VILLAROEL vs ESTRADA G.R. No.

47362 December 19, 1940

FACTS:
On May 9, 1912, Alejandro Callao, mother of Juan Villaroel, obtained a loan of P1,000 from
spouses Mariano Estrada and Severina payable after seven years.
Alejandra died, leaving Juan Villaroel as sole heir, Spouses Mariano Estrada and Severina also
died, leaving Bernardino Estrada as sole heir.
On August 9, 1930, Juan Villaroel signed a document in which he declared to pay the debt of his
deceased mother in the amount of P1,000 with legal interest of 12% per annum.
The Court of First Instance of Laguna ordered Juan Villaroel to pay the amount of P1,000 with
an interest of 12% per annum since August 9, 1930 until full payment
Villaroel appealed.
ISSUE: Whether or not the right to prescription may be waived or renounced.

HELD: Yes, right to prescription may be waived or renounced. As a general rule, when a debt
has already prescribed, it cannot be imposed by the creditor. However, a new contract which
recognizes and assumes the prescribed debt is an exception, for it would be valid and
enforceable. Hence, a person who acknowledges the correctness of the debt and promises to pay
it despite knowing that the debt has already prescribed, such as the case at bar, waived the
benefit of the prescription.

G.R. No. L-13667 April 29, 1960

PRIMITIVO ANSAY, ETC., ET AL., plaintiffs-appellants,

vs.
THE BOARD OF DIRECTORS OF THE NATIONAL DEVELOPMENT COMPANY, ET AL., defendants-appellees.

Celso A. Fernandez for appellants.

Juan C. Jimenez, for appellees.

PARAS, C. J.:

On July 25, 1956, appellants filed against appellees in the Court of First Instance of Manila a complaint praying for a 20%
Christmas bonus for the years 1954 and 1955. The court a quo on appellees' motion to dismiss, issued the following order:

Considering the motion to dismiss filed on 15 August, 1956, set for this morning; considering that at the hearing
thereof, only respondents appeared thru counsel and there was no appearance for the plaintiffs although the court
waited for sometime for them; considering, however, that petitioners have submitted an opposition which the court will
consider together with the arguments presented by respondents and the Exhibits marked and presented, namely,
Exhibits 1 to 5, at the hearing of the motion to dismiss; considering that the action in brief is one to compel respondents
to declare a Christmas bonus for petitioners workers in the National Development Company; considering that the Court
does not see how petitioners may have a cause of action to secure such bonus because:

(a) A bonus is an act of liberality and the court takes it that it is not within its judicial powers to command respondents
to be liberal;
 (b) Petitioners admit that respondents are not under legal duty to give such bonus but that they had only ask that such
bonus be given to them because it is a moral obligation of respondents to give that but as this Court understands, it has
no power to compel a party to comply with a moral obligation (Art. 142, New Civil Code.).

IN VIEW WHEREOF, dismissed. No pronouncement as to costs.

A motion for reconsideration of the afore-quoted order was denied. Hence this appeal.

Appellants contend that there exists a cause of action in their complaint because their claim rests on moral grounds or what in
brief is defined by law as a natural obligation.

Since appellants admit that appellees are not under legal obligation to give such claimed bonus; that the grant arises only from a
moral obligation or the natural obligation that they discussed in their brief, this Court feels it urgent to reproduce at this point, the
definition and meaning of natural obligation.

Article 1423 of the New Civil Code classifies obligations into civil or natural. "Civil obligations are a right of action to compel
their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of
action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been
delivered or rendered by reason thereof".

It is thus readily seen that an element of natural obligation before it can be cognizable by the court is voluntary fulfillment by the
obligor. Certainly retention can be ordered but only after there has been voluntary performance. But here there has been no
voluntary performance. In fact, the court cannot order the performance.

At this point, we would like to reiterate what we said in the case of Philippine Education Co. vs. CIR and the Union of Philippine
Education Co., Employees (NUL) (92 Phil., 381; 48 Off. Gaz., 5278) —

xxx xxx xxx

From the legal point of view a bonus is not a demandable and enforceable obligation. It is so when it is made a part of
the wage or salary compensation.

And while it is true that the subsequent case of H. E. Heacock vs. National Labor Union, et al., 95 Phil., 553; 50 Off. Gaz., 4253,
we stated that:

Even if a bonus is not demandable for not forming part of the wage, salary or compensation of an employee, the same
may nevertheless, be granted on equitable consideration as when it was given in the past, though withheld in
succeeding two years from low salaried employees due to salary increases.

still the facts in said Heacock case are not the same as in the instant one, and hence the ruling applied in said case cannot be
considered in the present action.

G.R. No. L-48889 May 11, 1989

DEVELOPMENT BANK OF THE PHILIPPINES (DBP), petitioner,

vs.
THE HONORABLE MIDPAINTAO L. ADIL, Judge of the Second Branch of the Court of First Instance of Iloilo and
SPOUSES PATRICIO CONFESOR and JOVITA VILLAFUERTE, respondents.

GANCAYCO, J.:

The issue posed in this petition for review on certiorari is the validity of a promissory note which was executed in consideration
of a previous promissory note the enforcement of which had been barred by prescription.
On February 10, 1940 spouses Patricio Confesor and Jovita Villafuerte obtained an agricultural loan from the Agricultural and
Industrial Bank (AIB), now the Development of the Philippines (DBP), in the sum of P2,000.00, Philippine Currency, as
evidenced by a promissory note of said date whereby they bound themselves jointly and severally to pay the account in ten (10)
equal yearly amortizations. As the obligation remained outstanding and unpaid even after the lapse of the aforesaid ten-year
period, Confesor, who was by then a member of the Congress of the Philippines, executed a second promissory note on April 11,
1961 expressly acknowledging said loan and promising to pay the same on or before June 15, 1961. The new promissory note
reads as follows —

I hereby promise to pay the amount covered by my promissory note on or before June 15, 1961. Upon my
failure to do so, I hereby agree to the foreclosure of my mortgage. It is understood that if I can secure a
certificate of indebtedness from the government of my back pay I will be allowed to pay the amount out of it.

Said spouses not having paid the obligation on the specified date, the DBP filed a complaint dated September 11, 1970 in the City
Court of Iloilo City against the spouses for the payment of the loan.

After trial on the merits a decision was rendered by the inferior court on December 27, 1976, the dispositive part of which reads
as follows:

WHEREFORE, premises considered, this Court renders judgment, ordering the defendants Patricio Confesor
and Jovita Villafuerte Confesor to pay the plaintiff Development Bank of the Philippines, jointly and
severally, (a) the sum of P5,760.96 plus additional daily interest of P l.04 from September 17, 1970, the date
Complaint was filed, until said amount is paid; (b) the sum of P576.00 equivalent to ten (10%) of the total
claim by way of attorney's fees and incidental expenses plus interest at the legal rate as of September
17,1970, until fully paid; and (c) the costs of the suit.

Defendants-spouses appealed therefrom to the Court of First Instance of Iloilo wherein in due course a decision was rendered on
April 28, 1978 reversing the appealed decision and dismissing the complaint and counter-claim with costs against the plaintiff.

A motion for reconsideration of said decision filed by plaintiff was denied in an order of August 10, 1978. Hence this petition
wherein petitioner alleges that the decision of respondent judge is contrary to law and runs counter to decisions of this Court
when respondent judge (a) refused to recognize the law that the right to prescription may be renounced or waived; and (b) that in
signing the second promissory note respondent Patricio Confesor can bind the conjugal partnership; or otherwise said respondent
became liable in his personal capacity. The petition is impressed with merit. The right to prescription may be waived or
renounced. Article 1112 of Civil Code provides:

Art. 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the
right to prescribe in the future.

Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply
the abandonment of the right acquired.

There is no doubt that prescription has set in as to the first promissory note of February 10, 1940. However, when respondent
Confesor executed the second promissory note on April 11, 1961 whereby he promised to pay the amount covered by the
previous promissory note on or before June 15, 1961, and upon failure to do so, agreed to the foreclosure of the mortgage, said
respondent thereby effectively and expressly renounced and waived his right to the prescription of the action covering the first
promissory note.

This Court had ruled in a similar case that –

... when a debt is already barred by prescription, it cannot be enforced by the creditor. But a new contract
recognizing and assuming the prescribed debt would be valid and enforceable ... . 1

Thus, it has been held —

Where, therefore, a party acknowledges the correctness of a debt and promises to pay it after the same has
prescribed and with full knowledge of the prescription he thereby waives the benefit of prescription. 2
This is not a mere case of acknowledgment of a debt that has prescribed but a new promise to pay the debt. The consideration of
the new promissory note is the pre-existing obligation under the first promissory note. The statutory limitation bars the remedy
but does not discharge the debt.

A new express promise to pay a debt barred ... will take the case from the operation of the statute of
limitations as this proceeds upon the ground that as a statutory limitation merely bars the remedy and does
not discharge the debt, there is something more than a mere moral obligation to support a promise, to wit a –
pre-existing debt which is a sufficient consideration for the new the new promise; upon this sufficient
consideration constitutes, in fact, a new cause of action. 3

... It is this new promise, either made in express terms or deduced from an acknowledgement as a legal
implication, which is to be regarded as reanimating the old promise, or as imparting vitality to the remedy
(which by lapse of time had become extinct) and thus enabling the creditor to recover upon his original
contract. 4

However, the court a quo held that in signing the promissory note alone, respondent Confesor cannot thereby bind his wife,
respondent Jovita Villafuerte, citing Article 166 of the New Civil Code which provides:

Art. 166. Unless the wife has been declared a non compos mentis or a spend thrift, or is under civil
interdiction or is confined in a leprosarium, the husband cannot alienate or encumber any real property of the
conjugal partnership without, the wife's consent. If she ay compel her to refuses unreasonably to give her
consent, the court m grant the same.

We disagree. Under Article 165 of the Civil Code, the husband is the administrator of the conjugal partnership. As such
administrator, all debts and obligations contracted by the husband for the benefit of the conjugal partnership, are chargeable to
the conjugal partnership. No doubt, in this case, respondent Confesor signed the second promissory note for the benefit of the
5

conjugal partnership. Hence the conjugal partnership is liable for this obligation.

WHEREFORE, the decision subject of the petition is reversed and set aside and another decision is hereby rendered reinstating
the decision of the City Court of Iloilo City of December 27, 1976, without pronouncement as to costs in this instance. This
decision is immediately executory and no motion for extension of time to file motion for reconsideration shall be granted.

SO ORDERED.

G.R. No. 202578, September 27, 2017

HEIRS OF GILBERTO ROLDAN, NAMELY: ADELINA ROLDAN, ROLANDO ROLDAN, GILBERTO ROLDAN, JR., MARIO ROLDAN, DANNY
ROLDAN, LEONARDO ROLDAN, ELSA ROLDAN, ERLINDA ROLDAN-CARAOS, THELMA ROLDAN-MASINSIN, GILDA ROLDAN-DAWAL
AND RHODORA ROLDAN-ICAMINA, Petitioners, v. HEIRS OF SILVELA ROLDAN, NAMELY: ANTONIO R. DE GUZMAN, AUGUSTO R. DE
GUZMAN, ALICIA R. VALDORIA-PINEDA, AND SALLY R. VALDORIA, AND HEIRS OF LEOPOLDO MAGTULIS, NAMELY: CYNTHIA YORAC-
MAGTULIS, LEA JOYCE MAGTULIS-MALABORBOR, DHANCY MAGTULIS, FRANCES DIANE MAGTULIS, AND JULIERTO MAGTULIS-
PLACER, Respondents.

DECISION

SERENO, C.J.:

Before this Court is a Petition for Review on Certiorari1 assailing the Court of Appeals (CA) Decision2 and Resolution,3 which affirmed the Decision4 of the Regional
Trial Court (RTC). The RTC ruled that petitioner heirs of Gilberto Roldan, respondent heirs of Silvela Roldan,5 and respondent heirs of Leopoldo Magtulis are co-
owners of Lot No. 4696.

FACTS OF THE CASE

6
Natalia Magtulis owned Lot No. 4696, an agricultural land in Kalibo, Aklan, which had an area of 21,739 square meters, and was covered by Original Certificate of
Title No. P-7711.7 Her heirs included Gilberto Roldan and Silvela Roldan, her two children by her first marriage; and, allegedly, Leopolda Magtulis her child with
another man named Juan Aguirre.8 After her death in 1961, Natalia left the lot to her children. However, Gilberta and his heirs took possession of the property to the
exclusion of respondents.

On 19 May 2003, respondents filed before the RTC a Complaint for Partition and Damages against petitioners. 9 The latter refused to yield the property on these
grounds: (1) respondent heirs of Silvela had already sold her share to Gilberto; and (2) respondent heirs of Leopolda had no cause of action, given that he was not a
child of Natalia.

During trial, petitioners failed to show any document evidencing the sale of Silvela's share to Gilberto. Thus, in its Decision dated 14 December 2007, the RTC ruled
that the heirs of Silvela remained co-owners of the property they had inherited from Natalia. As regards Leopoldo Magtulis, the trial court concluded that he was a son
of Natalia based on his Certificate of Baptism10 and Marriage Contract.11

Considering that Gilberta, Silvela, and Leopolda were all descendants of Natalia, the RTC declared each set of their respective heirs entitled to one-third share of the
property. Consequently, it ordered petitioners to account and deliver to respondents their equal share to the produce of the land.

Petitioners appealed to the CA. They reiterated that Silvela had sold her share of the property to her brother Gilberta. They asserted that the RTC could not have
considered Leopolda the son of Natalia on the mere basis of his Certificate of Baptism. Emphasizing that filiation required a high standard of proof, petitioners argued
that the baptismal certificate of Leopoldo served only as evidence of the administration of the sacrament.

In its Decision dated 20 December 2011, the CA affirmed the ruling of the RTC that Gilberto, Silvela, and Leopoldo remained co-owners of Lot No. 4696. The
appellate court refused to conclude that Silvela had sold her shares to Gilberto without any document evidencing a sales transaction. It also held that Leopoldo was the
son of Natalia, since his Certificate of Baptism and Marriage Contract indicated her as his mother.

Petitioner heirs of Gilberto moved for reconsideration, 12 but to no avail. Before this Court, they reiterate that Silvela sold her shares to Gilberto, and that Leopoldo was
not the son of Natalia. They emphasize that the certificates of baptism and marriage do not prove Natalia to be the mother of Leopoldo since these documents were
executed without her participation.

Petitioners additionally contend that respondents lost their rights over the property, since the action for partition was lodged before the RTC only in 2003, or 42 years
since Gilberto occupied the property in 1961. For the heirs of Gilberto, prescription and laches already preclude the heirs of Silvela and the heirs of Leopoldo from
claiming co-ownership over Lot No. 4696.

