less than 1-1/2 turns and were not welded, resulting in some loss of strength which
opinion of the Commissioner rests on the shoulders of the defendants and the loss of could be critical near the ends of the columns. He answered the supposition of the
strength in this column contributed to the damage which occurred. defendants that the spirals and the ties must have been looted, by calling attention to
the fact that the missing spirals and ties were only in two out of the 25 columns,
It is reasonable to conclude, therefore, that the proven defects, deficiencies and which rendered said supposition to be improbable.
violations of the plans and specifications of the PBA building contributed to the
damages which resulted during the earthquake of August 2, 1968 and the vice of The Commissioner conceded that the hollow in column A-4, second floor, did not
these defects and deficiencies is that they not only increase but also aggravate the aggravate or contribute to the damage, but averred that it is "evidence of poor
weakness mentioned in the design of the structure. In other words, these defects and construction." On the claim that the eccentricity could be absorbed within the factor
deficiencies not only tend to add but also to multiply the effects of the shortcomings of safety, the Commissioner answered that, while the same may be true, it also
in the design of the building. We may say, therefore, that the defects and deficiencies contributed to or aggravated the damage suffered by the building.
in the construction contributed greatly to the damage which occurred.
The objection regarding the cutting of the spirals in Column A-5, groundfloor, was
Since the execution and supervision of the construction work in the hands of the answered by the Commissioner by reiterating the observation in his report that
contractor is direct and positive, the presence of existence of all the major defects irrespective of who did the cutting of the spirals, the defendants should be held liable
and deficiencies noted and proven manifests an element of negligence which may for the same as the general contractor of the building. The Commissioner further
amount to imprudence in the construction work. (pp. 42-49, Commissioners Report). stated that the loss of strength of the cut spirals and inelastic deflections of the
supposed lattice work defeated the purpose of the spiral containment in the column
As the parties most directly concerned with this portion of the Commissioner's and resulted in the loss of strength, as evidenced by the actual failure of this column.
report, the defendants voiced their objections to the same on the grounds that the
Commissioner should have specified the defects found by him to be "meritorious"; Again, the Court concurs in the findings of the Commissioner on these issues and fails
that the Commissioner failed to indicate the number of cases where the spirals and to find any sufficient cause to disregard or modify the same. As found by the
ties were not carried from the floor level to the bottom reinforcement of the deeper Commissioner, the "deviations made by the defendants from the plans and
beam, or where the spacing of the spirals and ties in the columns were greater than specifications caused indirectly the damage sustained and that those deviations not
that called for in the specifications; that the hollow in column A4, second floor, the only added but also aggravated the damage caused by the defects in the plans and
eccentricities in the columns, the lack of proper length of splicing of spirals, and the specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142)
cut in the spirals in column A5, ground floor, did not aggravate or contribute to the
82

damage suffered by the building; that the defects in the construction were within the
The afore-mentioned facts clearly indicate the wanton negligence of both the
defendant and the third-party defendants in effecting the plans, designs,
specifications, and construction of the PBA building and We hold such negligence as
equivalent to bad faith in the performance of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379,
4380) which may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the
natural and probable consequences thereof, although the act of a third person, or an
act of God for which he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell
hundreds of ancient buildings in the vicinity were hardly affected by the earthquake.
Only one thing spells out the fatal difference; gross negligence and evident bad faith,
without which the damage would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, We deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE
MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of attorney's
fees) occasioned by the loss of the building (including interest charges and lost
rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.

Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.


83
A. USURIOUS TRANSACTIONS/INTEREST Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave
only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as
23. G.R. No. 131622 November 27, 1998 advance interest for one month at 6% per month. Servando and Leticia executed a
promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,
vs. On November 19, 1985, Servando and Liticia obtained from Veronica another loan in
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, the amount of P90,000.00, payable in two months, at 6% interest per month. They
JR. doing lending business under the trade name and style "GONZALES CREDIT executed a promissory note to evidence the loan, maturing on Janaury 19, 1986. They
ENTERPRISES", respondents. received only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.
PARDO, J.:
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in
The case before the Court is a petition for review on certiorari, under Rule 45 of the the amout of P300,000.00, maturing in one month, secured by a real estate mortgage
Revised Rules of Court, seeking to set aside the decision of the Court of Appeals, 1 and over a property belonging to Leticia Makalintal Yaptinchay, who issued a special
its resolution denying reconsideration, 2 the dispositive portion of which decision power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage.
reads as follows: Servando and Leticia executed a promissory note in favor of Veronica to pay the sum
of P300,000.00, after a month, or on July 11, 1986. However, only the sum of
P275.000.00, was given to them out of the proceeds of the loan.
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are
hereby-ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per month Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
of the total amount due and demandable as penalty charges effective August 23,
1986, until the entire amount is fully paid. On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from
The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a
imposition of costs against the defendants. total of P500,000.00, payable on August 23, 1986. They executed a promissory note,
reading as follows:
SO ORDERED. 3
Baliwag, Bulacan July 23, 1986
The Court required the respondents to comment on the petition, 4 which was filed on
April 3, 1998,5 and the petitioners to reply thereto, which was filed on May 29, Maturity Date Augsut 23, 1986
1998.6 We now resolve to give due course to the petition and decide the case.
P500,000.00
The facts of the case, as found by the Court of Appeals in its decision, which are
considered binding and conclusive on the parties herein, as the appeal is limited to FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
questions of law, are as follows: VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT
ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag,
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . . (P500,000.00)
Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus
84

engaged in the money lending business under the name "Gonzales Credit
2% service charge per annum from date hereof until fully paid according to the Bulacan, a complaint for collection of the full amount of the loan including interests
amortization schedule contained herein. (Emphasis supplied) and other charges.

Payment will be made in full at the maturity date. In his answer to the complaint filed with the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any loan from the plaintiffs; that it was
Should I/WE fail to pay any amortization or portion hereof when due, all the other defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of
installments together with all interest accrued shall immediately be due and payable P500,000.00, and actually received the amount and benefited therefrom; that the
and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) loan was secured by a real estate mortgage executed in favor of the plaintiffs, and
per month of the amount due and demandable as penalty charges in the form of that he (Servando Franco) signed the promissory note only as a witness.
liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT
(25%) thereof in full, without deductions as Attorney's Fee whether actually incurred In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel
or not, of the total amount due and demandable, exclusive of costs and judicial or alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
extra judicial expenses. (Emphasis supplied). mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional service
I, WE further agree that in the event the present rate of interest on loan is increased charge of 2% per annum, and penalty charge of 1% per month; that the stipulation
by law or the Central Bank of the Philippines, the holder shall have the option to for attorney's fees of 25% of the amount due is unconscionable, illegal and excessive,
apply and collect the increased interest charges without notice although the original and that substantial payments made were applied to interest, penalties and other
interest have already been collected wholly or partially unless the contrary is required charges.
by law.
After due trial, the lower court declared that the due execution and genuineness of
It is also a special condition of this contract that the parties herein agree that the the four promissory notes had been duly proved, and ruled that although the Usury
amount of peso-obligation under this agreement is based on the present value of the Law had been repealed, the interest charged by the plaintiffs on the loans was
peso, and if there be any change in the value thereof, due to extraordinary inflation unconscionable and "revolting to the conscience". Hence, the trial court applied "the
or deflation, or any other cause or reason, then the peso-obligation herein contracted provision of the New [Civil] Code" that the "legal rate of interest for loan or
shall be adjusted in accordance with the value of the peso then prevailing at the time forbearance of money, goods or credit is 12% per annum." 7
of the complete fulfillment of the obligation.
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive
Demand and notice of dishonor waived. Holder may accept partial payments and portion of which reads as follows:
grant renewals of this note or extension of payments, reserving rights against each
and all indorsers and all parties to this note. WHEREFORE, premises considered, judgment is hereby rendered, as follows:

IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive 1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally,
all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from
Court. November 7, 1985 and 1% per month as penalty, until the entire amount is paid in
full.
On maturity of the loan, the borrowers failed to pay the indebtedness of
P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory 2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly
note. and severally the amount of P84,000.00 with 12% interest per annum and 1% per
cent per month as penalty from November 19, 1985 until the whole amount is fully
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. paid;
Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos,
85
3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of SO ORDERED. 11
P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11,
1986, until the whole amount is fully paid; On April 15, 1997, defendants-appellants filed a motion for reconsideration of the
said decision. By resolution dated November 25, 1997, the Court of Appeals denied
4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of the motion. 12
P50,000.00 as attorney's fees;
Hence, defendants interposed the present recourse via petition for review
5. All counterclaims are hereby dismissed. on certiorari. 13

With costs against the defendants.8 We find the petition meritorious.

In due time, both plaintiffs and defendants appealed to the Court of Appeals. Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus,
the question presented is whether or not the stipulated rate of interest at 5.5% per
In their appeal, plaintiffs-appellants argued that the promissory note, which month on the loan in the sum of P500,000.00, that plaintiffs extended to the
consolidated all the unpaid loans of the defendants, is the law that governs the defendants is usurious. In other words, is the Usury Law still effective, or has it been
parties. They further argued that Circular No. 416 of the Central Bank prescribing the repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant
rate of interest for loans or forbearance of money, goods or credit at 12% per annum, to its powers under P.D. No. 116, as amended by P.D. No. 1684?
applies only in the absence of a stipulation on interest rate, but not when the parties
agreed thereon. We agree with petitioners that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the exorbitant. 13 However, we can not consider the rate "usurious" because this Court
Usury Law having become 'legally inexistent' with the promulgation by the Central has consistently held that Circular No. 905 of the Central Bank, adopted on December
Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest 22, 1982, has expressly removed the interest ceilings prescribed by the Usury
that may be charged on the loan".9 The Court of Appeals further held that "the Law 14 and that the Usury Law is now "legally inexistent". 15
imposition of 'an additional amount equivalent to 1% per month of the amount due
and demandable as penalty charges in the form of liquidated damages until fully paid' In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch
was allowed by 61 16 the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the
law". 10 Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a
Central Bank Circular can not repeal a law. Only a law can repeal another law." 17 In
Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision the recent case of Florendo vs. Court of Appeals 18, the Court reiterated the ruling that
reversing that of the Regional Trial Court, disposing as follows: "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury
has been legally non-existent in our jurisdiction. Interest can now be charged as
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are lender and borrower may agree upon." 19
hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per month Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated
of the total amount due and demandable as penalty charges effective August 24, upon by the parties in the promissory note iniquitous or unconscionable, and, hence,
1986, until the entire amount is fully paid. contrary to morals ("contra bonos mores"), if not against the law. 20 The stipulation is
void. 21 The courts shall reduce equitably liquidated damages, whether intended as an
The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the indemnity or a penalty if they are iniquitous or unconscionable. 22
imposition of costs against the defendants.
86
Consequently, the Court of Appeals erred in upholding the stipulation of the parties.
Rather, we agree with the trial court that, under the circumstances, interest at 12%
per annum, and an additional 1% a month penalty charge as liquidated damages may
be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of
Appeals promulgated on March 21, 1997, and its resolution dated November 25, 24. G.R. No. 183272 October 15, 2014
1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos,
SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner,
Bulacan, in Civil Case No. 134-M-90, involving the same parties.
vs.
SANDRA TAN KIT and The Estate of the Deceased NORBERTO TAN KIT, respondents.
No pronouncement as to costs in this instance.
DECISION
SO ORDERED.
DEL CASTILLO, J.:

The Court of Appeals' (CA) imposition of 12o/o interest on the ₱13,080.93 premium
refund is the only matter in question in this case.

This Petition for Review on Certiorari1 assails the October 17, 2007 Decision2 of CA in
CA-GR. CV No. 86923, which, among others, imposed a 12% per annum rate of
interest reckoned from the time of death of the insured until fully paid, on the
premium to be reimbursed by petitioner Sun Life of Canada (Philippines), Inc.
(petitioner) to respondents Sandra Tan Kit (respondent Tan Kit) and the Estate of the
Deceased Norberto Tan Kit (respondent estate). Likewise assailed in this Petition is
the CA's June 12, 2008 Resolution3 denying petitioner's Motion for Reconsideration of
the said Decision.

Factual Antecedents

Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit
(Norberto), whose application for a life insurance policy, 4 with face value of
₱300,000.00, was granted by petitioner on October 28, 1999. On February 19, 2001,
or within the two-year contestability period,5 Norberto died of disseminated gastric
carcinoma.6Consequently, respondent Tan Kit filed a claim under the subject policy.

In a Letter7 dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on
account of Norberto’s failure to fully and faithfully disclose in his insurance
application certain material and relevant information about his health and smoking
history. Specifically, Norberto answered "No" to the question inquiring whether he
87

had smoked cigarettes or cigars within the last 12 months prior to filling out said
application.8 However, the medical report of Dr. Anna Chua (Dr. Chua), one of the Cost de oficio.
several physicians that Norberto consulted for his illness, reveals that he was a
smoker and had only stopped smoking in August 1999. According to petitioner, its SO ORDERED.13
underwriters would not have approved Norberto’s application for life insurance had
they been given the correct information. Believing that the policy is null and void, Petitioner moved for reconsideration,14 but was denied in an Order15 dated February
petitioner opined that its liability is limited to the refund of all the premiums paid. 15, 2006.
Accordingly, it enclosed in the said letter a check for ₱13,080.93 representing the
premium refund.
Hence, petitioner appealed to the CA.

In a letter9 dated September 13, 2001, respondent Tan Kit refused to accept the
Ruling of the Court of Appeals
check and insisted on the payment of the insurance proceeds.
On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated
On October 4, 2002, petitioner filed a Complaint10 for Rescission of Insurance
October 17, 2007.
Contract before the Regional Trial Court (RTC) of Makati City.
From the records, the CA found that prior to his death, Norberto had consulted two
Ruling of the Regional Trial Court
physicians, Dr. Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on
December 28, 2000, to whom he confided that he had stopped smoking only in 1999.
In its November 30, 2005 Decision,11 the RTC noted that petitioner’s physician, Dr. At the time therefore that he applied for insurance policy on October 28, 1999, there
Charity Salvador (Dr. Salvador), conducted medical examination on Norberto. is no truth to his claim that he did not smoke cigarettes within 12 months prior to the
Moreover, petitioner’s agent, Irma Joy E. Javelosa (Javelosa), answered "NO" to the said application. The CA thus held that Norberto is guilty of concealment which
question "Are you aware of anything about the life to be insured’s lifestyle, hazardous misled petitioner in forming its estimates of the risks of the insurance policy. This
sports, habits, medical history, or any risk factor that would have an adverse effect on gave petitioner the right to rescind the insurance contract which it properly exercised
insurability?" in her Agent’s Report. Javelosa also already knew Norberto two years in this case.
prior to the approval of the latter’s application for insurance. The RTC concluded that
petitioner, through the above-mentioned circumstances, had already cleared
In addition, the CA held that the content of Norberto’s medical records are deemed
Norberto of any misrepresentation that he may have committed. The RTC also opined
admitted by respondents since they failed to deny the same despite having received
that the affidavit of Dr. Chua, presented as part of petitioner’s evidence and which
from petitioner a Request for Admission pursuant to Rule 26 of the Rules of
confirmed the fact that the insured was a smoker and only stopped smoking a year
Court.17 And since an admission is in the nature of evidence the legal effects of which
ago [1999], is hearsay since Dr. Chua did not testify in court. Further, since Norberto
form part of the records, the CA discredited the RTC’s ruling that the subject medical
had a subsisting insurance policy with petitioner during his application for insurance
records and the affidavits executed by Norberto’s physicians attesting to the truth of
subject of this case, it was incumbent upon petitioner to ascertain the health
the same were hearsay.
condition of Norberto considering the additional burden that it was assuming. Lastly,
petitioner did not comply with the requirements for rescission of insurance contract
The dispositive portion of the CA Decision reads:
as held in Philamcare Health Systems, Inc. v. Court of Appeals. 12 Thus, the dispositive
portion of the RTC Decision:
WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and
the appealed Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is
WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor
hereby rendered GRANTING the complaint a quo.
of the [respondents and] against the [petitioner], hence it hereby orders the
[petitioner] to pay the [respondent], Sandra Tan Kit, the sum of Philippine Pesos:
THREE HUNDRED THOUSAND (₱300,000.00), representing the face value of the Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of
insurance policy with interest at six percent (6%) per annum from October 4, 2002 ₱13,080.93 representing the [premium] paid by the insured with interest at the rate
of 12% per annum from the time of the death of the insured until fully paid.
88

until fully paid.


SO ORDERED.18 under the circumstances was to consign the amount of payment in court during the
pendency of the case.
The parties filed their separate motions for reconsideration. 19 While respondents
questioned the factual and legal bases of the CA Decision, petitioner, on the other Our Ruling
hand, assailed the imposition of interest on the premium ordered refunded to
respondents. Tio Khe Chio is not applicable in this case.

However, the appellate court denied the motions in its June 12, 2008 Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive
Resolution,20 viz: on the issue of payment of interest.1âwphi1 There, the Court pointed to Sections 243
and 244 of the Insurance Code which explicitly provide for payment of interest when
WHEREFORE, the foregoing considered, the separate motions for reconsideration there is unjustified refusal or withholding of payment of the claim by the
filed by the [petitioner] and the [respondents] are hereby DENIED. insurer, 23 and to Article 220924 of the New Civil Code which likewise provides for
payment of interest when the debtor is in delay.
SO ORDERED.21
The Court finds, however, that Tio Khe Chio is not applicable here as it deals with
Only petitioner appealed to this Court through the present Petition for Review on payment of interest on the insurance proceeds in which the claim therefor was either
Certiorari. unreasonably denied or withheld or the insurer incurred delay in the payment
thereof. In this case, what is involved is an order for petitioner to refund to
Issue respondents the insurance premium paid by Norberto as a consequence of the
rescission of the insurance contract on account of the latter’s concealment of
material information in his insurance application. Moreover, petitioner did not
The sole issue in this case is whether petitioner is liable to pay interest on the
unreasonably deny or withhold the insurance proceeds as it was satisfactorily
premium to be refunded to respondents.
established that Norberto was guilty of concealment.
The Parties’ Arguments
Nature of interest imposed by the CA
Petitioner argues that no interest should have been imposed on the premium to be
There are two kinds of interest – monetary and compensatory.
refunded because the CA Decision does not provide any legal or factual basis
therefor; that petitioner directly and timely tendered to respondents an amount
representing the premium refund but they rejected it since they opted to pursue "Monetary interest refers to the compensation set by the parties for the use or
their claim for the proceeds of the insurance policy; that respondents should bear the forbearance of money."25 No such interest shall be due unless it has been expressly
consequence of their unsound decision of rejecting the refund tendered to them; stipulated in writing.26 "On the other hand, compensatory interest refers to the
and, that petitioner is not guilty of delay or of invalid or unjust rescission as to make it penalty or indemnity for damages imposed by law or by the courts." 27 The interest
liable for interest. Hence, following the ruling in Tio Khe Chio v. Court of Appeals,22 no mentioned in Articles 2209 and 221228of the Civil Code applies to compensatory
interest can be assessed against petitioner. interest.29

Respondents, on the other hand, contend that the reimbursement of premium is Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not
clearly a money obligation or one that arises from forbearance of money, hence, the monetary interest because aside from the fact that there is no use or forbearance of
imposition of 12% interest per annum is just, proper and supported by jurisprudence. money involved in this case, the subject interest was not one which was agreed upon
While they admit that they refused the tender of payment of the premium refund, by the parties in writing. This being the case and judging from the tenor of the CA, to
they aver that they only did so because they did not want to abandon their claim for wit:
the proceeds of the insurance policy. In any case, what petitioner should have done
89
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of SO ORDERED.
₱13,080.93 representing the [premium] paid by the insured with interest at the rate
of 12% per annum from time of death of the insured until fully paid. 30 MARIANO C. DEL CASTILLO
Associate Justice
there can be no other conclusion than that the interest imposed by the appellate
court is in the nature of compensatory interest.

The CA incorrectly imposed compensatory interest on the premium refund reckoned


from the time of death of the insured until fully paid

As a form of damages, compensatory interest is due only if the obligor is proven to


have failed to comply with his obligation.31

In this case, it is undisputed that simultaneous to its giving of notice to respondents


that it was rescinding the policy due to concealment, petitioner tendered the refund
of premium by attaching to the said notice a check representing the amount of
refund. However, respondents refused to accept the same since they were seeking
for the release of the proceeds of the policy. Because of this discord, petitioner filed
for judicial rescission of the contract. Petitioner, after receiving an adverse judgment
from the RTC, appealed to the CA. And as may be recalled, the appellate court found
Norberto guilty of concealment and thus upheld the rescission of the insurance
contract and consequently decreed the obligation of petitioner to return to
respondents the premium paid by Norberto. Moreover, we find that petitioner did
not incur delay or unjustifiably deny the claim.

Based on the foregoing, we find that petitioner properly complied with its obligation
under the law and contract. Hence, it should not be made liable to pay compensatory
interest.

Considering the prevailing circumstances of the case, we hereby direct petitioner to


reimburse the premium paid within 15 days from date of finality of this Decision. If
petitioner fails to pay within the said period, then the amount shall be deemed
equivalent to a forbearance of credit.32 In such a case, the rate of interest shall be 6%
per annum.33

WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-
G.R. CV No. 86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc.
is ordered to reimburse to respondents Sandra Tan Kit and the Estate of the
Deceased Norberto Tan Kit the sum of ~13,080.93 representing the premium paid by
the insured within fifteen (15) days from date of finality of this Decision. If the
amount is not reimbursed within said period, the same shall earn interest of 6% per
90

annum until fully paid.


1/27/2003 119,752.28 618.23 3,891.07 124,234.58
2/27/2003 124,234.58 990.93 4,037.62 129,263.13
3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90
4/27/2003 115,177.90 644.26 3,743.28 119,565.44
25. G.R. No. 175490 September 17, 2009 5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10

ILEANA DR. MACALINAO, Petitioner, 8,362.50


6/29/2003 113,540.10 323.57 3,607.32 118,833.49
vs. (7,000.00)
BANK OF THE PHILIPPINE ISLANDS, Respondent.
7/27/2003 118,833.49 608.07 3,862.09 123,375.65

DECISION 8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56


9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23
VELASCO, JR., J.:
10/28/2003
The Case
11/28/2003

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court 12/28/2003
seeking to reverse and set aside the June 30, 2006 Decision 1 of the Court of Appeals
1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78
(CA) and its November 21, 2006 Resolution2 denying petitioner’s motion for
reconsideration.
Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit
The Facts and BPI Mastercard, the charges or balance thereof remaining unpaid after the
payment due date indicated on the monthly Statement of Accounts shall bear
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of interest at the rate of 3% per month and an additional penalty fee equivalent to
the credit card facilities of respondent Bank of the Philippine Islands (BPI). 3 Petitioner another 3% per month. Particularly:
Macalinao made some purchases through the use of the said credit card and
defaulted in paying for said purchases. She subsequently received a letter dated 8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement of
January 5, 2004 from respondent BPI, demanding payment of the amount of one Account (SOA) and the Cardholder agrees that all charges made through the use of
hundred forty-one thousand five hundred eighteen pesos and thirty-four centavos the CARD shall be paid by the Cardholder as stated in the SOA on or before the last
(PhP 141,518.34), as follows: day for payment, which is twenty (20) days from the date of the said SOA, and such
payment due date may be changed to an earlier date if the Cardholder’s account is
considered overdue and/or with balances in excess of the approved credit limit, or to
Statement Previous Purchases Penalty Finance such other date as may be deemed proper by the CARD issuer with notice to the
Balance Due
Date Balance (Payments) Interest Charges Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a
10/27/2002 94,843.70 559.72 3,061.99 98,456.41 holiday, the last day for the payment automatically becomes the last working day
prior to said payment date. However, notwithstanding the absence or lack of proof of
11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02 service of the SOA of the Cardholder, the latter shall pay any and all charges made
through the use of the CARD within thirty (30) days from date or dates thereof.
12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28
Failure of the Cardholder to pay the charges made through the CARD within the
91
payment period as stated in the SOA or within thirty (30) days from actual date or After the summons and a copy of the complaint were served upon petitioner
dates of purchase whichever occur earlier, shall render him in default without the Macalinao and her husband, they failed to file their Answer. 7 Thus, respondent BPI
necessity of demand from BCC, which the Cardholder expressly waives. The charges moved that judgment be rendered in accordance with Section 6 of the Rule on
or balance thereof remaining unpaid after the payment due date indicated on the Summary Procedure.8 This was granted in an Order dated June 16, 2004.9 Thereafter,
monthly Statement of Accounts shall bear interest at the rate of 3% per month for respondent BPI submitted its documentary evidence. 101avvphi1
BPI Express Credit, BPI Gold Mastercard and an additional penalty fee equivalent to
another 3% of the amount due for every month or a fraction of a month’s delay. In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and
PROVIDED that if there occurs any change on the prevailing market rates, BCC shall ordered petitioner Macalinao and her husband to pay the amount of PhP 141,518.34
have the option to adjust the rate of interest and/or penalty fee due on the plus interest and penalty charges of 2% per month, to wit:
outstanding obligation with prior notice to the cardholder. The Cardholder hereby
authorizes BCC to correspondingly increase the rate of such interest [in] the event of WHEREFORE, finding merit in the allegations of the complaint supported by
changes in the prevailing market rates, and to charge additional service fees as may documentary evidence, judgment is hereby rendered in favor of the plaintiff, Bank of
be deemed necessary in order to maintain its service to the Cardholder. A CARD with the Philippine Islands and against defendant-spouses Ileana DR Macalinao and Danilo
outstanding balance unpaid after thirty (30) days from original billing statement date SJ Macalinao by ordering the latter to pay the former jointly and severally the
shall automatically be suspended, and those with accounts unpaid after ninety (90) following:
days from said original billing/statement date shall automatically be cancel (sic),
without prejudice to BCC’s right to suspend or cancel any card anytime and for
1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE HUNDRED
whatever reason. In case of default in his obligation as provided herein, Cardholder
EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty charges of 2% per
shall surrender his/her card to BCC and in addition to the interest and penalty
month from January 05, 2004 until fully paid;
charges aforementioned , pay the following liquidated damages and/or fees (a) a
collection fee of 25% of the amount due if the account is referred to a collection
2. P10,000.00 as and by way of attorney’s fees; and
agency or attorney; (b) service fee for every dishonored check issued by the
cardholder in payment of his account without prejudice, however, to BCC’s right of
considering Cardholder’s account, and (c) a final fee equivalent to 25% of the unpaid 3. Cost of suit.
balance, exclusive of litigation expenses and judicial cost, if the payment of the
account is enforced though court action. Venue of all civil suits to enforce this SO ORDERED.11
Agreement or any other suit directly or indirectly arising from the relationship
between the parties as established herein, whether arising from crimes, negligence or Only petitioner Macalinao and her husband appealed to the Regional Trial Court
breach thereof, shall be in the process of courts of the City of Makati or in other (RTC) of Makati City, their recourse docketed as Civil Case No. 04-1153. In its Decision
courts at the option of BCC.4 (Emphasis supplied.)1avvphi1 dated October 14, 2004, the RTC affirmed in toto the decision of the MeTC and held:

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the
the Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money result of a recomputation at the reduced rate of 2% per month. Note that the total
against her and her husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of amount sought by the plaintiff-appellee was P154,608.75 exclusive of finance charge
the MeTC and was docketed as Civil Case No. 84462 entitled Bank of the Philippine of 3.25% per month and late payment charge of 6% per month.
Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ. Macalinao. 5
WHEREFORE, the appealed decision is hereby affirmed in toto.
In said complaint, respondent BPI prayed for the payment of the amount of one
hundred fifty-four thousand six hundred eight pesos and seventy-eight centavos (PhP No pronouncement as to costs.
154,608.78) plus 3.25% finance charges and late payment charges equivalent to 6% of
the amount due from February 29, 2004 and an amount equivalent to 25% of the SO ORDERED.12
total amount due as attorney’s fees, and of the cost of suit. 6
92
Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE
docketed as CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND
the RTC: THUS ILLEGAL.

WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the II.
total amount due and interest rate. Accordingly, petitioners are jointly and severally
ordered to pay respondent Bank of the Philippine Islands the following: THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST
FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.
1. The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and
Seventy Centavos plus interest and penalty charges of 3% per month from January 5, III.
2004 until fully paid;
THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD
2. P10,000.00 as and by way of attorney’s fees; and HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE
CORRECT AMOUNT OF PETITIONER’S OBLIGATION, OR IN THE ALTERNATIVE,
3. Cost of Suit. REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT
PROOF OF THE CORRECT AMOUNT THEREOF.
SO ORDERED.13
Our Ruling
Although sued jointly with her husband, petitioner Macalinao was the only one who
filed the petition before the CA since her husband already passed away on October The petition is partly meritorious.
18, 2005.14
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should
In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount Be Reduced to 2% Per Month or 24% Per Annum
sought to be satisfied in the demand letter of respondent BPI) is clearly not the result
of the re-computation at the reduced interest rate as previous higher interest rates In its Complaint, respondent BPI originally imposed the interest and penalty charges
were already incorporated in the said amount. Thus, the said amount should not be at the rate of 9.25% per month or 111% per annum. This was declared as
made as basis in computing the total obligation of petitioner Macalinao. Further, the unconscionable by the lower courts for being clearly excessive, and was thus reduced
CA also emphasized that respondent BPI should not compound the interest in the to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest
instant case absent a stipulation to that effect. The CA also held, however, that the and penalty charge and increased them to 3% per month or 36% per annum based on
MeTC erred in modifying the amount of interest rate from 3% monthly to only 2% the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card,
considering that petitioner Macalinao freely availed herself of the credit card facility which governs the transaction between petitioner Macalinao and respondent BPI.
offered by respondent BPI to the general public. It explained that contracts of
adhesion are not invalid per se and are not entirely prohibited. In the instant petition, Macalinao claims that the interest rate and penalty charge of
3% per month imposed by the CA is iniquitous as the same translates to 36% per
Petitioner Macalinao’s motion for reconsideration was denied by the CA in its annum or thrice the legal rate of interest.15 On the other hand, respondent BPI
Resolution dated November 21, 2006. Hence, petitioner Macalinao is now before this asserts that said interest rate and penalty charge are reasonable as the same are
Court with the following assigned errors: based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit
Card.16
I.
93
We find for petitioner. We are of the opinion that the interest rate and penalty stipulated penalty charge of 3% per month or 36% per annum, in addition to regular
charge of 3% per month should be equitably reduced to 2% per month or 24% per interests, is indeed iniquitous and unconscionable.
annum.
Thus, under the circumstances, the Court finds it equitable to reduce the interest rate
Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA
Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted at 1.5% monthly to 1% monthly or a total of 2% per month or 24% per annum in line
that this is not the first time that this Court has considered the interest rate of 36% with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code.
per annum as excessive and unconscionable. We held in Chua vs. Timan:17
There Is No Basis for the Dismissal of the Case,
The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans
must be equitably reduced to 1% per month or 12% per annum. We need not Much Less a Remand of the Same for Further Reception of Evidence
unsettle the principle we had affirmed in a plethora of cases that stipulated interest
rates of 3% per month and higher are excessive, iniquitous, unconscionable and Petitioner Macalinao claims that the basis of the re-computation of the CA, that is,
exorbitant. Such stipulations are void for being contrary to morals, if not against the the amount of PhP 94,843.70 stated on the October 27, 2002 Statement of Account,
law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively was not the amount of the principal obligation. Thus, this allegedly necessitates a re-
removed the ceiling on interest rates for both secured and unsecured loans, examination of the evidence presented by the parties. For this reason, petitioner
regardless of maturity, nothing in the said circular could possibly be read as granting Macalinao further contends that the dismissal of the case or its remand to the lower
carte blanche authority to lenders to raise interest rates to levels which would either court would be a more appropriate disposition of the case.
enslave their borrowers or lead to a hemorrhaging of their assets. (Emphasis
supplied.)
Such contention is untenable. Based on the records, the summons and a copy of the
complaint were served upon petitioner Macalinao and her husband on May 4, 2004.
Since the stipulation on the interest rate is void, it is as if there was no express Nevertheless, they failed to file their Answer despite such service. Thus, respondent
contract thereon. Hence, courts may reduce the interest rate as reason and equity BPI moved that judgment be rendered accordingly. 21 Consequently, a decision was
demand.18 rendered by the MeTC on the basis of the evidence submitted by respondent BPI.
This is in consonance with Sec. 6 of the Revised Rule on Summary Procedure, which
The same is true with respect to the penalty charge. Notably, under the Terms and states:
Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated
therein that respondent BPI shall impose an additional penalty charge of 3% per Sec. 6. Effect of failure to answer. — Should the defendant fail to answer the
month. Pertinently, Article 1229 of the Civil Code states: complaint within the period above provided, the court, motu proprio, or on motion of
the plaintiff, shall render judgment as may be warranted by the facts alleged in the
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation complaint and limited to what is prayed for therein: Provided, however, that the
has been partly or irregularly complied with by the debtor. Even if there has been no court may in its discretion reduce the amount of damages and attorney’s fees
performance, the penalty may also be reduced by the courts if it is iniquitous or claimed for being excessive or otherwise unconscionable. This is without prejudice to
unconscionable. the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or
more defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis
In exercising this power to determine what is iniquitous and unconscionable, courts supplied.)
must consider the circumstances of each case since what may be iniquitous and
unconscionable in one may be totally just and equitable in another. 19 Considering the foregoing rule, respondent BPI should not be made to suffer for
petitioner Macalinao’s failure to file an answer and concomitantly, to allow the latter
In the instant case, the records would reveal that petitioner Macalinao made partial to submit additional evidence by dismissing or remanding the case for further
payments to respondent BPI, as indicated in her Billing Statements. 20 Further, the reception of evidence. Significantly, petitioner Macalinao herself admitted the
94

existence of her obligation to respondent BPI, albeit with reservation as to the


principal amount. Thus, a dismissal of the case would cause great injustice to )
respondent BPI. Similarly, a remand of the case for further reception of evidence
would unduly prolong the proceedings of the instant case and render inutile the 8,362.50
6/29/2003 82,152.50 83,515.00 835.15 835.15 85,185.30
proceedings conducted before the lower courts. (7,000.00)
7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis
for the re-computation of the interest considering that this was the first amount 8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
which appeared on the Statement of Account of petitioner Macalinao. There is no
other amount on which the re-computation could be based, as can be gathered from 9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
the evidence on record. Furthermore, barring a showing that the factual findings 10/28/200
complained of are totally devoid of support in the record or that they are so glaringly 83,515.00 83,515.00 835.15 835.15 85,185.30
3
erroneous as to constitute serious abuse of discretion, such findings must stand, for
this Court is not expected or required to examine or contrast the evidence submitted 11/28/200
83,515.00 83,515.00 835.15 835.15 85,185.30
by the parties.22 3
12/28/200
In view of the ruling that only 1% monthly interest and 1% penalty charge can be 83,515.00 83,515.00 835.15 835.15 85,185.30
3
applied to the beginning balance of PhP 94,843.70, this Court finds the following
computation more appropriate: 1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30
14,397.2 14,397.2 112,309.5
TOTAL 83,515.00
Total 6 6 2
Purchases Penalty
Statement Previous Interest Amount
(Payments Balance Charge
Date Balance (1%) Due for
) (1%) WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006
the Month
in CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due,
10/27/200 interest rate, and penalty charge. Accordingly, petitioner Macalinao is ordered to pay
94,843.70 94,843.70 948.44 948.44 96,740.58
2 respondent BPI the following:

11/27/200
94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58 (1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-
2
two centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month
12/31/200 110,152.5 112,355.5 from January 5, 2004 until fully paid;
79,843.70 30,308.80 1,101.53 1,101.53
2 0 6
(2) PhP 10,000 as and by way of attorney’s fees; and
110,152.5 110,152.5 112,355.5
1/27/2003 1,101.53 1,101.53
0 0 6
(3) Cost of suit.
110,152.5 110,152.5 112,355.5
2/27/2003 1,101.53 1,101.53
0 0 6 SO ORDERED.
110,152.5 (18,000.00
3/27/2003 92,152.50 921.53 921.53 93,995.56 PRESBITERO J. VELASCO, JR.
0 )
Associate Justice
4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56
95

5/27/2003 92,152.50 (10,000.00 82,152.50 821.53 821.53 83,795.56


26. G.R. No. 125944 June 29, 2001

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners,


vs.
JOSE AVELINO SALAZAR, respondents.

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, of the decision of the Court of Appeals in CA-G.R. CV No. 37899, affirming
the decision of the Regional Trial Court, Branch 16, Malolos, Bulacan, in Civil Case No.
375-M-91, "Spouses Danilo and Ursula Solangon vs. Jose Avelino Salazar" for
annulment of mortgage. The dispositive portion of the RTC decision reads:

"WHEREFORE, judgment is hereby rendered against the plaintiffs in favor of the


defendant Salazar, as follows:

1. Ordering the dismissal of the complaint;

2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991;

3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of
attorney’s fees; and

4. To pay the costs.

SO ORDERED."1

The facts as summarized by the Court of Appeals in its decision being challenged are:

"On August 22, 1986, the plaintiffs-appellants executed a deed or real estate
mortgage in which they mortgaged a parcel of land situated in Sta. Maria, Bulacan, in
favor of the defendant-appellee, to secure payment of a loan of P60,000.00 payable
within a period of four (4) months, with interest thereon at the rate of 6% per month
96

(Exh. "B").
On May 27, 1987, the plaintiffs-appellants executed a deed of real estate mortgage in 5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES raised by the
which they mortgaged the same parcel of land to the defendant-appellee, to secure appellants.
payment of a loan of P136,512.00, payable within a period of one (1) year, with
interest thereon at the legal rate (Exh. "1"). In his comment, respondent Jose Avelino Salazar avers that the petition should not be
given due course as it raises questions of facts which are not allowed in a petition for
On December 29, 1990, the plaintiffs-appellants executed a deed of real estate review on certiorari.
mortgage in which they mortgaged the same parcel of land in favor of defendant-
appellee, to secure payment of a loan in the amount of P230,000.00 payable within a We find no merit in the instant petition.
period of four (4) months, with interest thereon at the legal rate (Exh. "2", Exh. "C").
The core of the present controversy is the validity of the third contract of mortgage
This action was initiated by the plaintiffs-appellants to prevent the foreclosure of the which was foreclosed.
mortgaged property. They alleged that they obtained only one loan form the
defendant-appellee, and that was for the amount of P60,000.00, the payment of Petitioners contend that they obtained from respondent Avelino Salazar only one (1)
which was secured by the first of the above-mentioned mortgages. The subsequent loan in the amount of P60,000.00 secured by the first mortgage of August 1986.
mortgages were merely continuations of the first one, which is null and void because According to them, they signed the third mortgage contract in view of respondent’s
it provided for unconscionable rate of interest. Moreover, the defendant-appellee assurance that the same will not be foreclosed. The trial court, which is in the best
assured them that he will not foreclose the mortgage as long as they pay the position to evaluate the evidence presented before it, did not give credence to
stipulated interest upon maturity or within a reasonable time thereafter. They have petitioners’ corroborated testimony and ruled:
already paid the defendant-appellee P78,000.00 and tendered P47,000.00 more, but
the latter has initiated foreclosure proceedings for their alleged failure to pay the
"The testimony is improbable. The real estate mortgage was signed not only by
loan P230,000.00 plus interest.1âwphi1.nêt
Ursula Solangon but also by her husband including the Promissory Note appended to
it. Signing a document without knowing its contents is contrary to common
On the other hand, the defendant-appellee Jose Avelino Salazar claimed that the experience. The uncorroborated testimony of Ursula Solangon cannot be given
above-described mortgages were executed to secure three separate loans of weight."2
P60,000.00 P136,512.00 and P230,000.00, and that the first two loans were paid, but
the last one was not. He denied having represented that he will not foreclose the
Petitioners likewise insist that, contrary to the finding of the Court of appeals, they
mortgage as long as the plaintiffs-appellants pay interest."
had paid the amount of P136,512.00, or the second loan. In fact, such payment was
confirmed by respondent Salazar in his answer to their complaint.
In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals
the following errors:
It is readily apparent that petitioners are raising issues of fact in this petition. In a
petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
1. The Court of Appeals erred in holding that three (3) mortgage contracts were only questions of law may be raised and they must be distinctly set forth. The settled
executed by the parties instead of one (1); rule is that findings of fact of the lower courts (including the Court of Appeals) are
final and conclusive and will not be reviewed on appeal except: (1) when the
2. The Court of Appeals erred in ruling that a loan obligation secured by a real estate conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2)
mortgage with an interest of 72% per cent per annum or 6% per month is not when the inference made is manifestly mistaken, absurd or impossible; (3) when
unconscionable; there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the
4. The Court of Appeals erred in holding that the loan of P136,512.00 HAS NOT BEEN Court of Appeals, in making its findings, went beyond the issues of the case and such
PAID when the mortgagee himself states in his ANSWER that the same was already findings are contrary to the admission of both appellant and appellee; (6) when the
paid; and findings of the Court of Appeals are contrary to those of the trial court; and (7) when
97
the findings of fact are conclusions without citation of specific evidence on which Nevertheless, we find the interest at 5.5 % per month, or 66% per annum,
they are based.3 stipulated upon by the parties in the promissory note iniquitous or unconscionable,
and hence, contrary to morals (‘contra bonos mores’), if not against the law. The
None of these instances are extant in the present case. stipulation is void. The courts shall reduce equitably liquidated damages, whether
intended as an indemnity or a penalty if they are iniquitous or
Parenthetically, petitioners are questioning the rate of interest involved here. They unconscionable." (Emphasis supplied)
maintain that the Court of Appeals erred in decreeing that the stipulated interest rate
of 72% per annum or 6% per month is not unconscionable. In the case at bench, petitioners stand on a worse situation. They are required to pay
the stipulated interest rate of 6% per month or 72% per annum which is definitely
The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since outrageous and inordinate. Surely, it is more consonant with justice that the said
the Usury Law had been repealed by Central Bank Circular No. 905 there is no more interest rate be reduced equitably. An interest of 12% per annum is deemed fair and
maximum rate of interest and the rate will just depend on the mutual agreement of reasonable.
the parties. Obviously, this was in consonance with our ruling in Liam Law v. Olympic
Sawmill Co.4 WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to
the MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12
The factual circumstances of the present case require the application of a different % per annum.
jurisprudential instruction. While the Usury Law ceiling on interest rates was lifted by
C.B. Circular No. 905, nothing in the said circular grants lenders carte SO ORDERED.
blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.5 In Medel v. Court of Melo, Vitug, Panganiban, Gonzaga-Reyes, JJ., concur.
Appeals,6 this court had the occasion to rule on this question - whether or not the
stipulated rate of interest at 5.5% per month on a loan amounting to P500,000.00 is
usurious. While decreeing that the aforementioned interest was not usurious, this
Court held that the same must be equitably reduced for
being iniquitous, unconscionable and exorbitant, thus:

"We agree with petitioners that the stipulated rate of interest at 5.5% per month
on the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant. However, we can not consider the rate ‘usurious’ because this Court has
consistently held that Circular No. 905 of the Central Bank, adopted on December 22,
1982, has expressly removed the interest ceilings prescribed by the Usury Law and
that the Usury Law is now ‘legally inexistent.’

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the
Court held that CB Circular No. 905 did not repeal nor in any way amend the Usury
Law but simply suspended the latter’s effectivity. Indeed, we have held that ‘a Central
Bank Circular can not repeal a law. Only a law can repeal another law. In the recent
case of Florendo v. Court of Appeals, the Court reiterated the ruling that ‘by virtue of
CB Circular 905, the Usury Law has been rendered ineffective.’ ‘Usury Law has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon.’
98
FEDERAL BUILDERS, INC., Petitioner,
vs.
FOUNDATION SPECIALISTS, INC., Respondent,

x-----------------------x

G.R. No. 194621

FOUNDATION SPECIALISTS, INC., Petitioner,


vs.
FEDERAL BUILDERS, INC., Respondent.

DECISION

PERALTA, J.:

Before the Court are two consolidated cases, namely: (1) Petition for review on
certiorari under Rule 45 of the Rules of Court, docketed as G.R. No. 194507, filed by
Federal Builders, Inc., assailing the Decision 1 and Resolution,2dated July 15, 2010 and
November 23, 2010, respectively, of the Court of Appeals (CA) in CA-G.R. CV No.
70849, which affirmed with modification the Decision3 dated May 3, 2001 of the
Regional Trial Court (RTC) in Civil Case No. 92-075; and (2) Petition for review on
certiorari under Rule 45 of the Rules of Court,docketed as G.R. No. 194621, filed by
Foundation Specialists, Inc., assailing the same Decision4 and Resolution,5 dated July
15, 2010 and November 23, 2010,respectively, of the CA in CA- G.R. CV No. 70849,
which affirmed with modification the Decision 6 dated May 3, 2001 of the RTC in Civil
Case No. 92-075.

The antecedent facts are as follows:

On August 20, 1990, Federal Builders, Inc. (FBI) entered into an agreement with
Foundation Specialists, Inc. (FSI) whereby the latter, as subcontractor, undertook the
construction of the diaphragm wall, capping beam, and guide walls of the Trafalgar
Plaza located at Salcedo Village, Makati City (the Project), for a total contract price of
Seven Million Four Hundred Thousand Pesos (₱7,400,000.00). 7 Under the
agreement,8 FBI was to pay a downpayment equivalent to twenty percent (20%) of
the contract price and the balance, through a progress billing every fifteen (15) days,
payable not later than one (1) week from presentation of the billing.
27. G.R. No. 194507 September 8, 2014

On January 9, 1992, FSI filed a complaint for Sum of Money against FBI before the RTC
of Makati City seeking to collect the amount of One Million Six Hundred Thirty-Five
99
Thousand Two Hundred Seventy-Eight Pesos and Ninety-One Centavos interest rate on the amount of Billings 3 and 4, the CA ruled that the lower court did
(₱1,635,278.91), representing Billings No. 3 and 4, with accrued interest from August not err in imposing the same in the following wise:
1, 1991 plus moral and exemplary damages with attorney’s fees. 9 In its complaint,FSI
alleged that FBI refused to pay said amount despite demand and itscompletion of x x x The rule is well-settled that when an obligation is breached, and it consists in the
ninety-seven percent (97%) of the contracted works. payment of a sum of money, the interest due shall itself earn legal interest from the
time it is judicially demanded (BPI Family Savings Bank, Inc. vs. First Metro
In its Answer with Counterclaim, FBI claimed that FSI completed only eighty-five Investment Corporation, 429 SCRA 30). When there is no rate of interest stipulated,
percent (85%) of the contracted works, failing to finish the diaphragm wall and such as in the present case, the legal rate of interest shall be imposed, pursuant to
component works in accordance with the plans and specifications and abandoning Article 2209 of the New Civil Code. In the absence of a stipulated interest rate on a
the jobsite. FBI maintains that because of FSI’s inadequacy, its schedule in finishing loan due, the legal rate of interest shall be 12% per annum.13
the Project has been delayed resulting in the Project owner’s deferment of its own
progress billings.10 It further interposed counterclaims for amounts it spent for the Both parties filed separate Motions for Reconsideration assailing different portions of
remedial works on the alleged defects in FSI’s work. the CADecision, but to no avail.14 Undaunted, they subsequently elevated their claims
withthis Court via petitions for review on certiorari.
On May 3, 2001, after evaluating the evidence of both parties, the RTC ruled in favor
of FSI, the dispositive portion of its Decision reads: On the one hand, FSI asserted that the CA should not have deleted the sum of
₱279,585.00 representing the cost of undelivered cement and reduced the award of
WHEREFORE, on the basis of the foregoing, judgment is rendered ordering defendant attorney’s fees to ₱50,000.00, since it was an undisputed fact that FBI failed to
to pay plaintiff the following: deliver the agreed quantity of cement. On the other hand, FBI faulted the CA for
affirming the decision of the lower court insofar as the award of the sum representing
1. The sum of ₱1,024,600.00 representing billings 3 and 4, less the amount of Billings 3 and 4, the interest imposed thereon, and the rejection of his counterclaim
₱33,354.40 plus 12% legal interest from August 30, 1991; were concerned. In a Resolution15 dated February 21, 2011, however, this Court
denied, with finality, the petition filed by FSI in G.R. No. 194621 for having been filed
2. The sum of ₱279,585.00 representing the cost of undelivered cement; late.

