Jurisprudence Moral Damages

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 178008 October 9, 2013
SAN FERNANDO REGALA TRADING, INC., Petitioner,

vs.
CARGILL PHILIPPINES, INC., Respondent.
x-----------------------x
G.R. No. 178042
CARGILL PHILIPPINES, INC., Petitioner,

vs.
SAN FERNANDO REGALA TRADING, INC., Respondent.
DECISION
ABAD, J.:
These cases pertain to the reciprocal obligations of the parties in a contract of sale to deliver the goods, receive them, and pay
the price as stipulated and the consequent effects of breach of such obligations.
The facts and the Case
Cargill Philippines, Inc. (Cargill) and San Fernando Regala Trading, Inc. (San Fernando) were cane molasses traders that did
business with each other for sometime. The present controversy arose when San Fernando claimed that Cargill reneged on its
contractual obligations to deliver certain quantities of molasses. Cargill denied this, insisting that San Fernando actually refused
to accept the delivery of the goods. This enmity resulted in Cargill’s filing on March 2, 1998 a complaint for sum of money and
damages against San Fernando before the Regional Trial Court (RTC) of Makati City in Civil Case 98-493.
Cargill alleged that on July 15, 1996 it entered into Contract 50261 covering its sale to San Fernando of 4,000 metric tons (mt) of
molasses at the price of ₱3,950.00 per mt. Cargill agreed to deliver the molasses within the months of "April to May 1997" at the
wharf of Union Ajinomoto, Inc.(Ajinomoto) along the Pasig River, Metro Manila. This was a risk-taking forward sale in that its
execution was to take place about 10 months later when the parties did not yet know what the trading price of molasses would
be.
Shortly after, Cargill also entered into Contract 50472 covering another sale to San Fernando of 5,000 mt of molasses at
₱2,750.00 per mt. The delivery period under this contract was within "October-November-December 1996," sooner than the
delivery period under Contract 5026. Apparently, San Fernando had a deal with Ajinomoto for the supply of these molasses.
Cargill further alleged that it offered to deliver the 4,000 mt of molasses as required by Contract 5026 within the months of April
and May1997 but San Fernando accepted only 951 mt, refusing to accept the rest. On April 2, 1997 Dolman V, the barge
carrying Cargill’s 1,174 mt of molasses, arrived at the Ajinomoto wharf but San Fernando refused to accept the same. The barge
stayed at the wharf for 71 days, waiting for San Fernando’s unloading order. Because of the delay, the owner of the barges
lapped Cargill with demurrage amounting to ₱920,000.00. Cargill also suffered ₱3,480,000.00 in damages by way of unrealized
profits because it had to sell the cargo to another buyer at a loss.
Cargill further alleged that it earlier sought to deliver the molasses covered by Contract 5047 at the Ajinomoto wharf in the
months of October, November, and December 1996, but San Fernando failed or refused for unjustified reasons to accept the
delivery. Consequently, Cargill suffered damages by way of unrealized profits of ₱360,000.00 from this contract. Apart from
asking the RTC for awards of unrealized profits, Cargill also asked for a return of the demurrage it paid, attorney’s fees, and cost
of litigation.
To substantiate its claim, Cargill presented David Mozo of Dolman Transport Corp. who testified that Cargill chartered its Dolman
V barge to carry molasses from Pasacao to the Ajinomoto wharf in Pasig. But the barge was unable to unload its cargo and was
placed on stand-by for around 70days, awaiting orders to unload its molasses. Consequently, Dolman Transport charged Cargill
for demurrage.
Cargill also presented Arthur Gunlao, an employee, who testified that his company was unable to unload the molasses covered
by Contracts 5026and 5047 because San Fernando’s President, Quirino Kehyeng, advised them to wait because Ajinomoto’s
storage tanks were still full and could not receive the molasses. Because of the prolonged delay in the unloading of the goods,
Cargill had no choice but to sell the molasses to another buyer. At the prodding of Kehyeng, Cargill wrote San Fernando on May
14, 1997 proposing changes in the delivery periods of Contract 5026 and 5047,respectively from "April to May 1997" to "May to
June 1997" and from" October-November-December 1996" to "May-June-July 1997."3 The amendments were needed to keep
the contracts valid and maintain the good business relations between the two companies.
In its Answer with counterclaim, San Fernando pointed out that, except for the 951 mt of molasses that Cargill delivered in March
1997, the latter made no further deliveries for Contract 5026. Indeed, Cargill sent San Fernando a letter dated May 14, 1997
proposing a change in the delivery period for that contract from "April to May 1997" to "May to June 1997."But San Fernando
rejected the change since it had a contract to sell the molasses to Ajinomoto for ₱5,300.00 per mt.4 San Fernando expected to
earn a ₱5,400,000.00 profit out of Contract 5026.
As for Contract 5047, San Fernando maintained that Cargill delivered no amount of molasses in connection with the same.
Cargill admitted its inability to deliver the goods when it wrote San Fernando a letter on May 14,1997, proposing to move the
delivery period from "October-November-December 1996" to "May-June-July 1997." But San Fernando also rejected the change
since it had already contracted to sell the subject molasses to Ajinomoto for ₱4,950.00 per mt.5 San Fernando expected a profit
of ₱11,000,000.00 under this contract.
To prove its claims, San Fernando presented its President, Kehyeng, who testified that apart from the March 1997 delivery of 951
mt of molasses under Contract 5026, Cargill made no further deliveries. He called Dennis Seah of Cargill several times
demanding delivery but nothing came of it. Subsequently, Cargill wrote San Fernando, proposing the extension of the delivery
periods provided in their two contracts. But Kehyeng rejected the proposal and refused to sign his conformity at the appropriate
spaces on Cargill’s letter.
Kehyeng denied that San Fernando had refused to receive deliveries because it bought molasses from Cargill at prices higher
than what Ajinomoto was willing to pay. Kehyeng insisted that San Fernando had always received Cargill’s deliveries even on
occasions when the prices fluctuated resulting in losses to his company. He claimed that, as a result of Cargill’s violation of
Contracts 5026 and 5047, San Fernando was entitled to rescission and awards for unrealized profits of ₱4,115,329.20 and
₱11,000,000.00, respectively, moral and exemplary damages each in the amount of ₱500,000.00, attorney’s fees of
₱1,000,000.00, and litigation expenses.
On December 23, 2003 the RTC dismissed Cargill’s complaint for lack of merit and granted San Fernando’s counterclaims. The
RTC did not give credence to Cargill’s claim that San Fernando refused to accept the deliveries of molasses because
Ajinomoto’s tanks were full. San Fernando sufficiently proved that Ajinomoto continued receiving molasses from other suppliers
during the entire time that Cargill’s chartered barge was put on stand-by at the wharf, supposedly waiting for San Fernando’s
unloading orders.
It was incomprehensible, said the RTC, for San Fernando to refuse Cargill’s deliveries, considering that Ajinomoto had already
agreed to buy the molasses from it. Cargill’s failure to make the required deliveries resulted in San Fernando’s default on its
obligations to Ajinomoto, prompting the latter to cancel its orders. As a result, San Fernando lost expected profits of
₱4,115,329.20 representing the remaining undelivered molasses under Contract 5026 and ₱11,000,000.00 under Contract
5047.The RTC awarded San Fernando its claims for unrealized profits,₱500,000.00 in moral damages, another ₱500,000.00 in
exemplary damages, attorney’s fees of ₱1,000,000.00, and ₱500,000.00 as cost of litigation.
The Court of Appeals (CA) ruled on appeal, however, that Cargill was not entirely in breach of Contract 5026. Cargill made an
advance delivery of 951 mt in March 1997. It then actually sent a barge containing 1,174 mt of molasses on April 2, 1997 for
delivery at Ajinomoto’s wharf but San Fernando refused to have the cargo unloaded. Consequently, the trial court erred in
awarding San Fernando unrealized profits of ₱4,115,329.20 under Contract 5026. The CA also ruled that since San Fernando
unjustifiably refused to accept the April 2, 1997 delivery, it should reimburse Cargill the₱892,732.50 demurrage that it paid the
owner of the barge.
The CA, however, found Cargill guilty of breach of Contract 5047which called for delivery of the molasses in "October-November-
December 1996." Since San Fernando did not accede to Cargill’s request to move the delivery period back, Cargill violated the