In their Comment,13 respondents assert that the arguments raised by petitioners involve questions of fact not cognizable by this Court. As regards the issue of
prescription and laches, they insist that petitioners cannot invoke a new theory for the first time on appeal.

ISSUES OF THE CASE

The following issues are presented to this Court for resolution:

1. Whether the CA erred in affirming the RTC's finding that Silvela did not sell her share of the property to Gilberto

2. Whether the courts a quo correctly appreciated Leopoldo to be the son of Natalia based on his baptismal and marriage certificates

3. Whether prescription and laches bar respondents from claiming coownership over Lot No. 4696

RULING OF THE COURT

Sale of the Shares of Silvela to Gilberto

Petitioners argue before us that Silvela had a perfected contract of sale with Gilberto over her shares of Lot No. 4696. That argument is obviously a question of
fact,14 as it delves into the truth of whether she conveyed her rights in favor of her brother.

The assessment of the existence of the sale requires the calibration of the evidence on record and the probative weight thereof. The RTC, as affirmed by the CA,
already performed its function and found that the heirs of Gilberto had not presented any document or witness to prove the fact of sale.

The factual determination of courts, when adopted and confirmed by the CA, is final and conclusive on this Court except if unsupported by the evidence on
record.15 In this case, the exception does not apply, as petitioners merely alleged that Silvela "sold, transferred and conveyed her share in the land in question to
Gilberto Roldan for a valuable consideration" without particularizing the details or referring to any proof of the transaction.16 Therefore, we sustain the conclusion that
she remains coowner of Lot No. 4696.

Filiation of Leopoldo to Natalia

In resolving the issue of filiation, the RTC and the CA referred to Articles 172 and 175 of the Family Code, viz.:
Art. 172. The filiation of legitimate children is established by any of the following:

(1) The record of birth appearing in the civil register or a final judgment; or
(2) An admission of legitimate filiation in a public document or a private handwritten instrument and signed by the parent concerned.

In the absence of the foregoing evidence, the legitimate filiation shall be proved by:

(1) The open and continuous possession of the status of a legitimate child; or
(2) Any other means allowed by the Rules of Court and special laws.

Art. 175. Illegitimate children may establish their illegitimate filiation in the same way and on the same evidence as legitimate children.

The action must be brought within the same period specified in Article 173, except when the action is based on the second paragraph of Article 172, in which case the
action may be brought during the lifetime of the alleged parent.
The parties concede that there is no record of Leopolda's birth in either the National Statistics Office 17 or in the Office of the Municipal Registrar of Kalibo,
Aklan.18 The RTC and the CA then referred to other means to prove the status of Leopoldo: his Certificate of Baptism and his Marriage Contract. Since both
documents indicate Natalia as the mother of Leopoldo, the courts a quo concluded that respondent heirs of Leopoldo had sufficiently proven the filiation of their
ancestor to the original owner of Lot No. 4696. For this reason, the RTC and the CA maintained that the heirs of Leopoldo are entitled to an equal share of the
property, together with the heirs of Gilberto and heirs of Silvela.

We disagree.

Jurisprudence has already assessed the probative value of baptismal certificates. In Fernandez v. Court of Appeals,19 which referred to our earlier rulings in Berciles v.
Government Service Insurance System20and Macadangdang v. Court of Appeals,21 the Court explained that because the putative parent has no hand in the preparation
of a baptismal certificate, that document has scant evidentiary value. The canonical certificate is simply a proof of the act to which the priest may certify, i.e., the
administration of the sacrament. In other words, a baptismal certificate is "no proof of the declarations in the record with respect to the parentage of the child baptized,
or of prior and distinct facts which require separate and concrete evidence."22

In cases that followed Fernandez, we reiterated that a baptismal certificate is insufficient to prove filiation. 23 But in Makati Shangri-La Hotel and Resort, Inc. v.
Harper,24 this Court clarified that a baptismal certificate has evidentiary value to prove kinship "if considered alongside other evidence of filiation." 25 Therefore, to
resolve one's lineage, courts must peruse other pieces of evidence instead of relying only on a canonical record. By way of example, we have considered the
combination of testimonial evidence,26 family pictures,27 as well as family books or charts,28 alongside the baptismal certificates of the claimants, in proving kinship.

In this case, the courts below did not appreciate any other material proof related to the baptismal certificate of Leopoldo that would establish his filiation with Natalia,
whether as a legitimate or as an illegitimate son.

The only other document considered by the RTC and the CA was the Marriage Contract of Leopoldo. But, like his baptismal certificate, his Marriage Contract also
lacks probative value as the latter was prepared without the participation of Natalia. In Reyes v. Court of Appeals,29 we held that even if the marriage contract therein
stated that the alleged father of the bride was the bride's father, that document could not be taken as evidence of filiation, because it was not signed by the alleged
father of the bride.

The instant case is similar to an issue raised in Paa v. Chan.30 The claimant in that case relied upon baptismal and marriage certificates to argue filiation. The Court
said:
As regards the baptismal and marriage certificates of Leoncio Chan, the same are not competent evidence to prove that he was the illegitimate child of Bartola
Maglaya by a Chinese father. While these certificates may be considered public documents, they are evidence only to prove the administration of the sacraments on
the dates therein specified - which in this case were the baptism and marriage, respectively, of Leoncio Chan - but not the veracity of the statements or declarations
made therein with respect to his kinsfolk and/or citizenship.
All told, the Baptismal Certificate and the Marriage Contract of Leopoldo, which merely stated that Natalia is his mother, are inadequate to prove his filiation with the
property owner. Moreover, by virtue of these documents alone, the RTC and the CA could not have justly concluded that Leopoldo and his successors-in-interest were
entitled to a one-third share of the property left by Natalia, equal to that of each of her undisputed legitimate children Gilberto and Silvela. As held in Board of
Commissioners v. Dela Rosa,31 a baptismal certificate is certainly not proof of the status of legitimacy or illegitimacy of the claimant. Therefore, the CA erred in
presuming the hereditary rights of Leopoldo to be equal to those of the legitimate heirs of Natalia.

Prescription and Laches

According to petitioners, prescription and laches have clearly set in given their continued occupation of the property in the last 42 years. Prescription cannot be
appreciated against the co-owners of a property, absent any conclusive act of repudiation made clearly known to the other coowners.32

Here, petitioners merely allege that the purported co-ownership "was already repudiated by one of the parties" without supporting evidence. Aside from the mere
passage of time, there was failure on the part of petitioners to substantiate their allegation of laches by proving that respondents slept on their rights.33 Nevertheless,
had they done so, two grounds deter them from successfully claiming the existence of prescription and laches.

First, as demanded by the repudiation requisite for prescription to be appreciated, there is a need to determine the veracity of factual matters such as the date when the
period to bring the action commenced to run. In Macababbad, Jr. v. Masirag,34 we considered that determination as factual in nature. The same is true in relation to
finding the existence of laches. We held in Crisostomo v. Garcia, Jr.35 that matters like estoppel, laches, and fraud require the presentation of evidence and the
determination of facts. Since petitions for review on certiorari under Rule 45 of the Rules of Court, as in this case, entertain questions of law,36 petitioners claim of
prescription and laches fail.

Second, petitioners have alleged prescription and laches only before this Court. Raising a new ground for the first time on appeal contravenes due process, as that act
deprives the adverse party of the opportunity to contest the assertion of the claimant. 37 Since respondents were not able to refute the issue of prescription and laches,
this Court denies the newly raised contention of petitioners.

WHEREFORE, the Petition for Review on Certiorari filed by petitioner heirs of Gilberto Roldan is PARTIALLY GRANTED. The Court of Appeals Decision and
Resolution in CA-G.R. CEB-CV No. 02327 are hereby MODIFIED to read as follows:

1. Only the heirs of Gilberta Roldan and Silvela Roldan are declared co-owners of the land covered by Original Certificate of Title No. P-7711, which should be
partitioned among them in the following proportions:
a. One-half share to the heirs of Gilberta Roldan; and
b. One-half share to the heirs of Silvela Roldan.
2. Petitioners are ordered to account for and deliver to the heirs of Silvela Roldan their one-half share on the produce of the land.

SO ORDERED.

G.R. No. L-3756 June 30, 1952

SAGRADA ORDEN DE PREDICADORES DEL SANTISMO ROSARIO DE FILIPINAS, plaintiff-appellee,

vs.
NATIONAL COCONUT CORPORATION, defendant-appellant.

First Assistant Corporate Counsel Federico C. Alikpala and Assistant Attorney Augusto Kalaw for appellant.
Ramirez and Ortigas for appellee.

LABRADOR, J.:

This is an action to recover the possession of a piece of real property (land and warehouses) situated in Pandacan Manila, and the
rentals for its occupation and use. The land belongs to the plaintiff, in whose name the title was registered before the war. On
January 4, 1943, during the Japanese military occupation, the land was acquired by a Japanese corporation by the name of
Taiwan Tekkosho for the sum of P140,00, and thereupon title thereto issued in its name (transfer certificate of title No. 64330,
Register of Deeds, Manila). After liberation, more specifically on April 4, 1946, the Alien Property Custodian of the United
States of America took possession, control, and custody thereof under section 12 of the Trading with the Enemy Act, 40 Stat.,
411, for the reason that it belonged to an enemy national. During the year 1946 the property was occupied by the Copra Export
Management Company under a custodianship agreement with United States Alien Property Custodian (Exhibit G), and when it
vacated the property it was occupied by the defendant herein. The Philippine Government made representations with the Office
Alien Property Custodian for the use of property by the Government (see Exhibits 2, 2-A, 2-B, and 1). On March 31, 1947, the
defendant was authorized to repair the warehouse on the land, and actually spent thereon the repairs the sum of P26,898.27. In
1948, defendant leased one-third of the warehouse to one Dioscoro Sarile at a monthly rental of P500, which was later raised to
P1,000 a month. Sarile did not pay the rents, so action was brought against him. It is not shown, however, if the judgment was
ever executed.

Plaintiff made claim to the property before the Alien Property Custodian of the United States, but as this was denied, it brought
an action in court (Court of First Instance of Manila, civil case No. 5007, entitled "La Sagrada Orden Predicadores de la
Provinicia del Santisimo Rosario de Filipinas," vs. Philippine Alien Property Administrator, defendant, Republic of the
Philippines, intervenor) to annul the sale of property of Taiwan Tekkosho, and recover its possession. The Republic of the
Philippines was allowed to intervene in the action. The case did not come for trial because the parties presented a joint petition in
which it is claimed by plaintiff that the sale in favor of the Taiwan Tekkosho was null and void because it was executed under
threats, duress, and intimidation, and it was agreed that the title issued in the name of the Taiwan Tekkosho be cancelled and the
original title of plaintiff re-issued; that the claims, rights, title, and interest of the Alien Property Custodian be cancelled and held
for naught; that the occupant National Coconut Corporation has until February 28, 1949, to recover its equipment from the
property and vacate the premises; that plaintiff, upon entry of judgment, pay to the Philippine Alien Property Administration the
sum of P140,000; and that the Philippine Alien Property Administration be free from responsibility or liability for any act of the
National Coconut Corporation, etc. Pursuant to the agreement the court rendered judgment releasing the defendant and the
intervenor from liability, but reversing to the plaintiff the right to recover from the National Coconut Corporation reasonable
rentals for the use and occupation of the premises. (Exhibit A-1.)

The present action is to recover the reasonable rentals from August, 1946, the date when the defendant began to occupy the
premises, to the date it vacated it. The defendant does not contest its liability for the rentals at the rate of P3,000 per month from
February 28, 1949 (the date specified in the judgment in civil case No. 5007), but resists the claim therefor prior to this date. It
interposes the defense that it occupied the property in good faith, under no obligation whatsoever to pay rentals for the use and
occupation of the warehouse. Judgment was rendered for the plaintiff to recover from the defendant the sum of P3,000 a month,
as reasonable rentals, from August, 1946, to the date the defendant vacates the premises. The judgment declares that plaintiff has
always been the owner, as the sale of Japanese purchaser was void ab initio; that the Alien Property Administration never
acquired any right to the property, but that it held the same in trust until the determination as to whether or not the owner is an
enemy citizen. The trial court further declares that defendant can not claim any better rights than its predecessor, the Alien
Property Administration, and that as defendant has used the property and had subleased portion thereof, it must pay reasonable
rentals for its occupation.

Against this judgment this appeal has been interposed, the following assignment of error having been made on defendant-
appellant's behalf:

The trial court erred in holding the defendant liable for rentals or compensation for the use and occupation of the
property from the middle of August, 1946, to December 14, 1948.

1. Want to "ownership rights" of the Philippine Alien Property Administration did not render illegal or invalidate its
grant to the defendant of the free use of property.

2. the decision of the Court of First Instance of Manila declaring the sale by the plaintiff to the Japanese purchaser null
and void ab initio and that the plaintiff was and has remained as the legal owner of the property, without legal
interruption, is not conclusive.

3. Reservation to the plaintiff of the right to recover from the defendant corporation not binding on the later;

4. Use of the property for commercial purposes in itself alone does not justify payment of rentals.

5. Defendant's possession was in good faith.

6. Defendant's possession in the nature of usufruct.

In reply, plaintiff-appellee's counsel contends that the Philippine Allien Property Administration (PAPA) was a mere
administrator of the owner (who ultimately was decided to be plaintiff), and that as defendant has used it for commercial
purposes and has leased portion of it, it should be responsible therefore to the owner, who had been deprived of the possession for
so many years. (Appellee's brief, pp. 20, 23.)

We can not understand how the trial court, from the mere fact that plaintiff-appellee was the owner of the property and the
defendant-appellant the occupant, which used for its own benefit but by the express permission of the Alien Property Custodian
of the United States, so easily jumped to the conclusion that the occupant is liable for the value of such use and occupation. If
defendant-appellant is liable at all, its obligations, must arise from any of the four sources of obligations, namley, law, contract or
quasi-contract, crime, or negligence. (Article 1089, Spanish Civil Code.) Defendant-appellant is not guilty of any offense at all,
because it entered the premises and occupied it with the permission of the entity which had the legal control and administration
thereof, the Allien Property Administration. Neither was there any negligence on its part. There was also no privity (of contract
or obligation) between the Alien Property Custodian and the Taiwan Tekkosho, which had secured the possession of the property
from the plaintiff-appellee by the use of duress, such that the Alien Property Custodian or its permittee (defendant-appellant) may
be held responsible for the supposed illegality of the occupation of the property by the said Taiwan Tekkosho. The Allien
Property Administration had the control and administration of the property not as successor to the interests of the enemy holder
of the title, the Taiwan Tekkosho, but by express provision of law (Trading with the Enemy Act of the United States, 40 Stat.,
411; 50 U.S.C.A., 189). Neither is it a trustee of the former owner, the plaintiff-appellee herein, but a trustee of then Government
of the United States (32 Op. Atty. Gen. 249; 50 U.S.C.A. 283), in its own right, to the exclusion of, and against the claim or title
of, the enemy owner. (Youghioheny & Ohio Coal Co. vs. Lasevich [1920], 179 N.W., 355; 171 Wis., 347; U.S.C.A., 282-283.)
From August, 1946, when defendant-appellant took possession, to the late of judgment on February 28, 1948, Allien Property
Administration had the absolute control of the property as trustee of the Government of the United States, with power to dispose
of it by sale or otherwise, as though it were the absolute owner. (U.S vs. Chemical Foundation [C.C.A. Del. 1925], 5 F. [2d], 191;
50 U.S.C.A., 283.) Therefore, even if defendant-appellant were liable to the Allien Property Administration for rentals, these
would not accrue to the benefit of the plaintiff-appellee, the owner, but to the United States Government.