3. The sum of ₱200,000.00 as attorney’s fees; and Hence, the present petition filed byFBI in G.R. No. 194507 invoking the following
arguments:
4. The cost of suit.
I.
Defendant’s counterclaim is deniedfor lack of factual and legal basis.
THE COURT OF APPEALS COMMITTED A CLEAR, REVERSABLE ERROR WHEN IT
AFFIRMED THE TRIAL COURT’S JUDGMENT THAT FEDERAL BUILDERS, INC. WAS
SO ORDERED.11
LIABLE TO PAY THE BALANCE OF ₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40
NOTWITHSTANDING THAT THE DIAPHRAGM WALL CONSTRUCTED BY FOUNDATION
On appeal, the CA affirmed the Decision of the lower court, but deleted the sum of
SPECIALIST, INC. WAS CONCEDEDLY DEFECTIVE AND OUT-OF-SPECIFICATIONS AND
₱279,585.00 representing the cost of undelivered cement and reduced the award of THAT PETITIONER HAD TO REDO IT AT ITS OWN EXPENSE.
attorney’s fees to ₱50,000.00. In its Decision 12 dated July 15, 2010, the CA explained
that FSI failed to substantiate how and in what manner it incurred the cost of cement
II.
by stressing that its claim was not supported by actual receipts. Also, it found that
while the trial court did not err in awarding attorney’s fees, the same should be
reduced for being unconscionable and excessive. On FBI’s rejection of the 12% annual THE COURT OF APPEALS COMMITTED SERIOUS, REVERSABLE ERROR WHEN IT
100

IMPOSED THE 12% LEGAL INTEREST FROM AUGUST 30, 1991 ON THE DISPUTED
CLAIM OF ₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40 DESPITE THE FACT THAT limited to, the failure to deliver the needed cement as agreed upon in the contract, to
THERE WAS NO STIPULATION IN THE AGREEMENT OF THE PARTIES WITH REGARD TO wit:
INTEREST AND DESPITE THE FACT THAT THEIR AGREEMENT WAS NOT A "LOAN OR
FORBEARANCE OF MONEY." On March 8, 1991, plaintiff had finished the construction of the guide wall and
diaphragm wall (Exh. "R") but had not yet constructed the capping beam as of April
III. 22, 1991 for defendant’s failure to deliver the needed cement in accordance with
their agreement(Exhibit "I"). The diaphragm wall had likewise been concrete tested
THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS REVERSABLE ERROR and was found to have conformed with the required design strength (Exh. "R").
WHEN IT DISMISSED THE COUNTERCLAIM OF PETITIONER NOTWITHSTANDING
OVERWHELMING EVIDENCE SUPPORTING ITS CLAIM OF ₱8,582,756.29 AS ACTUAL Subsequently, plaintiff was paid the aggregate amount of ₱5,814,000.00. But as of
DAMAGES. May 30, 1991, plaintiff’s billings numbers 3 and 4 had remained unpaid (Exhs. "L",
"M", and "M-1").
The petition is partly meritorious.
xxxx
We agree with the courts below and reject FBI’s first and third arguments. Well-
entrenched in jurisprudence is the rule that factual findings of the trial court, On the misaligned diaphragm wall from top to bottom and inbetween panels, plaintiff
especially when affirmed by the appellate court, are accorded the highest degree of explained thatin the excavation of the soil where the rebar cages are lowered and
respectand considered conclusive between the parties, save for the following later poured with concrete cement, the characteristics of the soil is not the same or
exceptional and meritorious circumstances: (1) when the factual findings of the homogenous all throughout. Because of this property of the soil,in the process of
appellate court and the trial court are contradictory; (2) whenthe findings of the trial excavation, it may erode in some places that may cause spaces that the cement may
court are grounded entirely on speculation, surmises or conjectures; (3) when the fill or occupy which would naturally cause bulges, protrusions and misalignment in
lower court’s inference from its factual findings is manifestly mistaken, absurd or the concrete cast into the excavated ground(tsn., June 1, 2000, pp 14-18). This, in fact
impossible; (4) when there is grave abuse of discretion in the appreciation of facts; (5) was anticipated when the agreement was executed and included as provision 6.4
when the findings of the appellate court go beyond the issues of the case, or fail to thereof.
notice certain relevant facts which, if properly considered, will justify a different
conclusion; (6) when there is a misappreciation of facts; (7) when the findings of fact The construction of the diaphragm wall panel by panel caused misalignment and the
are themselves conflicting; and (8) when the findings of fact are conclusions without chipping off of the portions misaligned is considered a matter of course. Defendant,
mention of the specific evidence on which they are based, are premised on the as the main contractor of the project, has the responsibility of chopping or chipping
absence of evidence, or are contradicted by evidence on record. 16 off of bulges(tsn., ibid, pp 20-21). Wrong location of rebar dowels was anticipated by
both contractor and subcontractor as the latter submitted a plan called "Detail of
None of the aforementioned exceptions are present herein. In the assailed Decision, Sheer Connectors" (Exh "T") which was approved.The plan provided two alternatives
the RTC meticulouslydiscussed the obligations of each party, the degree of their by which the wrong location of rebar dowels may be remedied. Hence, defendant,
compliance therewith, as well as their respective shortcomings, all of which were aware of the possibility of inaccurate location of these bars, cannot therefore ascribe
properly substantiated with the corresponding documentary and testimonial the same to the plaintiff as defective work.
evidence.
Construction of the capping beam required the use of cement. Records, however,
Under the construction agreement, FSI’s scope of workconsisted in (1) the show that from September 14, 1990 up to May 30, 1991 (Exhs. "B" to "L"), plaintiff
construction of the guide walls, diaphragm walls, and capping beam; and (2) the had repeatedly requested defendant to deliver cement. Finally, on April 22, 1991,
installation of steel props.17 As the lower courts aptly observed from the records at plaintiff notified defendant of its inability to construct the capping beam for the
hand, FSI had, indeed, completed ninety-seven percent (97%) of its contracted works latter’s failure to deliver the cement as provided in their agreement(Exh. "I").
and the non-completion of the remaining three percent (3%), as well as the alleged Although records show that there was mention of revision of design, there was no
101

defects in the said works, are actually attributable to FBI’s own fault such as, but not
evidence presented to show such revision required less amount of cement than what works. Hence, defendant’s refusal to pay was not justified and the alleged defects of
was agreed on by plaintiff and defendant. the diaphragm wall (tsn, Sept. 28, 2000, p. 17) which it claims to have discovered only
after January 1992 were mere afterthoughts.19
The seventh phase of the construction of the diaphragm wall is the construction of
the steel props which could be installed only after the soil has been excavated by the Thus, in the absence of any record to otherwise prove FSI’s neglect in the fulfilment
main contractor. When defendant directed plaintiff to install the props, the latter of its obligations under the contract, this Court shall refrain from reversing the
requested for a site inspection to determine if the excavation of the soil was finished findings of the courts below, which are fully supported by and deducible from, the
up to the 4th level basement. Plaintiff, however, did not receive any response.It later evidence on record. Indeed, FBI failed to present any evidence to justify its refusal to
learned that defendant had contracted out that portion of work to another sub- pay FSI for the works it was contracted to perform. As such, We do not see any
contractor (Exhs. "O" and "P"). Nevertheless, plaintiff informed defendant of its reason to deviate from the assailed rulings.
willingness to execute that portion of its work.18
Anent FBI’s second assignment of error, however, We find merit in the argument that
It is clear from the foregoing that contrary to the allegations of FBI, FSI had indeed the 12% interest rateis inapplicable, since this case does not involve a loan or
completed its assigned obligations, with the exception of certain assigned tasks, forbearance ofmoney. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
which was due to the failure of FBI to fulfil its end of the bargain. Appeals,20 We laid down the following guidelines in computing legal interest:

It can similarly be deduced that the defects FBI complained of, such as the misaligned II. With regard particularly to an award of interest in the concept of actual and
diaphragm wall and the erroneous location of the rebar dowels, were not only compensatory damages, the rate of interest, as well as the accrual thereof, is
anticipated by the parties, having stipulated alternative plans to remedy the same, imposed, as follows:
but more importantly, are also attributable to the very actions of FBI. Accordingly,
considering that the alleged defects in FSI’s contracted works were not so much due 1. When the obligation is breached, and it consists in the payment of a sum of money,
to the fault or negligence of the FSI, but were satisfactorily proven to be caused by i.e., a loan or forbearance of money, the interest due should be that which may have
FBI’s own acts, FBI’s claim of ₱8,582,756.29 representing the cost of the measures it been stipulated in writing. Furthermore, the interest due shall itself earn legal
undertook to rectify the alleged defects must necessarily fail. In fact, as the lower interest from the time it is judicially demanded. In the absence of stipulation, the rate
court noted, at the time when FBI had evaluated FSI’s works, it did not categorically of interest shall be 12% per annum to be computed from default, i.e., from judicial or
pose any objection thereto, viz: extrajudicial demand under and subject to the provisions of Article1169 of the Civil
Code.
Defendant admitted that it had paid ₱6 million based on its evaluation of plaintiff’s
accomplishments (tsn., Sept. 28, 2000, p. 17) and its payment was made without 2. When an obligation, not constituting a loan or forbearance of money, is breached,
objection on plaintiff’s works, the majority of which were for the accomplishments in an interest on the amount of damages awarded may be imposed at the discretion of
the construction of the diaphragm wall (tsn., ibid, p. 70). the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
xxxx with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
While there is no evidence to show the scope of work for these billings, it is safe to judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
assume that these were also works in the construction of the diaphragm wall so reasonably established at the time the demand is made, the interest shall begin to
considering that as of May 16, 1991, plaintiff had only the installation of the steel run only from the date the judgment of the court is made (at which time the
props and welding works to complete (Exh. "H"). If defendant was able to evaluate quantification of damages may be deemed to have been reasonably ascertained). The
the work finished by plaintiff the majority of which was the construction of the actual base for the computation of legal interest shall, in any case, be on the amount
diaphragm wall and paid it about ₱6 million as accomplishment, there was no reason finally adjudged.
why it could not evaluate plaintiff’s works covered by billings 3 and 4.In other words,
102

defendants did nothave to excavate in order to determine and evaluate plaintiff’s


3. When the judgment of the court awarding a sum of money becomes final and satisfaction, this interim period being deemed to be by then an equivalent to a
executory, the rate of legal interest, whether the case falls under paragraph 1 or forbearance of credit.
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of And, in addition to the above, judgments that have become final and executory prior
credit.21 to July 1, 2013, shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein.23
In line, however, with the recent circular of the Monetary Board of the Bangko
Sentral ng Pilipinas (BSP-MB) No. 799, we have modified the guidelines in Nacar v. It should be noted, however, that the new rate could only be applied prospectively
Gallery Frames,22 as follows: and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013, the new rate of six
I. When an obligation, regardless of itssource, i.e., law, contracts, quasicontracts, percent (6%) per annum shall be the prevailing rate of interest when applicable. Thus,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages. the need to determine whether the obligation involved herein is a loanand
The provisions under Title XVIII on "Damages" of the Civil Code govern in determining forbearance of money nonetheless exists.
the measure of recoverable damages.
In S.C. Megaworld Construction and Development Corporation v. Engr. Parada, 24 We
II. With regard particularly to an award of interest in the concept of actual and clarified the meaning of obligations constituting loans or forbearance of money in the
compensatory damages, the rate of interest, as well as the accrual thereof, is following wise:
imposed, as follows:
As further clarified in the case of Sunga-Chan v. CA, a loan or forbearance of money,
1. When the obligation is breached, and it consists in the payment of a sum of money, goods or credit describes a contractual obligation whereby a lender or creditor has
i.e., a loan or forbearance of money, the interest due should be that which may have refrained during a given period from requiring the borrower or debtor to repay the
been stipulated in writing. Furthermore, the interest due shall itself earn legal loan or debt then due and payable. Thus:
interest from the time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 6% per annumto be computed from default, i.e., from judicial or In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil under Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving the
Code. loan or forbearance of money. And for transactions involving payment of indemnities
in the concept of damages arising from default in the performance of obligations in
2. When an obligation, not constituting a loan or forbearance of money, is breached, general and/or for money judgment not involving a loan or forbearance of money,
an interest on the amount of damages awarded may be imposed at the discretion of goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a
the court at the rate of 6% per annum. No interest, however, shall be adjudged on yearly 6% interest. Art. 2209 pertinently provides:
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
reasonable certainty, the interest shall begin to run from the time the claim is made incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
judicially or extrajudicially(Art. 1169, Civil Code), but when such certainty cannot be shall be the payment of the interest agreed upon, and in the absence of stipulation,
so reasonably established at the time the demand is made, the interest shall begin to the legal interest, which is six per cent per annum.
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The The term "forbearance," within the context of usury law, has been described as a
actual base for the computation of legal interest shall, in any case, be on the amount contractual obligation ofa lender or creditor to refrain, during a given period of time,
finally adjudged. 3. When the judgment of the court awarding a sum of money from requiring the borrower or debtor to repay the loan or debt then due and
becomes final and executory, the rate of legal interest, whether the case falls under payable.25
paragraph 1 or paragraph 2, above, shall be 6% per annumfrom such finality until its
103
Forbearance of money, goods or credits, therefore, refers to arrangements other should be reduced to 6% per annum considering the fact that the obligation involved
than loan agreements, where a person acquiesces to the temporary use of his money, herein does not partake of a loan or forbearance of money.
goods orcredits pending the happening of certain events or fulfilment of certain
conditions.26 Consequently, if those conditions are breached, said person is entitled WHEREFORE, premises considered, the instant petition is DENIED. The Decision and
not only to the return of the principal amount paid, but also to compensation for the Resolution, dated July 15, 2010 and November 23, 2010, respectively, of the Court of
use of his money which would be the same rateof legal interest applicable to a loan Appeals in CA-G.R. CV No. 70849 are hereby AFFIRMED with MODIFICATION. Federal
since the use or deprivation of funds therein is similar to a loan. 27 Builders, Inc. is ORDERED to pay Foundation Specialists, Inc. the sum of Pl ,024,600.00
representing billings 3 and 4, less the amount of ₱33,354.40, plus interest at six
This case, however, does not involve an acquiescence to the temporary use of a percent (6%) per annum reckoned from August 30, 1991 until full payment thereof.
party’s money but a performance of a particular service, specifically the construction
of the diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza. SO ORDERED.

A review of similar jurisprudence would tell us that this Court had repeatedly DIOSDADO M. PERALTA
recognized this distinction and awarded interest at a rate of 6% on actual or Associate Justice
compensatory damages arising from a breach not only of construction Acting Chairperson
contracts,28 such as the one subject ofthis case, but also of contracts wherein one of
the parties reneged on its obligation to perform messengerial services,29 deliver
certain quantities of molasses,30 undertake the reforestation of a denuded forest
land,31 as well as breaches of contracts of carriage,32 and trucking agreements.33 We
have explained therein that the reason behind such is that said contracts do not
partake of loans or forbearance of money but are more in the nature of contracts of
service.

Thus, in the absence of any stipulation as to interest in the agreement between the
parties herein, the matter of interest award arising from the dispute in this case
would actually fall under the second paragraph of the above-quoted guidelines inthe
landmark case of Eastern Shipping Lines, which necessitates the imposition of
interestat the rate of 6%, instead of the 12% imposed by the courts below.

The 6% interest rate shall further be imposed from the finality of the judgment herein
until satisfaction thereof, in light of our recent ruling in Nacar v. Gallery Frames. 34

Note, however, that contrary to FBI’sassertion, We find no error in the RTC’s ruling
that the interest shall begin to run from August 30, 1991 as this is the date when FSI
extrajudicially made its claim against FBI through a letter demanding payment for its
services.35

In view of the foregoing, therefore, We find no compelling reason to disturb the VII. KINDS OF CIVIL OBLIGATIONS
factual findings of the RTC and the CA, which are fully supported by and deducible
from, the evidence on record, insofar as the sum representing Billings 3 and 4 is ART 1180
concerned. As to the rate of interest due thereon, however, We note that the same
104
28. G.R. No. L-7900. January 12, 1956. In refusing to pay the balance still due the Plaintiffs, Defendant does not repudiate
the above agreement, but contends in substance that pursuant to its terms payment
CIRIACO TIGLAO, ET AL., Plaintiffs-Appellees, vs. of salary differentials after the exhaustion of the P400,000 already appropriated is
subject to the condition that “funds for the purpose are available” and that no such
THE MANILA RAILROAD COMPANY, Defendant-Appellant. funds are available because Defendant is losing in its business.

DECISION The Defendant has, indeed, presented in evidence two summary statements of its
accounting department, showing that it has sustained losses in its operations during
the fiscal year ending June 30, 1953, and during the month of July next following.
REYES, A., J.:
These statements, however, do not necessarily prove that, in a multimillion-peso
business such as that of the Defendant funds for the payment of a debt of P7,275 due
This action was commenced in the Municipal Court of Manila, in October, 1952, by 35
the Plaintiffs could not have been raised or made available because of the losses
retired employees of the Defendant Manila Railroad Co. to recover the sum of
suffered in one year and one month. The memorandum of agreement does not
P7,275, the aggregate balance of salary differentials still due them under a
stipulate that the salary differentials shall be paid only from surplus profits. In fact,
memorandum of agreement signed by the Defendant and the unions representing its
the agreement provides that the standardized salaries — with the resulting salary
employees and laborers. After an unfavorable judgment in that court,
differentials naturally — are “to be carried in all subsequent budgets of the
the Defendant appealed to the Court of First Instance of Manila, and having again lost
company.” And we think it may be admitted that in a going concern the availability of
in that court it brought the case here on appeal, raising only questions of law.
funds for a particular purpose is a matter that does not necessarily depend upon the
cash position of the company but rather upon the judgment of its board of directors
The memorandum of agreement above-mentioned, which was signed in October, in the choice of projects, measures or expenditures that should be given preference
1948, and constitutes the basis of Plaintiffs’ claim, contains the following stipulations: or priority, or in the choice between alternatives. So if Defendant was able to raise or
appropriate funds to meet other obligations notwithstanding the fact that it was
“1. That the Manila Railroad Company hereby reiterates its approval of the losing, we think it could have done likewise with respect to its debt to the Plaintiffs,
standardized salaries provided for by the Standardization Committee effective as of an obligation which is deserving of preferential attention because it is owed to the
July 1, 1948, to be carried in all subsequent budgets of the Company, payment to be poor.
made in accordance with Item 2; and immediate payment of said salaries will
commence with the available funds of P400,000, already appropriated for this Viewed in this light, that is, that the time to redeem Defendant’s promise to pay
purpose; salary differentials, after the exhaustion of what had already been appropriated for
that purpose, really depended upon the judgment of its board of directors — it not
“2. That we hereby further agree that upon the exhaustion of the amount of appearing that Defendant was bankrupt — the obligation to pay the said salary
P400,000, the employees and laborers affected by the standardized plan will receive differentials may be considered as one with a term whose duration has been left to
their present salaries provided that any wage differential from date of exhaustion will the will of the debtor, so that pursuant to article 1128 of the old Civil Code (Art. 1197
be paid when funds for the purpose are available.” of the new), the duration of the term may be fixed by the courts.

It is agreed that Plaintiffs, who retired with gratuity in January, 1951, were entitled to There is something to Defendant’s contention that in previous cases this Court has
collect the salary differentials, or increase in pay, resulting from the standardization held that the duration of the term should be fixed in a separate action for that
of their salaries; that for salary differentials corresponding to the period from July 1, express purpose. But we think the lower court has given good reasons for not
1948, to January 31, 1949, they have already received a total of P9,906.05, but that adhering to technicalities in its desire to do substantial justice. It says:
there is still due them the total sum of P7,275, which has remained unpaid because of
the exhaustion of the P400,000 appropriated for the purpose. “(1) The facts in the instant case are not disputed, the parties having submitted the
case for decision to be based on an agreed stipulation of facts;
105
“(2) The fixing of a period for the payment of the obligation has been amply
discussed by the parties in their pleadings so that this Court may render judgment on
that subject matter under the alternative prayer of the Plaintiffs ‘for such further
relief as this Honorable Court may deem just and equitable’;

“(3) To dismiss the present case and require the Plaintiffs to file another action for
fixing the period of Defendant’s obligation, would entail multiplicity of suits;

“(4) In this case there are thirty-five Plaintiffs who were low salaried employees of
the DefendantManila Railroad Company and the said Plaintiffs have not been paid
their salary differentials for the period of, from February 1 to June 30, 1948; and

“(5) To dismiss the present case and order the Plaintiffs to file another suit would
open the door for dilatory tactics leading to a protracted litigation and in effect deny
the benefits of social justice.”

We may add that Defendant does not claim that if a separate action were instituted
to fix the duration of the term of its obligation, it could present better proofs than
those already adduced in the present case. Such separate action would, therefore, be
a mere formality and would serve no purpose other than to delay.

We, however, agree that the lower court should not have made the interest adjudged
run from October 21, 1948, the day the action was commenced in the municipal
court, but only from default of payment of the principal within the period of one year
fixed by the court.

Wherefore, with the only modification as to the date the adjudged interest is to
commence to run, the judgment below is affirmed, with costs against
the Defendant and Appellant.

Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Reyes, J.
B. L., JJ., concur.
106
February 15, 1966 he executed a "Deed of Assignment" 4 in favor of herein
petitioners the material parts of which read as follows:

xxx xxx xxx

I, LEONARDO A. TIRO, of legal age, married and a resident of Medina, Misamis


Oriental, for and in consideration of the sum of ONE HUNDRED TWENTY THOUSAND
PESOS (P120,000.00), Philippine Currency, do by these presents, ASSIGN, TRANSFER
AND CONVEY, absolutely and forever unto JOSE M. JAVIER and ESTRELLA F. JAVIER,
spouses, of legal age and a resident (sic) of 2897 F.B. Harrison, Pasay City, my shares
of stocks in the TIMBERWEALTH CORPORATION in the total amount of P120,000.00,
ART. 1181
payment of which shall be made in the following manner:
29. G.R. No. L-48194 March 15, 1990
1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,
2. The balance of P100,000.00 shall be paid P10,000.00 every shipment of export logs
vs.
actually produced from the forest concession of Timberwealth Corporation.
COURT OF APPEALS and LEONARDO TIRO, respondents.

That I hereby agree to sign and endorse the stock certificate in favor of Mr. & Mrs.
Eddie Tamondong for petitioners.
Jose M. Javier, as soon as stock certificates are issued.
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.
xxx xxx xxx

At the time the said deed of assignment was executed, private respondent had a
pending application, dated October 21, 1965, for an additional forest concession
REGALADO, J.:
covering an area of 2,000 hectares southwest of and adjoining the area of the
concession subject of the deed of assignment. Hence, on February 28, 1966, private
Petitioners pray for the reversal of the decision of respondent Court of Appeals in CA- respondent and petitioners entered into another "Agreement" 5 with the following
G.R. No. 52296-R, dated March 6, 1978, 1 the dispositive portion whereof decrees: stipulations:

WHEREFORE, the judgment appealed from is hereby set aside and another one xxx xxx xxx
entered ordering the defendants-appellees, jointly and solidarily, to pay plaintiff-
appellant the sum of P79,338.15 with legal interest thereon from the filing of the
1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede and
complaint, plus attorney's fees in the amount of P8,000.00. Costs against defendants-
convey whatever rights he may acquire, absolutely and forever, to TIMBERWEALTH
appellees.2
CORPORATION, a corporation duly organized and existing under the laws of the
Philippines, over a forest concession which is now pending application and approval
As found by respondent court or disclosed by the records, 3 this case was generated as additional area to his existing licensed area under O.T. License No. 391-103166,
by the following antecedent facts. situated at Medina, Misamis Oriental;

Private respondent is a holder of an ordinary timber license issued by the Bureau of 2. That for and in consideration of the aforementioned transfer of rights over said
107

Forestry covering 2,535 hectares in the town of Medina, Misamis Oriental. On additional area to TIMBERWEALTH CORPORATION, ESTRELLA F. JAVIER and JOSE M.
JAVIER, both directors and stockholders of said corporation, do hereby undertake to On September 23, 1968, petitioners filed their answer admitting the due execution of
pay LEONARDO TIRO, as soon as said additional area is approved and transferred to the contracts but interposing the special defense of nullity thereof since private
TIMBERWEALTH CORPORATION the sum of THIRTY THOUSAND PESOS (P30,000.00), respondent failed to comply with his contractual obligations and, further, that the
which amount of money shall form part of their paid up capital stock in conditions for the enforceability of the obligations of the parties failed to materialize.
TIMBERWEALTH CORPORATION; As a counterclaim, petitioners sought the return of P55,586.00 which private
respondent had received from them pursuant to an alleged management agreement,
3. That this Agreement is subject to the approval of the members of the Board of plus attorney's fees and costs.
Directors of the TIMBERWEALTH CORPORATION.
On October 7, 1968, private respondent filed his reply refuting the defense of nullity
xxx xxx xxx of the contracts in this wise:

On November 18, 1966, the Acting Director of Forestry wrote private respondent that What were actually transferred and assigned to the defendants were plaintiff's rights
his forest concession was renewed up to May 12, 1967 under O.T.L. No. 391-51267, and interest in a logging concession described in the deed of assignment, attached to
but since the concession consisted of only 2,535 hectares, he was therein informed the complaint and marked as Annex A, and agreement Annex E; that the "shares of
that: stocks" referred to in paragraph II of the complaint are terms used therein merely to
designate or identify those rights and interests in said logging concession. The
In pursuance of the Presidential directive of May 13, 1966, you are hereby given until defendants actually made use of or enjoyed not the "shares of stocks" but the logging
May 12, 1967 to form an organization such as a cooperative, partnership or concession itself; that since the proposed Timberwealth Corporation was owned
corporation with other adjoining licensees so as to have a total holding area of not solely and entirely by defendants, the personalities of the former and the latter are
less than 20,000 hectares of contiguous and compact territory and an aggregate one and the same. Besides, before the logging concession of the plaintiff or the
allowable annual cut of not less than 25,000 cubic meters, otherwise, your license will latter's rights and interests therein were assigned or transferred to defendants, they
not be further renewed. 6 never became the property or assets of the Timberwealth Corporation which is at
most only an association of persons composed of the defendants. 10
Consequently, petitioners, now acting as timber license holders by virtue of the deed
of assignment executed by private respondent in their favor, entered into a Forest and contending that the counterclaim of petitioners in the amount of P55,586.39 is
Consolidation Agreement 7 on April 10, 1967 with other ordinary timber license actually only a part of the sum of P69,661.85 paid by the latter to the former in
holders in Misamis Oriental, namely, Vicente L. De Lara, Jr., Salustiano R. Oca and partial satisfaction of the latter's claim. 11
Sanggaya Logging Company. Under this consolidation agreement, they all agreed to
pool together and merge their respective forest concessions into a working unit, as After trial, the lower court rendered judgment dismissing private respondent's
envisioned by the aforementioned directives. This consolidation agreement was complaint and ordering him to pay petitioners the sum of P33,161.85 with legal
approved by the Director of Forestry on May 10, 1967. 8 The working unit was interest at six percent per annum from the date of the filing of the answer until
subsequently incorporated as the North Mindanao Timber Corporation, with the complete payment. 12
petitioners and the other signatories of the aforesaid Forest Consolidation Agreement
as incorporators. 9 As earlier stated, an appeal was interposed by private respondent to the Court of
Appeals which reversed the decision of the court of a quo.
On July 16, 1968, for failure of petitioners to pay the balance due under the two
deeds of assignment, private respondent filed an action against petitioners, based on On March 28, 1978, petitioners filed a motion in respondent court for extension of
the said contracts, for the payment of the amount of P83,138.15 with interest at 6% time to file a motion for reconsideration, for the reason that they needed to change
per annum from April 10, 1967 until full payment, plus P12,000.00 for attorney's fees counsel. 13 Respondent court, in its resolution dated March 31, 1978, gave petitioners
and costs. fifteen (15) days from March 28, 1978 within which to file said motion for
reconsideration, provided that the subject motion for extension was filed on
108

time. 14 On April 11, 1978, petitioners filed their motion for reconsideration in the
Court of Appeals. 15 On April 21, 1978, private respondent filed a consolidated are null and void, the former for total absence of consideration and the latter for
opposition to said motion for reconsideration on the ground that the decision of non-fulfillment of the conditions stated therein.
respondent court had become final on March 27, 1978, hence the motion for
extension filed on March 28, 1978 was filed out of time and there was no more Petitioners contend that the deed of assignment conveyed to them the shares of
period to extend. However, this was not acted upon by the Court of Appeals for the stocks of private respondent in Timberwealth Corporation, as stated in the deed
reason that on April 20, 1978, prior to its receipt of said opposition, a resolution was itself. Since said corporation never came into existence, no share of stocks was ever
issued denying petitioners' motion for reconsideration, thus: transferred to them, hence the said deed is null and void for lack of cause or
consideration.
The motion for reconsideration filed on April 11, 1978 by counsel for defendants-
appellees is denied. They did not file any brief in this case. As a matter of fact this We do not agree. As found by the Court of Appeals, the true cause or consideration
case was submitted for decision without appellees' brief. In their said motion, they of said deed was the transfer of the forest concession of private respondent to
merely tried to refute the rationale of the Court in deciding to reverse the appealed petitioners for P120,000.00. This finding is supported by the following
judgment. 16 considerations, viz:

Petitioners then sought relief in this Court in the present petition for review 1. Both parties, at the time of the execution of the deed of assignment knew that the
on certiorari. Private respondent filed his comment, reiterating his stand that the Timberwealth Corporation stated therein was non-existent. 18
decision of the Court of Appeals under review is already final and executory.
2. In their subsequent agreement, private respondent conveyed to petitioners his
Petitioners countered in their reply that their petition for review presents substantive inchoate right over a forest concession covering an additional area for his existing
and fundamental questions of law that fully merit judicial determination, instead of forest concession, which area he had applied for, and his application was then
being suppressed on technical and insubstantial reasons. Moreover, the aforesaid pending in the Bureau of Forestry for approval.
one (1) day delay in the filing of their motion for extension is excusable, considering
that petitioners had to change their former counsel who failed to file their brief in the 3. Petitioners, after the execution of the deed of assignment, assumed the operation
appellate court, which substitution of counsel took place at a time when there were of the logging concessions of private respondent. 19
many successive intervening holidays.
4. The statement of advances to respondent prepared by petitioners stated:
On July 26, 1978, we resolved to give due course to the petition. "P55,186.39 advances to L.A. Tiro be applied to succeeding shipments. Based on the
agreement, we pay P10,000.00 every after (sic) shipment. We had only 2
The one (1) day delay in the filing of the said motion for extension can justifiably be shipments" 20
excused, considering that aside from the change of counsel, the last day for filing the
said motion fell on a holiday following another holiday, hence, under such 5. Petitioners entered into a Forest Consolidation Agreement with other holders of
circumstances, an outright dismissal of the petition would be too harsh. Litigations forest concessions on the strength of the questioned deed of assignment. 21
should, as much as possible, be decided on their merits and not on technicalities. In a
number of cases, this Court, in the exercise of equity jurisdiction, has relaxed the
The aforesaid contemporaneous and subsequent acts of petitioners and private
stringent application of technical rules in order to resolve the case on its
respondent reveal that the cause stated in the questioned deed of assignment is
merits. 17Rules of procedure are intended to promote, not to defeat, substantial
false. It is settled that the previous and simultaneous and subsequent acts of the
justice and, therefore, they should not be applied in a very rigid and technical sense.
parties are properly cognizable indica of their true intention. 22 Where the parties to a
contract have given it a practical construction by their conduct as by acts in partial
We now proceed to the resolution of this case on the merits. performance, such construction may be considered by the court in construing the
contract, determining its meaning and ascertaining the mutual intention of the
109

The assignment of errors of petitioners hinges on the central issue of whether the parties at the time of contracting. 23 The parties' practical construction of their
deed of assignment dated February 15, 1966 and the agreement of February 28, 1966
contract has been characterized as a clue or index to, or as evidence of, their depends upon the fulfillment of the obligation of the other. In this case, the failure of
intention or meaning and as an important, significant, convincing, persuasive, or private respondent to comply with his obligation negates his right to demand
influential factor in determining the proper construction of the agreement. 24 performance from petitioners. Delivery and payment in a contract of sale, are so
interrelated and intertwined with each other that without delivery of the goods there
The deed of assignment of February 15, 1966 is a relatively simulated contract which is no corresponding obligation to pay. The two complement each other. 30
states a false cause or consideration, or one where the parties conceal their true
agreement. 25 A contract with a false consideration is not null and void per Moreover, under the second paragraph of Article 1461 of the Civil Code, the efficacy
se. 26 Under Article 1346 of the Civil Code, a relatively simulated contract, when it of the sale of a mere hope or expectancy is deemed subject to the condition that the
does not prejudice a third person and is not intended for any purpose contrary to thing will come into existence. In this case, since private respondent never acquired
law, morals, good customs, public order or public policy binds the parties to their real any right over the additional area for failure to secure the approval of the Bureau of
agreement. Forestry, the agreement executed therefor, which had for its object the transfer of
said right to petitioners, never became effective or enforceable.
The Court of Appeals, therefore, did not err in holding petitioners liable under the
said deed and in ruling that — WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED. The
agreement of the parties dated February 28, 1966 is declared without force and
. . . In view of the analysis of the first and second assignment of errors, the effect and the amount of P30,000.00 is hereby ordered to be deducted from the sum
defendants-appellees are liable to the plaintiff-appellant for the sale and transfer in awarded by respondent court to private respondent. In all other respects, said
their favor of the latter's forest concessions. Under the terms of the contract, the decision of respondent court is affirmed.
parties agreed on a consideration of P120,000.00. P20,000.00 of which was paid,
upon the signing of the contract and the balance of P100,000.00 to be paid at the SO ORDERED.
rate of P10,000.00 for every shipment of export logs actually produced from the
forest concessions of the appellant sold to the appellees. Since plaintiff-appellant's Melencio-Herrera, Paras, Padilla and Sarmiento JJ., concur.
forest concessions were consolidated or merged with those of the other timber
license holders by appellees' voluntary act under the Forest Consolidation Agreement
(Exhibit D), approved by the Bureau of Forestry (Exhibit D-3), then the unpaid balance
of P49,338.15 (the amount of P70,661.85 having been received by the plaintiff-
appellant from the defendants-appellees) became due and demandable. 27

As to the alleged nullity of the agreement dated February 28, 1966, we agree with
petitioners that they cannot be held liable thereon. The efficacy of said deed of
assignment is subject to the condition that the application of private respondent for
an additional area for forest concession be approved by the Bureau of Forestry. Since
private respondent did not obtain that approval, said deed produces no effect. When
a contract is subject to a suspensive condition, its birth or effectivity can take place
only if and when the event which constitutes the condition happens or is fulfilled. 28 If
the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed. 29

The said agreement is a bilateral contract which gave rise to reciprocal obligations,
that is, the obligation of private respondent to transfer his rights in the forest
concession over the additional area and, on the other hand, the obligation of
110

petitioners to pay P30,000.00. The demandability of the obligation of one party


Atienza, Celestina A. Gonzales, Regalado Atienza and Melita A. Dela Cruz (collectively,
the Atienzas)1 own a 21,959 square meters of registered agricultural land at Valle
Cruz, Cabanatuan City.2 They acquired the land under an emancipation
patent3 through the government’s land reform program.4

On August 12, 2002 the Atienzas and respondent Domingo P. Espidol entered into a
contract called Kasunduan sa Pagbibili ng Lupa na may Paunang-Bayad (contract to
sell land with a down payment) covering the property.5 They agreed on a price of
₱130.00 per square meter or a total of ₱2,854,670.00, payable in three installments:
₱100,000.00 upon the signing of the contract; ₱1,750,000.00 in December 2002, and
the remaining ₱974,670.00 in June 2003. Respondent Espidol paid the Atienzas
₱100,000.00 upon the execution of the contract and paid ₱30,000.00 in commission
to the brokers.

When the Atienzas demanded payment of the second installment of ₱1,750,000.00 in


December 2002, however, respondent Espidol could not pay it. He offered to pay the
Atienzas ₱500.000.00 in the meantime,6 which they did not accept. Claiming that
Espidol breached his obligation, on February 21, 2003 the Atienzas filed a
complaint7 for the annulment of their agreement with damages before the Regional
Trial Court (RTC) of Cabanatuan City in Civil Case 4451.

30. G.R. No. 180665 August 11, 2010 In his answer,8 respondent Espidol admitted that he was unable to pay the December
2002 second installment, explaining that he lost access to the money which he shared
HEIRS OF PAULINO ATIENZA, namely, RUFINA L. ATIENZA, ANICIA A. IGNACIO, with his wife because of an injunction order issued by an American court in
ROBERTO ATIENZA, MAURA A. DOMINGO, AMBROCIO ATIENZA, MAXIMA ATIENZA, connection with a domestic violence case that she filed against him. 9 In his desire to
LUISITO ATIENZA, CELESTINA A. GONZALES, REGALADO ATIENZA and MELITA A. abide by his obligation, however, Espidol took time to travel to the Philippines to
DELA CRUZ Petitioners, offer ₱800,000.00 to the Atienzas.
vs.
DOMINGO P. ESPIDOL, Respondent. Respondent Espidol also argued that, since their contract was one of sale on
installment, his failure to pay the installment due in December 2002 did not amount
DECISION to a breach. It was merely an event that justified the Atienzas’ not to convey the title
to the property to him. The non-payment of an installment is not a legal ground for
ABAD, J.: annulling a perfected contract of sale. Their remedy was to bring an action for specific
performance. Moreover, Espidol contended that the action was premature since the
last payment was not due until June 2003.
This case is about the legal consequences when a buyer in a contract to sell on
installment fails to make the next payments that he promised.
In a decision10 dated January 24, 2005, the RTC ruled that, inasmuch as the non-
payment of the purchase price was not considered a breach in a contract to sell on
The Facts and the Case
installment but only an event that authorized the vendor not to convey title, the
proper issue was whether the Atienzas were justified in refusing to accept
Petitioner Heirs of Paulino Atienza, namely, Rufina L. Atienza, Anicia A. Ignacio, respondent Espidol’s offer of an amount lesser than that agreed upon on the second
111

Roberto Atienza, Maura A. Domingo, Ambrocio Atienza, Maxima Atienza, Luisito installment.
The trial court held that, although respondent’s legal problems abroad cannot justify One. That the Atienzas brought up the illegality of their sale of subject land only when
his failure to comply with his contractual obligation to pay an installment, it could not they filed their motion for reconsideration of the CA decision is not lost on this Court.
be denied that he made an honest effort to pay at least a portion of it. His traveling to As a rule, no question will be entertained on appeal unless it was raised before the
the Philippines from America showed his willingness and desire to make good on his court below. This is but a rule of fairness.16
obligation. His good faith negated any notion that he intended to renege on what he
owed. The Atienzas brought the case to court prematurely considering that the last Nonetheless, in order to settle a matter that would apparently undermine a
installment was not then due. significant policy adopted under the land reform program, the Court cannot simply
shirk from the issue. The Atienzas’ title shows on its face that the government
Furthermore, said the RTC, any attempt by the Atienzas to cancel the contract would granted title to them on January 9, 1990 by virtue of P.D. 27. This law explicitly
have to comply with the provisions of Republic Act (R.A.) 6552 or the Realty prohibits any form of transfer of the land granted under it except to the government
Installment Buyer Protection Act (R.A. 6552), particularly the giving of the required or by hereditary succession to the successors of the farmer beneficiary.
notice of cancellation, that they omitted in this case. The RTC thus declared the
contract between the parties valid and subsisting and ordered the parties to comply Upon the enactment of Executive Order 228 17 in 1987, however, the restriction
with its terms and conditions. ceased to be absolute. Land reform beneficiaries were allowed to transfer ownership
of their lands provided that their amortizations with the Land Bank of the Philippines
On appeal,11 the Court of Appeals (CA) affirmed the decision of the trial court. 12 Not (Land Bank) have been paid in full.18 In this case, the Atienzas’ title categorically
satisfied, the Atienzas moved for reconsideration.13 They argued that R.A. 6552 did states that they have fully complied with the requirements for the final grant of title
not apply to the case because the land was agricultural and respondent Espidol had under P.D. 27. This means that they have completed payment of their amortization
not paid two years worth of installment that the law required for coverage. And, in an with Land Bank. Consequently, they could already legally transfer their title to
apparent shift of theory, the Atienzas now also impugn the validity of their contract another.
to sell, claiming that, since the property was covered by an emancipation patent, its
sale was prohibited and void. But the CA denied the motion for reconsideration, Two. Regarding the right to cancel the contract for non-payment of an installment,
hence, the present petition.14 there is need to initially determine if what the parties had was a contract of sale or a
contract to sell. In a contract of sale, the title to the property passes to the buyer
Questions Presented upon the delivery of the thing sold. In a contract to sell, on the other hand, the
ownership is, by agreement, retained by the seller and is not to pass to the vendee
The questions presented for resolution are: until full payment of the purchase price. In the contract of sale, the buyer’s non-
payment of the price is a negative resolutory condition; in the contract to sell, the
1. Whether or not the Atienzas could validly sell to respondent Espidol the subject buyer’s full payment of the price is a positive suspensive condition to the coming into
land which they acquired through land reform under Presidential Decree 2715 (P.D. effect of the agreement. In the first case, the seller has lost and cannot recover the
27); ownership of the property unless he takes action to set aside the contract of sale. In
the second case, the title simply remains in the seller if the buyer does not comply
with the condition precedent of making payment at the time specified in the
2. Whether or not the Atienzas were entitled to the cancellation of the contract to
contract.19 Here, it is quite evident that the contract involved was one of a contract to
sell they entered into with respondent Espidol on the ground of the latter’s failure to
sell since the Atienzas, as sellers, were to retain title of ownership to the land until
pay the second installment when it fell due; and
respondent Espidol, the buyer, has paid the agreed price. Indeed, there seems no
question that the parties understood this to be the case.20
3. Whether or not the Atienzas’ action for cancellation of title was premature absent
the notarial notice of cancellation required by R.A. 6552.
Admittedly, Espidol was unable to pay the second installment of ₱1,750,000.00 that
fell due in December 2002.1awph!1That payment, said both the RTC and the CA, was
The Court’s Rulings
a positive suspensive condition failure of which was not regarded a breach in the
112

sense that there can be no rescission of an obligation (to turn over title) that did not
yet exist since the suspensive condition had not taken place. And this is correct so far. existent status of that contract to relieve themselves of any liability should they
Unfortunately, the RTC and the CA concluded that should Espidol eventually pay the decide to sell the property to someone else. Parenthetically, Espidol never offered to
price of the land, though not on time, the Atienzas were bound to comply with their settle the full amount of the price in June 2003, when the last installment fell due, or
obligation to sell the same to him. during the whole time the case was pending before the RTC.

But this is error. In the first place, since Espidol failed to pay the installment on a day Three. Notice of cancellation by notarial act need not be given before the contract
certain fixed in their agreement, the Atienzas can afterwards validly cancel and ignore between the Atienzas and respondent Espidol may be validly declare non-existent.
the contract to sell because their obligation to sell under it did not arise. Since the R.A. 6552 which mandated the giving of such notice does not apply to this case. The
suspensive condition did not arise, the parties stood as if the conditional obligation cancellation envisioned in that law pertains to extrajudicial cancellation or one done
had never existed.21 outside of court,25 which is not the mode availed of here. The Atienzas came to court
to seek the declaration of its obligation under the contract to sell cancelled. Thus, the
Secondly, it was not a pure suspensive condition in the sense that the Atienzas made absence of that notice does not bar the filing of their action.
no undertaking while the installments were not yet due. Mr. Justice Edgardo L. Paras
gave a fitting example of suspensive condition: "I’ll buy your land for ₱1,000.00 if you Since the contract has ceased to exist, equity would, of course, demand that, in the
pass the last bar examinations." This he said was suspensive for the bar examinations absence of stipulation, the amount paid by respondent Espidol be returned, the
results will be awaited. Meantime the buyer is placed under no immediate obligation purpose for which it was given not having been attained; 26 and considering that the
to the person who took the examinations.22 Atienzas have consistently expressed their desire to refund the ₱130,000.00 that
Espidol paid.27
Here, however, although the Atienzas had no obligation as yet to turn over title
pending the occurrence of the suspensive condition, it was implicit that they were WHEREFORE, the Court GRANTS the petition and REVERSES and SETS ASIDE the
under immediate obligation not to sell the land to another in the meantime. When August 31, 2007 decision and November 5, 2007 resolution of the Court of Appeals in
Espidol failed to pay within the period provided in their agreement, the Atienzas were CA-G.R. CV 84953. The Court declares the Kasunduan sa Pagbibili ng Lupa na may
relieved of any obligation to hold the property in reserve for him. Paunang-Bayad between petitioner Heirs of Paulino Atienza and respondent
Domingo P. Espidol dated August 12, 2002 cancelled and the Heirs’ obligation under it
The ruling of the RTC and the CA that, despite the default in payment, the Atienzas non-existent. The Court directs petitioner Heirs of Atienza to reimburse the
remained bound to this day to sell the property to Espidol once he is able to raise the ₱130,000.00 down payment to respondent Espidol.
money and pay is quite unjustified. The total price was ₱2,854,670.00. The Atienzas
decided to sell the land because petitioner Paulino Atienza urgently needed money SO ORDERED.
for the treatment of his daughter who was suffering from leukemia.23 Espidol paid a
measly ₱100,000.00 in down payment or about 3.5% of the total price, just about the 31. G.R. No. 112127 | July 17, 1995
minimum size of a broker’s commission. Espidol failed to pay the bulk of the price,
₱1,750,000.00, when it fell due four months later in December 2002. Thus, it was not CENTRAL PHILIPPINE UNIVERSITY, petitioner, vs.
such a small default as to justify the RTC and the CA’s decision to continue to tie up COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE
the Atienzas to the contract to sell upon the excuse that Espidol tried his honest best LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ, respondents.
to pay.
BELLOSILLO, J.:
Although the Atienzas filed their action with the RTC on February 21, 2003, four
months before the last installment of ₱974,670.00 fell due in June 2003, it cannot be
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the
said that the action was premature. Given Espidol’s failure to pay the second
decision of the Court of Appeals which reversed that of the Regional Trial Court of
installment of ₱1,750,000.00 in December 2002 when it was due, the Atienzas’
Iloilo City directing petitioner to reconvey to private respondents the property
obligation to turn over ownership of the property to him may be regarded as no
113

donated to it by their predecessor-in-interest.


longer existing.24 The Atienzas had the right to seek judicial declaration of such non-
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the The appellate court also found that while the first condition mandated petitioner to
Board of Trustees of the Central Philippine College (now Central Philippine University utilize the donated property for the establishment of a medical school, the donor did
[CPU]), executed a deed of donation in favor of the latter of a parcel of land identified not fix a period within which the condition must be fulfilled, hence, until a period was
as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174- fixed for the fulfillment of the condition, petitioner could not be considered as having
B, for which Transfer Certificate of Title No. T-3910-A was issued in the name of the failed to comply with its part of the bargain. Thus, the appellate court rendered its
donee CPU with the following annotations copied from the deed of donation — decision reversing the appealed decision and remanding the case to the court of
origin for the determination of the time within which petitioner should comply with
1. The land described shall be utilized by the CPU exclusively for the the first condition annotated in the certificate of title.
establishment and use of a medical college with all its buildings as part of
the curriculum; Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted
annotations in the certificate of title of petitioner are onerous obligations and
2. The said college shall not sell, transfer or convey to any third party nor in resolutory conditions of the donation which must be fulfilled non-compliance of
any way encumber said land; which would render the donation revocable; (b) in holding that the issue of
prescription does not deserve "disquisition;" and, (c) in remanding the case to the
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said trial court for the fixing of the period within which petitioner would establish a
college shall be under obligation to erect a cornerstone bearing that name. medical college.2
Any net income from the land or any of its parks shall be put in a fund to be
known as the "RAMON LOPEZ CAMPUS FUND" to be used for improvements We find it difficult to sustain the petition. A clear perusal of the conditions set forth in
of said campus and erection of a building thereon.1 the deed of donation executed by Don Ramon Lopez, Sr., gives us no alternative but
to conclude that his donation was onerous, one executed for a valuable consideration
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., which is considered the equivalent of the donation itself, e.g., when a donation
filed an action for annulment of donation, reconveyance and damages against CPU imposes a burden equivalent to the value of the donation. A gift of land to the City of
alleging that since 1939 up to the time the action was filed the latter had not Manila requiring the latter to erect schools, construct a children's playground and
complied with the conditions of the donation. Private respondents also argued that open streets on the land was considered an onerous donation. 3 Similarly, where Don
petitioner had in fact negotiated with the National Housing Authority (NHA) to Ramon Lopez donated the subject parcel of land to petitioner but imposed an
exchange the donated property with another land owned by the latter. obligation upon the latter to establish a medical college thereon, the donation must
be for an onerous consideration.
In its answer petitioner alleged that the right of private respondents to file the action
had prescribed; that it did not violate any of the conditions in the deed of donation Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights,
because it never used the donated property for any other purpose than that for as well as the extinguishment or loss of those already acquired, shall depend upon
which it was intended; and, that it did not sell, transfer or convey it to any third party. the happening of the event which constitutes the condition. Thus, when a person
donates land to another on the condition that the latter would build upon the land a
school, the condition imposed was not a condition precedent or a suspensive
On 31 May 1991, the trial court held that petitioner failed to comply with the
condition but a resolutory one.4 It is not correct to say that the schoolhouse had to be
conditions of the donation and declared it null and void. The court a quo further
constructed before the donation became effective, that is, before the donee could
directed petitioner to execute a deed of the reconveyance of the property in favor of
become the owner of the land, otherwise, it would be invading the property rights of
the heirs of the donor, namely, private respondents herein.
the donor. The donation had to be valid before the fulfillment of the condition. 5 If
there was no fulfillment or compliance with the condition, such as what obtains in
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the
the instant case, the donation may now be revoked and all rights which the donee
annotations at the back of petitioner's certificate of title were resolutory conditions may have acquired under it shall be deemed lost and extinguished.
breach of which should terminate the rights of the donee thus making the donation
114

revocable.
The claim of petitioner that prescription bars the instant action of private valid. But, unfortunately, it failed to do so. Hence, there is no more need to fix the
respondents is unavailing. duration of a term of the obligation when such procedure would be a mere
technicality and formality and would serve no purpose than to delay or lead to an
The condition imposed by the donor, i.e., the building of a medical school unnecessary and expensive multiplication of suits. 9 Moreover, under Art. 1191 of the
upon the land donated, depended upon the exclusive will of the donee as to Civil Code, when one of the obligors cannot comply with what is incumbent upon
when this condition shall be fulfilled. When petitioner accepted the him, the obligee may seek rescission and the court shall decree the same unless there
donation, it bound itself to comply with the condition thereof. Since the time is just cause authorizing the fixing of a period. In the absence of any just cause for the
within which the condition should be fulfilled depended upon the exclusive court to determine the period of the compliance, there is no more obstacle for the
will of the petitioner, it has been held that its absolute acceptance and the court to decree the rescission claimed.
acknowledgment of its obligation provided in the deed of donation were
sufficient to prevent the statute of limitations from barring the action of Finally, since the questioned deed of donation herein is basically a gratuitous one,
private respondents upon the original contract which was the deed of doubts referring to incidental circumstances of a gratuitous contract should be
donation.6 resolved in favor of the least transmission of rights and interests. 10Records are clear
and facts are undisputed that since the execution of the deed of donation up to the
Moreover, the time from which the cause of action accrued for the revocation of the time of filing of the instant action, petitioner has failed to comply with its obligation
donation and recovery of the property donated cannot be specifically determined in as donee. Petitioner has slept on its obligation for an unreasonable length of time.
the instant case. A cause of action arises when that which should have been done is Hence, it is only just and equitable now to declare the subject donation already
not done, or that which should not have been done is done. 7 In cases where there is ineffective and, for all purposes, revoked so that petitioner as donee should now
no special provision for such computation, recourse must be had to the rule that the return the donated property to the heirs of the donor, private respondents herein, by
period must be counted from the day on which the corresponding action could have means of reconveyance.
been instituted. It is the legal possibility of bringing the action which determines the
starting point for the computation of the period. In this case, the starting point begins WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991
with the expiration of a reasonable period and opportunity for petitioner to fulfill is REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June
what has been charged upon it by the donor. 1993 is accordingly MODIFIED. Consequently, petitioner is directed to reconvey to
private respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered by
The period of time for the establishment of a medical college and the necessary Transfer Certificate of Title No. T-3910-A within thirty (30) days from the finality of
buildings and improvements on the property cannot be quantified in a specific this judgment.
number of years because of the presence of several factors and circumstances
involved in the erection of an educational institution, such as government laws and Costs against petitioner.
regulations pertaining to education, building requirements and property restrictions
which are beyond the control of the donee. SO ORDERED.