contract when it did not deliver the goods during the previously agreed period. Cargill was liable to San Fernando for unrealized
profits of ₱11,000,000.00 that it would have made if it had sold them to Ajinomoto. The CA deleted the award of moral and
exemplary damages in favor of San Fernando for its failure to sufficiently establish Cargill’s bad faith in complying with its
obligations. The CA also deleted the awards of attorney’s fees and cost of litigation.
The CA thus ordered: 1) San Fernando to reimburse Cargill the demurrage of ₱892,732.50 that it paid, subject to 6% interest per
annum computed from the date of the filing of the complaint until the finality of the decision; and 2) Cargill to pay San Fernando
₱11,000,000.00 in unrealized profits under Contract 5047. The CA deleted the award of moral and exemplary damages,
attorney’s fees, and cost of litigation. This prompted both Cargill and San Fernando to appeal to this Court.
Issues for Resolution
These cases present the following issues:
1. Whether or not the CA erred in ruling that Cargill was not guilty of breach of obligation to deliver the 4,000 mt of
molasses covered by Contract 5026 during the period April and May 1997;
2. Whether or not the CA erred in ruling that Cargill was guilty of breach of obligation to deliver the 5,000 mt of
molasses covered by Contract5047 during the period October, November, and December 1996; and
3. Whether or not the CA erred in deleting the award of moral and exemplary damages, attorney’s fees, and cost
of suit in favor of San Fernando.
The Rulings of the Court
One. The CA held that Cargill committed no breach of Contract 5026 because it had earlier delivered 951 mt of molasses in
March 19976 and sent a barge containing 1,174 mt of the goods on April 2, 1997 at the Ajinomoto’s wharf. It was actually San
Fernando that refused to accept this delivery on April 2.
But Contract 5026 required Cargill to deliver 4,000 mt of molasses during the period "April to May 1997." Thus, anything less
than that quantity constitutes breach of the agreement. And since Cargill only delivered a total of 2,125 mt of molasses during the
agreed period, Cargill should be regarded as having violated Contract 5026 with respect to the undelivered balance of 1,875 mt
of molasses.
Notably, Chargill’s chartered barge showed up with 1,174 mt of molasses at the Ajinomoto wharf on April 27, 1997. The barge
stayed therefor around 70 days, awaiting orders to unload the cargo. David Mozo of Dolman Transport Corp. attested to this.
Dolman V was put on stand-by at the wharf while other barges queued to unload their molasses into Ajinomoto’s storage tanks.7
In failing to accept delivery of Cargill’s 1,174molasses, San Fernando should reimburse Cargill the ₱892,732.50 demurrage that it
paid.
Ultimately, what are the liabilities of the parties under Contract 5026?Had San Fernando accepted the delivery of 1,174 mt of
molasses on April27, 1997 Cargill would have been entitled to payment of their price of ₱4,637,300.00 at ₱3,950.00 per mt. But,
since Cargill succeeded in selling that 1,174 mt of molasses to Schuurmans & Van Ginneken for ₱1,861.92 per mt.8 Cargill’s
unrealized profit then amounted to only ₱2,451,405.59. Thus:
₱3,950 per mt – ₱1,861.92 per mt = ₱2,088.09 x 1,174
mt = ₱2,451,405.59
Since Cargill failed, however, to deliver the balance of 1,875 mt of molasses under Contract 5026, it must pay San Fernando the
₱2,531,250.00, representing the latter’s unrealized profits had it been able to sell that 1,875mt of molasses to Ajinomoto. Thus:
₱5,300 per mt selling price at Ajinomoto – ₱3,950acquisition cost = ₱1,350 profit per mt ₱1,350.00 profit margin per mt x 1,875
mt = ₱2,531,250.00
Cargill, of course, claimed that it had sufficient inventories of molasses to complete its deliveries, implying that had San Fernando
accepted its initial delivery of 1,174 mt it would have continued delivering the rest. But it is not enough for a seller to show that he
is capable of delivering the goods on the date he agreed to make the delivery. He has to bring his goods and deliver them at the
place their agreement called for, i.e., at the Ajinomoto Pasig River wharf.
A stipulation designating the place and manner of delivery is controlling on the contracting parties.9 The thing sold can only be
understood as delivered to the buyer when it is placed in the buyer’s control and possession at the agreed place of
delivery.10 Cargill presented no evidence that it attempted to make other deliveries to complete the balance of Contract 5026.
Two. The CA correctly ruled that Cargill was in breach of Contract 5047 which provided for delivery of the molasses within the
months of October, November, and December 1996. Thus, when Cargill wrote San Fernando on May 14, 1997 proposing to
move the delivery dates of this contract to May, June, and July, 1997, it was already in default. San Fernando’s refusal to signify
its conformity at the proper space on Cargill’s letter-proposal regarding Contract 5047 signifies that it was not amenable to the
change.
San Fernando had good reason for this: it had already agreed to supply Ajinomoto the molasses covered by Contract 5047 at the
rate of ₱4,950.00 per mt.11 Consequently, Cargill’s failure to deliver the 5,000 mt of molasses on "October-November-December
1996" makes it liable to San Fernando for ₱11,000,000.00 in unrealized profits. Thus:
₱4,950 per mt selling price to Ajinomoto – ₱2,750acquisition cost = ₱2,200 profit per mt
₱2,200 per mt x 5,000 mt = ₱11,000,000.00
In failing to make any delivery under Contract 5047, Cargill should pay San Fernando the profit that it lost because of such
breach. Cargill of course points out that San Fernando never wrote a demand letter respecting its failure to make any delivery
under that contract. But demand was not necessary since Cargill’s obligation under the contract specified the date and place of
delivery, i.e., "October-November-December 1996," at the Ajinomoto wharf in Pasig.12
Three. The Court concurs with the CA’s deletion of the RTC’s award of moral damages to San Fernando. As a rule, moral
1âw phi1
damages are not awarded to a corporation unless it enjoyed good reputation that the offender debased and besmirched by his
actuations.13 San Fernando failed to prove by sufficient evidence that it fell within this exception. Besides, moral damages are, as
a rule, also not recoverable in culpa contractual except when bad faith had been proved.14
San Fernando failed to show that Cargill was motivated by bad faith or ill will when it failed to deliver the molasses as agreed.
The Court rules that the CA correctly deleted the award of exemplary damages to San Fernando. In breach of contract, the court
may only award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner.15 The evidence has not sufficiently established that Cargill’s failure to deliver the molasses on time was attended by
such wickedness.
Lastly, the CA correctly deleted the award of attorney’s fees and cost of litigation to San Fernando. Attorney’s fees and expenses
of litigation under Article 2208 of the Civil Code are proper only when exemplary damages are awarded. Here, the Court has
ruled that San Fernando is not entitled to an award of exemplary damages. Both parties actually committed shortcomings in
complying with their contractual obligations. San Fernando failed in Contract 5026 to accept Cargill’s delivery of 1,174 mt of
molasses; Cargill only complied partially with its undertakings under Contract 5026and altogether breached its obligations under
Contract 5047. For these, they must bear their own expenses of litigation.
WHEREFORE, the Court PARTIALLY GRANTS the petitions and MODIFIES the Court of Appeals Decision on January 19, 2007
in CA-G.R.CV 81993 as follows:
1. San Fernando Regala Trading, Inc. is ORDERED to pay Cargill Philippines, Inc. (a) ₱892,732.50 representing
the demurrage that the latter incurred and (b) ₱2,451,405.59 representing its unrealized profit on the rejected
delivery of 1,174 mt of molasses, both under Contract 5026, for a total of ₱3,344,138.09, with interest at 6% per
annum computed from the date of the filing of the complaint until the same is fully paid; and
2. Cargill Philippines, Inc. is ORDERED to pay San Fernando Regala Trading, Inc. the latter’s unrealized profits
of ₱2,531,250.00 for the breach of Contract 5026 and ₱11,000,000.00 for the breach of Contract 5047, for a total
of P 13,531,250.00, with interest at 6% per annum computed from the date of the tiling of the answer with
counterclaim until the same is fully paid.
The Court of Appeals' deletion of the awards of moral and exemplary damages, attorney's fees, and costs of litigation stands.
SO ORDERED.
ROBERTO A. ABAD
Associate Justice
WE CONCUR:
PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson
DIOSDADO M. PERALTA JOSE CATRAL MENDOZA
Associate Justice Associate Justice
MARVIC MARIO VICTOR F. LEONEN