But there is another ground why the claim or rentals can not be made against defendant-appellant. There was no agreement
between the Alien Property Custodian and the defendant-appellant for the latter to pay rentals on the property. The existence of
an implied agreement to that effect is contrary to the circumstances. The copra Export Management Company, which preceded
the defendant-appellant, in the possession and use of the property, does not appear to have paid rentals therefor, as it occupied it
by what the parties denominated a "custodianship agreement," and there is no provision therein for the payment of rentals or of
any compensation for its custody and or occupation and the use. The Trading with the Enemy Act, as originally enacted, was
purely a measure of conversation, hence, it is very unlikely that rentals were demanded for the use of the property. When the
National coconut Corporation succeeded the Copra Export Management Company in the possession and use of the property, it
must have been also free from payment of rentals, especially as it was Government corporation, and steps where then being taken
by the Philippine Government to secure the property for the National Coconut Corporation. So that the circumstances do not
justify the finding that there was an implied agreement that the defendant-appellant was to pay for the use and occupation of the
premises at all.

The above considerations show that plaintiff-appellee's claim for rentals before it obtained the judgment annulling the sale of the
Taiwan Tekkosho may not be predicated on any negligence or offense of the defendant-appellant, or any contract, express or
implied, because the Allien Property Administration was neither a trustee of plaintiff-appellee, nor a privy to the obligations of
the Taiwan Tekkosho, its title being based by legal provision of the seizure of enemy property. We have also tried in vain to find
a law or provision thereof, or any principle in quasi contracts or equity, upon which the claim can be supported. On the contrary,
as defendant-appellant entered into possession without any expectation of liability for such use and occupation, it is only fair and
just that it may not be held liable therefor. And as to the rents it collected from its lessee, the same should accrue to it as a
possessor in good faith, as this Court has already expressly held. (Resolution, National Coconut Corporation vs. Geronimo, 83
Phil. 467.)

Lastly, the reservation of this action may not be considered as vesting a new right; if no right to claim for rentals existed at the
time of the reservation, no rights can arise or accrue from such reservation alone.

Wherefore, the part of the judgment appealed from, which sentences defendant-appellant to pay rentals from August, 1946, to
February 28, 1949, is hereby reversed. In all other respects the judgment is affirmed. Costs of this appeal shall be against the
plaintiff-appellee.

G.R. No. 183204 January 13, 2014

THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner,
vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.

DECISION

DEL CASTILLO, J.:

Bank deposits, which are in the nature of a simple loan or mutuum, must be paid upon demand by the depositor.
1 2

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the April 2, 2008 Decision and the May 30,
3 4

2008 Resolution of he Court of Appeals CA) in CA-G.R. CV No. 89086.

5

Factual Antecedents

Petitioner Metropolitan Bank and Trust Company is a domestic banking corporation duly organized and existing under the laws
of the Philippines. Respondent Ana Grace Rosales (Rosales) is the owner of China Golden Bridge Travel Services, a travel
6 7

agency. Respondent Yo Yuk To is the mother of respondent Rosales.

8 9

In 2000, respondents opened a Joint Peso Account with petitioner’s Pritil-Tondo Branch. As of August 4, 2004, respondents’
10 11

Joint Peso Account showed a balance of ₱2,515,693.52. 12

In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a Taiwanese National applying for a retiree’s visa from
the Philippine Leisure and Retirement Authority (PLRA), to petitioner’s branch in Escolta to open a savings account, as required
by the PLRA. Since Liu Chiu Fang could speak only in Mandarin, respondent Rosales acted as an interpreter for her.
13 14

On March 3, 2003, respondents opened with petitioner’s Pritil-Tondo Branch a Joint Dollar Account with an initial deposit of15

US$14,000.00. 16

On July 31, 2003, petitioner issued a "Hold Out" order against respondents’ accounts. 17

On September 3, 2003, petitioner, through its Special Audit Department Head Antonio Ivan Aguirre, filed before the Office of
the Prosecutor of Manila a criminal case for Estafa through False Pretences, Misrepresentation, Deceit, and Use of Falsified
Documents, docketed as I.S. No. 03I-25014, against respondent Rosales. Petitioner accused respondent Rosales and an
18 19

unidentified woman as the ones responsible for the unauthorized and fraudulent withdrawal of US$75,000.00 from Liu Chiu
Fang’s dollar account with petitioner’s Escolta Branch. Petitioner alleged that on February 5, 2003, its branch in Escolta received
20

from the PLRA a Withdrawal Clearance for the dollar account of Liu Chiu Fang; that in the afternoon of the same day,
21

respondent Rosales went to petitioner’s Escolta Branch to inform its Branch Head, Celia A. Gutierrez (Gutierrez), that Liu Chiu
Fang was going to withdraw her dollar deposits in cash; that Gutierrez told respondent Rosales to come back the following day
22

because the bank did not have enough dollars; that on February 6, 2003, respondent Rosales accompanied an unidentified
23

impostor of Liu Chiu Fang to the bank; that the impostor was able to withdraw Liu Chiu Fang’s dollar deposit in the amount of
24

US$75,000.00; that on March 3, 2003, respondents opened a dollar account with petitioner; and that the bank later discovered
25

that the serial numbers of the dollar notes deposited by respondents in the amount of US$11,800.00 were the same as those
withdrawn by the impostor. 26

Respondent Rosales, however, denied taking part in the fraudulent and unauthorized withdrawal from the dollar account of Liu
Chiu Fang. Respondent Rosales claimed that she did not go to the bank on February 5, 2003. Neither did she inform Gutierrez
27 28

that Liu Chiu Fang was going to close her account. Respondent Rosales further claimed that after Liu Chiu Fang opened an
29

account with petitioner, she lost track of her. Respondent Rosales’ version of the events that transpired thereafter is as follows:
30

On February 6, 2003, she received a call from Gutierrez informing her that Liu Chiu Fang was at the bank to close her
account. At noon of the same day, respondent Rosales went to the bank to make a transaction. While she was transacting with
31 32

the teller, she caught a glimpse of a woman seated at the desk of the Branch Operating Officer, Melinda Perez (Perez). After 33

completing her transaction, respondent Rosales approached Perez who informed her that Liu Chiu Fang had closed her account
and had already left. Perez then gave a copy of the Withdrawal Clearance issued by the PLRA to respondent Rosales. On June
34 35

16, 2003, respondent Rosales received a call from Liu Chiu Fang inquiring about the extension of her PLRA Visa and her dollar
account. It was only then that Liu Chiu Fang found out that her account had been closed without her knowledge. Respondent
36 37

Rosales then went to the bank to inform Gutierrez and Perez of the unauthorized withdrawal. On June 23, 2003, respondent
38
Rosales and Liu Chiu Fang went to the PLRA Office, where they were informed that the Withdrawal Clearance was issued on the
basis of a Special Power of Attorney (SPA) executed by Liu Chiu Fang in favor of a certain Richard So. Liu Chiu Fang,
39

however, denied executing the SPA. The following day, respondent Rosales, Liu Chiu Fang, Gutierrez, and Perez met at the
40

PLRA Office to discuss the unauthorized withdrawal. During the conference, the bank officers assured Liu Chiu Fang that the
41

money would be returned to her. 42

On December 15, 2003, the Office of the City Prosecutor of Manila issued a Resolution dismissing the criminal case for lack of
probable cause. Unfazed, petitioner moved for reconsideration.
43

On September 10, 2004, respondents filed before the Regional Trial Court (RTC) of Manila a Complaint for Breach of
44

Obligation and Contract with Damages, docketed as Civil Case No. 04110895 and raffled to Branch 21, against petitioner.
Respondents alleged that they attempted several times to withdraw their deposits but were unable to because petitioner had
placed their accounts under "Hold Out" status. No explanation, however, was given by petitioner as to why it issued the "Hold
45

Out" order. Thus, they prayed that the "Hold Out" order be lifted and that they be allowed to withdraw their deposits. They
46 47

likewise prayed for actual, moral, and exemplary damages, as well as attorney’s fees. 48

Petitioner alleged that respondents have no cause of action because it has a valid reason for issuing the "Hold Out" order. It 49

averred that due to the fraudulent scheme of respondent Rosales, it was compelled to reimburse Liu Chiu Fang the amount of
US$75,000.00 and to file a criminal complaint for Estafa against respondent Rosales.
50 51

While the case for breach of contract was being tried, the City Prosecutor of Manila issued a Resolution dated February 18, 2005,
reversing the dismissal of the criminal complaint. An Information, docketed as Criminal Case No. 05-236103, was then filed
52 53

charging respondent Rosales with Estafa before Branch 14 of the RTC of Manila. 54

Ruling of the Regional Trial Court

On January 15, 2007, the RTC rendered a Decision finding petitioner liable for damages for breach of contract. The RTC ruled
55 56

that it is the duty of petitioner to release the deposit to respondents as the act of withdrawal of a bank deposit is an act of demand
by the creditor. The RTC also said that the recourse of petitioner is against its negligent employees and not against
57

respondents. The dispositive portion of the Decision reads:

58

WHEREFORE, premises considered, judgment is hereby rendered ordering [petitioner] METROPOLITAN BANK & TRUST
COMPANY to allow [respondents] ANA GRACE ROSALES and YO YUK TO to withdraw their Savings and Time Deposits
with the agreed interest, actual damages of ₱50,000.00, moral damages of ₱50,000.00, exemplary damages of ₱30,000.00 and
10% of the amount due [respondents] as and for attorney’s fees plus the cost of suit.

The counterclaim of [petitioner] is hereby DISMISSED for lack of merit.

SO ORDERED. 59

Ruling of the Court of Appeals

Aggrieved, petitioner appealed to the CA.

On April 2, 2008, the CA affirmed the ruling of the RTC but deleted the award of actual damages because "the basis for
[respondents’] claim for such damages is the professional fee that they paid to their legal counsel for [respondent] Rosales’
defense against the criminal complaint of [petitioner] for estafa before the Office of the City Prosecutor of Manila and not this
case." Thus, the CA disposed of the case in this wise:
60

WHEREFORE, premises considered, the Decision dated January 15, 2007 of the RTC, Branch 21, Manila in Civil Case No. 04-
110895 is AFFIRMED with MODIFICATION that the award of actual damages to [respondents] Rosales and Yo Yuk To is
hereby DELETED.

SO ORDERED. 61

Petitioner sought reconsideration but the same was denied by the CA in its May 30, 2008 Resolution. 62
 Issues

Hence, this recourse by petitioner raising the following issues:

A. THE [CA] ERRED IN RULING THAT THE "HOLD-OUT" PROVISION IN THE APPLICATION AND
AGREEMENT FOR DEPOSIT ACCOUNT DOES NOT APPLY IN THIS CASE.

B. THE [CA] ERRED WHEN IT RULED THAT PETITIONER’S EMPLOYEES WERE NEGLIGENT IN
RELEASING LIU CHIU FANG’S FUNDS.

C. THE [CA] ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES, EXEMPLARY DAMAGES, AND
ATTORNEY’S FEES. 63

Petitioner’s Arguments

Petitioner contends that the CA erred in not applying the "Hold Out" clause stipulated in the Application and Agreement for
Deposit Account. It posits that the said clause applies to any and all kinds of obligation as it does not distinguish between
64

obligations arising ex contractu or ex delictu. Petitioner also contends that the fraud committed by respondent Rosales was
65

clearly established by evidence; thus, it was justified in issuing the "Hold-Out" order. Petitioner likewise denies that its
66 67

employees were negligent in releasing the dollars. It claims that it was the deception employed by respondent Rosales that
68

caused petitioner’s employees to release Liu Chiu Fang’s funds to the impostor. 69

Lastly, petitioner puts in issue the award of moral and exemplary damages and attorney’s fees. It insists that respondents failed to
prove that it acted in bad faith or in a wanton, fraudulent, oppressive or malevolent manner. 70

Respondents’ Arguments

Respondents, on the other hand, argue that there is no legal basis for petitioner to withhold their deposits because they have no
monetary obligation to petitioner. They insist that petitioner miserably failed to prove its accusations against respondent
71

Rosales. In fact, no documentary evidence was presented to show that respondent Rosales participated in the unauthorized
72

withdrawal. They also question the fact that the list of the serial numbers of the dollar notes fraudulently withdrawn on February
73

6, 2003, was not signed or acknowledged by the alleged impostor. Respondents likewise maintain that what was established
74

during the trial was the negligence of petitioner’s employees as they allowed the withdrawal of the funds without properly
verifying the identity of the depositor. Furthermore, respondents contend that their deposits are in the nature of a loan; thus,
75

petitioner had the obligation to return the deposits to them upon demand. Failing to do so makes petitioner liable to pay
76

respondents moral and exemplary damages, as well as attorney’s fees. 77

Our Ruling

The Petition is bereft of merit.

At the outset, the relevant issues in this case are (1) whether petitioner breached its contract with respondents, and (2) if so,
whether it is liable for damages. The issue of whether petitioner’s employees were negligent in allowing the withdrawal of Liu
Chiu Fang’s dollar deposits has no bearing in the resolution of this case. Thus, we find no need to discuss the same.

The "Hold Out" clause does not apply

to the instant case.

Petitioner claims that it did not breach its contract with respondents because it has a valid reason for issuing the "Hold Out" order.
Petitioner anchors its right to withhold respondents’ deposits on the Application and Agreement for Deposit Account, which
reads:

Authority to Withhold, Sell and/or Set Off:

The Bank is hereby authorized to withhold as security for any and all obligations with the Bank, all monies, properties or
securities of the Depositor now in or which may hereafter come into the possession or under the control of the Bank, whether left
with the Bank for safekeeping or otherwise, or coming into the hands of the Bank in any way, for so much thereof as will be
sufficient to pay any or all obligations incurred by Depositor under the Account or by reason of any other transactions between
the same parties now existing or hereafter contracted, to sell in any public or private sale any of such properties or securities of
Depositor, and to apply the proceeds to the payment of any Depositor’s obligations heretofore mentioned.

xxxx

JOINT ACCOUNT

xxxx

The Bank may, at any time in its discretion and with or without notice to all of the Depositors, assert a lien on any balance of the
Account and apply all or any part thereof against any indebtedness, matured or unmatured, that may then be owing to the Bank
by any or all of the Depositors. It is understood that if said indebtedness is only owing from any of the Depositors, then this
provision constitutes the consent by all of the depositors to have the Account answer for the said indebtedness to the extent of the
equal share of the debtor in the amount credited to the Account. 78

Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for Deposit Account is misplaced.