Thus, when the obligation does not fix a period but from its nature and circumstances Quiason and Kapunan, JJ., concur.
it can be inferred that a period was intended, the general rule provided in Art. 1197
of the Civil Code applies, which provides that the courts may fix the duration thereof
because the fulfillment of the obligation itself cannot be demanded until after the
court has fixed the period for compliance therewith and such period has arrived.8

This general rule however cannot be applied considering the different set of
circumstances existing in the instant case. More than a reasonable period of fifty (50)
years has already been allowed petitioner to avail of the opportunity to comply with
115

the condition even if it be burdensome, to make the donation in its favor forever
32. G.R. No. L-24190 | July 13, 1926 either that the revocation had been consented to by the donee, the municipality of
Tarlac, or that it had been judicially decreed. None of these circumstances existed
GEORGE L. PARKS, plaintiff-appellant, vs. PROVINCE OF TARLAC, MUNICIPALITY OF when Concepcion Cirer and James Hill sold this parcel to the plaintiff. Consequently,
TARLAC, CONCEPCION CIRER, and JAMES HILL, her husband, defendants-appellees. when the sale was made Concepcion Cirer and James Hill were no longer the owners
of this parcel and could not have sold it to the plaintiff, nor could the latter have
Jos. N. Wolfson for appellant. acquired it from them.
Provincial Fiscal Lopez de Jesus for the Province and Municipality of Tarlac.
No appearance for the other appellees. But the appellant contends that a condition precedent having been imposed in the
donation and the same not having been complied with, the donation never became
AVANCEÑA, C. J.: effective. We find no merit in this contention. The appellant refers to the condition
imposed that one of the parcels donated was to be used absolutely and exclusively
On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land for the erection of a central school and the other for a public park, the work to
No. 2 referred to in the complaint, donated it perpetually to the municipality of commence in both cases within the period of six months from the date of the
Tarlac, Province of Tarlac, under certain conditions specified in the public document ratification by the partes of the document evidencing the donation. It is true that this
in which they made this donation. The donation was accepted by Mr. Santiago de condition has not been complied with. The allegation, however, that it is a condition
Jesus in the same document on behalf of the municipal council of Tarlac of which he precedent is erroneous. The characteristic of a condition precedent is that the
was the municipal president. The parcel thus donated was later registered in the acquisition of the right is not effected while said condition is not complied with or is
name of the donee, the municipality of Tarlac. On January 15, 1921, Concepcion Cirer not deemed complied with. Meanwhile nothing is acquired and there is only an
and James Hill sold this parcel to the herein plaintiff George L. Parks. On August 24, expectancy of right. Consequently, when a condition is imposed, the compliance of
1923, the municipality of Tarlac transferred the parcel to the Province of Tarlac which cannot be effected except when the right is deemed acquired, such condition
which, by reason of this transfer, applied for and obtained the registration thereof in cannot be a condition precedent. In the present case the condition that a public
its name, the corresponding certificate of title having been issued to it. school be erected and a public park made of the donated land, work on the same to
commence within six months from the date of the ratification of the donation by the
parties, could not be complied with except after giving effect to the donation. The
The plaintiff, George L. Parks, alleging that the conditions of the donation had not
donee could not do any work on the donated land if the donation had not really been
been complied with and invoking the sale of this parcel of land made by Concepcion
effected, because it would be an invasion of another's title, for the land would have
Cirer and James Hill in his favor, brought this action against the Province of Tarlac, the
continued to belong to the donor so long as the condition imposed was not complied
municipality of Tarlac, Concepcion Cirer and James Hill and prayed that he be
with.
declared the absolute owner entitled to the possession of this parcel, that the
transfer of the same by the municipality of Tarlac to the Province of Tarlac be
annulled, and the transfer certificate issued to the Province of Tarlac cancelled. The appellant also contends that, in any event, the condition not having been
complied with, even supposing that it was not a condition precedent but subsequent,
the non-compliance thereof is sufficient cause for the revocation of the donation.
The lower court dismissed the complaint.
This is correct. But the period for bringing an action for the revocation of the
donation has prescribed. That this action is prescriptible, there is no doubt. There is
The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this
no legal provision which excludes this class of action from the statute of limitations.
parcel made by Concepcion Cirer and James Hill in his favor on January 15, 1921, but
And not only this, — the law itself recognizes the prescriptibility of the action for the
that sale cannot have any effect. This parcel having been donated by Concepcion
revocation of a donation, providing a special period of five years for the revocation by
Cirer and James Hill to the municipality of Tarlac, which donation was accepted by the
the subsequent birth of children (art. 646, Civil Code), and one year for the revocation
latter, the title to the property was transferred to the municipality of Tarlac. It is true
by reason of ingratitude. If no special period is provided for the prescription of the
that the donation might have been revoked for the causes, if any, provided by the
action for revocation for noncompliance of the conditions of the donation (art. 647,
law, but the fact is that it was not revoked when Concepcion Cirer and James Hill
Civil Code), it is because in this respect the donation is considered onerous and is
made the sale of this parcel to the plaintiff. Even supposing that causes existed for
116

governed by the law of contracts and the general rules of prescription. Under the law
the revocation of this donation, still, it was necessary, in order to consider it revoked,
in force (sec. 43, Code of Civ. Proc.) the period of prescription of this class of action is
ten years. The action for the revocation of the donation for this cause arose on April
19, 1911, that is six months after the ratification of the instrument of donation of
October 18, 1910. The complaint in this action was presented July 5, 1924, more than
ten years after this cause accrued.

By virtue of the foregoing, the judgment appealed from is affirmed, with the costs
against the appellant. So ordered.

Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.


117
ART. 1182 xxxxxxxxx
Na magbibigay ng paunang bayad ang BUMIBILI SA NAGBIBILI na halagang
33. G.R. No. 137909. December 11, 2003 DALAWANG LIBONG PISO (P2,000.00) Kualtang Pilipino, sa sandaling lagdaan
ang kasulatang ito.
FIDELA DEL CASTILLO Vda. DE MISTICA, petitioner, vs. Spouses BERNARDINO Na ang natitirang halagang LABING WALONG LIBONG PISO (P18,000.00)
NAGUIAT and MARIA PAULINA GERONA-NAGUIAT, respondents. Kualtang Pilipino, ay babayaran ng BUM[I]BILI sa loob ng Sampung (10) taon,
na magsisimula sa araw din ng lagdaan ang kasulatang ito.
DECISION Sakaling hindi makakabayad ang Bumibili sa loob ng panahon
pinagkasunduan, an[g] BUMIBILI ay magbabayad ng pakinabang o interes ng
PANGANIBAN, J.: 12% isang taon, sa taon nilakaran hanggang sa itoy mabayaran tuluyan ng
Bumibili:
The failure to pay in full the purchase price stipulated in a deed of sale does Sa katunayan ng lahat ay nilagdaan ng Magkabilang Panig ang kasulatang ito,
not ipso facto grant the seller the right to rescind the agreement. Unless otherwise ngayon ika 5 ng Abril, 1979, sa Bayan ng Meycauayan. Lalawigan ng Bulacan,
stipulated by the parties, rescission is allowed only when the breach of the contract is Pilipinas.
substantial and fundamental to the fulfillment of the obligation.
The Case (signed) (signed)
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking BERNARDINO NAGUIAT EULALIO MISTICA
to nullify the October 31, 1997 Decision[2] and the February 23, 1999 Resolution[3] of Bumibili Nagbibili
the Court of Appeals (CA) in CA-GR CV No. 51067. The assailed Decision disposed as
follows: Pursuant to said agreement, [Respondent Bernardino Naguiat] gave a
WHEREFORE, modified as indicated above, the decision of the Regional Trial Court is downpayment of P2,000.00. He made another partial payment of P1,000.00 on 7
hereby AFFIRMED.[4] February 1980. He failed to make any payments thereafter. Eulalio Mistica died
The assailed Resolution denied petitioners Motion for Reconsideration. sometime in October 1986.
The Facts
The facts of the case are summarized by the CA as follows: On 4 December 1991, [petitioner] filed a complaint for rescission
Eulalio Mistica, predecessor-in-interest of herein [petitioner], is the owner of a parcel alleging inter alia: that the failure and refusal of [respondents] to pay the balance of
of land located at Malhacan, Meycauayan, Bulacan. A portion thereof was leased to the purchase price constitutes a violation of the contract which entitles her to rescind
[Respondent Bernardino Naguiat] sometime in 1970. the same; that [respondents] have been in possession of the subject portion and they
On 5 April 1979, Eulalio Mistica entered into a contract to sell with [Respondent should be ordered to vacate and surrender possession of the same to [petitioner] ;
Bernardino Naguiat] over a portion of the aforementioned lot containing an area of that the reasonable amount of rental for the subject land is P200.00 a month; that on
200 square meters. This agreement was reduced to writing in a document entitled account of the unjustified actuations of [respondents], [petitioner] has been
Kasulatan sa Pagbibilihan which reads as follows: constrained to litigate where she incurred expenses for attorneys fees and litigation
NAGSASALAYSAY: expenses in the sum of P20,000.00.
Na ang NAGBIBILI ay nagmamay-aring tunay at naghahawak ng isang lagay
na lupa na nasa Nayon ng Malhacan, Bayan ng Meycauayan, Lalawigan ng In their answer and amended answer, [respondents] contended that the contract
Bulacan, na ang kabuuan sukat at mga kahangga nito gaya ng sumusunod: cannot be rescinded on the ground that it clearly stipulates that in case of failure to
xxxxxxxxx pay the balance as stipulated, a yearly interest of 12% is to be paid. [Respondent
Na alang-alang sa halagang DALAWANG PUNG LIBONG PISO Bernardino Naguiat] likewise alleged that sometime in October 1986, during the wake
(P20,000.00) Kualtang Pilipino, ang NAGBIBILI ay nakipagkasundo ng kanyang of the late Eulalio Mistica, he offered to pay the remaining balance to [petitioner] but
ipagbibili ang isang bahagi o sukat na DALAWANG DAAN (200) METROS the latter refused and hence, there is no breach or violation committed by them and
PARISUKAT, sa lupang nabanggit sa itaas, na ang mga kahangga nito no damages could yet be incurred by the late Eulalio Mistica, his heirs or assigns
118

ay gaya ng sumusunod: pursuant to the said document; that he is presently the owner in fee simple of the
subject lot having acquired the same by virtue of a Free Patent Title duly awarded to
him by the Bureau of Lands; and that his title and ownership had already become As to the matter of the extra 58 square meters, the CA held that its
indefeasible and incontrovertible. As counterclaim, [respondents] pray for moral reconveyance was no longer feasible, because it had been included in the title issued
damages in the amount of P50,000.00; exemplary damages in the amount to them. The appellate court ruled that the only remedy available was to order them
of P30,000.00; attorneys fees in the amount of P10,000.00 and other litigation to pay petitioner the fair market value of the usurped portion.
expenses.
Hence, this Petition.[6]
On 8 July 1992, [respondents] also filed a motion to dismiss which was denied by the Issues
court on 29 July 1992. The motion for reconsideration was likewise denied per its
Order of 17 March 1993. In her Memorandum,[7] petitioner raises the following issues:
1. Whether or not the Honorable Court of Appeals erred in the application of Art.
After the presentation of evidence, the court on 27 January 1995 rendered the now 1191 of the New Civil Code, as it ruled that there is no breach of obligation
assailed judgment, the dispositive portion of which reads: inspite of the lapse of the stipulated period and the failure of the private
respondents to pay.
WHEREFORE, premises considered, judgment is hereby rendered: 2. Whether or not the Honorable Court of Appeals [e]rred in ruling that rescission of
the contract is no longer feasible considering that a certificate of title had
1. Dismissing the complaint and ordering the [petitioner] to pay the [respondents] been issued in favor of the private respondents.
attorneys fee in the amount of P10,000.00 and costs of the suit; 3. Whether or not the Honorable Court of Appeals erred in ruling that since the 58 sq.
m. portion in question is covered by a certificate of title in the names of
2. Ordering the [respondents]: private respondents reconveyance is no longer feasible and proper. [8]
a. To pay [petitioner] and the heirs of Eulalio Mistica the balance of the
purchase price in the amount of P17,000.00, with interest thereon at the The Courts Ruling
rate of 12% per annum computed from April 5, 1989 until full payment is
made, subject to the application of the consigned amount to such The Petition is without merit.
payment;
b. To return to [petitioner] and the heirs of Eulalio Mistica the extra area of 58 First Issue:
square meters from the land covered by OCT No. 4917 (M), the Rescission in Article 1191
corresponding price therefor based on the prevailing market price Petitioner claims that she is entitled to rescind the Contract under Article
thereof.[5] (Citations omitted) 1191 of the Civil Code, because respondents committed a substantial breach when
they did not pay the balance of the purchase price within the ten-year period. She
CAs Decision further avers that the proviso on the payment of interest did not extend the period to
Disallowing rescission, the CA held that respondents did not breach the Contract pay. To interpret it in that way would make the obligation purely potestative and,
of Sale. It explained that the conclusion of the ten-year period was not a resolutory thus, void under Article 1182 of the Civil Code.
term, because the Contract had stipulated that payment -- with interest of 12 percent
-- could still be made if respondents failed to pay within the period. According to the We disagree. The transaction between Eulalio Mistica and respondents, as
appellate court, petitioner did not disprove the allegation of respondents that they evidenced by the Kasulatan, was clearly a Contract of Sale. A deed of sale is
had tendered payment of the balance of the purchase price during her husbands considered absolute in nature when there is neither a stipulation in the deed that
funeral, which was well within the ten-year period. title to the property sold is reserved to the seller until the full payment of the price;
nor a stipulation giving the vendor the right to unilaterally resolve the contract the
Moreover, rescission would be unjust to respondents, because they had already moment the buyer fails to pay within a fixed period.[9]
transferred the land title to their names. The proper recourse, the CA held, was to
order them to pay the balance of the purchase price, with 12 percent interest. In a contract of sale, the remedy of an unpaid seller is either specific
performance or rescission.[10] Under Article 1191 of the Civil Code, the right to rescind
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an obligation is predicated on the violation of the reciprocity between parties,


brought about by a breach of faith by one of them. [11] Rescission, however, is allowed The CA further ruled that rescission in this case would be unjust to
only where the breach is substantial and fundamental to the fulfillment of the respondents, because a certificate of title had already been issued in their
obligation.[12] names. Petitioner nonetheless argues that the Court is still empowered to order
rescission.
In the present case, the failure of respondents to pay the balance of the
purchase price within ten years from the execution of the Deed did not amount to a We clarify. The issuance of a certificate of title in favor of respondents does not
substantial breach. In the Kasulatan, it was stipulated that payment could be made determine whether petitioner is entitled to rescission. It is a fundamental principle in
even after ten years from the execution of the Contract, provided the vendee paid 12 land registration that such title serves merely as an evidence of an indefeasible and
percent interest. The stipulations of the contract constitute the law between the incontrovertible title to the property in favor of the person whose name appears
parties; thus, courts have no alternative but to enforce them as agreed upon and therein.[17]
written.[13]
While a review of the decree of registration is no longer possible after the
Moreover, it is undisputed that during the ten-year period, petitioner and her expiration of the one-year period from entry, an equitable remedy is still available to
deceased husband never made any demand for the balance of the purchase those wrongfully deprived of their property.[18] A certificate of title cannot be subject
price. Petitioner even refused the payment tendered by respondents during her to collateral attack and can only be altered, modified or canceled in direct
husbands funeral, thus showing that she was not exactly blameless for the lapse of proceedings in accordance with law.[19] Hence, the CA correctly held that the
the ten-year period. Had she accepted the tender, payment would have been made propriety of the issuance of title in the name of respondents was an issue that was
well within the agreed period. not determinable in these proceedings.

If petitioner would like to impress upon this Court that the parties intended Third Issue:
otherwise, she has to show competent proof to support her contention. Instead, she Reconveyance of the Portion Importunately Included
argues that the period cannot be extended beyond ten years, because to do so would Petitioner argues that it would be reasonable for respondents to pay her the
convert the buyers obligation to a purely potestative obligation that would annul the value of the lot, because the CA erred in ruling that the reconveyance of the extra 58-
contract under Article 1182 of the Civil Code. square meter lot, which had been included in the certificate of title issued to them,
was no longer feasible.
This contention is likewise untenable. The Code prohibits purely potestative,
suspensive, conditional obligations that depend on the whims of the debtor, because In principle, we agree with petitioner. Registration has never been a mode of
such obligations are usually not meant to be fulfilled. [14] Indeed, to allow the acquiring ownership over immovable property, because it does not create or vest
fulfillment of conditions to depend exclusively on the debtors will would be to title, but merely confirms one already created or vested.[20] Registration does not give
sanction illusory obligations. [15] The Kasulatan does not allow such thing. First, holders any better title than what they actually have. [21] Land erroneously included in
nowhere is it stated in the Deed that payment of the purchase price is dependent the certificate of title of another must be reconveyed in favor of its true and actual
upon whether respondents want to pay it or not. Second, the fact that they already owner.[22]
made partial payment thereof only shows that the parties intended to be bound by
the Kasulatan. Section 48 of Presidential Decree 1529, however, provides that the certificate of
title shall not be subject to collateral attack, alteration, modification, or cancellation
Both the trial and the appellate courts arrived at this finding. Well-settled is the except in a direct proceeding.[23] The cancellation or removal of the extra portion
rule that findings of fact by the CA are generally binding upon this Court and will not from the title of respondents is not permissible in an action for rescission of the
be disturbed on appeal, especially when they are the same as those of the trial contract of sale between them and petitioners late husband, because such action is
court.[16] Petitioner has not given us sufficient reasons to depart from this rule. tantamount to allowing a collateral attack on the title.

Second Issue: It appears that an action for cancellation/annulment of patent and title and for
120

Rescission Unrelated to Registration reversion was already filed by the State in favor of petitioner and the heirs of her
husband.[24] Hence, there is no need in this case to pass upon the right of respondents
to the registration of the subject land under their names. For the same reason, there
is no necessity to order them to pay petitioner the fair market value of the extra 58-
square meter lot importunately included in the title.

WHEREFORE, the assailed Decision and Resolution are AFFIRMED with


the MODIFICATION that the payment for the extra 58-square meter lot included in
respondents title is DELETED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
121
34. G.R. No. L-5003 June 27, 1953 College, Inc. presented a claim before the Court of First Instance of Bulacan in her
testate proceeding, for the collection of the sum of P20,000, representing the value
NAZARIO TRILLANA, administrator-appellee, vs. of the subscription to the capital stock of the Quezon College, Inc. This claim was
QUEZON COLLEGE, INC., claimant-appellant. opposed by the administrator of the estate, and the Court of First Instance of
Bulacan, after hearing issued an order dismissing the claim of the Quezon College,
PARAS, J.: Inc. on the ground that the subscription in question was neither registered in nor
authorized by the Securities and Exchange Commission. From this order the Quezon
College, Inc. has appealed.
Damasa Crisostomo sent the following letter to the Board of Trustees of the Quezon
College:
It is not necessary for us to discuss at length appellant's various assignments
of error relating to the propriety of the ground relief upon by the trial court, since, as
June 1, 1948 pointed out in the brief for the administrator and appellee, there are other decisive
considerations which, though not touched by the lower court, amply sustained the
appealed order.
ThE BOARD OF TRUSTEES
Quezon College It appears that the application sent by Damasa Crisostomo to the Quezon
Manila
College, Inc. was written on a general form indicating that an applicant will enclose an
amount as initial payment and will pay the balance in accordance with law and the
Gentlemen: regulations of the College. On the other hand, in the letter actually sent by Damasa
Crisostomo, the latter (who requested that her subscription for 200 shares be
Please enter my subscription to dalawang daan (200) shares of your capital stock with entered) not only did not enclose any initial payment but stated that "babayaran
a par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na kong lahat pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the
ako ay makapag-pahuli ng isda) pesos as my initial payment and the balance payable record to show that the Quezon College, Inc. accepted the term of payment
in accordance with law and the rules and regulations of the Quezon College. I hereby suggested by Damasa Crisostomo, or that if there was any acceptance the same came
agree to shoulder the expenses connected with said shares of stock. I further submit to her knowledge during her lifetime. As the application of Damasa Crisostomo is
myself to all lawful demands, decisions or directives of the Board of Trustees of the obviously at variance with the terms evidenced in the form letter issued by the
Quezon College and all its duly constituted officers or authorities (ang nasa itaas ay Quezon College, Inc., there was absolute necessity on the part of the College to
binasa at ipinaliwanag sa akin sa wikang tagalog na aking nalalaman). express its agreement to Damasa's offer in order to bind the latter. Conversely, said
acceptance was essential, because it would be unfair to immediately obligate the
Quezon College, Inc. under Damasa's promise to pay the price of the subscription
Very respectfully,
after she had caused fish to be caught. In other words, the relation between Damasa
Crisostomo and the Quezon College, Inc. had only thus reached the preliminary stage
(Sgd.) DAMASA CRISOSTOMO whereby the latter offered its stock for subscription on the terms stated in the form
Signature of subscriber letter, and Damasa applied for subscription fixing her own plan of payment, — a
relation, in the absence as in the present case of acceptance by the Quezon College,
Nilagdaan sa aming harapan: Inc. of the counter offer of Damasa Crisostomo, that had not ripened into an
enforceable contract.
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO Indeed, the need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa Crisostomo to
Damasa Crisostomo died on October 26, 1948. As no payment appears to pay the value of the subscription after she has harvested fish, a condition obviously
122

have been made on the subscription mentioned in the foregoing letter, the Quezon dependent upon her sole will and, therefore, facultative in nature, rendering the
obligation void, under article 1115 of the old Civil Code which provides as follows: "If
the fulfillment of the condition should depend upon the exclusive will of the debtor,
the conditional obligation shall be void. If it should depend upon chance, or upon the
will of a third person, the obligation shall produce all its effects in accordance with
the provisions of this code." It cannot be argued that the condition solely is void,
because it would have served to create the obligation to pay, unlike a case,
exemplified by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative
condition was held void because it referred merely to the fulfillment of an already
existing indebtedness.

In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court already
held that "a condition, facultative as to the debtor, is obnoxious to the first sentence
contained in article 1115 and renders the whole obligation void."

Wherefore, the appealed order is affirmed, and it is so ordered with costs against
appellant.

Tuason, Padilla and Reyes, JJ., concur in the result.