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of
the opinion of the Court's Division.

Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section I 3, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in
the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's
Division.
MARIA LOURDES P. A. SERENO

Chief Justice
Footnotes
1 Records, p. 9, Exhibit "A."
2 Id. at 12, Exhibit "B."
3 Id. at 67-68, Exhibits "4" and "5."
4 Id. at 408, Exhibit "6."
5 Id. at 413, Exhibit "8."
6 This delivery has already been paid for by San Fernando.
7 TSN, October 12, 1999, pp. 8-10.
8 TSN, January 18, 2000, pp. 11-12.
9 C IVIL C ODE , Art. 1521.
10 Id., Art. 1497.
11 Supra note 5.
12 See CIVIL CODE, Art. 1169 (1).
13 ABS-CBN Broadcasting Corp. v. Court of Appeals, 361 Phil. 499, 530 (1999).
14 Yobido v. Court of Appeals, 346 Phil. 1, 13 (1997).
15 CIVIL CODE, Art. 2232.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 206806 June 25, 2014
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied
only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed
from a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and
Plastic Products, Enterprises, to factories engaged in the paper mill business.4 From February 2007 to March 2007, he delivered
scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive
Officer and President, Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim
the value of the raw materials or deliver to him their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated April 18,
20077 in the amount of 1,487,766.68 as partial payment, with the assurance that the check would not bounce.8 When he
deposited the check on April 18, 2007, it was dishonored for being drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement10 where Arco Pulp and
Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and
Plastic Products. The memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy that
ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of ₱18.50 per kg. to Megapack Container for
Mr. Eric Sy’s account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners will be supplied by
Quality Paper & Plastic Products Ent., total of 600 Metric Tons at ₱6.50 per kg. (price subject to change per advance notice).
Quantity of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack Container Corp. based on the
above production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31, but no
payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the Regional Trial Court, Branch 171,
Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed to have its representatives attend the pre-trial
hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex parte.16
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed the complaint,
holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation took place, which
extinguished Arco Pulp and Paper’s obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take place since the
memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement between them.
He argued that if his name was mentioned in the contract, it was only for supplying the parties their required scrap papers, where
his conformity through a separate contract was indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment dated September 19,
2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of ₱7,220,968.31 with interest at 12%
per annum from the time of demand; ₱50,000.00 moral damages; ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s
fees.22
The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an alternative
obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s fees due to the bad faith exhibited by Arco Pulp
and Paper in not honoring its undertaking.24
Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief Executive Officer, Candida
A. Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation of the original
obligation since Eric Sy became the new debtor of respondent. They also argue that there is no legal basis to hold petitioner
Candida A. Santos personally liable for the transaction that petitioner corporation entered into with respondent. The Court of
Appeals, they allege, also erred in awarding moral and exemplary damages and attorney’s fees to respondent who did not show
proof that he was entitled to damages.27
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper novation in this
case. He argues that the Court of Appeals was correct in ordering the payment of 7,220,968.31 with damages since the debt of
petitioners remains unpaid.28 He also argues that the Court of Appeals was correct in holding petitioners solidarily liable since
petitioner Candida A. Santos was "the prime mover for such outstanding corporate liability."29 In their reply, petitioners reiterate
that novation took place since there was nothing in the memorandum of agreement showing that the obligation was alternative.
They also argue that when respondent allowed them to deliver the finished products to Eric Sy, the original obligation was
novated.30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC dated November 21,
2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded
The petition is denied.
The obligation between the

parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by different prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the choice of the
debtor who generally has the right of election."32 The right of election is extinguished when the party who may exercise that option
categorically and unequivocally makes his or her choice known.33
The choice of the debtor must also be communicated to the creditor who must receive notice of it since: The object of this notice
is to give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor, and only after said
notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a
competent court.34
According to the factual findings of the trial court and the appellate court, the original contract between the parties was for
respondent to deliver scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became
petitioner Arco Pulp and Paper’s obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either
(1) pay the price or(2) deliver the finished products of equivalent value to respondent.35
The appellate court, therefore, correctly identified the obligation between the parties as an alternative obligation, whereby
petitioner Arco Pulp and Paper, after receiving the raw materials from respondent, would either pay him the price of the raw
materials or, in the alternative, deliver to him the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap papers, they exercised
their option to pay the price. Respondent’s receipt of the check and his subsequent act of depositing it constituted his notice of
petitioner Arco Pulp and Paper’s option to pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on the same day. The
memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Paper’s finished products would be to a third
person, thereby extinguishing the option to deliver the finished products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement constituted a novation of the contract
between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the finished products to a third person, it did
not novate the original obligation between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when there is
subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that "the old and the new
obligations be on every point incompatible with each other."36
Novation was extensively discussed by this court in Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the Civil Code defines novation
as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from — and may even be made without the knowledge of — the debtor, since it consists
of a third person’s assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent
of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one
that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either by changing the object or
the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third
person to the rights of the creditor, an act known as subjective or personal novation. For novation to take place, the following
requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old
obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of
incompatibility is whether the two obligations can stand together, each one with its own independent existence.38 (Emphasis
supplied)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law jurisprudence, the
principle — novatio non praesumitur —that novation is never presumed.At bottom, for novation tobe a jural reality, its animus
must be ever present, debitum pro debito — basically extinguishing the old obligation for the new one.39 (Emphasis supplied)
There is nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and
Paper to respondent would be extinguished. It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and
Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a third
person instead.
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of
any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need not be
secured. This is clear from the first line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original agreement between the parties, respondent must have first
agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal
terms that it has replaced the original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances
is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent to pass on
their obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it
showed that the former neither acknowledged nor consented to the latter as his new debtor. These acts, when taken together,
clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to
respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of
₱7,220,968.31.
Petitioners are liable for

damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where the breach is due to
fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it proved that the breach was due to fraud or
bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from
whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive.42
Further, the following requisites must be proven for the recovery of moral damages:
An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be an injury, whether physical,
mental or psychological, clearly sustained by the claimant; (2) second, there must be culpable act or omission factually
established; (3) third, the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant;
and (4) fourth, the award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code.43
Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business. This has remained unpaid since 2007.
This injury undoubtedly was caused by petitioner Arco Pulp and Paper’s act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an unfunded check but also
entered into a contract with a third person in an effort to evade its liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party breaches a contract, he
or she goes against Article 19 of the Civil Code, which states: Article 19. Every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.
Persons who have the right to enter into contractual relations must exercise that right with honesty and good faith. Failure to do
so results in an abuse of that right, which may become the basis of an action for damages. Article 19, however, cannot be its sole
basis:
Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of an actionable tort.
Article 19 describes the degree of care required so that an actionable tort may arise when it is alleged together with Article 20 or
Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the
same.
Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public
policy shall compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts that are contrary to morals,
good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have been willful or negligent.
Willful may refer to the intention to do the act and the desire to achieve the outcome which is considered by the plaintiff in tort
action as injurious. Negligence may refer to a situation where the act was consciously done but without intending the result which
the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily proscribed by law. This
article requires that the act be willful, that is, that there was an intention to do the act and a desire to achieve the outcome. In
cases under Article 21, the legal issues revolve around whether such outcome should be considered a legal injury on the part of
the plaintiff or whether the commission of the act was done in violation of the standards of care required in Article 19.45
When parties act in bad faith and do not faithfully comply with their obligations under contract, they run the risk of violating Article
1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with
in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered since it only specifies,
among others, Article 21. When a party reneges on his or her obligations arising from contracts in bad faith, the act is not only
contrary to morals, good customs, and public policy; it is also a violation of Article 1159. Breaches of contract become the basis
of moral damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that the breach be done
fraudulently or in bad faith. In Adriano v. Lasala:46
To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless and malicious, in
bad faith, oppressive, or abusive. Hence, the person claiming bad faith must prove its existence by clear and convincing evidence
for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud.
It is, therefore, a question of intention, which can be inferred from one’s conduct and/or contemporaneous
statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the circumstances in
each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was presumably with the
knowledge that it was being drawn against a closed account. Worse, it attempted to shift their obligations to a third person without
the consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud."48 Moral damages
may, therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be
adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should
be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:
The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the commission of a similar
offense. The case of People v. Ranteciting People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to serve as a deterrent to serious
wrong doings, and as a vindication of undue sufferings and wanton invasion of the rights of an injured or a punishment for those
guilty of outrageous conduct. These terms are generally, but not always, used interchangeably. In common law, there is
preference in the use of exemplary damages when the award is to account for injury to feelings and for the sense of indignity and
humiliation suffered by a person as a result of an injury that has been maliciously and wantonly inflicted, the theory being that
there should be compensation for the hurt caused by the highly reprehensible conduct of the defendant—associated with such
circumstances as willfulness, wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—
that intensifies the injury. The terms punitive or vindictive damages are often used to refer to those species of damages that may
be awarded against a person to punish him for his outrageous conduct. In either case, these damages are intended in good
measure to deter the wrongdoer and others like him from similar conduct in the future.50 (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory damages, and only after the claimant's
right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon the amount of
compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent manner.51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on their obligations, considering
that these obligations were freely entered into by them. Exemplary damages may also be awarded in this case to serve as a
deterrent to those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be
recovered, except:
(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to prove that the transaction
was also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and
distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations
incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this
legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following
requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful
acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of
corporate fiction is a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court
can take cognizance of factual issues if the findings of the lower court are not supported by the evidence on record or are based
on a misapprehension of facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the
corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the
officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief Executive Officer of
Arco Pulp and Paper. She also issued the check in partial payment of petitioner corporation’s obligations to respondent on behalf
of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co.,
Inc."54 Any obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she would
be solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate purposes, such as to evade a just and due obligation, or to
justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated
as identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to honor their undertaking in
favor of the [respondent]. After the check in the amount of 1,487,766.68 issued by [petitioner] Santos was dishonored for being
drawn against a closed account, [petitioner] corporation denied any privity with [respondent]. These acts prompted the
[respondent] to avail of the remedies provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate veil. When petitioner Arco
1âwphi 1
Pulp and Paper’s obligation to respondent became due and demandable, she not only issued an unfunded check but also
contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor
petitioner corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may
be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper.
The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v. Gallery Frames,59 the rate of
interest due on the obligation must be modified from 12% per annum to 6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have laid down the following
guidelines with regard to the rate of legal interest:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Linesare accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and
shall continue to be implemented applying the rate of interest fixed therein.61 (Emphasis supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of ₱7,220,968.31 should now be at 6% per annum, computed
from May 5, 2007, when respondent sent his letter of demand to petitioners. This interest shall continue to be due from the finality
of this decision until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent Dan T. Lim the
amount of ₱7,220,968.31 with interest of 6% per annum at the time of demand until finality of judgment and its full satisfaction,
with moral damages in the amount of ₱50,000.00, exemplary damages in the amount of ₱50,000.00, and attorney's fees in the
amount of ₱50,000.00.
SO ORDERED.