The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the sources of obligation
enumerated in Article 1157 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict. In this case,
79

petitioner failed to show that respondents have an obligation to it under any law, contract, quasi-contract, delict, or quasi-delict.
And although a criminal case was filed by petitioner against respondent Rosales, this is not enough reason for petitioner to issue a
"Hold Out" order as the case is still pending and no final judgment of conviction has been rendered against respondent Rosales.
In fact, it is significant to note that at the time petitioner issued the "Hold Out" order, the criminal complaint had not yet been
filed. Thus, considering that respondent Rosales is not liable under any of the five sources of obligation, there was no legal basis
for petitioner to issue the "Hold Out" order. Accordingly, we agree with the findings of the RTC and the CA that the "Hold Out"
clause does not apply in the instant case.

In view of the foregoing, we find that petitioner is guilty of breach of contract when it unjustifiably refused to release
respondents’ deposit despite demand. Having breached its contract with respondents, petitioner is liable for damages.

Respondents are entitled to moral and

exemplary damages and attorney’s fees. 1âwphi1

In cases of breach of contract, moral damages may be recovered only if the defendant acted fraudulently or in bad faith, or is
80

"guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations." 81

In this case, a review of the circumstances surrounding the issuance of the "Hold Out" order reveals that petitioner issued the
"Hold Out" order in bad faith. First of all, the order was issued without any legal basis. Second, petitioner did not inform
respondents of the reason for the "Hold Out." Third, the order was issued prior to the filing of the criminal complaint. Records
82

show that the "Hold Out" order was issued on July 31, 2003, while the criminal complaint was filed only on September 3,
83

2003. All these taken together lead us to conclude that petitioner acted in bad faith when it breached its contract with
84

respondents. As we see it then, respondents are entitled to moral damages.

As to the award of exemplary damages, Article 2229 of the Civil Code provides that exemplary damages may be imposed "by
85

way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages."
They are awarded only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. 86

In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless, oppressive or malevolent manner when it
refused to release the deposits of respondents without any legal basis. We need not belabor the fact that the banking industry is
impressed with public interest. As such, "the highest degree of diligence is expected, and high standards of integrity and
87

performance are even required of it." It must therefore "treat the accounts of its depositors with meticulous care and always to
88

have in mind the fiduciary nature of its relationship with them." For failing to do this, an award of exemplary damages is
89

justified to set an example.

The award of attorney's fees is likewise proper pursuant to paragraph 1, Article 2208 of the Civil Code.
90

In closing, it must be stressed that while we recognize that petitioner has the right to protect itself from fraud or suspicions of
fraud, the exercise of his right should be done within the bounds of the law and in accordance with due process, and not in bad
faith or in a wanton disregard of its contractual obligation to respondents.

WHEREFORE, the Petition is hereby DENIED. The assailed April 2, 2008 Decision and the May 30, 2008 Resolution of the
Court of Appeals in CA-G.R. CV No. 89086 are hereby AFFIRMED. SO ORDERED.

G.R. No. 179337 April 30, 2008

JOSEPH SALUDAGA, petitioner,

vs.
FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of FEU, respondents.

DECISION

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 29, 2007 Decision2 of the Court of
Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the November 10, 2004 Decision 3 of the Regional Trial Court of
Manila, Branch 2, in Civil Case No. 98-89483 and dismissing the complaint filed by petitioner; as well as its August 23, 2007
Resolution4 denying the Motion for Reconsideration.5

The antecedent facts are as follows:

Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University (FEU) when he was shot by
Alejandro Rosete (Rosete), one of the security guards on duty at the school premises on August 18, 1996. Petitioner was rushed
to FEU-Dr. Nicanor Reyes Medical Foundation (FEU-NRMF) due to the wound he sustained.6Meanwhile, Rosete was brought to
the police station where he explained that the shooting was accidental. He was eventually released considering that no formal
complaint was filed against him.

Petitioner thereafter filed a complaint for damages against respondents on the ground that they breached their obligation to
provide students with a safe and secure environment and an atmosphere conducive to learning. Respondents, in turn, filed a
Third-Party Complaint7 against Galaxy Development and Management Corporation (Galaxy), the agency contracted by
respondent FEU to provide security services within its premises and Mariano D. Imperial (Imperial), Galaxy's President, to
indemnify them for whatever would be adjudged in favor of petitioner, if any; and to pay attorney's fees and cost of the suit. On
the other hand, Galaxy and Imperial filed a Fourth-Party Complaint against AFP General Insurance.8

On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads:

WHEREFORE, from the foregoing, judgment is hereby rendered ordering:

1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally Joseph
Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum from the filing of the
complaint until fully paid; moral damages of P300,000.00, exemplary damages of P500,000.00, attorney's
fees of P100,000.00 and cost of the suit;

2. Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to indemnify jointly
and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity as President of FEU) for the
above-mentioned amounts;

3. And the 4th party complaint is dismissed for lack of cause of action. No pronouncement as to costs.

SO ORDERED.9
Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal portion of which provides, viz:

WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is hereby REVERSED and
SET ASIDE. The complaint filed by Joseph Saludaga against appellant Far Eastern University and its President in Civil
Case No. 98-89483 is DISMISSED.

SO ORDERED.10

Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on the following grounds:

THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND JURISPRUDENCE
IN RULING THAT:

5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;

5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING FROM A GUNSHOT
WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF NO LESS THAN THEIR OWN SECURITY
GUARD IN VIOLATION OF THEIR BUILT-IN CONTRACTUAL OBLIGATION TO PETITIONER, BEING
THEIR LAW STUDENT AT THAT TIME, TO PROVIDE HIM WITH A SAFE AND SECURE EDUCATIONAL
ENVIRONMENT;

5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE WAS WALKING ON
HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT THEIR EMPLOYEE BY VIRTUE OF THE
CONTRACT FOR SECURITY SERVICES BETWEEN GALAXY AND FEU NOTWITHSTANDING THE FACT
THAT PETITIONER, NOT BEING A PARTY TO IT, IS NOT BOUND BY THE SAME UNDER THE PRINCIPLE
OF RELATIVITY OF CONTRACTS; and

5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE AGENCY WHICH
WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF RESPONDENT FEU.11

Petitioner is suing respondents for damages based on the alleged breach of student-school contract for a safe learning
environment. The pertinent portions of petitioner's Complaint read:

6.0. At the time of plaintiff's confinement, the defendants or any of their representative did not bother to visit and
inquire about his condition. This abject indifference on the part of the defendants continued even after plaintiff was
discharged from the hospital when not even a word of consolation was heard from them. Plaintiff waited for more than
one (1) year for the defendants to perform their moral obligation but the wait was fruitless. This indifference and total
lack of concern of defendants served to exacerbate plaintiff's miserable condition.

xxxx

11.0. Defendants are responsible for ensuring the safety of its students while the latter are within the University
premises. And that should anything untoward happens to any of its students while they are within the University's
premises shall be the responsibility of the defendants. In this case, defendants, despite being legally and morally bound,
miserably failed to protect plaintiff from injury and thereafter, to mitigate and compensate plaintiff for said injury;

12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them. Under this contract,
defendants are supposed to ensure that adequate steps are taken to provide an atmosphere conducive to study and
ensure the safety of the plaintiff while inside defendant FEU's premises. In the instant case, the latter breached this
contract when defendant allowed harm to befall upon the plaintiff when he was shot at by, of all people, their security
guard who was tasked to maintain peace inside the campus.12

In Philippine School of Business Administration v. Court of Appeals,13 we held that:

When an academic institution accepts students for enrollment, there is established a contract between them, resulting in
bilateral obligations which both parties are bound to comply with. For its part, the school undertakes to provide the
student with an education that would presumably suffice to equip him with the necessary tools and skills to pursue
 higher education or a profession. On the other hand, the student covenants to abide by the school's academic
requirements and observe its rules and regulations.

Institutions of learning must also meet the implicit or "built-in" obligation of providing their students with an
atmosphere that promotes or assists in attaining its primary undertaking of imparting knowledge. Certainly, no student
can absorb the intricacies of physics or higher mathematics or explore the realm of the arts and other sciences when
bullets are flying or grenades exploding in the air or where there looms around the school premises a constant threat to
life and limb. Necessarily, the school must ensure that adequate steps are taken to maintain peace and order within the
campus premises and to prevent the breakdown thereof.14

It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there was created a
contractual obligation between the two parties. On petitioner's part, he was obliged to comply with the rules and regulations of
the school. On the other hand, respondent FEU, as a learning institution is mandated to impart knowledge and equip its students
with the necessary skills to pursue higher education or a profession. At the same time, it is obliged to ensure and take adequate
steps to maintain peace and order within the campus.

It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify,
prima facie, a corresponding right of relief.15 In the instant case, we find that, when petitioner was shot inside the campus by no
less the security guard who was hired to maintain peace and secure the premises, there is a prima facie showing that respondents
failed to comply with its obligation to provide a safe and secure environment to its students.

In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because they could not
have reasonably foreseen nor avoided the accident caused by Rosete as he was not their employee; 16and that they complied with
their obligation to ensure a safe learning environment for their students by having exercised due diligence in selecting the
security services of Galaxy.

After a thorough review of the records, we find that respondents failed to discharge the burden of proving that they exercised due
diligence in providing a safe learning environment for their students. They failed to prove that they ensured that the guards
assigned in the campus met the requirements stipulated in the Security Service Agreement. Indeed, certain documents about
Galaxy were presented during trial; however, no evidence as to the qualifications of Rosete as a security guard for the university
was offered.

Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards assigned to them
actually possess the qualifications required in the Security Service Agreement. It was not proven that they examined the
clearances, psychiatric test results, 201 files, and other vital documents enumerated in its contract with Galaxy. Total reliance on
the security agency about these matters or failure to check the papers stating the qualifications of the guards is negligence on the
part of respondents. A learning institution should not be allowed to completely relinquish or abdicate security matters in its
premises to the security agency it hired. To do so would result to contracting away its inherent obligation to ensure a safe
learning environment for its students.

Consequently, respondents' defense of force majeure must fail. In order for force majeure to be considered, respondents must
show that no negligence or misconduct was committed that may have occasioned the loss. An act of God cannot be invoked to
protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. One's negligence may
have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or
proximate cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to
be partly the result of a person's participation - whether by active intervention, neglect or failure to act - the whole occurrence is
humanized and removed from the rules applicable to acts of God.17

Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are liable for
damages. Accordingly, for breach of contract due to negligence in providing a safe learning environment, respondent FEU is
liable to petitioner for damages. It is essential in the award of damages that the claimant must have satisfactorily proven during
the trial the existence of the factual basis of the damages and its causal connection to defendant's acts. 18

In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other medical expenses. 19 While
the trial court correctly imposed interest on said amount, however, the case at bar involves an obligation arising from a contract
and not a loan or forbearance of money. As such, the proper rate of legal interest is six percent (6%) per annum of the amount
demanded. Such interest shall continue to run from the filing of the complaint until the finality of this Decision.20 After this
Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction.
The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring a personal assistant
while recuperating were however not duly supported by receipts.21 In the absence thereof, no actual damages may be awarded.
Nonetheless, temperate damages under Art. 2224 of the Civil Code may be recovered where it has been shown that the claimant
suffered some pecuniary loss but the amount thereof cannot be proved with certainty. Hence, the amount of P20,000.00 as
temperate damages is awarded to petitioner.

As regards the award of moral damages, there is no hard and fast rule in the determination of what would be a fair amount of
moral damages since each case must be governed by its own peculiar circumstances. 22 The testimony of petitioner about his
physical suffering, mental anguish, fright, serious anxiety, and moral shock resulting from the shooting incident 23 justify the
award of moral damages. However, moral damages 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. The award is not meant to enrich the complainant at the
expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the
moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante,
and should be proportionate to the suffering inflicted. Trial courts must then guard against the award of exorbitant damages; they
should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to passion, prejudice, or
corruption on the part of the trial court.24 We deem it just and reasonable under the circumstances to award petitioner moral
damages in the amount of P100,000.00.

Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is reasonable in view of Article
2208 of the Civil Code.25 However, the award of exemplary damages is deleted considering the absence of proof that respondents
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. In Powton Conglomerate, Inc. v.
Agcolicol,26 we held that:

[A] corporation is invested by law with a personality separate and distinct from those of the persons composing it, such
that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be
held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly attach, as a rule, only when - (1) he assents to a patently
unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when
there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents
to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the
corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action. 27

None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not be held solidarily
liable with respondent FEU.

Incidentally, although the main cause of action in the instant case is the breach of the school-student contract, petitioner, in the
alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code, which provides:

Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for
those of persons for whom one is responsible.

xxxx

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of
their assigned tasks, even though the former are not engaged in any business or industry.

xxxx

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all
the diligence of a good father of a family to prevent damage.

We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under Art. 2180 of the
Civil Code because respondents are not the employers of Rosete. The latter was employed by Galaxy. The instructions issued by
respondents' Security Consultant to Galaxy and its security guards are ordinarily no more than requests commonly envisaged in
the contract for services entered into by a principal and a security agency. They cannot be construed as the element of control as
to treat respondents as the employers of Rosete.28

As held in Mercury Drug Corporation v. Libunao:29

In Soliman, Jr. v. Tuazon,30 we held that where the security agency recruits, hires and assigns the works of its
watchmen or security guards to a client, the employer of such guards or watchmen is such agency, and not the client,
since the latter has no hand in selecting the security guards. Thus, the duty to observe the diligence of a good father of a
family cannot be demanded from the said client:

… [I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and assigns the work
of its watchmen or security guards, the agency is the employer of such guards or watchmen. Liability for
illegal or harmful acts committed by the security guards attaches to the employer agency, and not to the
clients or customers of such agency. As a general rule, a client or customer of a security agency has no hand
in selecting who among the pool of security guards or watchmen employed by the agency shall be assigned to
it; the duty to observe the diligence of a good father of a family in the selection of the guards cannot, in the
ordinary course of events, be demanded from the client whose premises or property are protected by the
security guards.

xxxx

The fact that a client company may give instructions or directions to the security guards assigned to it, does not, by
itself, render the client responsible as an employer of the security guards concerned and liable for their wrongful acts or
omissions.31

We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and Rubber Company of the Philippines v.
Tempengko,32 we held that:

The third-party complaint is, therefore, a procedural device whereby a 'third party' who is neither a party nor privy to
the act or deed complained of by the plaintiff, may be brought into the case with leave of court, by the defendant, who
acts as third-party plaintiff to enforce against such third-party defendant a right for contribution, indemnity, subrogation
or any other relief, in respect of the plaintiff's claim. The third-party complaint is actually independent of and separate
and distinct from the plaintiff's complaint. Were it not for this provision of the Rules of Court, it would have to be filed
independently and separately from the original complaint by the defendant against the third-party. But the Rules permit
defendant to bring in a third-party defendant or so to speak, to litigate his separate cause of action in respect of
plaintiff's claim against a third-party in the original and principal case with the object of avoiding circuitry of action
and unnecessary proliferation of law suits and of disposing expeditiously in one litigation the entire subject matter
arising from one particular set of facts.33

Respondents and Galaxy were able to litigate their respective claims and defenses in the course of the trial of petitioner's
complaint. Evidence duly supports the findings of the trial court that Galaxy is negligent not only in the selection of its
employees but also in their supervision. Indeed, no administrative sanction was imposed against Rosete despite the shooting
incident; moreover, he was even allowed to go on leave of absence which led eventually to his disappearance. 34 Galaxy also
failed to monitor petitioner's condition or extend the necessary assistance, other than the P5,000.00 initially given to petitioner.
Galaxy and Imperial failed to make good their pledge to reimburse petitioner's medical expenses.