123
35. G.R. No. 107207 November 23, 1995 -and-

VIRGILIO R. ROMERO, petitioner, vs. HON. COURT OF APPEALS and ENRIQUETA VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and residing at
CHUA VDA. DE ONGSIONG, respondents. 110 San Miguel St., Plainview Subd., Mandaluyong Metro Manila, hereinafter
referred to as the VENDEE:
VITUG, J.:
W I T N E S S E T H : That
The parties pose this question: May the vendor demand the rescission of a contract
for the sale of a parcel of land for a cause traceable to his own failure to have the WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of
squatters on the subject property evicted within the contractually-stipulated period? ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less,
located in Barrio San Dionisio, Municipality of Parañaque, Province of Rizal, covered
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of by TCT No. 361402 issued by the Registry of Deeds of Pasig and more particularly
production, manufacture and exportation of perlite filter aids, permalite insulation described as follows:
and processed perlite ore. In 1988, petitioner and his foreign partners decided to put
up a central warehouse in Metro Manila on a land area of approximately 2,000 xxx xxx xxx
square meters. The project was made known to several freelance real estate brokers.
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR
A day or so after the announcement, Alfonso Flores and his wife, accompanied by a has accepted the offer, subject to the terms and conditions hereinafter stipulated:
broker, offered a parcel of land measuring 1,952 square meters. Located in Barangay
San Dionisio, Parañaque, Metro Manila, the lot was covered by TCT No. 361402 in the NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE
name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY,
property and, except for the presence of squatters in the area, he found the place Philippine Currency, payable by VENDEE to in to (sic) manner set forth, the VENDOR
suitable for a central warehouse. agrees to sell to the VENDEE, their heirs, successors, administrators, executors,
assign, all her rights, titles and interest in and to the property mentioned in the FIRST
Later, the Flores spouses called on petitioner with a proposal that should he advance WHEREAS CLAUSE, subject to the following terms and conditions:
the amount of P50,000.00 which could be used in taking up an ejectment case against
the squatters, private respondent would agree to sell the property for only P800.00 1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine Currency, is
per square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract, to be paid upon signing and execution of this instrument.
denominated "Deed of Conditional Sale," was executed between petitioner and
private respondent. The simply-drawn contract read: 2. The balance of the purchase price in the amount of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45 days
DEED OF CONDITIONAL SALE after the removal of all squatters from the above described property.

KNOW ALL MEN BY THESE PRESENTS: 3. Upon full payment of the overall purchase price as aforesaid, VENDOR without
necessity of demand shall immediately sign, execute, acknowledged (sic) and deliver
This Contract, made and executed in the Municipality of Makati, Philippines this 9th the corresponding deed of absolute sale in favor of the VENDEE free from all liens and
day of June, 1988 by and between: encumbrances and all Real Estate taxes are all paid and updated.

ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at It is hereby agreed, covenanted and stipulated by and between the parties hereto
105 Simoun St., Quezon City, Metro Manila, hereinafter referred to as the VENDOR; that if after 60 days from the date of the signing of this contract the VENDOR shall not
124

be able to remove the squatters from the property being purchased, the
downpayment made by the buyer shall be returned/reimbursed by the VENDOR to was handed down beyond the 60-day period (expiring 09 August 1988) stipulated in
the VENDEE. the contract. The writ of execution of the judgment was issued, still later, on 30
March 1989.
That in the event that the VENDEE shall not be able to pay the VENDOR the balance
of the purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00
HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to the she received from petitioner since, she said, she could not "get rid of the squatters"
VENDEE of the removal of the squatters from the property being purchased, the FIFTY on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in his reply of 17 April
THOUSAND PESOS (P50,000.00) previously paid as downpayment shall be forfeited in 1989, refused the tender and stated:.
favor of the VENDOR.
Our client believes that with the exercise of reasonable diligence considering
Expenses for the registration such as registration fees, documentary stamp, transfer the favorable decision rendered by the Court and the writ of execution
fee, assurances and such other fees and expenses as may be necessary to transfer the issued pursuant thereto, it is now possible to eject the squatters from the
title to the name of the VENDEE shall be for the account of the VENDEE while capital premises of the subject property, for which reason, he proposes that he shall
gains tax shall be paid by the VENDOR. take it upon himself to eject the squatters, provided, that expenses which
shall be incurred by reason thereof shall be chargeable to the purchase price
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of of the land.4
Makati MM, Philippines on this 9th day of June, 1988.
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its
(Sgd.) (Sgd.) Regional Director for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of
Parañaque for a grace period of 45 days from 21 April 1989 within which to relocate
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA. and transfer the squatter families. Acting favorably on the request, the court
suspended the enforcement of the writ of execution accordingly.
DE ONGSIONG
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-
day grace period and his client's willingness to "underwrite the expenses for the
Vendee Vendor
execution of the judgment and ejectment of the occupants."5
SIGNED IN THE PRESENCE OF:
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent,
advised Atty. Apostol that the Deed of Conditional Sale had been
(Sgd.) (Sgd.)
rendered null and void by virtue of his client's failure to evict the squatters from the
premises within the agreed 60-day period. He added that private respondent had
Rowena C. Ongsiong Jack M. Cruz1 "decided to retain the property."6

On 23 June 1989, Atty. Apostol wrote back to explain:

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged The contract of sale between the parties was perfected from the very moment
a check for P50,000.002from petitioner.3 that there was a meeting of the minds of the parties upon the subject lot and the
price in the amount of P1,561,600.00. Moreover, the contract had already been
Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil partially fulfilled and executed upon receipt of the downpayment of your client.
Case No. 7579) against Melchor Musa and 29 other squatter families with the Ms. Ongsiong is precluded from rejecting its binding effects relying upon her
Metropolitan Trial Court of Parañaque. A few months later, or on 21 February 1989,
125

inability to eject the squatters from the premises of subject property during the
judgment was rendered ordering the defendants to vacate the premises. The decision agreed period. Suffice it to state that, the provision of the Deed of Conditional
Sale do not grant her the option or prerogative to rescind the contract and to squatters within the stipulated period or (b), upon the other hand, the sum's
retain the property should she fail to comply with the obligation she has assumed forfeiture by the vendor if the vendee were to fail in paying the agreed purchase
under the contract. In fact, a perusal of the terms and conditions of the contract price, amounted to "penalty clauses". The court added:
clearly shows that the right to rescind the contract and to demand the
return/reimbursement of the downpayment is granted to our client for his This Court is not convinced of the ground relied upon by the plaintiff in
protection. seeking the rescission, namely: (1) he (sic) is afraid of the squatters; and (2)
she has spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3,
Instead, however, of availing himself of the power to rescind the contract and 1990). Militating against her profession of good faith is plaintiffs conduct
demand the return, reimbursement of the downpayment, our client had opted to which is not in accord with the rules of fair play and justice. Notably, she
take it upon himself to eject the squatters from the premises. Precisely, we refer caused the issuance of an alias writ of execution on August 25, 1989 (Exh. 6)
you to our letters addressed to your client dated April 17, 1989 and June 8, 1989. in the ejectment suit which was almost two months after she filed the
complaint before this Court on June 27, 1989. If she were really afraid of the
Moreover, it is basic under the law on contracts that the power to rescind is given squatters, then she should not have pursued the issuance of an alias writ of
to the injured party. Undoubtedly, under the circumstances, our client is the execution. Besides, she did not even report to the police the alleged phone
injured party. threats from the squatters. To the mind of the Court, the so-called squatter
factor is simply factuitous (sic).9
Furthermore, your client has not complied with her obligation under their
contract in good faith. It is undeniable that Ms. Ongsiong deliberately refused to The lower court, accordingly, dismissed the complaint and ordered, instead,
exert efforts to eject the squatters from the premises of the subject property and private respondent to eject or cause the ejectment of the squatters from the
her decision to retain the property was brought about by the sudden increase in property and to execute the absolute deed of conveyance upon payment of the
the value of realties in the surrounding areas. full purchase price by petitioner.

Please consider this letter as a tender of payment to your client and a demand to Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate
execute the absolute Deed of Sale.7 court rendered its decision. 10It opined that the contract entered into by the parties
was subject to a resolutory condition, i.e., the ejectment of the squatters from the
A few days later (or on 27 June 1989), private respondent, prompted by petitioner's land, the non-occurrence of which resulted in the failure of the object of the contract;
continued refusal to accept the return of the P50,000.00 advance payment, filed with that private respondent substantially complied with her obligation to evict the
the Regional Trial Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of squatters; that it was petitioner who was not ready to pay the purchase price and
the deed of "conditional" sale, plus damages, and for the consignation of P50,000.00 fulfill his part of the contract, and that the provision requiring a mandatory
cash. return/reimbursement of the P50,000.00 in case private respondent would fail to
eject the squatters within the 60-day period was not a penal clause. Thus, it
concluded.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of
execution in Civil Case No. 7579 on motion of private respondent but the squatters
apparently still stayed on. WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one
entered declaring the contract of conditional sale dated June 9, 1988 cancelled and
ordering the defendant-appellee to accept the return of the downpayment in the
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of
amount of P50,000.00 which was deposited in the court below. No pronouncement
Makati8 rendered decision holding that private respondent had no right to rescind the
as to costs.11
contract since it was she who "violated her obligation to eject the squatters from the
subject property" and that petitioner, being the injured party, was the party who
could, under Article 1191 of the Civil Code, rescind the agreement. The court ruled Failing to obtain a reconsideration, petitioner filed this petition for review
on certiorari raising issues that, in fine, center on the nature of the contract adverted
126

that the provisions in the contract relating to (a) the return/reimbursement of the
P50,000.00 if the vendor were to fail in her obligation to free the property from to and the P50,000.00 remittance made by petitioner.
A perfected contract of sale may either be absolute or conditional 12 depending on which, according to their nature, may be in keeping with good faith, usage and law.
whether the agreement is devoid of, or subject to, any condition imposed on Under the agreement, private respondent is obligated to evict the squatters on the
the passing of title of the thing to be conveyed or on the obligation of a party property. The ejectment of the squatters is a condition the operative act of which sets
thereto. When ownership is retained until the fulfillment of a positive condition the into motion the period of compliance by petitioner of his own obligation, i.e., to pay
breach of the condition will simply prevent the duty to convey title from acquiring the balance of the purchase price. Private respondent's failure "to remove the
an obligatory force. If the condition is imposed on an obligationof a party which is not squatters from the property" within the stipulated period gives petitioner the right to
complied with, the other party may either refuse to proceed or waive said condition either refuse to proceed with the agreement or waive that condition in consonance
(Art. 1545, Civil Code). Where, of course, the condition is imposed upon with Article 1545 of the Civil Code.16 This option clearly belongs to petitioner and not
the perfection of the contract itself, the failure of such condition would prevent the to private respondent.
juridical relation itself from coming into existence.13
We share the opinion of the appellate court that the undertaking required of private
In determining the real character of the contract, the title given to it by the parties is respondent does not constitute a "potestative condition dependent solely on his will"
not as much significant as its substance. For example, a deed of sale, although that might, otherwise, be void in accordance with Article 1182 of the Civil Code17 but
denominated as a deed of conditional sale, may be treated as absolute in nature, if a "mixed" condition "dependent not on the will of the vendor alone but also of third
title to the property sold is not reserved in the vendor or if the vendor is not granted persons like the squatters and government agencies and personnel concerned."18 We
the right to unilaterally rescind the contract predicated must hasten to add, however, that where the so-called "potestative condition" is
on the fulfillment or non-fulfillment, as the case may be, of the prescribed imposed not on the birth of the obligation but on its fulfillment, only the obligation is
condition.14 avoided, leaving unaffected the obligation itself.19

The term "condition" in the context of a perfected contract of sale pertains, in reality, In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows
to the compliance by one party of an undertaking the fulfillment of which would the obligee to choose between proceeding with the agreement or waiving the
beckon, in turn, the demandability of the reciprocal prestation of the other party. The performance of the condition. It is this provision which is the pertinent rule in the
reciprocal obligations referred to would normally be, in the case of vendee, the case at bench. Here, evidently, petitioner has waived the performance of the
payment of the agreed purchase price and, in the case of the vendor, the fulfillment condition imposed on private respondent to free the property from squatters. 20
of certain express warranties (which, in the case at bench is the timely eviction of the
squatters on the property). In any case, private respondent's action for rescission is not warranted. She is not the
injured party.21 The right of resolution of a party to an obligation under Article 1191
It would be futile to challenge the agreement here in question as not being a duly of the Civil Code is predicated on a breach of faith by the other party that violates the
perfected contract. A sale is at once perfected when a person (the seller) obligates reciprocity between them.22 It is private respondent who has failed in her obligation
himself, for a price certain, to deliver and to transfer ownership of a specified thing or under the contract. Petitioner did not breach the agreement. He has agreed, in fact,
right to another (the buyer) over which the latter agrees. 15 to shoulder the expenses of the execution of the judgment in the ejectment case and
to make arrangements with the sheriff to effect such execution. In his letter of 23
The object of the sale, in the case before us, was specifically identified to be a 1,952- June 1989, counsel for petitioner has tendered payment and demanded forthwith the
square meter lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of execution of the deed of absolute sale. Parenthetically, this offer to pay, having been
Title No. 361402 of the Registry of Deeds for Pasig and therein technically described. made prior to the demand for rescission, assuming for the sake of argument that
The purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be paid such a demand is proper under Article 159223 of the Civil Code, would likewise suffice
upon the execution of the document of sale and the balance of P1,511,600.00 to defeat private respondent's prerogative to rescind thereunder.
payable "45 days after the removal of all squatters from the above described
property." There is no need to still belabor the question of whether the P50,000.00 advance
payment is reimbursable to petitioner or forfeitable by private respondent, since, on
From the moment the contract is perfected, the parties are bound not only to the the basis of our foregoing conclusions, the matter has ceased to be an issue. Suffice it
127

fulfillment of what has been expressly stipulated but also to all the consequences to say that petitioner having opted to proceed with the sale, neither may petitioner
demand its reimbursement from private respondent nor may private respondent
subject it to forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED


AND SET ASIDE, and another is entered ordering petitioner to pay private respondent
the balance of the purchase price and the latter to execute the deed of absolute sale
in favor of petitioner. No costs.

SO ORDERED.

Feliciano, Romero, Melo and Panganiban, JJ., concur.


128
ARTICLE 1189 Sometime in 2003, SSS, a government financial institution (GFI) created pursuant to
Republic Act (RA) No. 1161[7] and placed under the direction and control of SSC, took
36. G.R. No. 165272 | 2007-09-13 steps to liquefy its long-term investments and diversify them into higher-yielding and
less volatile investment products. Among its assets determined as needing to be
SERGIO R. OSMENA III et al Petitioners, vs SOCIAL SECURITY SYSTEM OF THE liquefied were its shareholdings in EPCIB. The principal reason behind the intended
PHILIPPINES et al, Respondents. disposition, as explained by respondent Dela Paz during the February 4, 2004 hearing
conducted by the Senate Committee on Banks, Financial Institutions and Currencies,
is that the shares in question have substantially declined in value and the SSS could
DECISION
no longer afford to continue holding on to them at the present level of EPCIB's
income.
GARCIA, J.:
Some excerpts of what respondent Dela Paz said in that hearing:
Senator Sergio R. Osmeña III[1] and four (4) other members[2] of the Philippine
Senate, joined by Social Security System (SSS) members Luis F. Sison and Patricia C.
The market value of Equitable-PCI Bank had actually hovered at P34.00 since July
Sison, specifically seek in this original petition for certiorari and prohibition the
2003. At some point after the price went down to P16 or P17 after the September 11
nullification of the following issuances of respondent Social Security Commission
..., it went up to P42.00 but later on went down to P34.00. xxx. We looked at the
(SSC):
prices in about March of 2001 and noted that the trade prices then ranged from P50
to P57.
1) RESOLUTION No. 428[3] dated July 14, 2004; and
xxx xxx xxx
2) RESOLUTION No. 485[4] dated August 11, 2004.
I have to concede that [EPCIB] has started to recover, ....
The first assailed resolution approved the proposed sale of the entire equity stake of
the SSS in what was then the Equitable PCI Bank, Inc. (EPCIB or EPCI), consisting of
187,847,891 common shares, through the Swiss Challengebidding procedure, and
authorized SSS President Corazon S. Dela Paz (Dela Paz) to constitute a bidding
committee that would formulate the terms of reference of the Swiss Perhaps the fact that there had been this improved situation in the bank that
Challenge bidding mode. The second resolution approved the Timetable and attracted Banco de Oro .... xxx. I wouldn't know whether the prices would eventually
Instructions to Bidders. go up to 60 of (sic) 120. But on the basis of my being the vice-chair on the bank, I
believe that this is the subject of a lot of conjecture. It can also go down .... So, in the
present situation where the holdings of SSS in [EPCIB] consists of about 10 percent of
Petitioners[5] also ask that a prohibitive writ issue to permanently enjoin public
the total reserve fund, we cannot afford to continue holding it at the present level of
respondents from implementing Res. Nos. 428 and 485 or otherwise proceeding with
income ....xxx. And therefore, on that basis, an exposure to certain form of assets
the sale of subject shares through the Swiss Challengemethod.
whose price can go down to 16 to 17 which is a little over 20 percent of what we have
in our books, is not a very prudent way or conservative way of handling those funds.
By Resolution[6] dated October 5, 2004, the Court en banc required the parties to
We need not continue experiencing opportunity losses but have an amount that will
observe the status quo ante the passage of the assailed resolutions. In the same give us a fair return to that kind of value (Words in bracket added.)
resolution, the Court noted the motion of respondent BDO Capital and Investment
Corporation (BDO Capital) to admit its Opposition to the Petition.
Albeit there were other interested parties, only Banco de Oro Universal Bank (BDO)
and its investment subsidiary, respondent BDO Capital,[8] appeared in earnest to
The relevant factual antecedents:
acquire the shares in question. Following talks between them, BDO and SSS signed,
129

on December 30, 2003, a Letter- Agreement,[9] for the sale and purchase of some
187.8 million EPCIB common shares (the Shares, hereinafter), at P43.50 per share,
which represents a premium of 30% of the then market value of the EPCIB shares. At
about this time, the Shares were trading at an average of P34.50 @ share.
The records do not show whether or not any interested group/s submitted bids. The
In the same Letter-Agreement,[10] the parties agreed "to negotiate in good faith a bottom line, however, is that even before the bid envelopes, if any, could be opened,
mutually acceptable Share Sale and Purchase Agreement and execute the same not the herein petitioners commenced the instant special civil action
later than thirty (30) business days from [December 30, 2003]." for certiorari, setting their sights primarily on the legality of the Swiss Challenge angle
and a provision in the Instruction to Bidders under which the SSS undertakes to offer
On April 19, 2004, the Commission on Audit (COA),[11] in response to respondent the Shares to BDO should no bidder or prospective bidder qualifies. And as earlier
Dela Paz's letter-query on the applicability of the public bidding requirement under mentioned, the Court, via a status quo order,[19] effectively suspended the
COA Circular No. 89-296[12] on the divestment by the SSS of its entire EPICB equity proceedings on the proposed sale.
holdings, stated that the "circular covers all assets of government agencies except
those merchandize or inventory held for sale in the regular course of business." And Under the Swiss Challenge format, one of the bidders is given the option or
while it expressed the opinion[13] that the sale of the subject Shares are "subject to preferential "right to match" the winning bid.
guidelines in the Circular," the COA qualified its determination with a statement that
such negotiated sale would partake of a stock exchange transaction and, therefore, Petitioners assert, in gist, that a public bidding with a Swiss Challenge component is
would be adhering to the general policy of public auction. Wrote the COA: contrary to COA Circular No. 89-296 and public policy which requires adherence to
competitive public bidding in a government-contract award to assure the best price
Nevertheless, since activities in the stock exchange which offer to the general public possible for government assets. Accordingly, the petitioners urge that the planned
stocks listed therein, the proposed sale, although denominated as "negotiated sale" disposition of the Shares through a Swiss Challenge method be scrapped. As argued,
substantially complies with the general policy of public auction as a mode of the Swiss Challenge feature tends to discourage would-be-bidders from undertaking
divestment. This is so for shares of stocks are actually being auctioned to the general the expense and effort of bidding if the chance of winning is diminished by the
public every time that the stock exchanges are openly operating. preferential "right to match" clause. Pushing the point, petitioners aver that the
Shares are in the nature of long-term or non-current assets not regularly traded or
Following several drafting sessions, SSS and BDO Capital, the designated buyers of the held for sale in the regular course of business. As such, their disposition must be
Banco de Oro Group, agreed on a final draft version of the Share Purchase governed by the aforementioned COA circular which, subject to several exceptions,
Agreement[14] (SPA). In it, the parties mutually agreed to the purchase by the BDO prescribes "public auction" as a primary mode of disposal of GFIs' assets. And
Capital and the sale by SSS of all the latter's EPCIB shares at the closing date at the obviously finding the proposed purchase price to be inadequate, the petitioners
specified price of P43.50 per share or a total of P8,171,383,258.50. expressed the belief that "if properly bidded out in accordance with [the] COA Circular
..., the Shares could be sold at a price of at least Sixty Pesos (P60.00) per share." Other
The proposed SPA, together with the Letter-Agreement, was then submitted to the supporting arguments for allowing certiorari are set forth in some detail in the basic
Department of Justice (DOJ) which, in an Opinion[15] dated April 29, 2004, concurred petition.
with the COA's opinion adverted to and stated that it did not find anything
objectionable with the terms of both documents.

On July 14, 2004, SSC passed Res. No. 428[16] approving, as earlier stated, the sale of Against the petitioners' stance, public respondents inter alia submit that the sale of
the EPCIB shares through the Swiss Challenge method. A month later, the equally subject Shares is exempt from the tedious public bidding requirement of COA.
assailed Res. No. 485[17] was also passed. Obviously stressing the practical side of the matter, public respondents assert that if
they are to hew to the bidding requirement in the disposition of SSS's Philippine Stock
On August 23, 24, and 25, 2004, SSS advertised an Invitation to Bid[18] for the block Exchange (PSE)-listed stocks, it would place the System at a disadvantage vis-á -vis
purchase of the Shares. The Invitation to Bid expressly provided that the "result of the other stock market players who certainly enjoy greater flexibility in reacting to the
vagaries of the market and could sell their holdings at a moment's notice when the
130

bidding is subject to the right of BDO Capital ... to match the highest bid." October 20,
2004 was the date set for determining the winning bid. price is right. Public respondents hasten to add, however, that the bidding-exempt
status of the Shares did not prevent the SSS from prudently proceeding with the First to comply with the above were public respondents SSS et al., by filing
bidding as contemplated in the assailed resolutions as a measure to validate the their Compliance and Manifestation,[28] therein essentially stating that the case is
adequacy of the unit price BDO Capital offered therefor and to possibly obtain a now moot in view of the SM-BDO Group's Tender Offer at P92.00 @ unit share, for
higher price than its definitive offer of P43.50 per share.[20] Public respondents also the subject EPCIB common shares, inclusive of the SSS shares subject of the petition.
advanced the legal argument, also shared by their co-respondent BDO Capital, in its They also stated the observation that the petitioners' Manifestation and Motion to
Comment,[21] that the proposed sale is not covered by COA Circular No. 89-296 since Take Judicial Notice,[29] never questioned the Tender Offer, thus confirming the
the Shares partake of the nature of merchandise or inventory held for sale in the dispensability of a competitive public bidding in the disposition of subject Shares.
regular course of SSS's business.
For perspective, a "tender offer" is a publicly announced intention by a person acting
Pending consideration of the petition, supervening events and corporate movements alone or in concert with other persons to acquire equity securities of a public
transpired that radically altered the factual complexion of the case. Some of these company, i.e., one listed on an exchange, among others.[30] The term is also defined
undisputed events are detailed in the petitioners' separate Manifestation & Motion as "an offer by the acquiring person to stockholders of a public company for them to
to Take Judicial Notice[22] and their respective annexes. To cite the relevant ones: tender their shares therein on the terms specified in the offer"[31] Tender offer is in
place to protect the interests of minority stockholders of a target company against
1. In January 2006, BDO made public its intent to merge with EPCIB. Under what BDO any scheme that dilutes the share value of their investments. It affords such minority
termed as "Merger of Equals", EPCIB shareholders would get 1.6 BDO shares for shareholders the opportunity to withdraw or exit from the company under
every EPCIB share.[23] reasonable terms, a chance to sell their shares at the same price as those of the
majority stockholders.[32]
2. In early January 2006, the GSIS publicly announced receiving from an undisclosed
entity an offer to buy its stake in EPCIB - 12% of the bank's outstanding capital stock - Next to comply with the same Resolution of the Court was respondent BDO
at P92.00 per share.[24] Capital via its Compliance,[33] thereunder practically reiterating public respondents'
position on the question of mootness and the need, under the premises, to go into
public bidding. It added the arguments that the BDO-SM Group's Tender Offer,
involving as it did a general offer to buy all EPCIB common shares at the stated price
and terms, were inconsistent with the idea of public bidding; and that the Tender
3. On August 31, 2006, SM Investments Corporation, an affiliate of BDO and BDO
Offer rules actually provide for an opportunity for competing groups to top the
Capital, in consortium with Shoemart, Inc. et al., (collectively, the SM Group)
Tender Offer price.
commenced, through the facilities of the PSE and pursuant to R.A. No. 8799[25], a
mandatory tender offer (Tender Offer) covering the purchase of the entire
outstanding capital stock of EPCIB at P92.00 per share. Pursuant to the terms of the On the other hand, petitioners, in their Manifestation,[34] concede the huge gap
Tender Offer, which was to start on August 31, 2006 and end on September 28, 2006 between the unit price stated in the Tender Offer and the floor price of P43.50 per
- the Tender Offer Period - all shares validly tendered under it by EPCIB shareholders share stated in the Invitation to Bid. It is their posture, however, that unless SSS
of record shall be deemed accepted for payment on closing date subject to certain withdraws the sale of the subject shares by way of the Swiss Challenge, the offer
conditions.[26] Among those who accepted the Tender Offer of the SM Group was price of P92 per share cannot render the case moot and academic.
EBC Investments, Inc., a subsidiary of EPCIB.
Meanwhile, the positive response to the Tender Offer enabled the SM-BDO Group to
4. A day or two later, BDO filed a Tender Offer Report with the Securities and acquire controlling interests over EPCIB and paved the way for a BDO-EPCIB merger.
Exchange Commission (SEC) and the PSE.[27] The merger was formalized by subsequent submission of the necessary merger
documents[35] to the SEC.
Owing to the foregoing developments, the Court, on October 3, 2006, issued a
Resolution requiring the 'parties to CONFIRM news reports that price of subject On May 25, 2007, the SEC issued a Certificate of Filing of the Article and Plan of
Merger[36] approving the merger between BDO and EPCIB, relevant portions of
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shares has been agreed upon at P92; and if so, to MANIFEST whether this case has
become moot." which are reproduced hereunder:
d. All the properties of EPCI, real or personal, tangible or intangible ... shall be
deemed transferred to the Merged Bank without further act or deed.
THIS IS TO CERTIFY that the Plan and Articles of Merger
Per Article 2 of the Plan of Merger on the exchange of shares mechanism, "all the
executed on December 28, 2006 by and between: issued and outstanding common stock of [EPCIB] ('EPCI shares') shall be converted
into fully-paid and non assessable common stock of BDO ('BDO common shares') at
BANCO DE ORO UNIVERSAL BANK, the ratio of 1.80 BDO Common shares for each issued [EPCIB] share ('the Exchange
Ratio')." And under the exchange procedure, "BDO shall issue BDO Common Shares to
EPCI stockholders corresponding to each EPCI Share held by them in accordance with
Now BANCO DE ORO-EPCI, INC.
the aforesaid Exchange Ratio."
(Surviving Corporation)
It appears that BDO, or BDO-EPCI, Inc. to be precise, has since issued BDO common
shares to respondent SSS corresponding to the number of its former EPCIB
and
shareholdings under the ratio and exchange procedure prescribed in the Plan of
Merger. In net effect, SSS, once the owner of a block of EPCIB shares, is now a large
EQUITABLE PCI BANK, INC. stockholder of BDO-EPCI, Inc.