Associate Justice
WE CONCUR:
DIOSDADO M. PERALTA*
Associate Justice
Acting Chairperson
MARTIN S. VILLARAMA, JR.** JOSE CATRAL MENDOZA

BIENVENIDO L. REYES***
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of
the opinion of the Court's Division.
DIOSDADO M. PERALTA
Associate Justice
Acting Chairperson, Third Division
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairperson’s Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of
the Court's Division.

Chief Justice
Footnotes
* Associate Justice Diosdado M. Peralta was designated as Acting Chairperson of the Third Division per Special
Order No. 1707 dated June 17, 2014, vice Associate Justice Presbitero J. Velasco, Jr., in view of the latter's
official trip to Nairobi, Kenya on June 22 to 25, 2014 and to South Africa on June 26 to 29, 2014.
** Associate Justice Martin S. Villarama, Jr. was designated as Acting Member per Special Order No. 1691 dated
May 22, 2014, in view of the vacancy in the Third Division.
*** Associate Justice Bienvenido L. Reyes was designated as Acting Member of the Third Division per Special
Order No. 1704 dated June 17, 2014, vice Associate Justice Presbitero J. Velasco, Jr., in view of the latter's
official trip to Nairobi, Kenya on June 22 to 25, 2014 and to South Africa on June 26 to 29, 2014.
1
Rollo, pp. 8–20.
2
Id. at 101–110.
3
Id. at 22–29.
4
Id. at 23, complaint.
5
Id.
6
Id. at 101–102, CA decision.
7
Id. at 38.
8
Id. at 23.
9
Id. at 38.
10
Id. at 39.
11
Id.
12
Id. at 40.
13
Id. at 24.
14
Id. at 22–29.
15
Id. at 41–45.
16
Id. at 52, RTC decision.
17
Id. at 51–54.
18
Id. at 71–95.
19
Id. at 85.
20
Per Seventeenth Division, penned by J. Villon, and concurred in by J. Macalino and J. Inting.
21
Rollo, pp. 101–110.
22
Id. at 110, CA decision.
23
24
25
Id. at 111–116.
26
Id. at 121–122.
27
Id. at 8–20.
28
Id. at 126–131.
29
Id. at 129, comment.
30
Id. at 133–136.
31
Entitled In Re: In Dispensing with Rejoinder, which states that:
"[U]pon the filing of a Reply (when required), no REJOINDER shall be required by the Court.
Instead, the Court shall resolve either to (a) give due course to the petition and either consider the case
submitted for decision based on the pleadings or require the parties to submit their respective
memoranda; or (b) deny or dismiss the petition, as the case may be."
Dissenting opinion of Justice Ynares-Santiago in Chavez v. PEA, 451 Phil. 1, 102–103 (2003) [Per J. Carpio, En
32
Banc], citing A. M. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE
PHILIPPINESIV, 203 (1991).
33
Borbon II v. Service wide Specialists, 328 Phil. 150, 157–158 (1996) [Per J. Vitug, First Division].
Ong Guan Can v. Century Insurance Co., Ltd., 46 Phil. 592, 594 (1924) [PerJ. Villamor, En Banc]. See also
34
CIVIL CODE, art. 1201.
35
See rollo, p. 53, RTC decision, and rollo, p. 108, CA decision.
36
CIVIL CODE, art. 1292.
37
462 Phil. 779 (2003) [Per. J. Panganiban, First Division].
Id. at 788–790, citing Idolor v. CA,404 Phil. 220, 228 (2001) [Per J. Gonzaga-Reyes, Third Division]; Agro
38
Conglomerates, Inc. v. CA, 401 Phil. 644, 655 (2000) [Per J. Quisumbing, Second Division]; De Cortes v.
Venturanza, 170 Phil. 55, 68 (1977) [Per J. Makasiar, First Division]; PNB v. Mallari and The First Nat'l. Surety &
Assurance Co., Inc., 104 Phil. 437, 441 (1958) [Per J. Felix, En Banc]; A. M.TOLENTINO, CIVIL CODE OF THE
PHILIPPINES, IV, 390 (1991); Garcia v. Khu Yek Chiong, 65 Phil. 466, 468 (1938) [Per C.J. Avanceña, En Banc];
Babst v. CA,403 Phil. 244 (2001) [Per J. Ynares-Santiago, First Division]; Spouses Bautista v. Pilar Development
Corporation, 371 Phil. 533 (1999) [Per J. Puno, First Division]; Security Bank and Trust Company, Inc. v.
Cuenca,396 Phil. 108, 122 (2000) [Per J. Panganiban, Third Division]; Reyes v. CA,332 Phil. 40, 50 (1996) [Per J.
Torres, Jr., Second Division]; Molino v. Security Diners International Corporation,415 Phil. 587 (2001) [Per J.
Gonzaga-Reyes, Third Division].
39
Reyes v. Court of Appeals, 332 Phil. 40, 56 (1996) [Per J. Torres, Jr., Second Division].
40
Land Bank of the Philippines v. Ong, G.R. No. 190755, November 24, 2010, 636 SCRA 266, 277 [Per J.
Velasco, Jr., First Division], citing Philippine Savings Bank v. Spouses Mañalac, 496 Phil. 671, 687– 688 (2005)
[Per J. Ynares-Santiago, First Division].
41
Rollo, p. 39.
42
Philippine Savings Bank v. Spouses Castillo, G.R. No. 193178, May 30, 2011, 649 SCRA 527, 538 [Per J.
Nachura, Second Division], citing Philippine National Bank v. Rocamora, 616 Phil. 369, 385 (2009) [Per J. Brion,
Second Division]; Pilipinas Shell Petroleum Corporation v. John Bordman Ltd. of Iloilo, Inc., 509 Phil. 728, 751
(2005) [Per J. Panganiban, Third Division].
43
Francisco v. Ferrer, Jr., 405 Phil. 741, 749–750 (2001) [Per J. Pardo, First Division].
Concurring opinion of J. Leonen, Alano v. Logmao, G.R. No. 175540, April 7, 2014
44
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/175540_leonen.pdf> [Per J.
Peralta, Third Division].
45
Id.
G.R. No. 197842, October 9, 2013

46
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2013/october2013/197842.pdf> [Per J.
Mendoza, Third Division].
47
Id., citing Erlinda Francisco v. Ferrer, Jr.,405 Phil. 741, 745 (2001) [Per J. Pardo, First Division]; Magat v. Court
of Appeals, 392 Phil. 63, 76 (2000) [Per J. Pardo, First Division]; Far East Bank & Trust Company v. Court of
Appeals, 311 Phil. 783, 787 (1995) [Per J. Vitug, En Banc]; Ace Haulers Corporation v. Court of Appeals, 393
Phil. 220, 230 (2000) [Per J. Pardo, First Division]; Tan v. Northwest Airlines, Inc., 383 Phil. 1026, 1032 (2000)
[Per J. Pardo, First Division]; Ford Philippines, Inc. v. Court of Appeals, 335 Phil. 1, 9 (1997) [Per J. Francisco,
Third Division]; and Llorente, Jr. v. Sandiganbayan, 350 Phil. 820, 843 (1998) [Per J. Panganiban, First Division].
Adriano v. Lasala, G.R. No. 197842, October 9, 2013

48
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2013/october2013/197842.pdf> [Per J.
Mendoza, Third Division].
G.R. No. 171428, November 11, 2013