For these acts of negligence and for having supplied respondent FEU with an unqualified security guard, which resulted to the
latter's breach of obligation to petitioner, it is proper to hold Galaxy liable to respondent FEU for such damages equivalent to the
above-mentioned amounts awarded to petitioner.

Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly negligent in directing the
affairs of the security agency. It was Imperial who assured petitioner that his medical expenses will be shouldered by Galaxy but
said representations were not fulfilled because they presumed that petitioner and his family were no longer interested in filing a
formal complaint against them.35

WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 87050
nullifying the Decision of the trial court and dismissing the complaint as well as the August 23, 2007 Resolution denying the
Motion for Reconsideration are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch 2,
in Civil Case No. 98-89483 finding respondent FEU liable for damages for breach of its obligation to provide students with a safe
and secure learning atmosphere, is AFFIRMED with the following MODIFICATIONS:

a. respondent Far Eastern University (FEU) is ORDERED to pay petitioner actual damages in the amount of P35,298.25, plus
6% interest per annum from the filing of the complaint until the finality of this Decision. After this decision becomes final and
executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction;

b. respondent FEU is also ORDERED to pay petitioner temperate damages in the amount of P20,000.00; moral damages in the
amount of P100,000.00; and attorney's fees and litigation expenses in the amount of P50,000.00;

c. the award of exemplary damages is DELETED.

The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims of respondents are
likewise DISMISSED.

Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial are ORDEREDto jointly
and severally pay respondent FEU damages equivalent to the above-mentioned amounts awarded to petitioner.

SO ORDERED.

PEOPLE’S CAR, INC., Plaintiff-Appellant, v. COMMANDO SECURITY SERVICE AGENCY, Defendant-Appellee.

DECISION

TEEHANKEE, J.:

In this appeal from the adverse judgment of the Davao court of first instance limiting plaintiff-appellant’s recovery under its complaint to the sum of P1,000.00 instead
of the actual damages of P8,489.10 claimed and suffered by it as a direct result of the wrongful acts of defendant security agency’s guard assigned at plaintiff’s
premises in pursuance of their "Guard Service Contract", the Court finds merit in the appeal and accordingly reverses the trial court’s judgment.

The appeal was certified to this Court by a special division of the Court of Appeals on a four-to-one vote as per its resolution of April 14, 1973 that "since the case
was submitted to the court a quo for decision on the strength of the stipulation of facts, only questions of law can he involved in the present appeal." cralaw virtua1aw library

The Court has accepted such certification and docketed this appeal on the strength of its own finding from the records that plaintiff’s notice of appeal was expressly to
this Court (not to the appellate court) "on pure questions of law" 1 and its record on appeal accordingly prayed that "the corresponding records be certified and
forwarded to the Honorable Supreme Court." 2 The trial court so approved the same 3 on July 3, 1971 instead of having required the filing of a petition for review of
the judgment sought to be appealed from directly with this Court, in accordance with the provisions of Republic Act 5440. By some unexplained and hitherto
undiscovered error of the clerk of court, furthermore, the record on appeal was erroneously forwarded to the appellate court rather than to this Court.

The parties submitted the case for judgment on a stipulation of facts. There is thus no dispute as to the factual bases of plaintiff’s complaint for recovery of actual
damages against defendant, to wit, that under the subsisting "Guard Service Contract" between the parties, defendant-appellee as a duly licensed security service
agency undertook in consideration of the payments made by plaintiff "to safeguard and protect the business premises of (plaintiff) from theft, pilferage, robbery,
vandalism and all other unlawful acts of any person or persons prejudicial to the interest of (plaintiff)." 4

On April 5, 1970 at around 1:00 A.M., however, defendant’s security guard on duty at plaintiff’s premises, "without any authority, consent, approval, knowledge or
orders of the plaintiff and/or defendant brought out of the compound of the plaintiff a car belonging to its customer, and drove said car for a place or places unknown,
abandoning his post as such security guard on duty inside the plaintiff’s compound, and while so driving said car in one of the City streets lost control of said car,
causing the same to fall into a ditch along J.P. Laurel St., Davao City by reason of which the plaintiff’s complaint for qualified theft against said driver, was blottered
in the office of the Davao City Police Department." 5

As a result of these wrongful acts of defendant’s security guard, the car of plaintiff’s customer, Joseph Luy, which had been left with plaintiff for servicing and
maintenance, "suffered extensive damage in the total amount of P7,07910" 6 besides the car rental value "chargeable to defendant" in the sum of P1,410.00 for a car
that plaintiff had to rent and make available to its said customer to enable him to pursue his business and occupation for the period of forty-seven (47) days (from
April 25 to June 10, 1970) that it took plaintiff to repair the damaged car, 7 or total actual damages incurred by plaintiff in the sum of P8,489.10.

Plaintiff claimed that defendant was liable for the entire amount under paragraph 5 of their contract whereunder defendant assumed "sole responsibility for the acts
done during their watch hours" by its guards, whereas defendant contended, without questioning the amount of the actual damages incurred by plaintiff, that its
liability "shall not exceed one thousand (P1,000.00) pesos per guard post" under paragraph 4 of their contract.

The parties thus likewise stipulated on this sole issue submitted by them for adjudication, as follows: jgc:chanrobles.com.ph

"Interpretation of the contract, ad to the extent of the liability of the defendant to the plaintiff by reason of the acts of the employees of the defendant is the only issue
to be resolved.

"The defendant relies on Par. 4 of the contract to support its contention while the plaintiff relies on Par. 5 of the same contract in support of its claims against the
defendant. For ready reference they are quoted hereunder: chanrob1es v irtual 1aw library
‘Par. 4. — Party of the Second Part (defendant) through the negligence of its guards, after an investigation has been conducted by the Party of the First Part (plaintiff)
wherein the Party of the Second Part has been duly represented, shall assume full responsibilities for any loss or damages that may occur to any property of the Party
of the First Part for which it is accountable, during the watch hours of the Party of the Second Part, provided the same is reported to the Party of the Second Part
within twenty-four (24) hours of the occurrence, except where such loss or damage is due to force majeure, provided however that after the proper investigation to be
made thereof that the guard on post is found negligent and that the amount of the loss shall not exceed ONE THOUSAND (P1,000.00) PESOS per guard post.’

‘Par. 5— The party of the Second Part assumes the responsibility for the proper performance by the guards employed, of their duties and (shall) be solely responsible
for the acts done during their watch hours, the Party of the First Part being specifically released from any and all liabilities to the former’s employee or to the third
parties arising from the acts or omissions done by the guards during their tour of duty.’" 8

The trial court, misreading the above-quoted contractual provisions, held that "the liability of the defendant in favor of the plaintiff falls under paragraph 4 of the
Guard Service Contract" and rendered judgment "funding the defendant liable to the plaintiff in the amount of P1,000.00 with costs." cralaw virtua1aw library

Hence, this appeal, which, as already indicated, is meritorious and must be granted.

Paragraph 4 of the contract, which limits-defendant’s liability for the amount of loss or damage to any property of plaintiff to "P1,000.00 per guard post," is by its own
terms applicable only for loss or damage "through the negligence of its guards . . . during the watch hours" provided that the same is duly reported by plaintiff within
24 hours of the occurrence and the guard’s negligence is verified after proper investigation with the attendance of both contracting parties. Said paragraph is
manifestly inapplicable to the stipulated facts of record, which involve neither property of plaintiff that has been lost or damaged at its premises nor mere negligence
of defendant’s security guard on duty.

Here, instead of defendant, through its assigned security guards, complying with its contractual undertaking "to safeguard and protect the business premises of
(plaintiff) from theft, robbery, vandalism and all other unlawful acts of any person or persons," defendant’s own guard on duty unlawfully and wrongfully drove out of
plaintiff’s premises a customer’s car, lost control of it on the highway causing it to fall into a ditch, thereby directly causing plaintiff to incur actual damages in the
total amount of P8,489.10.

Defendant is therefore undoubtedly liable to indemnify plaintiff for the entire damages thus incurred, since under paragraph 5 of their contract it "assumed the
responsibility for the proper performance by the guards employed of their duties and (contracted to) be solely responsible for the acts done during their watch hours"
and "specifically released (plaintiff) from any and all liabilities . . . to the third parties arising from the acts or omissions done by the guards during their tour of duty."
As plaintiff had duly discharged its liability to the third party, its customer, Joseph Luy, for the undisputed damages of P8,489.10 caused said customer, due to the
wanton and unlawful act of defendant’s guard, defendant in turn was clearly liable under the terms of paragraph 5 of their contract to indemnify plaintiff in the same
amount.

The trial court’s approach that "had plaintiff understood the liability of the defendant to fall under paragraph 5, it should have told Joseph Luy, owner of the car, that
under the Guard Service Contract, it was not liable for the damage but the defendant and had Luy insisted on the liability of the plaintiff, the latter should have
challenged him to bring the matter to court. If Luy accepted the challenge and instituted an action against the plaintiff, it should have filed a third-party complaint
against the Commando Security Service Agency. But if Luy instituted the action against the plaintiff and the defendant, the plaintiff should have filed a crossclaim
against the latter," 9 was unduly technical and unrealistic and untenable.

Plaintiff was in law liable to its customer for the damages caused the customer’s car, which had been entrusted into its custody. Plaintiff therefore was in law justified
in making good such damages and relying in turn on defendant to honor its contract and indemnify it for such undisputed damages, which had been caused directly by
the unlawful and wrongful acts of defendant’s security guard in breach of their contract. As ordained in Article 1159, Civil Code, "obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good faith." cralaw virtua1aw library

Plaintiff in law could not tell its customer, as per the trial court’s view, that "under the Guard Service Contract it was not liable for the damage but the defendant" —
since the customer could not hold defendant to account for the damages as he had no privity of contract with defendant. Such an approach of telling the adverse party
to go to court, notwithstanding his plainly valid claim, aside from its ethical deficiency among others, could hardly create any goodwill for plaintiff’s business, in the
same way that defendant’s baseless attempt to evade fully discharging its contractual liability to plaintiff cannot be expected to have brought it more business. Worse,
the administration of justice is prejudiced, since the court dockets are unduly burdened with unnecessary litigation.

ACCORDINGLY, the judgment appealed from is hereby reversed and judgment is hereby rendered sentencing defendant-appellee to pay plaintiff-appellant the sum
of P8,489.10 as and by way of reimbursement of the stipulated actual damages and expenses, as well as the costs of suit in both instances. It is so ordered.

G.R. No. L-23749 April 29, 1977

FAUSTINO CRUZ, plaintiff-appellant,

vs.
J. M. TUASON & COMPANY, INC., and GREGORIO ARANETA, INC., defendants-appellees.

BARREDO, J.:

Appeal from the order dated August 13, 1964 of the Court of First Instance of Quezon City in Civil Case No. Q-7751, Faustino
Cruz vs. J.M. Tuason & Co., Inc., and Gregorio Araneta, Inc., dismissing the complaint of appellant Cruz for the recovery of
improvements he has made on appellees' land and to compel appellees to convey to him 3,000 square meters of land on three
grounds: (1) failure of the complaint to state a cause of action; (2) the cause of action of plaintiff is unenforceable under the
Statute of Frauds; and (3) the action of the plaintiff has already prescribed.

Actually, a perusal of plaintiff-appellant's complaint below shows that he alleged two separate causes of action, namely: (1) that
upon request of the Deudors (the family of Telesforo Deudor who laid claim on the land in question on the strength of an
"informacion posesoria" ) plaintiff made permanent improvements valued at P30,400.00 on said land having an area of more or
less 20 quinones and for which he also incurred expenses in the amount of P7,781.74, and since defendants-appellees are being
benefited by said improvements, he is entitled to reimbursement from them of said amounts and (2) that in 1952, defendants
availed of plaintiff's services as an intermediary with the Deudors to work for the amicable settlement of Civil Case No. Q-135,
then pending also in the Court of First Instance of Quezon City, and involving 50 quinones of land, of Which the 20 quinones
aforementioned form part, and notwithstanding his having performed his services, as in fact, a compromise agreement entered
into on March 16, 1963 between the Deudors and the defendants was approved by the court, the latter have refused to convey to
him the 3,000 square meters of land occupied by him, (a part of the 20 quinones above) which said defendants had promised to
do "within ten years from and after date of signing of the compromise agreement", as consideration for his services.

Within the Period allowed by the rules, the defendants filed separate motions to dismiss alleging three Identical grounds: (1) As
regards that improvements made by plaintiff, that the complaint states no cause of action, the agreement regarding the same
having been made by plaintiff with the Deudors and not with the defendants, hence the theory of plaintiff based on Article 2142
of the Code on unjust enrichment is untenable; and (2) anent the alleged agreement about plaintiffs services as intermediary in
consideration of which, defendants promised to convey to him 3,000 square meters of land, that the same is unenforceable under
the Statute of Frauds, there being nothing in writing about it, and, in any event, (3) that the action of plaintiff to compel such
conveyance has already prescribed.

Plaintiff opposed the motion, insisting that Article 2142 of the applicable to his case; that the Statute of Frauds cannot be invoked
by defendants, not only because Article 1403 of the Civil Code refers only to "sale of real property or of an interest therein" and
not to promises to convey real property like the one supposedly promised by defendants to him, but also because, he, the plaintiff
has already performed his part of the agreement, hence the agreement has already been partly executed and not merely executory
within the contemplation of the Statute; and that his action has not prescribed for the reason that defendants had ten years to
comply and only after the said ten years did his cause of action accrue, that is, ten years after March 16, 1963, the date of the
approval of the compromise agreement, and his complaint was filed on January 24, 1964.