(Absorbed Corporation) On the postulate that the instant petition has now become moot and academic, BDO
Capital supplemented its earlier Compliance and Manifestation[37] with a
... approved by a majority of the Board of Directors on November 06, 2006 and by a formal Motion to Dismiss.[38]
vote of the stockholders owning or representing at least two-thirds of the
outstanding capital stock of constituent corporations on December 27, 2006, signed By Resolution dated July 10, 2007, the Court required petitioners and respondent SSS
by the Presidents, certified by their respective Corporate Secretaries, whereby the to comment on BDO Capital's motion to dismiss "within ten (10) days from notice."
entire assets of [EPCI] Inc. will be transferred to and absorbed by [BDO] UNIVERSAL
BANK nowBANCO DE ORO-EPCI, INC. was approved by this Office on this date but
which approval shall be effective on May 31, 2007 pursuant to the provisions of ...
(Word in bracket added; emphasis in the original)
To date, petitioners have not submitted their compliance. On the other hand, SSS, by
way of comment, reiterated its position articulated in respondents' Compliance and
In line with Section 80 of the Corporation Code and as explicitly set forth in Article 1.3
Motion[39] that the SM-BDO Group Tender Offer at the price therein stated had
of the Plan of Mergeradverted to, among the effects of the BDO-EPCIB merger are
rendered this case moot and academic. And respondent SSS confirmed the following:
the following:
a) its status as BDO-EPCIB stockholder; b) the Tender Offer made by the SM Group to
EPCIB stockholders, including SSS, for their shares at P92.00 per share; and c) SSS'
acceptance of the Tender Offer thus made.

a. BDO and EPCI shall become a single corporation, with BDO as the surviving A case or issue is considered moot and academic when it ceases to present a
corporation. [EPCIB] shall cease to exist...; justiciable controversy by virtue of supervening events,[40] so that an adjudication of
the case or a declaration on the issue would be of no practical value or use.[41] In
xxx xxx xxx such instance, there is no actual substantial relief which a petitioner would be
entitled to, and which would be negated by the dismissal of the petition.[42] Courts
c. All the rights, privileges, immunities, franchises and powers of EPCI shall be generally decline jurisdiction over such case or dismiss it on the ground of mootness -
132

deemed transferred to and possessed by the merged Bank...; and - save when, among others, a compelling constitutional issue raised requires the
formulation of controlling principles to guide the bench, the bar and the public; or difficult as to be manifestly beyond the contemplation of the parties,[49] total or
when the case is capable of repetition yet evading judicial review.[43] partial release from a prestation and from the counter-prestation is allowed.

The case, with the view we take of it, has indeed become moot and academic for Under the theory of rebus sic stantibus,[50] the parties stipulate in the light of
interrelated reasons. certain prevailing conditions, and once these conditions cease to exist, the contract
also ceases to exist.[51] Upon the facts obtaining in this case, it is abundantly clear
We start off with the core subject of this case. As may be noted, the Letter- that the conditions in which SSS and BDO Capital and/or BDO executed the Letter-
Agreement,[44] the SPA,[45] the SSC resolutions assailed in this recourse, and Agreement upon which the pricing component - at P43.50 per share - of
the Invitation to Bid sent out to implement said resolutions, all have a common the Invitation to Bid was predicated, have ceased to exist. Accordingly, the
subject: the Shares - the 187.84 Million EPCIB common shares. It cannot be implementation of the Letter- Agreement or of the challenged Res. Nos. 428 and 485
overemphasized, however, that the Shares, as a necessary consequence of the BDO- cannot plausibly push through, even if the central figures in this case are so minded.
EPCIB merger[46] which saw EPCIB being absorbed by the surviving BDO, have
been transferred to BDO and converted into BDO common shares under the Lest it be overlooked, BDO-EPCI, in a manner of speaking, stands now as the
exchange ratio set forth in the BDO-EPCIB Plan of Merger. As thus converted, the issuer[52] of what were once the subject Shares. Consequently, should SSS opt to exit
subject Shares are no longer equity security issuances of the now defunct EPCIB, but from BDO and BDO Capital, or BDO Capital, in turn, opt to pursue SSS's shareholdings
those of BDO-EPCI, which, needless to stress, is a totally separate and distinct entity in EPCIB, as thus converted into BDO shares, the sale-purchase ought to be via an
from what used to be EPCIB. In net effect, therefore, the 187.84 Million EPCIB Issuer Tender Offer -- a phrase which means a publicly announced intention by an
common shares are now lost or inexistent. And in this regard, the Court takes judicial issuer to acquire any of its own class of equity securities or by an affiliate of such
notice of the disappearance of EPCIB stocks from the local bourse listing. Instead, issuer to acquire such securities.[53] In that eventuality, BDO or BDO Capital cannot
BDO-EPCI Stocks are presently listed and being traded in the PSE. possibly exercise the "right to match" under the Swiss Challenge procedure, a tender
offer being wholly inconsistent with public bidding. The offeror or buyer in an issue
Under the law on obligations and contracts, the obligation to give a determinate tender offer transaction proposes to buy or acquire, at the stated price and given
thing is extinguished if the object is lost without the fault of the debtor.[47] And per terms, its own shares of stocks held by its own stockholder who in turn simply have to
Art. 1192 (2) of the Civil Code, a thing is considered lost when it perishes or accept the tender to effect the sale. No bidding is involved in the process.
disappears in such a way that it cannot be recovered.[48] In a very real sense, the
interplay of the ensuing factors: a) the BDO-EPCIB merger; and b) the cancellation of While the Court ends up dismissing this petition because the facts and legal situation
subject Shares and their replacement by totally new common shares of BDO, has call for this kind of disposition, petitioners have to be commended for their efforts in
rendered the erstwhile 187.84 million EPCIB shares of SSS "unrecoverable" in the initiating this proceeding. For, in the final analysis, it was their petition which initially
contemplation of the adverted Civil Code provision. blocked implementation of the assailed SSC resolutions, and, in the process, enabled
the SSS and necessarily their members to realize very much more for their
With the above consideration, respondent SSS or SSC cannot, under any investments.
circumstance, cause the implementation of the assailed resolutions, let alone
proceed with the planned disposition of the Shares, be it via the traditional WHEREFORE, the instant petition is DISMISSED.
competitive bidding or the challenged public bidding with a Swiss Challenge feature.

At any rate, the moot-and-academic angle would still hold sway even if it were to be
assumed hypothetically that the subject Shares are still existing. This is so, for the No costs.
supervening BDO-EPCIB merger has so effected changes in the circumstances of SSS
and BDO/BDO Capital as to render the fulfillment of any of the obligations that each SO ORDERED.
may have agreed to undertake under either the Letter-Agreement, the SPA or
the Swiss Challenge package legally impossible. When the service has become so
133

CANCIO C. GARCIA
Associate Justice
134
ARTICLE 1191 an Agreement with Mangaoil for the purchase and sale of said
parcel of land, under the following terms and conditions:
37. G.R. No. 188661 | 2012-04-11

ESTELITA VILLAMAR, Petitioner, vs. BALBINO MANGAOIL, Respondent.


“1. The price of the land is ONE HUNDRED AND
DECISION EIGHTY THOUSAND (180,000.00) PESOS per hectare but
only the 3.5000 hec. shall be paid and the rest shall be
REYES, J.: given free, so that the total purchase or selling price shall
be [P]630,000.00 only;
The Case

Before us is a petition for review on certiorari[1] under Rule 45 of the Rules of


Court filed by Estelita Villamar (Villamar) to assail the Decision [2] rendered by the 2. ONE HUNDRED EIGHTY FIVE THOUSAND
Court of Appeals (CA) on February 20, 2009 in CA-G.R. CV No. 86286, the dispositive (185,000.00) PESOS of the total price was already
portion of which reads: received on March 27, 1998 for payment of the loan
secured by the certificate of title covering the land in
WHEREFORE, the instant appeal is DISMISSED. The favor of the Rural Bank of Cauayan, San Manuel Branch,
assailed decision is AFFIRMED in toto. San Manuel, Isabela [Rural Bank of Cauayan], in order
that the certificate of title thereof be withdrawn and
released from the said bank, and the rest shall be for
SO ORDERED.[3]
the payment of the mortgag[e]s in favor of Romeo
Lacaden and Florante Parangan;
The resolution[4] issued by the CA on July 8, 2009 denied the petitioner's
motion for reconsideration to the foregoing.
3. After the release of the certificate of title
covering the land subject-matter of this agreement, the
The ruling[5] of Branch 23, Regional Trial Court (RTC) of Roxas, Isabela, which
necessary deed of absolute sale in favor of the PARTY OF
was affirmed by the CA in the herein assailed decision and resolution, ordered the (1)
THE SECOND PART shall be executed and the transfer be
rescission of the contract of sale of real property entered into by Villamar and Balbino
immediately effected so that the latter can apply for a
Mangaoil (Mangaoil); and (2) return of the down payment made relative to the said loan from any lending institution using the corresponding
contract.
certificate of title as collateral therefor, and the proceeds
of the loan, whatever be the amount, be given to the
Antecedents Facts PARTY OF THE FIRST PART;

The CA aptly summarized as follows the facts of the case prior to the filing by 4. Whatever balance left from the agreed purchase
Mangaoil of the complaint[6] for rescission of contract before the RTC: price of the land subject matter hereof after deducting
the proceed of the loan and the [P]185,000.00 already
Villamar is the registered owner of a 3.6080 hectares parcel received as above-mentioned, the PARTY OF THE SECOND
of land [hereinafter referred as the subject property] in San PART shall pay unto the PARTY OF THE FIRST PART not
Francisco, Manuel, Isabela covered by Transfer Certificate of Title later than June 30, 1998 and thereafter the parties shall
(TCT) No. T-92958-A. On March 30, 1998, she entered into be released of any obligations for and against each other;
135

xxx”
On April 1, 1998, the parties executed a Deed of Absolute 7. That, also, the plaintiff could not physically, actually and
Sale whereby Villamar (then Estelita Bernabe) transferred the materially posses[s] and cultivate the said land because the private
subject parcel of land to Mangaoil for and in consideration of mortgage[e]s and/or present possessors refuse to vacate the
[P]150,000.00. same;

In a letter dated September 18, 1998, Mangaoil informed


Villamar that he was backing out from the sale agreed upon giving
as one of the reasons therefor: xxxx

“3. That the area is not yet fully cleared by 11. That on September 18, 1998, the plaintiff sent a letter
incumbrances as there are tenants who are not willing to to the defendant demanding a return of the amount so advanced
vacate the land without giving them back the amount that by him, but the latter ignored the same, x x x;
they mortgaged the land.”
12. That, again, on April 29, 1999, the plaintiff sent to the
Mangaoil demanded refund of his [P]185,000.00 down payment. defendant another demand letter but the latter likewise ignored
Reiterating said demand in another letter dated April 29, 1999, the the same, x x x;
same, however, was unheeded.[7] x x x (Citations omitted)
13. That, finally, the plaintiff notified the defendant by a
On January 28, 2002, the respondent filed before the RTC a complaint [8] for notarial act of his desire and intention to rescind the said contract
rescission of contract against the petitioner. In the said complaint, the respondent of sale, xxx;
sought the return of P185,000.00 which he paid to the petitioner, payment of
interests thereon to be computed from March 27, 1998 until the suit's termination,
and the award of damages, costs and P20,000.00 attorney's fees. The respondent's
factual allegations were as follows:
x x x x.[9] (Citations omitted)

5. That as could be gleaned the “Agreement” (Annex “A”),


In the respondent’s answer to the complaint, she averred that she had complied
the plaintiff [Mangaoil] handed to the defendant [Villamar] the sum
with her obligations to the respondent. Specifically, she claimed having caused the
of [P]185,000.00 to be applied as follows; [P]80,000 was for the
release of TCT No. T-92958-A by the Rural Bank of Cauayan and its delivery to a
redemption of the land which was mortgaged to the Rural Bank of
certain “Atty. Pedro C. Antonio” (Atty. Antonio). The petitioner alleged that Atty.
Cauayan, San Manuel Branch, San Manuel, Isabela, to enable the
Antonio was commissioned to facilitate the transfer of the said title in the
plaintiff to get hold of the title and register the sale x x
respondent's name. The petitioner likewise insisted that it was the respondent who
x and[P]105,000.00 was for the redemption of the said land from
unceremoniously withdrew from their agreement for reasons only the latter knew.
private mortgages to enable plaintiff to posses[s] and cultivate the
same;
The Ruling of the RTC

On September 9, 2005, the RTC ordered the rescission of the agreement and the
deed of absolute sale executed between the respondent and the petitioner. The
6. That although the defendant had already long redeemed
petitioner was, thus directed to return to the respondent the sum of P185,000.00
the said land from the said bank and withdrawn TCT No. T-92958-A,
which the latter tendered as initial payment for the purchase of the subject property.
she has failed and refused, despite repeated demands, to hand over
The RTC ratiocinated that:
136

the said title to the plaintiff and still refuses and fails to do so;
There is no dispute that the defendant sold the LAND to the Burden of proof is the duty of a party to prove the truth of
plaintiff for [P]630,000.00 with down payment of [P]185,000.00. his claim or defense, or any fact in issue necessary to establish his
There is no evidence presented if there were any other partial claim or defense by the amount of evidence required by law. In civil
payments made after the perfection of the contract of sale. cases, the burden of proof is on the defendant if he alleges, in his
answer, an affirmative defense, which is not a denial of an
Article 1458 of the Civil Code provides: essential ingredient in the plaintiff's cause of action, but is one
which, if established, will be a good defense – i.e., an “avoidance”
“Art. 1458. By the contract of sale[,] one of the of the claim, which prima facie, the plaintiff already has because of
contracting parties obligates himself to transfer the ownership of the defendant's own admissions in the pleadings.
and to deliver a determinate thing, and the other to pay therefore
a price certain in money or its equivalent.” Defendant-appellant Villamar's defense in this case was
an affirmative defense. She did not deny plaintiff-appellee’s
As such, in a contract of sale, the obligation of the vendee to allegation that she had an agreement with plaintiff-appellee for the
pay the price is correlative of the obligation of the vendor to deliver sale of the subject parcel of land. Neither did she deny that she was
the thing sold. It created or established at the same time, out of the obliged under the contract to deliver the certificate of title to
same course, and which result in mutual relations of creditor and plaintiff-appellee immediately after said title/property was
debtor between the parties. redeemed from the bank.What she rather claims is that she
already complied with her obligation to deliver the title to
plaintiff-appellee when she delivered the same to Atty. Antonio as
it was plaintiff-appellee himself who engaged the services of said
lawyer to precisely work for the immediate transfer of said title in
The claim of the plaintiff that the LAND has not been
his name. Since, however, this affirmative defense as alleged in
delivered to him was not refuted by the defendant. Considering
defendant-appellant's answer was not admitted by plaintiff-
that defendant failed to deliver to him the certificate of title and of
appellee, it then follows that it behooved the defendant-appellant
the possession over the LAND to the plaintiff, the contract must be to prove her averments by preponderance of evidence.
rescinded pursuant to Article 1191 of the Civil Code which, in part,
provides:
Yet, a careful perusal of the record shows that the
defendant-appellant failed to sufficiently prove said affirmative
“Art. 1191. The power of rescind obligations is
defense. She failed to prove that in the first place, “Atty. Antonio”
implied in reciprocal ones in case one of the obligors should not
existed to receive the title for and in behalf of plaintiff-appellee.
comply with what is incumbent upon him.”[10]
Worse, the defendant-appellant failed to prove that Atty. Antonio
received said title “as allegedly agreed upon.”
The petitioner filed before the CA an appeal to challenge the foregoing. She
ascribed error on the part of the RTC when the latter ruled that the agreement and
deed of sale executed by and between the parties can be rescinded as she failed to
deliver to the respondent both the subject property and the certificate of title
We likewise sustain the RTC's finding that defendant-
covering the same.
appellant V[i]llamar failed to deliver possession of the subject
property to plaintiff-appellee Mangaoil. As correctly observed by
The Ruling of the CA
the RTC - “[t]he claim of the plaintiff that the land has not been
delivered to him was not refuted by the defendant.” Not only that.
On February 20, 2009, the CA rendered the now assailed decision dismissing the On cross-examination, the defendant-appellant gave Us insight
137

petitioner’s appeal based on the following grounds: on why no such delivery could be made, viz.:
“x x x x the ownership is to pass, and that the buyer shall from
that time have and enjoy the legal and peaceful
Q: So, you were not able to deliver this property to Mr. Mangaoil possession of the thing;
just after you redeem the property because of the presence of these
two (2) persons, is it not? (2) An implied warranty that the thing shall be free
from any hidden defaults or defects, or any change or
encumbrance not declared or known to the buyer.

xxx x x x.”

A: Yes, sir. shows that actual, and not mere constructive delivery is warrantied
by the seller to the buyer. “(P)eaceful possession of the thing” sold
Q: Forcing you to file the case against them and which can hardly be enjoyed in a mere constructive delivery.
according to you, you have won, is it not?

A: Yes, sir.
The obligation of defendant-appellant Villamar to transfer
Q: And now at present[,] you are in actual possession of ownership and deliver possession of the subject parcel of land was
the land? her correlative obligation to plaintiff-appellee in exchange for the
latter's purchase price thereof. Thus, if she fails to comply with
what is incumbent upon her, a correlative right to rescind such
A: Yes, sir. x x x”
contract from plaintiff-appellee arises, pursuant to Article 1191 of
the Civil Code.[11] x x x (Citations omitted)
With the foregoing judicial admission, the RTC could not
have erred in finding that defendant-[appellant] failed to deliver the
The Issues
possession of the property sold, to plaintiff-appellee.

Aggrieved, the petitioner filed before us the instant petition and submits the
following issues for resolution:
Neither can We agree with defendant-appellant in her
I.
argument that the execution of the Deed of Absolute Sale by the
parties is already equivalent to a valid and constructive delivery of
the property to plaintiff-appellee. Not only is it doctrinally settled WHETHER THE FAILURE OF PETITIONER-SELLER TO DELIVER THE
that in a contract of sale, the vendor is bound to transfer the CERTIFICATE OF TITLE OVER THE PROPERTY TO RESPONDENT-
ownership of, and to deliver the thing that is the object of the BUYER IS A BREACH OF OBLIGATION IN A CONTRACT OF SALE OF
sale, the way Article 1547 of the Civil Code is worded, viz.: REAL PROPERTY THAT WOULD WARRANT RESCISSION OF THE
CONTRACT;
“Art. 1547. In a contract of sale, unless a contrary
intention appears, there is: II.

(1) An implied warranty on the part of the WHETHER PETITIONER IS LIABLE FOR BREACH OF OBLIGATION IN A
138

seller that he has a right to sell the thing at the time when CONTRACT OF SALE FOR FAILURE OF RESPONDENT[-]BUYER TO
IMMEDIATELY TAKE ACTUAL POSSESSION OF THE PROPERTY of sale in the respondent's favor. She adds that before T-92958-A can be cancelled
NOTWITHSTANDING THE ABSENCE OF ANY STIPULATION IN THE and a new one be issued in the respondent's favor, the latter decided to withdraw
CONTRACT PROVIDING FOR THE SAME; from their agreement. She also points out that in the letters seeking for an outright
rescission of their agreement sent to her by the respondent, not once did he demand
III. for the delivery of TCT.