49
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2013/november2013/171428.pdf> [Per J.
Leonen, Third Division].
50
Id.
51
Francisco v. Ferrer, Jr., 405 Phil. 741, 750 (2001) [Per J. Pardo, First Division], citing National Steel Corporation
v. Regional Trial Court of Lanao del Norte, Br. 2, Iligan City, 364 Phil. 240, 257–258 (1999) [Per J. Purisima, Third
Division].
52
G.R. No. 166282–83, February 13, 2013, 690 SCRA 519 [Per J. Mendoza, Third Division].
53
Id. at 525–527, citing Garcia v. Social Security Commission Legal and Collection,565 Phil. 193, 209–210 (2007)
[Per Chico-Nazario, Third Division]; Aratea v. Suico, 547 Phil. 407, 414 (2007) [Per J. Garcia, First Division];
Prudential Bank v. Alviar, 502 Phil. 595 (2005) [Per J. Tinga, Second Division]; Francisco v. Mallen, Jr., G.R. No.
173169, September 22, 2010, 631 SCRA 118, 123 [Per J. Carpio, Second Division]; Sarona v. National Labor
Relations Commission, G.R. No. 185280, January 18, 2012, 663 SCRA 394, 415 [Per J. Reyes, Second Division].
54
Rollo, p. 38.
G.R. No. 177493, March 19, 2014

55
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/march2014/177493.pdf> [Per J. Brion,

Second Division].
56
Id., citingJ. C. VITUG(Retired Supreme Court Associate Justice), COMMERCIAL LAW AND JURISPRUDENCE,
II, 9 (2006); Lim v. Court of Appeals, 380 Phil. 60, 76 (2000) [Per J. Buena, Second Division]; Philippine National
Bank v. Ritratto Group, Inc., 414 Phil. 494, 505 (2001) [Per J. Kapunan, First Division]; National Federation of
Labor Union (NAFLU) v. Ople, 227 Phil. 113 (1986) [Per J. Gutierrez, Jr., Second Division]; Commissioner of
Internal Revenue v. Norton & Harrison Company, 120 Phil. 684 (1964) [Per J. Paredes, En Banc].
57
Rollo, p. 109.
58
G.R. No. 189871, August 13, 2013, 703 SCRA 439 [Per J. Peralta, En Banc].
59
Id.
60
G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug, En Banc]. The guidelines previously stated that:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of
6%per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12%per annum from such finality
until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance
of credit.
61
Nacar v. Gallery Frames, GR. No. 189871, August 13, 2013, 703 SCRA 439, 457 458 [Per J. Peralta, En Banc].

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 172428 November 28, 2008
HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE, and DORIS C.