Ruling on the motion to dismiss, the trial court issued the herein impugned order of August 13, 1964:

In the motion, dated January 31, 1964, defendant Gregorio Araneta, Inc. prayed that the complaint against it
be dismissed on the ground that (1) the claim on which the action is founded is unenforceable under the
provision of the Statute of Frauds; and (2) the plaintiff's action, if any has already prescribed. In the other
motion of February 11, 1964, defendant J. M. Tuason & Co., Inc. sought the dismissal of the plaintiffs
complaint on the ground that it states no cause of action and on the Identical grounds stated in the motion to
dismiss of defendant Gregorio Araneta, Inc. The said motions are duly opposed by the plaintiff.

From the allegations of the complaint, it appears that, by virtue of an agreement arrived at in 1948 by the
plaintiff and the Deudors, the former assisted the latter in clearing, improving, subdividing and selling the
large tract of land consisting of 50 quinones covered by the informacion posesoria in the name of the late
Telesforo Deudor and incurred expenses, which are valued approximately at P38,400.00 and P7,781.74,
respectively; and, for the reasons that said improvements are being used and enjoyed by the defendants, the
plaintiff is seeking the reimbursement for the services and expenses stated above from the defendants.

Defendant J. M. Tuason & Co., Inc. claimed that, insofar as the plaintiffs claim for the reimbursement of the
amounts of P38,400.00 and P7,781.74 is concerned, it is not a privy to the plaintiff's agreement to assist the
Deudors n improving the 50 quinones. On the other hand, the plaintiff countered that, by holding and
utilizing the improvements introduced by him, the defendants are unjustly enriching and benefiting at the
expense of the plaintiff; and that said improvements constitute a lien or charge of the property itself

On the issue that the complaint insofar as it claims the reimbursement for the services rendered and expenses
incurred by the plaintiff, states no cause of action, the Court is of the opinion that the same is well-founded. It
is found that the defendants are not parties to the supposed express contract entered into by and between the
plaintiff and the Deudors for the clearing and improvement of the 50 quinones. Furthermore in order that the
alleged improvement may be considered a lien or charge on the property, the same should have been made in
good faith and under the mistake as to the title. The Court can take judicial notice of the fact that the tract of
land supposedly improved by the plaintiff had been registered way back in 1914 in the name of the
predecessors-in-interest of defendant J. M. Tuason & Co., Inc. This fact is confirmed in the decision rendered
by the Supreme Court on July 31, 1956 in Case G. R. No. L-5079 entitled J.M. Tuason & Co. Inc. vs.
Geronimo Santiago, et al., Such being the case, the plaintiff cannot claim good faith and mistake as to the
title of the land.
 On the issue of statute of fraud, the Court believes that same is applicable to the instant case. The allegation
in par. 12 of the complaint states that the defendants promised and agreed to cede, transfer and convey unto
the plaintiff the 3,000 square meters of land in consideration of certain services to be rendered then. it is clear
that the alleged agreement involves an interest in real property. Under the provisions of See. 2(e) of Article
1403 of the Civil Code, such agreement is not enforceable as it is not in writing and subscribed by the party
charged.

On the issue of statute of limitations, the Court holds that the plaintiff's action has prescribed. It is alleged in
par. 11 of the complaint that, sometime in 1952, the defendants approached the plaintiff to prevail upon the
Deudors to enter to a compromise agreement in Civil Case No. Q-135 and allied cases. Furthermore, par. 13
and 14 of the complaint alleged that the plaintiff acted as emissary of both parties in conveying their
respective proposals and couter-proposals until the final settlement was effected on March 16, 1953 and
approved by Court on April 11, 1953. In the present action, which was instituted on January 24, 1964, the
plaintiff is seeking to enforce the supposed agreement entered into between him and the defendants in 1952,
which was already prescribed.

WHEREFORE, the plaintiffs complaint is hereby ordered DISMISSED without pronouncement as to costs.

SO ORDERED. (Pp. 65-69, Rec. on Appeal,)

On August 22, 1964, plaintiff's counsel filed a motion for reconsideration dated August 20, 1964 as follows:

Plaintiff through undersigned counsel and to this Honorable Court, respectfully moves to reconsider its Order
bearing date of 13 August 1964, on the following grounds:

1. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION AGAINST DEFENDANTS

IN SO FAR AS PLAINTIFF'S CLAIM PAYMENT OF SERVICES AND REIMBURSEMENT OF HIS
EXPENSES, IS CONCERNED;

II. THAT REGARDING PLAINTIFF'S CLAIM OVER THE 3,000 SQ. MS., THE SAME HAS NOT
PRESCRIBED AND THE STATUTE OF FRAUDS IS NOT APPLICABLE THERETO;

ARGUMENT

Plaintiff's complaint contains two (2) causes of action — the first being an action for sum of money in the
amount of P7,781.74 representing actual expenses and P38,400.00 as reasonable compensation for services in
improving the 50 quinones now in the possession of defendants. The second cause of action deals with the
3,000 sq. ms. which defendants have agreed to transfer into Plaintiff for services rendered in effecting the
compromise between the Deudors and defendants;

Under its order of August 3, 1964, this Honorable Court dismissed the claim for sum of money on the ground
that the complaint does not state a cause of action against defendants. We respectfully submit:

1. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION AGAINST DEFENDANTS

IN SO FAR AS PLAINTIFF'S CLAIM FOR PAYMENT OF SERVICES AND REIMBURSEMENT OF
HIS EXPENSES IS CONCERNED.

Said this Honorable Court (at p. 2, Order):

ORDER

xxx xxx xxx

On the issue that the complaint, in so far as it claims the reimbursement for the services rendered and
expenses incurred by the plaintiff, states no cause of action, the Court is of the opinion that the same is well-
founded. It is found that the defendants are not parties to the supposed express contract entered into by and
between the plaintiff and the Deudors for the clearing and improvement of the 50 quinones. Furthermore, in
order that the alleged improvement may he considered a lien or charge on the property, the same should have
been made in good faith and under the mistake as to title. The Court can take judicial notice of the fact that
the tract of land supposedly improved by the plaintiff had been registered way back in 1914 in the name of
the predecessors-in-interest of defendant J. M. Tuason & Co., Inc. This fact is confirmed in the decision
rendered by the Supreme Court on July 31, 1956 in case G. R. No. L-5079 entitled 'J M. Tuason & Co., Inc.
vs, Geronimo Santiago, et al.' Such being the case, the plaintiff cannot claim good faith and mistake as to the
title of the land.

The position of this Honorable Court (supra) is that the complaint does not state a cause of action in so far as
the claim for services and expenses is concerned because the contract for the improvement of the properties
was solely between the Deudors and plaintiff, and defendants are not privies to it. Now, plaintiff's theory is
that defendants are nonetheless liable since they are utilizing and enjoying the benefit's of said improvements.
Thus under paragraph 16 of "he complaint, it is alleged:

(16) That the services and personal expenses of plaintiff mentioned in paragraph 7 hereof
were rendered and in fact paid by him to improve, as they in fact resulted in considerable
improvement of the 50 quinones, and defendants being now in possession of and utilizing
said improvements should reimburse and pay plaintiff for such services and expenses.

Plaintiff's cause of action is premised inter alia, on the theory of unjust enrichment under Article 2142 of the
civil Code:

ART. 2142. Certain lawful voluntary and unilateral acts give rise to the juridical relation
of quasi-contract to the end that no one shill be unjustly enriched or benefited at the
expense of another.

In like vein, Article 19 of the same Code enjoins that:

ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give every-one his due and observe honesty and good faith.

We respectfully draw the attention of this Honorable Court to the fact that ARTICLE 2142 (SUPRA) DEALS
WITH QUASI-CONTRACTS or situations WHERE THERE IS NO CONTRACT BETWEEN THE
PARTIES TO THE ACTION. Further, as we can readily see from the title thereof (Title XVII), that the Same
bears the designation 'EXTRA CONTRACTUAL OBLIGATIONS' or obligations which do not arise from
contracts. While it is true that there was no agreement between plaintiff and defendants herein for the
improvement of the 50 quinones since the latter are presently enjoying and utilizing the benefits brought
about through plaintiff's labor and expenses, defendants should pay and reimburse him therefor under the
principle that 'no one may enrich himself at the expense of another.' In this posture, the complaint states a
cause of action against the defendants.

II. THAT REGARDING PLAINTIFF'S CLAIM OVER THE 3,000 SQ. MS. THE SAME HAS NOT
PRESCRIBED AND THE STATUTE OF FRAUDS IS NOT APPLICABLE THERETO.

The Statute of Frauds is CLEARLY inapplicable to this case:

At page 2 of this Honorable Court's order dated 13 August 1964, the Court ruled as follows:

ORDER

xxx xxx xxx

On the issue of statute of fraud, the Court believes that same is applicable to the instant
Case, The allegation in par. 12 of the complaint states that the defendants promised and
agree to cede, transfer and convey unto the plaintiff, 3,000 square meters of land in
consideration of certain services to be rendered then. It is clear that the alleged agreement
involves an interest in real property. Under the provisions of Sec. 2(e) of Article 1403 of
 the Civil Code, such agreement is not enforceable as it is not in writing and subscribed by
the party charged.

To bring this issue in sharper focus, shall reproduce not only paragraph 12 of the complaint but also the other
pertinent paragraphs therein contained. Paragraph 12 states thus:

COMPLAINT

xxx xxx xxx

12). That plaintiff conferred with the aforesaid representatives of defendants several times and on these
occasions, the latter promised and agreed to cede, transfer and convey unto plaintiff the 3,000 sq. ms. (now
known as Lots 16-B, 17 and 18) which plaintiff was then occupying and continues to occupy as of this
writing, for and in consideration of the following conditions:

(a) That plaintiff succeed in convincing the DEUDORS to enter into a compromise
agreement and that such agreement be actually entered into by and between the
DEUDORS and defendant companies;

(b) That as of date of signing the compromise agreement, plaintiff shall be the owner of
the 3,000 sq. ms. but the documents evidencing his title over this property shall be
executed and delivered by defendants to plaintiff within ten (10) years from and after date
of signing of the compromise agreement;

(c) That plaintiff shall, without any monetary expense of his part, assist in clearing the 20
quinones of its occupants;

13). That in order to effect a compromise between the parties. plaintiff not only as well acted as emissary of
both parties in conveying their respective proposals and counter- proposals until succeeded in convinzing the
DEUDORS to settle with defendants amicably. Thus, on March 16, 1953, a Compromise Agreement was
entered into by and between the DEUDORS and the defendant companies; and on April 11, 1953, this
agreement was approved by this Honorable Court;

14). That in order to comply with his other obligations under his agreement with defendant companies,
plaintiff had to confer with the occupants of the property, exposing himself to physical harm, convincing said
occupants to leave the premises and to refrain from resorting to physical violence in resisting defendants'
demands to vacate;

That plaintiff further assisted defendants' employees in the actual demolition and
transferof all the houses within the perimeter of the 20 quinones until the end of 1955,
when said area was totally cleared and the houses transferred to another area designated
by the defendants as 'Capt. Cruz Block' in Masambong, Quezon City. (Pars. 12, 13 and
14, Complaint; Emphasis supplied)

From the foregoing, it is clear then the agreement between the parties mentioned in paragraph 12 (supra) of
the complaint has already been fully EXECUTED ON ONE PART, namely by the plaintiff. Regarding the
applicability of the statute of frauds (Art. 1403, Civil Code), it has been uniformly held that the statute of
frauds IS APPLICABLE ONLY TO EXECUTORY CONTRACTS BUT NOT WHERE THE CONTRACT
HAS BEEN PARTLY EXECUTED:

SAME ACTION TO ENFORCE. — The statute of frauds has been uniformly interpreted
to be applicable to executory and not to completed or contracts. Performance of the
contracts takes it out of the operation of the statute. ...

The statute of the frauds is not applicable to contracts which are either totally or
partially performed, on the theory that there is a wide field for the commission of frauds
in executory contracts which can only be prevented by requiring them to be in writing, a
facts which is reduced to a minimum in executed contracts because the intention of the
 parties becomes apparent buy their execution and execution, in mots cases, concluded the
right the parties. ... The partial performance may be proved by either documentary or
oral evidence. (At pp. 564-565, Tolentino's Civil Code of the Philippines, Vol. IV, 1962
Ed.; Emphasis supplied).

Authorities in support of the foregoing rule are legion. Thus Mr. Justice Moran in his 'Comments on the
Rules of Court', Vol. III, 1974 Ed., at p. 167, states:

2 THE STATUTE OF FRAUDS IS APPLICABLE ONLY TO EXECUTORY

CONTRACTS: CONTRACTS WHICH ARE EITHER TOTALLY OR PARTIALLY
PERFORMED ARE WITHOUT THE STATUE. The statute of frauds is applicable only
to executory contracts. It is neither applicable to executed contracts nor to contracts
partially performed. The reason is simple. In executory contracts there is a wide field for
fraud because unless they be in writing there is no palpable evidence of the intention of
the contracting parties. The statute has been enacted to prevent fraud. On the other hand
the commission of fraud in executed contracts is reduced to minimum in executed
contracts because (1) the intention of the parties is made apparent by the execution and
(2) execution concludes, in most cases, the rights of the parties. (Emphasis supplied)

Under paragraphs 13 and 14 of the complaint (supra) one can readily see that the plaintiff has fulfilled ALL
his obligation under the agreement between him defendants concerning the 3,000 sq. ms. over which the
latter had agreed to execute the proper documents of transfer. This fact is further projected in paragraph 15 of
the complaint where plaintiff states;

15). That in or about the middle of 1963, after all the conditions stated in paragraph 12
hereof had been fulfilled and fully complied with, plaintiff demanded of said defendants
that they execute the Deed of Conveyance in his favor and deliver the title certificate in
his name, over the 3,000 sq. ms. but defendants failed and refused and continue to fail
and refuse to heed his demands. (par. 15, complaint; Emphasis supplied).

In view of the foregoing, we respectfully submit that this Honorable court erred in holding that the statute of
frauds is applicable to plaintiff's claim over the 3,000 sq. ms. There having been full performance of the
contract on plaintiff's part, the same takes this case out of the context of said statute.

Plaintiff's Cause of Action had NOT Prescribed:

With all due respect to this Honorable court, we also submit that the Court committed error in holding that
this action has prescribed:

ORDER

xxx xxx xxx

On the issue of the statute of limitations, the Court holds that the plaintiff's action has
prescribed. It is alleged in par. III of the complaint that, sometime in 1952, the defendants
approached the plaintiff to prevail upon the Deudors to enter into a compromise
agreement in Civil Case No. Q-135 and allied cases. Furthermore, pars. 13 and 14 of the
complaint alleged that plaintiff acted as emissary of both parties in conveying their
respective proposals and counter-proposals until the final settlement was affected on
March 16, 1953 and approved by the Court on April 11, 1953. In the present actin, which
was instituted on January 24, 1964, the plaintiff is seeking to enforce the supposed
agreement entered into between him and the defendants in 1952, which has already
proscribed. (at p. 3, Order).