WHETHER THE EXECUTION OF A DEED OF SALE OF REAL PROPERTY The petitioner insists that the respondent's change of heart was due to (1) the
IN THE PRESENT CASE IS ALREADY EQUIVALENT TO A VALID AND latter's realization of the difficulty in determining the subject property's perimeter
CONSTRUCTIVE DELIVERY OF THE PROPERTY TO THE BUYER; boundary; (2) his doubt that the property he purchased would yield harvests in the
amount he expected; and (3) the presence of mortgagees who were not willing to
IV. give up possession without first being paid the amounts due to them. The petitioner
contends that the actual reasons for the respondent's intent to rescind their
agreement did not at all constitute a substantial breach of her obligations.
WHETHER OR NOT THE CONTRACT OF SALE SUBJECT MATTER OF
THIS CASE SHOULD BE RESCINDED ON SLIGHT OR CASUAL BREACH;
The petitioner stresses that under Article 1498 of the NCC, when a sale is made
through a public instrument, its execution is equivalent to the delivery of the thing
V.
which is the contract's object, unless in the deed, the contrary appears or can be
inferred. Further, in Power Commercial and Industrial Corporation v. CA,[17] it was
WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING
ruled that the failure of a seller to eject lessees from the property he sold and to
THE DECISION OF THE RTC ORDERING THE RESCISSION OF THE
deliver actual and physical possession, cannot be considered a substantial breach,
CONTRACT OF SALE[.][12]
when such failure was not stipulated as a resolutory or suspensive condition in the
contract and when the effects and consequences of the said failure were not
The Petitioner's Arguments specified as well. The execution of a deed of sale operates as a formal or symbolic
delivery of the property sold and it already authorizes the buyer to use the
The petitioner avers that the CA, in ordering the rescission of the agreement and instrument as proof of ownership.[18]
deed of sale, which she entered into with the respondent, on the basis of her alleged
failure to deliver the certificate of title, effectively imposed upon her an extra duty The petitioner argues that in the case at bar, the agreement and the absolute
which was neither stipulated in the contract nor required by law. She argues that deed of sale contains no stipulation that she was obliged to actually and physically
under Articles 1495[13]and 1496[14] of the New Civil Code (NCC), the obligation to deliver the subject property to the respondent. The respondent fully knew Lacaden's
deliver the thing sold is complied with by a seller who executes in favor of a buyer an and Parangan's possession of the subject property. When they agreed on the sale of
instrument of sale in a public document. Citing Chua v. Court of Appeals,[15] she claims the property, the respondent consciously assumed the risk of not being able to take
that there is a distinction between transferring a certificate of title in the buyer's immediate physical possession on account of Lacaden's and Parangan's presence
name, on one hand, and transferring ownership over the property sold, on the therein.
other. The latter can be accomplished by the seller's execution of an instrument of
sale in a public document. The recording of the sale with the Registry of Deeds and
The petitioner likewise laments that the CA allegedly misappreciated the
the transfer of the certificate of title in the buyer's name are necessary only to bind
evidence offered before it when it declared that she failed to prove the existence of
third parties to the transfer of ownership.[16]
Atty. Antonio. For the record, she emphasizes that the said lawyer prepared and
notarized the agreement and deed of absolute sale which were executed between
The petitioner contends that in her case, she had already complied with her the parties. He was also the petitioner’s counsel in the proceedings before the RTC.
obligations under the agreement and the law when she had caused the release of TCT Atty. Antonio was also the one asked by the respondent to cease the transfer of the
No. T-92958-A from the Rural Bank of Cauayan, paid individual mortgagees Romeo title over the subject property in the latter's name and to return the money he paid in
139

Lacaden (Lacaden) and Florante Parangan (Paranga), and executed an absolute deed advance.
The Respondent's Contentions 1498 of the same code provides that when the sale is made through a public
instrument, the execution thereof shall be equivalent to the delivery of the thing
In the respondent's comment,[19] he seeks the dismissal of the instant petition. which is the object of the contract, if from the deed, the contrary does not appear or
He invokes Articles 1191 and 1458 to argue that when a seller fails to transfer the cannot clearly be inferred.
ownership and possession of a property sold, the buyer is entitled to rescind the
contract of sale. Further, he contends that the execution of a deed of absolute sale In the case of Chua v. Court of Appeals,[22] which was cited by the petitioner, it
does not necessarily amount to a valid and constructive delivery. In Masallo v. was ruled that “when the deed of absolute sale is signed by the parties and notarized,
Cesar,[20] it was ruled that a person who does not have actual possession of real then delivery of the real property is deemed made by the seller to the buyer.” [23] The
property cannot transfer constructive possession by the execution and delivery of a transfer of the certificate of title in the name of the buyer is not necessary to confer
public document by which the title to the land is transferred. In Addison v. Felix and ownership upon him.
Tioco,[21] the Court was emphatic that symbolic delivery by the execution of a public
instrument is equivalent to actual delivery only when the thing sold is subject to the In the case now under our consideration, item nos. 2 and 3 of the agreement
control of the vendor. entered into by the petitioner and the respondent explicitly provide:

Our Ruling 2. ONE HUNDRED EIGHTY FIVE THOUSAND (P185,000.00)


PESOS of the total price was already received on March 27, 1998
The instant petition is bereft of merit. for payment of the loan secured by the certificate of title covering
the land in favor of the Rural Bank of Cauayan, San Manuel Branch,
There is only a single issue for resolution in the instant petition, to wit, whether San Manuel, Isabela, in order that the certificate of title thereof be
or not the failure of the petitioner to deliver to the respondent both the physical withdrawn and released from the said bank, and the rest shall be
possession of the subject property and the certificate of title covering the same for the payment of the mortgages in favor of Romeo Lacaden and
amount to a substantial breach of the former's obligations to the latter constituting a Florante Parangan;
valid cause to rescind the agreement and deed of sale entered into by the parties.
3. After the release of the certificate of title covering the land
We rule in the affirmative subject-matter of this agreement, the necessary deed of absolute
sale in favor of the PARTY OF THE SECOND PART shall be executed
The RTC and the CA both found that the petitioner failed to comply with her and the transfer be immediately effected so that the latter can
obligations to deliver to the respondent both the possession of the subject property apply for a loan from any lending institution using the
and the certificate of title covering the same. corresponding certificate of title as collateral therefor, and the
proceeds of the loan, whatever be the amount, be given to the
PARTY OF THE FIRST PART;[24] (underlining supplied)
Although Articles 1458, 1495 and 1498 of the NCC and case law do not
generally require the seller to deliver to the buyer the physical possession of the
property subject of a contract of sale and the certificate of title covering the same, As can be gleaned from the agreement of the contending parties, the
the agreement entered into by the petitioner and the respondent provides respondent initially paid the petitioner P185,000.00 for the latter to pay the loan
otherwise. However, the terms of the agreement cannot be considered as violative obtained from the Rural Bank of Cauayan and to cause the release from the said bank
of law, morals, good customs, public order, or public policy, hence, valid. of the certificate of title covering the subject property. The rest of the amount shall
be used to pay the mortgages over the subject property which was executed in favor
of Lacaden and Parangan. After the release of the TCT, a deed of sale shall be
Article 1458 of the NCC obliges the seller to transfer the ownership of and to
executed and transfer shall be immediately effected so that the title covering the
deliver a determinate thing to the buyer, who shall in turn pay therefor a price certain
subject property can be used as a collateral for a loan the respondent will apply for,
in money or its equivalent. In addition thereto, Article 1495 of the NCC binds the
the proceeds of which shall be given to the petitioner.
140

seller to warrant the thing which is the object of the sale. On the other hand, Article
Under Article 1306 of the NCC, the contracting parties may establish such obligation to eject the said mortgagors, the undertaking is necessarily implied.
stipulations, clauses, terms and conditions as they may deem convenient, provided Cessation of occupancy of the subject property is logically expected from the
they are not contrary to law, morals, good customs, public order or public policy. mortgagors upon payment by the petitioner of the amounts due to them

While Articles 1458 and 1495 of the NCC and the doctrine enunciated in the case We note that in the demand letter[26] dated September 18, 1998, which was sent
of Chua do not impose upon the petitioner the obligation to physically deliver to the by the respondent to the petitioner, the former lamented that “the area is not yet
respondent the certificate of title covering the subject property or cause the transfer fully cleared of incumbrances as there are tenants who are not willing to vacate the
in the latter's name of the said title, a stipulation requiring otherwise is not land without giving them back the amount that they mortgaged the land.” Further, in
prohibited by law and cannot be regarded as violative of morals, good customs, the proceedings before the RTC conducted after the complaint for rescission was
public order or public policy. Item no. 3 of the agreement executed by the parties filed, the petitioner herself testified that she won the ejectment suit against the
expressly states that “transfer [shall] be immediately effected so that the latter can mortgagors “only last year”.[27] The complaint was filed on September 8, 2002 or
apply for a loan from any lending institution using the corresponding certificate of more than four years from the execution of the parties' agreement. This means that
title as collateral therefore.” Item no. 3 is literal enough to mean that there should be after the lapse of a considerable period of time from the agreement's execution, the
physical delivery of the TCT for how else can the respondent use it as a collateral to mortgagors remained in possession of the subject property.
obtain a loan if the title remains in the petitioner’s possession. We agree with the RTC
and the CA that the petitioner failed to prove that she delivered the TCT covering the Notwithstanding the absence of stipulations in the agreement and
subject property to the respondent. What the petitioner attempted to establish was absolute deed of sale entered into by Villamar and Mangaoil expressly indicating
that she gave the TCT to Atty. Antonio whom she alleged was commissioned to effect the consequences of the former's failure to deliver the physical possession of the
the transfer of the title in the respondent's name. Although Atty. Antonio's existence subject property and the certificate of title covering the same, the latter is entitled
is certain as he was the petitioner’s counsel in the proceedings before the RTC, there to demand for the rescission of their contract pursuant to Article 1191 of the NCC.
was no proof that the former indeed received the TCT or that he was commissioned
to process the transfer of the title in the respondent's name. We note that the agreement entered into by the petitioner and the respondent
only contains three items specifying the parties' undertakings. In item no. 5, the
It is likewise the petitioner’s contention that pursuant to Article 1498 of the parties consented “to abide with all the terms and conditions set forth in this
NCC, she had already complied with her obligation to deliver the subject property agreement and never violate the same.”[28]
upon her execution of an absolute deed of sale in the respondent’s favor. The
petitioner avers that she did not undertake to eject the mortgagors Parangan and Article 1191 of the NCC is clear that “the power to rescind obligations is implied
Lacaden, whose presence in the premises of the subject property was known to the in reciprocal ones, in case one of the obligors should not comply with what is
respondent. incumbent upon him.” The respondent cannot be deprived of his right to demand for
rescission in view of the petitioner’s failure to abide with item nos. 2 and 3 of the
We are not persuaded. agreement. This remains true notwithstanding the absence of express stipulations in
the agreement indicating the consequences of breaches which the parties may
In the case of Power Commercial and Industrial Corporation [25] cited by the commit. To hold otherwise would render Article 1191 of the NCC as useless.
petitioner, the Court ruled that the failure of the seller to eject the squatters from the
property sold cannot be made a ground for rescission if the said ejectment was not Article 1498 of the NCC generally considers the execution of a public
stipulated as a condition in the contract of sale, and when in the negotiation stage, instrument as constructive delivery by the seller to the buyer of the property
the buyer's counsel himself undertook to eject the illegal settlers. subject of a contract of sale. The case at bar, however, falls among the exceptions
to the foregoing rule since a mere presumptive and not conclusive delivery is
The circumstances surrounding the case now under our consideration are created as the respondent failed to take material possession of the subject
different. In item no. 2 of the agreement, it is stated that part of the P185,000.00 property.
initially paid to the petitioner shall be used to pay the mortgagors, Parangan and
141

Lacaden. While the provision does not expressly impose upon the petitioner the
Further, even if we were to assume for argument's sake that the agreement rescission of the agreement and absolute deed of sale entered into by Estelita
entered into by the contending parties does not require the delivery of the physical Villamar and Balbino Mangaoil and the return of the down payment made for the
possession of the subject property from the mortgagors to the respondent, still, the purchase of the subject property, are AFFIRMED. However, pursuant to our ruling
petitioner's claim that her execution of an absolute deed of sale was already in Eastern Shipping Lines, Inc. v. CA,[31] an interest of 12% per annum is imposed on
sufficient as it already amounted to a constructive delivery of the thing sold which the sum ofP185,000.00 to be returned to Mangaoil to be computed from the date
Article 1498 of the NCC allows, cannot stand. of finality of this Decision until full satisfaction thereof.

In Philippine Suburban Development Corporation v. The Auditor General,[29] we SO ORDERED.


held:
BIENVENIDO L. REYES
When the sale of real property is made in a public instrument, the
execution thereof is equivalent to the delivery of the thing object of Associate Justice
the contract, if from the deed the contrary does not appear or
cannot clearly be inferred.

In other words, there is symbolic delivery of the property


subject of the sale by the execution of the public instrument, unless
from the express terms of the instrument, or by clear inference
therefrom, this was not the intention of the parties. Such would be
the case, for instance, x x x where the vendor has no control over
the thing sold at the moment of the sale, and, therefore, its
material delivery could not have been made.[30] (Underlining
supplied and citations omitted)

Stated differently, as a general rule, the execution of a public instrument


amounts to a constructive delivery of the thing subject of a contract of sale. However,
exceptions exist, among which is when mere presumptive and not conclusive delivery
is created in cases where the buyer fails to take material possession of the subject of
sale. A person who does not have actual possession of the thing sold cannot transfer
constructive possession by the execution and delivery of a public instrument.

In the case at bar, the RTC and the CA found that the petitioner failed to deliver
to the respondent the possession of the subject property due to the continued
presence and occupation of Parangan and Lacaden. We find no ample reason to
reverse the said findings. Considered in the light of either the agreement entered into
by the parties or the pertinent provisions of law, the petitioner failed in her
undertaking to deliver the subject property to the respondent.
142

IN VIEW OF THE FOREGOING, the instant petition is DENIED. The February 20,
2009 Decision and July 8, 2009 Resolution of the Court of Appeals, directing the
38. G.R. No. L-39378 August 28, 1984 cause and effect the subdivision of the said lots and deliver the titles and
possession thereof to the plaintiff. As to the claim and counterclaim for
GENEROSA AYSON-SIMON, plaintiff-appellee, vs. damages, let the hearing thereon be deferred until further move by the
NICOLAS ADAMOS and VICENTA FERIA, defendants-appellants. parties. 1

However, since execution of the foregoing Order was rendered impossible because of
Wenceslao V. Jarin for plaintiff-appellee. the judgment in Civil Case No. 174, which earlier declared the sale of the lots in
Arnovit, Lacre & Adamos for defendants-appellants. question by Juan Porciuncula to defendants-appellants to be null and void,
GENEROSA filed, on August 16, 1968, another suit in the Court of First Instance of
MELENCIO-HERRERA, J.: Manila (Civil Case No. 73942) for rescission of the sale with damages. On June 7,
1969, the Court rendered judgment, the dispositive portion of which reads:
Originally, this was an appeal by defendants from the Decision of the then Court of
First Instance of Manila, Branch XX, in Civil Case No. 73942, to the Court of Appeals WHEREFORE, judgment is rendered in favor of the plaintiff and
(now Intermediate Appellate Court), which Tribunal, certified the case to us because against defendants, ordering the latter jointly and severally, to pay the
the issue is a pure question of law. former the sum of P7,600.00, the total amount received by them from her
as purchase price of the two lots, with legal rate of interest from May 29,
On December 13, 1943, Nicolas Adamos and Vicente Feria, defendants-appellants 1946 until fully paid; another sum of P800.00, with legal rate 6f interest
herein, purchased two lots forming part of the Piedad Estate in Quezon City, with an from August 1, 1966 until fully paid; the sum of P1,000 for attorney's fees;
area of approximately 56,395 square meters, from Juan Porciuncula. Sometime and the costs of this suit. 2
thereafter, the successors-in-interest of the latter filed Civil Case No. 174 in the then
Court of First Instance of Quezon City for annulment of the sale and the cancellation Hence, the appeal before the Appellate Court on the ground that GENEROSA's action
of Transfer Certificate of Title No. 69475, which had been issued to defendants- had prescribed, considering that she had only four years from May 29, 1946, the date
appellants by virtue of the disputed sale. On December 18, 1963, the Court rendered of sale, within which to rescind said transaction, and that her complaint for specific
a Decision annulling the sale, cancelling TCT 69475, and authorizing the issuance of a performance may be deemed as a waiver of her right to rescission since the
new title in favor of Porciuncula's successors-in-interest. The said judgment was fulfillment and rescission of an obligation are alternative and not cumulative
affirmed by the Appellate Court and had attained finality. remedies.

In the meantime, on May 29, 1946, during the pendency of the above-mentioned The appeal is without merit. The Trial Court presided by then Judge, later Court of
case, defendants-appellants sold to GENEROSA Ayson Simon, plaintiff-appellee Appeals Associate Justice Luis B. Reyes, correctly resolved the issues, reiterated in the
herein, the two lots in question for P3,800.00 each, plus an additional P800.00 paid assignments of error on appeal, as follows:
subsequently for the purpose of facilitating the issuance of new titles in GENEROSA's
name. Due to the failure of defendants-appellants to comply with their commitment Defendants contend (1) that the fulfillment and the rescission of the
to have the subdivision plan of the lots approved and to deliver the titles and obligation in reciprocal ones are alternative remedies, and plaintiff having
possession to GENEROSA, the latter filed suit for specific performance before the chosen fulfillment in Civil Case No. Q- 7525, she cannot now seek
Court of First Instance of Quezon City on September 4, 1963 (Civil Case No. Q-7275). rescission; and (2) that even if plaintiff could seek rescission the action to
On January 20, 1964, said Court ordered: rescind the obligation has prescribed.

WHEREFORE, the plaintiff is declared entitled to a summary The first contention is without merit. The rule that the injured party
judgment and the defendants are hereby ordered to have the subdivision can only choose between fulfillment and rescission of the obligation, and
of Lot No. 6, Block No. 2, and Lot No. 11, Block No. 3, relocated and cannot have both, applies when the obligation is possible of fulfillment. If,
resurveyed and the subdivision plan approved and, if not possible for one as in this case, the fulfillment has become impossible, Article 1191 3 allows
143

reason or another, and in case of the absence or loss of said subdivision, to the injured party to seek rescission even after he has chosen fulfillment.
True it is that in Civil Case No. 7275 the Court already rendered a SO ORDERED.
Decision in favor of plaintiff, but since defendants cannot fulfill their
obligation to deliver the titles to and possession of the lots to plaintiff, the Teehankee, Actg. C.J., Plana, Relova,Gutierrez, Jr. and De la Fuente, JJ., concur.
portion of the decision requiring them to fulfill their obligations is without
force and effect. Only that portion relative to the payment of damages
remains in the dispositive part of the decision, since in either case
(fulfillment or rescission) defendants may be required to pay damages.

The next question to determine is whether the action to rescind the


obligation has prescribed.

Article 1191 of the Civil Code provides that the injured party may
also seek rescission, if the fulfillment should become impossible. The cause
of action to claim rescission arises when the fulfillment of the obligation
became impossible when the Court of First Instance of Quezon City in Civil
Case No. 174 declared the sale of the land to defendants by Juan
Porciuncula a complete nullity and ordered the cancellation of Transfer
Certificate of Title No. 69475 issued to them. Since the two lots sold to
plaintiff by defendants form part of the land involved in Civil Case No. 174,
it became impossible for defendants to secure and deliver the titles to and
the possession of the lots to plaintiff. But plaintiff had to wait for the
finality of the decision in Civil Case No. 174, According to the certification of
the clerk of the Court of First Instance of Quezon City (Exhibit "E-2"), the
decision in Civil Case No. 174 became final and executory "as per entry of
Judgment dated May 3, 1967 of the Court of Appeals." The action for
rescission must be commenced within four years from that date, May 3,
1967. Since the complaint for rescission was filed on August 16, 1968, the
four year period within which the action must be commenced had not
expired.

Defendants have the obligation to return to plaintiff the amount of


P7,600.00 representing the purchase price of the two lots, and the amount
of P800.00 which they received from plaintiff to expedite the issuance of
titles but which they could not secure by reason of the decision in Civil Case
No. 174. Defendant has to pay interest at the legal rate on the amount of
P7,600.00 from May 29, 1946, when they received the amount upon the
execution of the deeds of sale, and legal interest on the P800.00 from
August 1, 1966, when they received the same from plaintiff. 4

WHEREFORE, the appealed judgment of the former Court of First Instance of Manila,
Branch XX, in Civil Case No. 73942, dated June 7, 1969, is hereby affirmed in toto.
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Costs against defendants-appellants.


39. G.R No. 188986 B. OVERHEAD CONSOLE MONITORING SYSTEM
C. ENGINE TELEGRAPH SYSTEM
GALILEO A. MAGLASANG, doing business under the name GL D. ENGINE CONTROL SYSTEM
Enterprises, Petitioner, vs. E. WEATHER CONTROL SYSTEM
NORTHWESTERN INC., UNIVERSITY, Respondent. F. ECDIS SYSTEM
G. STEERING WHEEL SYSTEM
DECISION H. BRIDGE CONSOLE
TOTAL COST: Php 3,800,000.00
SERENO, CJ.:
LESS: OLD MARITIME
EQUIPMENT TRADE-IN VALUE 1,000,000.00
Before this Court is a Rule 45 Petition, seeking a review of the 27 July 2009 Court of
Appeals (CA) Decision in CA-G.R. CV No. 88989,1 which modified the Regional Trial DISCOUNT 100,000.00
Court (RTC) Decision of 8 January 2007 in Civil Case No. Q-04-53660.2 The CA held
that petitioner substantially breached its contracts with respondent for the PROJECT COST (MATERIALS & INSTALLATION) PhP 2,700,000.00
installation of an integrated bridge system (IBS).
(Emphasis in the original)
3
The antecedent .facts are as follows:
The second contract essentially contains the same terms and conditions as follows:6
On 10 June 2004, respondent Northwestern University (Northwestern), an
educational institution offering maritime-related courses, engaged the services of a That in consideration of the payment herein mentioned to be made by the First Party
Quezon City-based firm, petitioner GL Enterprises, to install a new IBS in Laoag City. (defendant), the Second Party agrees to furnish, supply, install & integrate the most
The installation of an IBS, used as the students’ training laboratory, was required by modern INTEGRATED BRIDGE SYSTEM located at Northwestern University MOCK
the Commission on Higher Education (CHED) before a school could offer maritime BOAT in accordance with the general conditions, plans and specifications of this
transportation programs.4 contract.

Since its IBS was already obsolete, respondent required petitioner to supply and SUPPLY & INSTALLATION OF THE FOLLOWING:
install specific components in order to form the most modern IBS that would be 1. ARPA RADAR SIMULATION ROOM
acceptable to CHED and would be compliant with the standards of the International xxxx
Maritime Organization (IMO). For this purpose, the parties executed two contracts. 2. GMDSS SIMULATION ROOM
xxxx
The first contract partly reads:5 TOTAL COST: PhP 270,000.00
(Emphasis in the original)
That in consideration of the payment herein mentioned to be made by the First Party
(defendant), the Second Party agrees to furnish, supply, install and integrate the most Common to both contracts are the following provisions: (1) the IBS and its
modern INTEGRATED BRIDGE SYSTEM located at Northwestern University MOCK components must be compliant with the IMO and CHED standard and with manuals
BOAT in accordance with the general conditions, plans and specifications of this for simulators/major equipment; (2) the contracts may be terminated if one party
contract. commits a substantial breach of its undertaking; and (3) any dispute under the
agreement shall first be settled mutually between the parties, and if settlement is not
SUPPLY & INSTALLATION OF THE FOLLOWING: obtained, resort shall be sought in the courts of law.
INTEGRATED BRIDGE SYSTEM
145

A. 2-RADAR SYSTEM
Subsequently, Northwestern paid ₱1 million as down payment to GL Enterprises. The mutual restitution, which would thereby restore the parties to their original positions
former then assumed possession of Northwestern’s old IBS as trade-in payment for as follows:11
its service. Thus, the balance of the contract price remained at ₱1.97 million.7
Accordingly, plaintiff is hereby ordered to restore to the defendant all the equipment
Two months after the execution of the contracts, GL Enterprises technicians delivered obtained by reason of the First Contract and refund the downpayment of
various materials to the project site. However, when they started installing the ₱1,000,000.00 to the defendant; and for the defendant to return to the plaintiff the
components, respondent halted the operations. GL Enterprises then asked for an equipment and materials it withheld by reason of the non-continuance of the
explanation.8 installation and integration project. In the event that restoration of the old
equipment taken from defendant's premises is no longer possible, plaintiff is hereby
Northwestern justified the work stoppage upon its finding that the delivered ordered to pay the appraised value of defendant's old equipment at ₱1,000,000.00.
equipment were substandard.9 It explained further that GL Enterprises violated the Likewise, in the event that restoration of the equipment and materials delivered by
terms and conditions of the contracts, since the delivered components (1) were old; the plaintiff to the defendant is no longer possible, defendant is hereby ordered to
(2) did not have instruction manuals and warranty certificates; (3) contained pay its appraised value at ₱1,027,480.00.
indications of being reconditioned machines; and (4) did not meet the IMO and CHED
standards. Thus, Northwestern demanded compliance with the agreement and Moreover, plaintiff is likewise ordered to restore and return all the equipment
suggested that GL Enterprises meet with the former’s representatives to iron out the obtained by reason of the Second Contract, or if restoration or return is not possible,
situation. plaintiff is ordered to pay the value thereof to the defendant.

Instead of heeding this suggestion, GL Enterprises filed on 8 September 2004 a SO ORDERED.


Complaint10 for breach of contract and prayed for the following sums: ₱1.97 million,
representing the amount that it would have earned, had Northwestern not stopped it Aggrieved, both parties appealed to the CA. With each of them pointing a finger at
from performing its tasks under the two contracts; at least ₱100,000 as moral the other party as the violator of the contracts, the appellate court ultimately
damages; at least ₱100,000 by way of exemplary damages; at least ₱100,000 as determined that GL Enterprises was the one guilty of substantial breach and liable for
attorney’s fees and litigation expenses; and cost of suit. Petitioner alleged that attorney’s fees.
Northwestern breached the contracts by ordering the work stoppage and thus
preventing the installation of the materials for the IBS. The CA appreciated that since the parties essentially sought to have an IBS compliant
with the CHED and IMO standards, it was GL Enterprises’ delivery of defective
Northwestern denied the allegation. In its defense, it asserted that since the equipment that materially and substantially breached the contracts. Although the
equipment delivered were not in accordance with the specifications provided by the contracts contemplated a completed project to be evaluated by CHED, Northwestern
contracts, all succeeding works would be futile and would entail unnecessary could not just sit idly by when it was apparent that the components delivered were
expenses. Hence, it prayed for the rescission of the contracts and made a compulsory substandard.
counterclaim for actual, moral, and exemplary damages, and attorney’s fees.
The CA held that Northwestern only exercised ordinary prudence to prevent the
The RTC held both parties at fault. It found that Northwestern unduly halted the inevitable rejection of the IBS delivered by GL Enterprises. Likewise, the appellate
operations, even if the contracts called for a completed project to be evaluated by court disregarded petitioner’s excuse that the equipment delivered might not have
the CHED. In turn, the breach committed by GL Enterprises consisted of the delivery been the components intended to be installed, for it would be contrary to human
of substandard equipment that were not compliant with IMO and CHED standards as experience to deliver equipment from Quezon City to Laoag City with no intention to
required by the agreement. use it.

Invoking the equitable principle that "each party must bear its own loss," the trial This time, applying Article 1191 of the Civil Code, the CA declared the rescission of
court treated the contracts as impossible of performance without the fault of either
146

the contracts. It then proceeded to affirm the RTC’s order of mutual restitution.
party or as having been dissolved by mutual consent. Consequently, it ordered
Additionally, the appellate court granted ₱50,000 to Northwestern by way of This Court defined in Cannu v. Galang13 that substantial, unlike slight or casual
attorney’s fees.