MAGLASANG, as Heirs of Deceased SPOUSES RAYMUNDO I. CRYSTAL and DESAMPARADOS C.
CRYSTAL, petitioners,
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
TINGA, J.:
Before us is a Petition for Review1 of the Decision2 and Resolution3 of the Court of Appeals dated 24
October 2005 and 31 March 2006, respectively, in CA G.R. CV No. 72886, which affirmed the 8 June
2001 decision of the Regional Trial Court, Branch 5, of Cebu City.4
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained a P300,000.00 loan in
behalf of the Cebu Contractors Consortium Co. (CCCC) from the Bank of the Philippine Islands-Butuan
branch (BPI-Butuan). The loan was secured by a chattel mortgage on heavy equipment and machinery of
CCCC. On the same date, the spouses executed in favor of BPI-Butuan a Continuing Suretyship5 where
they bound themselves as surety of CCCC in the aggregate principal sum of not exceeding P300,000.00.
Thereafter, or on 29 March 1979, Raymundo Crystal executed a promissory note6 for the amount
of P300,000.00, also in favor of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from BPI, Cebu City branch (BPI-
Cebu City). The renewal was evidenced by a promissory note7 dated 13 August 1979, signed by the
spouses in their personal capacities and as managing partners of CCCC. The promissory note states that
the spouses are jointly and severally liable with CCCC. It appears that before the original loan could be
granted, BPI-Cebu City required CCCC to put up a security.
However, CCCC had no real property to offer as security for the loan; hence, the spouses executed a real
estate mortgage8over their own real property on 22 September 1977. 9 On 3 October 1977, they executed
another real estate mortgage over the same lot in favor of BPI-Cebu City, to secure an additional loan
of P20,000.00 of CCCC.10
CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they became due. CCCC, as
well as the spouses, failed to pay their obligations despite demands. Thus, BPI resorted to the foreclosure
of the chattel mortgage and the real estate mortgage. The foreclosure sale on the chattel mortgage was
initially stalled with the issuance of a restraining order against BPI. 11 However, following BPI’s compliance
with the necessary requisites of extrajudicial foreclosure, the foreclosure sale on the chattel mortgage
was consummated on 28 February 1988, with the proceeds amounting to P240,000.00 applied to the loan
from BPI-Butuan which had then reached P707,393.90.12 Meanwhile, on 7 July 1981, Insular Bank of
Asia and America (IBAA), through its Vice-President for Legal and Corporate Affairs, offered to buy the lot
subject of the two (2) real
estate mortgages and to pay directly the spouses’ indebtedness in exchange for the release of the
mortgages. BPI rejected IBAA’s offer to pay.13
BPI filed a complaint for sum of money against CCCC and the spouses before the Regional Trial Court of
Butuan City (RTC Butuan), seeking to recover the deficiency of the loan of CCCC and the spouses with
BPI-Butuan. The trial court ruled in favor of BPI. Pursuant to the decision, BPI instituted extrajudicial
foreclosure of the spouses’ mortgaged property.14
On 10 April 1985, the spouses filed an action for Injunction With Damages, With A Prayer For A
Restraining Order and/ or Writ of Preliminary Injunction.15 The spouses claimed that the foreclosure of the
real estate mortgages is illegal because BPI should have exhausted CCCC’s properties first, stressing
that they are mere guarantors of the renewed loans. They also prayed that they be awarded moral and
exemplary damages, attorney’s fees, litigation expenses and cost of suit. Subsequently, the spouses filed
an amended complaint,16 additionally alleging that CCCC had opened and maintained a foreign currency
savings account (FCSA-197) with bpi, Makati branch (BPI-Makati), and that said FCSA was used as
security for a P450,000.00 loan also extended by BPI-Makati. The P450,000.00 loan was allegedly paid,
and thereafter the spouses demanded the return of the FCSA passbook. BPI rejected the demand; thus,
the spouses were unable to withdraw from the said account to pay for their other obligations to BPI.
The trial court dismissed the spouses’ complaint and ordered them to pay moral and exemplary damages
and attorney’s fees to BPI.17 It ruled that since the spouses agreed to bind themselves jointly and
severally, they are solidarily liable for the loans; hence, BPI can validly foreclose the two real estate
mortgages. Moreover, being guarantors-mortgagors, the spouses are not entitled to the benefit of
exhaustion. Anent the FCSA, the trial court found that CCCC originally had FCDU SA No. 197 with BPI,
Dewey Boulevard branch, which was transferred to BPI-Makati as FCDU SA 76/0035, at the request of
Desamparados Crystal. FCDU SA 76/0035 was thus closed, but Desamparados Crystal failed to
surrender the passbook because it was lost. The transferred FCSA in BPI-Makati was the one used as
security for CCCC’s P450,000.00 loan from BPI-Makati. CCCC was no longer allowed to withdraw from
FCDU SA No. 197 because it was already closed.
The spouses appealed the decision of the trial court to the Court of Appeals, but their appeal was
dismissed.18 The spouses moved for the reconsideration of the decision, but the Court of Appeals also
denied their motion for reconsideration.19Hence, the present petition.
Before the Court, petitioners who are the heirs of the spouses argue that the failure of the spouses to pay
the BPI-Cebu City loan of P120,000.00 was due to BPI’s illegal refusal to accept payment for the loan
unless the P300,000.00 loan from BPI-Butuan would also be paid. Consequently, in view of BPI’s unjust
refusal to accept payment of the BPI-Cebu City loan, the loan obligation of the spouses was extinguished,
petitioners contend.
The contention has no merit. Petitioners rely on IBAA’s offer to purchase the mortgaged lot from them
and to directly pay BPI out of the proceeds thereof to settle the loan.20 BPI’s refusal to agree to such
payment scheme cannot extinguish the spouses’ loan obligation. In the first place, IBAA is not privy to the
loan agreement or the promissory note between the spouses and BPI. Contracts, after all, take effect only
between the parties, their successors in interest, heirs
and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not bound to accept payment or
performance by a third person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary. We see no stipulation in the promissory note which states that a third person
may fulfill the spouses’ obligation. Thus, it is clear that the spouses alone bear responsibility for the same.
In any event, the promissory note is the controlling repository of the obligation of the spouses. Under the
promissory note, the spouses defined the parameters of their obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and
severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu
Philippines, the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,0000.00),
Philippine Currency, subject to periodic installments on the principal as follows: P30,000.00
quarterly amortization starting September 28, 1979. x x x 22
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. 23 A
liability is solidary "only when the obligation expressly so states, when the law so provides or when the
nature of the
obligation so requires."24 Thus, when the obligor undertakes to be "jointly and severally" liable, it means
that the obligation is solidary,25 such as in this case. By stating "I/we promise to pay, jointly and severally,
to the BANK OF THE PHILIPPINE ISLANDS," the spouses agreed to be sought out and be demanded
payment from, by BPI. BPI did demand payment from them, but they failed to comply with their obligation,
prompting BPI’s valid resort to the foreclosure of the chattel mortgage and the real estate mortgages.
More importantly, the promissory note, wherein the spouses undertook to be solidarily liable for the
principal loan, partakes the nature of a suretyship and therefore is an additional security for the loan.
Thus we held in one case that if solidary liability was instituted to "guarantee" a principal obligation, the
law deems the contract to be one of suretyship.26 And while a contract of a surety is in essence
secondary only to a valid principal obligation, the surety’s liability to the creditor or promisee of the
principal is said to be direct, primary, and absolute; in other words, the surety is directly and equally
bound with the principal. The surety therefore becomes liable for the debt or duty of another even if he
possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom. 27
Petitioners contend that the Court of Appeals erred in not granting their counterclaims, considering that
they suffered moral damages in view of the unjust refusal of BPI to accept the payment scheme proposed
by IBAA and the allegedly unjust and illegal foreclosure of the real estate mortgages on their
property.28 Conversely, they argue that the Court of Appeals erred in awarding moral damages to BPI,
which is a corporation, as well as exemplary damages, attorney’s fees and expenses of litigation.29
We do not agree. Moral damages are meant to compensate the claimant for any physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injuries unjustly caused.30 Such damages, to be recoverable, must be the
proximate result of a wrongful act or omission the factual basis for which is satisfactorily established by
the aggrieved party.31 There being no wrongful or unjust act on the part of BPI in demanding payment
from them and in seeking the foreclosure of the chattel and real estate mortgages, there is no lawful basis
for award of damages in favor of the spouses.
Neither is BPI entitled to moral damages. A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock.32 The Court of Appeals found BPI as "being
famous and having gained its familiarity and respect not only in the Philippines but also in the whole world
because of its good will and good reputation must protect and defend the same against any unwarranted
suit such as the case at bench."33 In holding that BPI is entitled to moral damages, the Court of Appeals
relied on the case of People v. Manero,34 wherein the Court ruled that "[i]t is only when a juridical person
has a good reputation that is debased, resulting in social humiliation, that moral damages may be
awarded."35
We do not agree with the Court of Appeals. A statement similar to that made by the Court in Manero can
be found in the case of Mambulao Lumber Co. v. PNB, et al.,36 thus:
x x x Obviously, an artificial person like herein appellant corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages. A corporation may have good reputation
which, if besmirched may also be a ground for the award of moral damages. x x x
(Emphasis supplied)
Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et al.,37 and Filipinas
Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol Christian College of Medicine
(AMEC-BCCM),38 the Court held that the statements in Manero and Mambulao were mere obiter dicta,
implying that the award of moral damages to corporations is not a hard and fast rule. Indeed, while the
Court may allow the grant of moral damages to corporations, it is not automatically granted; there must
still be proof of the existence of the factual basis of the damage and its causal relation to the defendant’s
acts. This is so because moral damages, though incapable of pecuniary estimation, are in the category of
an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on
the wrongdoer.39
The spouses’ complaint against BPI proved to be unfounded, but it does not automatically entitle BPI to
moral damages. Although the institution of a clearly unfounded civil suit can at times be a legal
justification for an award of attorney's fees, such filing, however, has almost invariably been held not to be
a ground for an award of moral damages. The rationale for the rule is that the law could not have meant
to impose a penalty on the right to litigate. Otherwise, moral damages must every time be awarded in
favor of the prevailing defendant against an unsuccessful plaintiff. 40 BPI may have been inconvenienced
by the suit, but we do not see how it could have possibly suffered besmirched reputation on account of
the single suit alone. Hence, the award of moral damages should be deleted.
The awards of exemplary damages and attorney’s fees, however, are proper. Exemplary damages, on
the other hand, are imposed by way of example or correction for the public good, when the party to a
contract acts in a wanton, fraudulent, oppressive or malevolent manner, while attorney’s fees are allowed
when exemplary damages are awarded and when the party to a suit is compelled to incur expenses to
protect his interest.41 The spouses instituted their complaint against BPI notwithstanding the fact that they
were the ones who failed to pay their obligations. Consequently, BPI was forced to litigate and defend its
interest. For these reasons, BPI is entitled to the awards of exemplary damages and attorney’s fees.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals dated 24
October 2005 and 31 March 2006, respectively, are hereby AFFIRMED, with the MODIFICATION that the
award of moral damages to Bank of the Philippine Islands is DELETED.
Costs against the petitioners.
SO ORDERED.
DANTE O. TINGA
Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CONCHITA CARPIO MORALES PRESBITERO J. VELASCO, JR.
ARTURO D. BRION
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson, Second Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is
hereby certified that the conclusions in the above Decision were reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.
REYNATO S. PUNO
Chief Justice
Footnotes
1 Rollo, pp. 4-21.
2Id. at 23-31. Penned by Associate Justice Vicente L. Yap. with Associate Justices Arsenio J.
Magpale and Apolinario D. Bruselas, Jr. concurring.
3 Id. at 48-49.
4 CA rollo, pp. 41-48. Penned by Judge Ireneo Lee Gako, Jr.
5 Records, pp. 26-29.
6 Defendant’s Folder of Exhibits, Exhibit 50.
7 Records, p. 25.
8 Records, p. 10.
9 A parcel of land identified as Lot 6098-B-2 covered by TCT NO. T-16118.
10 Records, p. 11.
11 In Civil Case No. 31972, the CFI of Rizal Branch CLIII issued a restraining order.
12 Supra note 2.
13 Plaintiff’s Folder of Exhibits. The offer was contained in a letter dated 7 July 1981. It reads:
Gentlemen:
We are buying that parcel of land covered by Transfer Certificate of Title No. T-16118 at
present securing a loan of Cebu Contractors Consortium with you.
Please lend us the Certificate of Title so that the same can be transferred to us. Your lien
will, of course, continue to be annotated upon said title even when it has already been
transferred to us.
As soon as we procure the Certificate of Title in our name, we will pay directly to you the
amount needed to wipe off the indebtedness of Cebu Contractors Consortium, in
exchange for your release of the mortgage.
14 Exhibits 27, 28 and 29, Defendant’s Folder of Exhibits.
15 Records, pp. 1-9.
16 Id. at 43-53.
17 RTC records, pp. 353-362.
18 Rollo, pp. 23-31.
19 Id. at 48-49.
20 Exhibit "P," Plaintiff’s Folder of Exhibits.
21 Civil Code, Art. 1311.
22 RTC records, p. 25.
23 PH Credit Corp. v. Court of Appeals, 421 Phil. 821, 832 (2001).
24 Inciong, Jr. v. CA, 327 Phil. 364, 373 (1996).
25International Finance Corporation v. Imperial Textile Mills, Inc., 15 November 2005, 475 SCRA
149.
26 Id. at 159.
27 Garcia, Jr. v. Court of Appeals, G.R. No. 80201, 20 November 1990, 191 SCRA 493, 496.
28 Rollo, p. 16.
29 Id.
30 Samson, Jr. v. Bank of the Philippine Islands, 453 Phi. 577, 583 (2003).
31 Expertravel and Tours, Inc. v. Court of Appeals, 368 Phil. 444, 448 (1999).
32 People v. Manero, Jr., G.R. Nos. 86883-85, 29 January 1993, 218 SCRA 85, 96-97.
33 Rollo, p. 30.
34 G.R. Nos. 86883-8529, 29 January 1993, 218 SCRA 85.
35 Id. at 97.
36 130 Phil. 366 (1968).
37 ABS-CBN Broadcasting Corp. v. Court of Appeals, 361 Phil. 499 (1999).