The present action has not prescribed, especially when we consider carefully the terms of the agreement
between plaintiff and the defendants. First, we must draw the attention of this Honorable Court to the fact that
this is an action to compel defendants to execute a Deed of Conveyance over the 3,000 sq. ms. subject of
 their agreement. In paragraph 12 of the complaint, the terms and conditions of the contract between the
parties are spelled out. Paragraph 12 (b) of the complaint states:

(b) That as of date of signing the compromise agreement, plaintiff shall be the owner of
the 3,000 sq. ms. but the documents evidencing his title over this property shall be
executed and delivered by defendants to plaintiff within ten (10) years from and after
date of signing of the compromise agreement. (Emphasis supplied).

The compromise agreement between defendants and the Deudors which was conclude through the efforts of
plaintiff, was signed on 16 March 1953. Therefore, the defendants had ten (10) years signed on 16 March
1953. Therefore, the defendants had ten (10) years from said date within which to execute the deed of
conveyance in favor of plaintiff over the 3,000 sq. ms. As long as the 10 years period has not expired,
plaintiff had no right to compel defendants to execute the document and the latter were under no obligation
to do so. Now, this 10-year period elapsed on March 16, 1963. THEN and ONLY THEN does plaintiff's
cause of action plaintiff on March 17, 1963. Thus, under paragraph 15, of the complaint (supra) plaintiff
made demands upon defendants for the execution of the deed 'in or about the middle of 1963.

Since the contract now sought to be enforced was not reduced to writing, plaintiff's cause of action expires on
March 16, 1969 or six years from March 16, 1963 WHEN THE CAUSE OF ACTION ACCRUED (Art.
1145, Civil Code).

In this posture, we gain respectfully submit that this Honorable Court erred in holding that plaintiff's action
has prescribed.

PRAYER

WHEREFORE, it is respectfully prayed that " Honorable Court reconsider its Order dated August 13, 1964;
and issue another order denying the motions to dismiss of defendants G. Araneta, Inc. and J. M. Tuason Co.
Inc. for lack of merit. (Pp. 70-85, Record on Appeal.)

Defendants filed an opposition on the main ground that "the arguments adduced by the plaintiff are merely reiterations of his
arguments contained in his Rejoinder to Reply and Opposition, which have not only been refuted in herein defendant's Motion to
Dismiss and Reply but already passed upon by this Honorable Court."

On September 7, 1964, the trial court denied the motion for reconsiderations thus:

After considering the plaintiff's Motion for Reconsideration of August 20, 1964 and it appearing that the
grounds relied upon in said motion are mere repetition of those already resolved and discussed by this Court
in the order of August 13, 1964, the instant motion is hereby denied and the findings and conclusions arrived
at by the Court in its order of August 13, 1964 are hereby reiterated and affirmed.

SO ORDERED. (Page 90, Rec. on Appeal.)

Under date of September 24, 1964, plaintiff filed his record on appeal.

In his brief, appellant poses and discusses the following assignments of error:

I. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND THAT
APPELLANT'S CLAIM OVER THE 3,000 SQ. MS. IS ALLEGEDLY UNENFORCEABLE UNDER THE
STATUTE OF FRAUDS;

II. THAT THE COURT A QUO FURTHER COMMITTED ERROR IN DISMISSING APPELLANT'S
COMPLAINT ON THE GROUND THAT HIS CLAIM OVER THE 3,000 SQ. MS. IS ALLEGEDLY
BARRED BY THE STATUTE OF LIMITATIONS; and

III. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT FOR FAILURE TO
STATE A CAUSE OF ACTION IN SO FAR AS APPELLANT'S CLAIM FOR REIMBURSEMENT OF
 EXPENSES AND FOR SERVICES RENDERED IN THE IMPROVEMENT OF THE FIFTY (50)
QUINONES IS CONCERNED.

We agree with appellant that the Statute of Frauds was erroneously applied by the trial court. It is elementary that the Statute
refers to specific kinds of transactions and that it cannot apply to any that is not enumerated therein. And the only agreements or
contracts covered thereby are the following:

(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;

(2) Those do not comply with the Statute of Frauds as set forth in this number, In the following cases an
agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making
thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to

marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than
five hundred pesos, unless the buyer accept and receive part of such goods and chattels,
or the evidences, or some of them of such things in action, or pay at the time some part of
the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property
sold, terms of sale, price, names of the purchasers and person on whose account the sale
is made, it is a sufficient memorandum:

(e) An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein:

(f) a representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract. (Art. 1403, civil Code.)

In the instant case, what appellant is trying to enforce is the delivery to him of 3,000 square meters of land which he claims
defendants promised to do in consideration of his services as mediator or intermediary in effecting a compromise of the civil
action, Civil Case No. 135, between the defendants and the Deudors. In no sense may such alleged contract be considered as
being a "sale of real property or of any interest therein." Indeed, not all dealings involving interest in real property come under
the Statute.

Moreover, appellant's complaint clearly alleges that he has already fulfilled his part of the bargains to induce the Deudors to
amicably settle their differences with defendants as, in fact, on March 16, 1963, through his efforts, a compromise agreement
between these parties was approved by the court. In other words, the agreement in question has already been partially
consummated, and is no longer merely executory. And it is likewise a fundamental principle governing the application of the
Statute that the contract in dispute should be purely executory on the part of both parties thereto.

We cannot, however, escape taking judicial notice, in relation to the compromise agreement relied upon by appellant, that in
several cases We have decided, We have declared the same rescinded and of no effect. In J. M. Tuason & Co., Inc. vs.
Bienvenido Sanvictores, 4 SCRA 123, the Court held:

It is also worthy of note that the compromise between Deudors and Tuason, upon which Sanvictores
predicates his right to buy the lot he occupies, has been validly rescinded and set aside, as recognized by this
Court in its decision in G.R. No. L-13768, Deudor vs. Tuason, promulgated on May 30, 1961.
We repeated this observation in J.M. Tuason & Co., Inc. vs. Teodosio Macalindong, 6 SCRA 938. Thus, viewed from what
would be the ultimate conclusion of appellant's case, We entertain grave doubts as to whether or not he can successfully maintain
his alleged cause of action against defendants, considering that the compromise agreement that he invokes did not actually
materialize and defendants have not benefited therefrom, not to mention the undisputed fact that, as pointed out by appellees,
appellant's other attempt to secure the same 3,000 square meters via the judicial enforcement of the compromise agreement in
which they were supposed to be reserved for him has already been repudiated by the courts. (pp. 5-7. Brief of Appellee Gregorio
Araneta, Inc.)

As regards appellant's third assignment of error, We hold that the allegations in his complaint do not sufficiently Appellants'
reliance. on Article 2142 of Civil Code is misplaced. Said article provides:

Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that
no one shall be unjustly enriched or benefited at the expense of another.

From the very language of this provision, it is obvious that a presumed qauasi-contract cannot emerge as against one party when
the subject mater thereof is already covered by an existing contract with another party. Predicated on the principle that no one
should be allowed to unjustly enrich himself at the expense of another, Article 2124 creates the legal fiction of a quasi-contract
precisely because of the absence of any actual agreement between the parties concerned. Corollarily, if the one who claims
having enriched somebody has done so pursuant to a contract with a third party, his cause of action should be against the latter,
who in turn may, if there is any ground therefor, seek relief against the party benefited. It is essential that the act by which the
defendant is benefited must have been voluntary and unilateral on the part of the plaintiff. As one distinguished civilian puts it,
"The act is voluntary. because the actor in quasi-contracts is not bound by any pre-existing obligation to act. It is unilateral,
because it arises from the sole will of the actor who is not previously bound by any reciprocal or bilateral agreement. The reason
why the law creates a juridical relations and imposes certain obligation is to prevent a situation where a person is able to benefit
or take advantage of such lawful, voluntary and unilateral acts at the expense of said actor." (Ambrosio Padilla, Civil Law, Vol.
VI, p. 748, 1969 ed.) In the case at bar, since appellant has a clearer and more direct recourse against the Deudors with whom he
had entered into an agreement regarding the improvements and expenditures made by him on the land of appellees. it Cannot be
said, in the sense contemplated in Article 2142, that appellees have been enriched at the expense of appellant.

In the ultimate. therefore, Our holding above that appellant's first two assignments of error are well taken cannot save the day for
him. Aside from his having no cause of action against appellees, there is one plain error of omission. We have found in the order
of the trial court which is as good a ground as any other for Us to terminate this case favorably to appellees. In said order Which
We have quoted in full earlier in this opinion, the trial court ruled that "the grounds relied upon in said motion are mere
repetitions of those already resolved and discussed by this Court in the order of August 13, 1964", an observation which We fully
share. Virtually, therefore. appellant's motion for reconsideration was ruled to be pro-forma. Indeed, a cursory reading of the
record on appeal reveals that appellant's motion for reconsideration above-quoted contained exactly the same arguments and
manner of discussion as his February 6, 1964 "Opposition to Motion to Dismiss" of defendant Gregorio Araneta, Inc. ((pp. 17-25,
Rec. on Appeal) as well as his February 17, 1964 "Opposition to Motion to Dismiss of Defendant J. M. Tuason & Co." (pp. 33-
45, Rec. on Appeal and his February 29, 1964 "Rejoinder to Reply Oil Defendant J. M. Tuason & Co." (pp. 52-64, Rec. on
Appeal) We cannot see anything in said motion for reconsideration that is substantially different from the above oppositions and
rejoinder he had previously submitted and which the trial court had already considered when it rendered its main order of
dismissal. Consequently, appellant's motion for reconsideration did not suspend his period for appeal. (Estrada vs. Sto. Domingo,
28 SCRA 890, 905-6.) And as this point was covered by appellees' "Opposition to Motion for Reconsideration" (pp. 8689),
hence, within the frame of the issues below, it is within the ambit of Our authority as the Supreme Court to consider the same
here even if it is not discussed in the briefs of the parties. (Insular Life Assurance Co., Ltd. Employees Association-NATU vs.
Insular Life Assurance Co., Ltd. [Resolution en banc of March 10, 1977 in G. R. No. L-25291).

Now, the impugned main order was issued on August 13, 1964, while the appeal was made on September 24, 1964 or 42 days
later. Clearly, this is beyond the 30-day reglementary period for appeal. Hence, the subject order of dismissal was already final
and executory when appellant filed his appeal.

WHEREFORE, the appeal of Faustino Cruz in this case is dismissed. No costs.

G.R. No. L-9188 December 4, 1914

GUTIERREZ HERMANOS, plaintiff-appellee,

vs.
ENGRACIO ORENSE, defendant-appellant.
William A. Kincaid, Thos. L. Hartigan, and Ceferino M. Villareal for appellant.
Rafael de la Sierra for appellee.

TORRES, J.:

Appeal through bill of exceptions filed by counsel for the appellant from the judgment on April 14, 1913, by the Honorable P. M.
Moir, judge, wherein he sentenced the defendant to make immediate delivery of the property in question, through a public
instrument, by transferring and conveying to the plaintiff all his rights in the property described in the complaint and to pay it the
sum of P780, as damages, and the costs of the suit.

On March 5, 1913, counsel for Gutierrez Hermanos filed a complaint, afterwards amended, in the Court of First Instance of
Albay against Engacio Orense, in which he set forth that on and before February 14, 1907, the defendant Orense had been the
owner of a parcel of land, with the buildings and improvements thereon, situated in the pueblo of Guinobatan, Albay, the
location, area and boundaries of which were specified in the complaint; that the said property has up to date been recorded in the
new property registry in the name of the said Orense, according to certificate No. 5, with the boundaries therein given; that, on
February 14, 1907, Jose Duran, a nephew of the defendant, with the latter's knowledge and consent, executed before a notary a
public instrument whereby he sold and conveyed to the plaintiff company, for P1,500, the aforementioned property, the vendor
Duran reserving to himself the right to repurchase it for the same price within a period of four years from the date of the said
instrument; that the plaintiff company had not entered into possession of the purchased property, owing to its continued
occupancy by the defendant and his nephew, Jose Duran, by virtue of a contract of lease executed by the plaintiff to Duran,
which contract was in force up to February 14, 1911; that the said instrument of sale of the property, executed by Jose Duran, was
publicly and freely confirmed and ratified by the defendant Orense; that, in order to perfect the title to the said property, but that
the defendant Orense refused to do so, without any justifiable cause or reason, wherefore he should be compelled to execute the
said deed by an express order of the court, for Jose Duran is notoriously insolvent and cannot reimburse the plaintiff company for
the price of the sale which he received, nor pay any sum whatever for the losses and damages occasioned by the said sale, aside
from the fact that the plaintiff had suffered damage by losing the present value of the property, which was worth P3,000; that,
unless such deed of final conveyance were executed in behalf of the plaintiff company, it would be injured by the fraud
perpetrated by the vendor, Duran, in connivance with the defendant; that the latter had been occupying the said property since
February 14, 1911, and refused to pay the rental thereof, notwithstanding the demand made upon him for its payment at the rate
of P30 per month, the just and reasonable value for the occupancy of the said property, the possession of which the defendant
likewise refused to deliver to the plaintiff company, in spite of the continuous demands made upon him, the defendant, with bad
faith and to the prejudice of the firm of Gutierrez Hermanos, claiming to have rights of ownership and possession in the said
property. Therefore it was prayed that judgment be rendered by holding that the land and improvements in question belong
legitimately and exclusively to the plaintiff, and ordering the defendant to execute in the plaintiff's behalf the said instrument of
transfer and conveyance of the property and of all the right, interest, title and share which the defendant has therein; that the
defendant be sentenced to pay P30 per month for damages and rental of the property from February 14, 1911, and that, in case
these remedies were not granted to the plaintiff, the defendant be sentenced to pay to it the sum of P3,000 as damages, together
with interest thereon since the date of the institution of this suit, and to pay the costs and other legal expenses.

The demurrer filed to the amended complaint was overruled, with exception on the part of the defendant, whose counsel made a
general denial of the allegations contained in the complaint, excepting those that were admitted, and specifically denied
paragraph 4 thereof to the effect that on February 14, 1907, Jose Duran executed the deed of sale of the property in favor of the
plaintiff with the defendant's knowledge and consent. 1awphil.net

As the first special defense, counsel for the defendant alleged that the facts set forth in the complaint with respect to the execution
of the deed did not constitute a cause of action, nor did those alleged in the other form of action for the collection of P3,000, the
value of the realty.