38 G.R. No. 141994, 17 January 2005, 448 SCRA 413.
39 Development Bank of The Philippines v. Court of Appeals, 451 Phil. 563, 587 (2003).
40 Expertravel and Tours, Inc. v. Court of Appeals, 368 Phil. 444, 449-450 (1999).
41 Spouses Paguyo v. Astorga, G.R. No. 130982, 16 September 2005, 470 SCRA 33, 35.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 175822 October 23, 2013
CALIFORNIA CLOTHING INC. and MICHELLE S. YBAÑEZ, Petitioners,

vs.
SHIRLEY G. QUIÑONES, Respondent.
DECISION
PERALTA, J.:
Assailed in this petition for review on certiorari under Rule 45 of the ; Rules of Court are the Court of
Appeals Decision1 dated August 3, 2006 and Resolution2 dated November 14, 2006 in CA-G.R. CV
No. 80309. The assailed decision reversed and set aside the June 20, 2003 Decision3 of the
Regional Trial Court of Cebu City (RTC), Branch 58, in Civil Case No. CEB-26984; while the
assailed resolution denied the motion for reconsideration filed by petitioner Michelle Ybañez
(Ybañez).
The facts of the case, as culled from the records, are as follows:
On July 25, 2001, respondent Shirley G. Quiñones, a Reservation Ticketing Agent of Cebu Pacific
Air in Lapu Lapu City, went inside the Guess USA Boutique at the second floor of Robinson’s
Department Store (Robinson’s) in Cebu City. She fitted four items: two jeans, a blouse and a shorts,
then decided to purchase the black jeans worth ₱2,098.00.4 Respondent allegedly paid to the
cashier evidenced by a receipt5 issued by the store.6
While she was walking through the skywalk connecting Robinson’s and Mercury Drug Store
(Mercury) where she was heading next, a Guess employee approached and informed her that she
failed to pay the item she got. She, however, insisted that she paid and showed the employee the
receipt issued in her favor.7 She then suggested that they talk about it at the Cebu Pacific Office
located at the basement of the mall. She first went to Mercury then met the Guess employees as
agreed upon.8
When she arrived at the Cebu Pacific Office, the Guess employees allegedly subjected her to
humiliation in front of the clients of Cebu Pacific and repeatedly demanded payment for the black
jeans.9 They supposedly even searched her wallet to check how much money she had, followed by
another argument. Respondent, thereafter, went home.10
On the same day, the Guess employees allegedly gave a letter to the Director of Cebu Pacific Air
narrating the incident, but the latter refused to receive it as it did not concern the office and the same
took place while respondent was off duty.11 Another letter was allegedly prepared and was supposed
to be sent to the Cebu Pacific Office in Robinson’s, but the latter again refused to receive
it.12 Respondent also claimed that the Human Resource Department (HRD) of Robinson’s was
furnished said letter and the latter in fact conducted an investigation for purposes of canceling
respondent’s Robinson’s credit card. Respondent further claimed that she was not given a copy of
said damaging letter.13 With the above experience, respondent claimed to have suffered physical
anxiety, sleepless nights, mental anguish, fright, serious apprehension, besmirched reputation,
moral shock and social humiliation.14 She thus filed the Complaint for Damages15 before the RTC
against petitioners California Clothing, Inc. (California Clothing), Excelsis Villagonzalo (Villagonzalo),
Imelda Hawayon (Hawayon) and Ybañez. She demanded the payment of moral, nominal, and
exemplary damages, plus attorney’s fees and litigation expenses.16
In their Answer,17 petitioners and the other defendants admitted the issuance of the receipt of
payment. They claimed, however, that instead of the cashier (Hawayon) issuing the official receipt, it
was the invoicer (Villagonzalo) who did it manually. They explained that there was
miscommunication between the employees at that time because prior to the issuance of the receipt,
Villagonzalo asked Hawayon " Ok na ?," and the latter replied " Ok na ," which the former believed to
mean that the item has already been paid.18 Realizing the mistake, Villagonzalo rushed outside to
look for respondent and when he saw the latter, he invited her to go back to the shop to make
clarifications as to whether or not payment was indeed made. Instead, however, of going back to the
shop, respondent suggested that they meet at the Cebu Pacific Office. Villagonzalo, Hawayon and
Ybañez thus went to the agreed venue where they talked to respondent.19 They pointed out that it
appeared in their conversation that respondent could not recall whom she gave the payment.20 They
emphasized that they were gentle and polite in talking to respondent and it was the latter who was
arrogant in answering their questions.21 As counterclaim, petitioners and the other defendants sought
the payment of moral and exemplary damages, plus attorney’s fees and litigation expenses.22
On June 20, 2003, the RTC rendered a Decision dismissing both the complaint and counterclaim of
the parties. From the evidence presented, the trial court concluded that the petitioners and the other
defendants believed in good faith that respondent failed to make payment. Considering that no
motive to fabricate a lie could be attributed to the Guess employees, the court held that when they
demanded payment from respondent, they merely exercised a right under the honest belief that no
payment was made. The RTC likewise did not find it damaging for respondent when the
confrontation took place in front of Cebu Pacific clients, because it was respondent herself who put
herself in that situation by choosing the venue for discussion. As to the letter sent to Cebu Pacific
Air, the trial court also did not take it against the Guess employees, because they merely asked for
assistance and not to embarrass or humiliate respondent. In other words, the RTC found no
evidence to prove bad faith on the part of the Guess employees to warrant the award of damages.23
On appeal, the CA reversed and set aside the RTC decision, the dispositive portion of which reads:
WHEREFORE, the instant appeal is GRANTED. The decision of the Regional Trial Court of Cebu
City, Branch 58, in Civil Case No. CEB-26984 (for: Damages) is hereby REVERSED and SET
ASIDE. Defendants Michelle Ybañez and California Clothing, Inc. are hereby ordered to pay plaintiff-
appellant Shirley G. Quiñones jointly and solidarily moral damages in the amount of Fifty Thousand
Pesos (₱50,000.00) and attorney’s fees in the amount of Twenty Thousand Pesos (₱20,000.00).
SO ORDERED.24
While agreeing with the trial court that the Guess employees were in good faith when they
confronted respondent inside the Cebu Pacific Office about the alleged non-payment, the CA,
however, found preponderance of evidence showing that they acted in bad faith in sending the
demand letter to respondent’s employer. It found respondent’s possession of both the official receipt
and the subject black jeans as evidence of payment.25 Contrary to the findings of the RTC, the CA
opined that the letter addressed to Cebu Pacific’s director was sent to respondent’s employer not
merely to ask for assistance for the collection of the disputed payment but to subject her to ridicule,
humiliation and similar injury such that she would be pressured to pay.26 Considering that Guess
already started its investigation on the incident, there was a taint of bad faith and malice when it
dragged respondent’s employer who was not privy to the transaction. This is especially true in this
case since the purported letter contained not only a narrative of the incident but accusations as to
the alleged acts of respondent in trying to evade payment.27 The appellate court thus held that
petitioners are guilty of abuse of right entitling respondent to collect moral damages and attorney’s
fees. Petitioner California Clothing Inc. was made liable for its failure to exercise extraordinary
diligence in the hiring and selection of its employees; while Ybañez’s liability stemmed from her act
of signing the demand letter sent to respondent’s employer. In view of Hawayon and Villagonzalo’s
good faith, however, they were exonerated from liability.28
Ybañez moved for the reconsideration29 of the aforesaid decision, but the same was denied in the
assailed November 14, 2006 CA Resolution.
Petitioners now come before the Court in this petition for review on certiorari under Rule 45 of the
Rules of Court based on the following grounds:
I.
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THE LETTER SENT TO THE
CEBU PACIFIC OFFICE WAS MADE TO SUBJECT HEREIN RESPONDENT TO RIDICULE,
HUMILIATION AND SIMILAR INJURY.
II.
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING MORAL DAMAGES AND

ATTORNEY’S FEES.30
The petition is without merit.
Respondent’s complaint against petitioners stemmed from the principle of abuse of rights provided
for in the Civil Code on the chapter of human relations. Respondent cried foul when petitioners
allegedly embarrassed her when they insisted that she did not pay for the black jeans she purchased
from their shop despite the evidence of payment which is the official receipt issued by the shop. The
issuance of the receipt notwithstanding, petitioners had the right to verify from respondent whether
she indeed made payment if they had reason to believe that she did not. However, the exercise of
such right is not without limitations. Any abuse in the exercise of such right and in the performance
of duty causing damage or injury to another is actionable under the Civil Code. The Court’s
pronouncement in Carpio v. Valmonte31 is noteworthy:
In the sphere of our law on human relations, the victim of a wrongful act or omission, whether done
willfully or negligently, is not left without any remedy or recourse to obtain relief for the damage or
injury he sustained. Incorporated into our civil law are not only principles of equity but also universal
moral precepts which are designed to indicate certain norms that spring from the fountain of good
conscience and which are meant to serve as guides for human conduct. First of these fundamental
precepts is the principle commonly known as "abuse of rights" under Article 19 of the Civil Code. It
provides that " Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due and observe honesty and good faith."x x x32 The elements of
abuse of rights are as follows: (1) there is a legal right or duty; (2) which is exercised in bad faith; (3)
for the sole intent of prejudicing or injuring another.33
In this case, petitioners claimed that there was a miscommunication between the cashier and the
invoicer leading to the erroneous issuance of the receipt to respondent. When they realized the
mistake, they made a cash count and discovered that the amount which is equivalent to the price of
the black jeans was missing. They, thus, concluded that it was respondent who failed to make such
payment. It was, therefore, within their right to verify from respondent whether she indeed paid or not
and collect from her if she did not. However, the question now is whether such right was exercised in
good faith or they went overboard giving respondent a cause of action against them.
Under the abuse of rights principle found in Article 19 of the Civil Code, a person must, in the
exercise of legal right or duty, act in good faith. He would be liable if he instead acted in bad faith,
with intent to prejudice another.34 Good faith refers to the state of mind which is manifested by the
acts of the individual concerned. It consists of the intention to abstain from taking an unconscionable
and unscrupulous advantage of another.35 Malice or bad faith, on the other hand, implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity.36
Initially, there was nothing wrong with petitioners asking respondent whether she paid or not. The
Guess employees were able to talk to respondent at the Cebu Pacific Office. The confrontation
started well, but it eventually turned sour when voices were raised by both parties. As aptly held by
both the RTC and the CA, such was the natural consequence of two parties with conflicting views
insisting on their respective beliefs. Considering, however, that respondent was in possession of the
item purchased from the shop, together with the official receipt of payment issued by petitioners, the
latter cannot insist that no such payment was made on the basis of a mere speculation. Their claim
should have been proven by substantial evidence in the proper forum.
It is evident from the circumstances of the case that petitioners went overboard and tried to force
respondent to pay the amount they were demanding. In the guise of asking for assistance,
petitioners even sent a demand letter to respondent’s employer not only informing it of the incident
but obviously imputing bad acts on the part of respondent. Petitioners claimed that after receiving
1âwphi1
the receipt of payment and the item purchased, respondent "was noted to hurriedly left (sic) the
store." They also accused respondent that she was not completely being honest when she was
asked about the circumstances of payment, thus:
x x x After receiving the OR and the item, Ms. Gutierrez was noted to hurriedly left (sic) the store. x x
x
When I asked her about to whom she gave the money, she gave out a blank expression and told
me, "I can’t remember." Then I asked her how much money she gave, she answered, "₱2,100; 2 pcs
1,000 and 1 pc 100 bill." Then I told her that that would (sic) impossible since we have no such
denomination in our cash fund at that moment. Finally, I asked her if how much change and if she
received change from the cashier, she then answered, "I don’t remember." After asking these simple
questions, I am very certain that she is not completely being honest about this. In fact, we invited her
to come to our boutique to clear these matters but she vehemently refused saying that she’s in a
hurry and very busy.37
Clearly, these statements are outrightly accusatory. Petitioners accused respondent that not only did
she fail to pay for the jeans she purchased but that she deliberately took the same without paying for
it and later hurriedly left the shop to evade payment. These accusations were made despite the
issuance of the receipt of payment and the release of the item purchased. There was, likewise, no
showing that respondent had the intention to evade payment. Contrary to petitioners’ claim,
respondent was not in a rush in leaving the shop or the mall. This is evidenced by the fact that the
Guess employees did not have a hard time looking for her when they realized the supposed non-
payment.
It can be inferred from the foregoing that in sending the demand letter to respondent’s employer,
petitioners intended not only to ask for assistance in collecting the disputed amount but to tarnish
respondent’s reputation in the eyes of her employer. To malign respondent without substantial
evidence and despite the latter’s possession of enough evidence in her favor, is clearly
impermissible. A person should not use his right unjustly or contrary to honesty and good faith,
otherwise, he opens himself to liability.38
The exercise of a right must be in accordance with the purpose for which it was established and
must not be excessive or unduly harsh.39 In this case, petitioners obviously abused their rights.
Complementing the principle of abuse of rights are the provisions of Articles 20 and 2 of the Civil
Code which read:40
Article 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to
morals or good customs, or public policy shall compensate the latter for the damage.
In view of the foregoing, respondent is entitled to an award of moral damages and attorney s fees.
Moral damages may be awarded whenever the defendant s wrongful act or omission is the
proximate cause of the plaintiffs physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury in the
cases specified or analogous to those provided in Article 2219 of the Civil Code.41 Moral damages
are not a bonanza. They are given to ease the defendant s grief and suffering. They should, thus,
reasonably approximate the extent of hurt caused and the gravity of the wrong done.42 They are
awarded not to enrich the complainant but to enable the latter to obtain means, diversions, or
amusements that will serve to alleviate the moral suffering he has undergone.43 We find that the
amount of ₱50,000.00 as moral damages awarded by the CA is reasonable under the
circumstances. Considering that respondent was compelled to litigate to protect her interest,
attorney s fees in the amount of of₱20,000.00 is likewise just and proper.
WHEREFORE, premises considered, the petition is DENIED for lack of merit. The Court of Appeals
Decision dated August 3, 2006 and Resolution dated November 14, 2006 in CA-G.R. CV No. 80309,
are AFFIRMED.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:

Associate Justice
Chairperson
ROBERTO A. ABAD JOSE CATRAL MENDOZA


Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court s Division.

Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the , Division Chairperson s Attestation, I
certify that the conclusions n the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court s Division.

Chief Justice
Footnotes
1Penned by Associate Justice Agustin S. Dizon, with Associate Justices Isaias P. Dicdican
and Apolinario D. Bruselas, Jr., concurring; rollo pp. 52-62.
2Penned by Associate Justice Agustin S. Dizon, with Associate Justices Isaias P. Dicdican
and Pampio A. Abarintos, concurring; rollo pp. 70-71.
3 Penned by Presiding Judge Gabriel T. Ingles; rollo pp. 40-51.
4 Rollo, pp. 52-53.
5 Records, p. 8.
6 Id. at 2.
7 Id.
8 Id.
9 Id.
10 Id. at 3.
11
Id.
12 Id.
13 Id. at 4.
14 Id. at 5.
15 Id. at 1-7.
16 Id. at 5.
17 Id. at 38-46.
18 Id. at 41-42.
19 Id. at 42.
20 Id. at 43.
21 Id.
22 Id. at 43-44.
23 Rollo, pp. 49-51.
24 Id. at 61. (Italics and emphasis in the original)
25 Id. at 56.
26 Id. at 57.
27
Id. at 58.
28 Id. at 61.
29 CA rollo, pp. 84-90.
30 Rollo, p. 14.
31 481 Phil. 352 (2004).
32 Carpio v. Valmonte, supra, at 361-362.
33Dart Philippines, Inc. v. Calogcog, G.R. No. 149241, August 24, 2009, 596 SCRA 614,
624; Carpio v. Valmonte, supra note 31, at 362.
34 Villanueva v. Rosqueta, G.R. No. 180764, January 19, 2010, 610 SCRA 334, 339.
35 Dart Philippines, Inc. v. Calogcog, supra note 33.
36Gonzales v. Philippine Commercial and International Bank, G.R. No. 180257, February 23,
2011, 644 SCRA 180, 202.
37 Rollo, p. 59. (Emphasis and italics in the original)
38 Uypitching v. Quiamco, G.R. No. 146322, December 6, 2006, 510 SCRA 172, 179.
39 Dart Philippines, Inc. v. Calogcog, supra note 33; id.
40 Carpio v. Valmonte, supra note 31, at 362.

41 Id. at 364.
42 Villanueva v. Rosqueta, supra note 34, at 341.
43 Carpio v. Valmonte, supra note 31, at 365.

Jurisprudence Moral Damages

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Republic of the Philippines

G.R. No. 178008 October 9, 2013

SAN FERNANDO REGALA TRADING, INC., Petitioner,

G.R. No. 178042

CARGILL PHILIPPINES, INC., Petitioner,

The facts and the Case

Issues for Resolution

These cases present the following issues:

The Rulings of the Court

₱3,950 per mt – ₱1,861.92 per mt = ₱2,088.09 x 1,174

₱2,200 per mt x 5,000 mt = ₱11,000,000.00

PRESBITERO J. VELASCO, JR.

MARVIC MARIO VICTOR F. LEONEN

PRESBITERO J. VELASCO, JR.

MARIA LOURDES P. A. SERENO

1 Records, p. 9, Exhibit "A."

2 Id. at 12, Exhibit "B."

3 Id. at 67-68, Exhibits "4" and "5."

4 Id. at 408, Exhibit "6."

5 Id. at 413, Exhibit "8."

6 This delivery has already been paid for by San Fernando.

7 TSN, October 12, 1999, pp. 8-10.

8 TSN, January 18, 2000, pp. 11-12.

9 C IVIL C ODE , Art. 1521.

10 Id., Art. 1497.

12 See CIVIL CODE, Art. 1169 (1).

14 Yobido v. Court of Appeals, 346 Phil. 1, 13 (1997).

15 CIVIL CODE, Art. 2232.

G.R. No. 206806 June 25, 2014

The facts are as follows:

The issues to be resolved by this court are as follows:

1. Whether the obligation between the parties was extinguished by novation

The petition is denied.

The obligation between the

The rules on novation are outlined in the Civil Code, thus:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

Novation was extensively discussed by this court in Garcia v. Llamas:37

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Petitioners are liable for

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

Article 20 and 21 of the Civil Code are as follows:

In Tankeh v. Development Bank of the Philippines,49 we stated that:

The requisites for the award of exemplary damages are as follows:

Article 2208 of the Civil Code states:

(1) When exemplary damages are awarded[.]

In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:

The rate of interest due on

MARVIC MARIO VICTOR F. LEONEN

MARTIN S. VILLARAMA, JR.** JOSE CATRAL MENDOZA

MARIA LOURDES P. A. SERENO