As the second special defense, he alleged that the defendant was the lawful owner of the property claimed in the complaint, as his
ownership was recorded in the property registry, and that, since his title had been registered under the proceedings in
rem prescribed by Act No. 496, it was conclusive against the plaintiff and the pretended rights alleged to have been acquired by
Jose Duran prior to such registration could not now prevail; that the defendant had not executed any written power of attorney
nor given any verbal authority to Jose Duran in order that the latter might, in his name and representation, sell the said property to
the plaintiff company; that the defendant's knowledge of the said sale was acquired long after the execution of the contract of sale
between Duran and Gutierrez Hermanos, and that prior thereto the defendant did not intentionally and deliberately perform any
act such as might have induced the plaintiff to believe that Duran was empowered and authorized by the defendant and which
would warrant him in acting to his own detriment, under the influence of that belief. Counsel therefore prayed that the defendant
be absolved from the complaint and that the plaintiff be sentenced to pay the costs and to hold his peace forever.

After the hearing of the case and an examination of the evidence introduced by both parties, the court rendered the judgment
aforementioned, to which counsel for the defendant excepted and moved for a new trial. This motion was denied, an exception
was taken by the defendant and, upon presentation of the proper bill of exceptions, the same was approved, certified and
forwarded to the clerk of his court.

This suit involves the validity and efficacy of the sale under right of redemption of a parcel of land and a masonry house with
the nipa roof erected thereon, effected by Jose Duran, a nephew of the owner of the property, Engracio Orense, for the sum of
P1,500 by means of a notarial instrument executed and ratified on February 14, 1907.

After the lapse of the four years stipulated for the redemption, the defendant refused to deliver the property to the purchaser, the
firm of Gutierrez Hermanos, and to pay the rental thereof at the rate of P30 per month for its use and occupation since February
14, 1911, when the period for its repurchase terminated. His refusal was based on the allegations that he had been and was then
the owner of the said property, which was registered in his name in the property registry; that he had not executed any written
power of attorney to Jose Duran, nor had he given the latter any verbal authorization to sell the said property to the plaintiff firm
in his name; and that, prior to the execution of the deed of sale, the defendant performed no act such as might have induced the
plaintiff to believe that Jose Duran was empowered and authorized by the defendant to effect the said sale.

The plaintiff firm, therefore, charged Jose Duran, in the Court of First Instance of the said province, with estafa, for having
represented himself in the said deed of sale to be the absolute owner of the aforesaid land and improvements, whereas in reality
they did not belong to him, but to the defendant Orense. However, at the trial of the case Engracio Orense, called as a witness,
being interrogated by the fiscal as to whether he and consented to Duran's selling the said property under right of redemption to
the firm of Gutierrez Hermanos, replied that he had. In view of this statement by the defendant, the court acquitted Jose Duran of
the charge of estafa.

As a result of the acquittal of Jose Duran, based on the explicit testimony of his uncle, Engacio Orense, the owner of the property,
to the effect that he had consented to his nephew Duran's selling the property under right of repurchase to Gutierrez Hermanos,
counsel for this firm filed a complainant praying, among other remedies, that the defendant Orense be compelled to execute a
deed for the transfer and conveyance to the plaintiff company of all the right, title and interest with Orense had in the property
sold, and to pay to the same the rental of the property due from February 14, 1911. itc-alf

Notwithstanding the allegations of the defendant, the record in this case shows that he did give his consent in order that his
nephew, Jose Duran, might sell the property in question to Gutierrez Hermanos, and that he did thereafter confirm and ratify the
sale by means of a public instrument executed before a notary.

It having been proven at the trial that he gave his consent to the said sale, it follows that the defendant conferred verbal, or at least
implied, power of agency upon his nephew Duran, who accepted it in the same way by selling the said property. The principal
must therefore fulfill all the obligations contracted by the agent, who acted within the scope of his authority. (Civil Code, arts.
1709, 1710 and 1727.)

Even should it be held that the said consent was granted subsequently to the sale, it is unquestionable that the defendant, the
owner of the property, approved the action of his nephew, who in this case acted as the manager of his uncle's business, and
Orense'r ratification produced the effect of an express authorization to make the said sale. (Civil Code, arts. 1888 and 1892.)

Article 1259 of the Civil Code prescribes: "No one can contract in the name of another without being authorized by him or
without his legal representation according to law.

A contract executed in the name of another by one who has neither his authorization nor legal representation shall be
void, unless it should be ratified by the person in whose name it was executed before being revoked by the other
contracting party.

The sworn statement made by the defendant, Orense, while testifying as a witness at the trial of Duran for estafa, virtually
confirms and ratifies the sale of his property effected by his nephew, Duran, and, pursuant to article 1313 of the Civil Code,
remedies all defects which the contract may have contained from the moment of its execution.
The sale of the said property made by Duran to Gutierrez Hermanos was indeed null and void in the beginning, but afterwards
became perfectly valid and cured of the defect of nullity it bore at its execution by the confirmation solemnly made by the said
owner upon his stating under oath to the judge that he himself consented to his nephew Jose Duran's making the said sale.
Moreover, pursuant to article 1309 of the Code, the right of action for nullification that could have been brought became legally
extinguished from the moment the contract was validly confirmed and ratified, and, in the present case, it is unquestionable that
the defendant did confirm the said contract of sale and consent to its execution.

On the testimony given by Engacio Orense at the trial of Duran for estafa, the latter was acquitted, and it would not be just that
the said testimony, expressive of his consent to the sale of his property, which determined the acquittal of his nephew, Jose
Duran, who then acted as his business manager, and which testimony wiped out the deception that in the beginning appeared to
have been practiced by the said Duran, should not now serve in passing upon the conduct of Engracio Orense in relation to the
firm of Gutierrez Hermanos in order to prove his consent to the sale of his property, for, had it not been for the consent admitted
by the defendant Orense, the plaintiff would have been the victim of estafa.

If the defendant Orense acknowledged and admitted under oath that he had consented to Jose Duran's selling the property in
litigation to Gutierrez Hermanos, it is not just nor is it permissible for him afterward to deny that admission, to the prejudice of
the purchaser, who gave P1,500 for the said property.

The contract of sale of the said property contained in the notarial instrument of February 14, 1907, is alleged to be invalid, null
and void under the provisions of paragraph 5 of section 335 of the Code of Civil Procedure, because the authority which Orense
may have given to Duran to make the said contract of sale is not shown to have been in writing and signed by Orense, but the
record discloses satisfactory and conclusive proof that the defendant Orense gave his consent to the contract of sale executed in a
public instrument by his nephew Jose Duran. Such consent was proven in a criminal action by the sworn testimony of the
principal and presented in this civil suit by other sworn testimony of the same principal and by other evidence to which the
defendant made no objection. Therefore the principal is bound to abide by the consequences of his agency as though it had
actually been given in writing (Conlu vs. Araneta and Guanko, 15 Phil. Rep., 387; Gallemit vs. Tabiliran, 20 Phil. Rep., 241;
Kuenzle & Streiff vs. Jiongco, 22 Phil. Rep., 110.)

The repeated and successive statements made by the defendant Orense in two actions, wherein he affirmed that he had given his
consent to the sale of his property, meet the requirements of the law and legally excuse the lack of written authority, and, as they
are a full ratification of the acts executed by his nephew Jose Duran, they produce the effects of an express power of agency.

The judgment appealed from in harmony with the law and the merits of the case, and the errors assigned thereto have been duly
refuted by the foregoing considerations, so it should be affirmed.

The judgment appealed from is hereby affirmed, with the costs against the appellant.

G.R. No. L-44546 January 29, 1988

RUSTICO ADILLE, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, EMETERIA ASEJO, TEODORICA ASEJO, DOMINGO ASEJO,
JOSEFA ASEJO and SANTIAGO ASEJO, respondents.

SARMIENTO, J.:

In issue herein are property and property rights, a familiar subject of controversy and a wellspring of enormous conflict that has led not only to protracted
legal entanglements but to even more bitter consequences, like strained relationships and even the forfeiture of lives. It is a question that likewise reflects a
tragic commentary on prevailing social and cultural values and institutions, where, as one observer notes, wealth and its accumulation are the basis of self-
fulfillment and where property is held as sacred as life itself. "It is in the defense of his property," says this modern thinker, that one "will mobilize his
deepest protective devices, and anybody that threatens his possessions will arouse his most passionate enmity." 1

The task of this Court, however, is not to judge the wisdom of values; the burden of reconstructing the social order is shouldered
by the political leadership-and the people themselves.
The parties have come to this Court for relief and accordingly, our responsibility is to give them that relief pursuant to the decree
of law.

The antecedent facts are quoted from the decision appealed from:
2

xxx xxx xxx

... [T]he land in question Lot 14694 of Cadastral Survey of Albay located in Legaspi City with an area of
some 11,325 sq. m. originally belonged to one Felisa Alzul as her own private property; she married twice in
her lifetime; the first, with one Bernabe Adille, with whom she had as an only child, herein defendant Rustico
Adille; in her second marriage with one Procopio Asejo, her children were herein plaintiffs, — now,
sometime in 1939, said Felisa sold the property in pacto de retro to certain 3rd persons, period of repurchase
being 3 years, but she died in 1942 without being able to redeem and after her death, but during the period of
redemption, herein defendant repurchased, by himself alone, and after that, he executed a deed of extra-
judicial partition representing himself to be the only heir and child of his mother Felisa with the consequence
that he was able to secure title in his name alone also, so that OCT. No. 21137 in the name of his mother was
transferred to his name, that was in 1955; that was why after some efforts of compromise had failed, his half-
brothers and sisters, herein plaintiffs, filed present case for partition with accounting on the position that he
was only a trustee on an implied trust when he redeemed,-and this is the evidence, but as it also turned out
that one of plaintiffs, Emeteria Asejo was occupying a portion, defendant counterclaimed for her to vacate
that, —

Well then, after hearing the evidence, trial Judge sustained defendant in his position that he was and became
absolute owner, he was not a trustee, and therefore, dismissed case and also condemned plaintiff occupant,
Emeteria to vacate; it is because of this that plaintiffs have come here and contend that trial court erred in:

I. ... declaring the defendant absolute owner of the property;

II. ... not ordering the partition of the property; and

III. ... ordering one of the plaintiffs who is in possession of the portion of the property to vacate the land, p. 1
Appellant's brief.

which can be reduced to simple question of whether or not on the basis of evidence and law, judgment appealed from should be
maintained. 3

xxx xxx xxx

The respondent Court of appeals reversed the trial Court, and ruled for the plaintiffs-appellants, the private respondents herein.
4

The petitioner now appeals, by way of certiorari, from the Court's decision.

We required the private respondents to file a comment and thereafter, having given due course to the petition, directed the parties
to file their briefs. Only the petitioner, however, filed a brief, and the private respondents having failed to file one, we declared
the case submitted for decision.

The petition raises a purely legal issue: May a co-owner acquire exclusive ownership over the property held in common?

Essentially, it is the petitioner's contention that the property subject of dispute devolved upon him upon the failure of his co-heirs
to join him in its redemption within the period required by law. He relies on the provisions of Article 1515 of the old Civil Article
1613 of the present Code, giving the vendee a retro the right to demand redemption of the entire property.

There is no merit in this petition.

The right of repurchase may be exercised by a co-owner with aspect to his share alone. While the records show that the
5

petitioner redeemed the property in its entirety, shouldering the expenses therefor, that did not make him the owner of all of it. In
other words, it did not put to end the existing state of co-ownership.
Necessary expenses may be incurred by one co-owner, subject to his right to collect reimbursement from the remaining co-
owners. There is no doubt that redemption of property entails a necessary expense. Under the Civil Code:
6

ART. 488. Each co-owner shall have a right to compel the other co-owners to contribute to the expenses of
preservation of the thing or right owned in common and to the taxes. Any one of the latter may exempt
himself from this obligation by renouncing so much of his undivided interest as may be equivalent to his
share of the expenses and taxes. No such waiver shall be made if it is prejudicial to the co-ownership.

The result is that the property remains to be in a condition of co-ownership. While a vendee a retro, under Article 1613 of the
Code, "may not be compelled to consent to a partial redemption," the redemption by one co-heir or co-owner of the property in
its totality does not vest in him ownership over it. Failure on the part of all the co-owners to redeem it entitles the vendee a
retro to retain the property and consolidate title thereto in his name. But the provision does not give to the redeeming co-owner
7

the right to the entire property. It does not provide for a mode of terminating a co-ownership.

Neither does the fact that the petitioner had succeeded in securing title over the parcel in his name terminate the existing co-
ownership. While his half-brothers and sisters are, as we said, liable to him for reimbursement as and for their shares in
redemption expenses, he cannot claim exclusive right to the property owned in common. Registration of property is not a means
of acquiring ownership. It operates as a mere notice of existing title, that is, if there is one.

The petitioner must then be said to be a trustee of the property on behalf of the private respondents. The Civil Code states:

ART. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes.

We agree with the respondent Court of Appeals that fraud attended the registration of the property. The petitioner's pretension
that he was the sole heir to the land in the affidavit of extrajudicial settlement he executed preliminary to the registration thereof
betrays a clear effort on his part to defraud his brothers and sisters and to exercise sole dominion over the property. The
aforequoted provision therefore applies.

It is the view of the respondent Court that the petitioner, in taking over the property, did so either on behalf of his co-heirs, in
which event, he had constituted himself a negotiorum gestor under Article 2144 of the Civil Code, or for his exclusive benefit, in
which case, he is guilty of fraud, and must act as trustee, the private respondents being the beneficiaries, under the Article 1456.
The evidence, of course, points to the second alternative the petitioner having asserted claims of exclusive ownership over the
property and having acted in fraud of his co-heirs. He cannot therefore be said to have assume the mere management of the
property abandoned by his co-heirs, the situation Article 2144 of the Code contemplates. In any case, as the respondent Court
itself affirms, the result would be the same whether it is one or the other. The petitioner would remain liable to the Private
respondents, his co-heirs.

This Court is not unaware of the well-established principle that prescription bars any demand on property (owned in common)
held by another (co-owner) following the required number of years. In that event, the party in possession acquires title to the
property and the state of co-ownership is ended . In the case at bar, the property was registered in 1955 by the petitioner, solely
8

in his name, while the claim of the private respondents was presented in 1974. Has prescription then, set in?

We hold in the negative. Prescription, as a mode of terminating a relation of co-ownership, must have been preceded by
repudiation (of the co-ownership). The act of repudiation, in turn is subject to certain conditions: (1) a co-owner repudiates the
co-ownership; (2) such an act of repudiation is clearly made known to the other co-owners; (3) the evidence thereon is clear and
conclusive, and (4) he has been in possession through open, continuous, exclusive, and notorious possession of the property for
the period required by law. 9

The instant case shows that the petitioner had not complied with these requisites. We are not convinced that he had repudiated the
co-ownership; on the contrary, he had deliberately kept the private respondents in the dark by feigning sole heirship over the
estate under dispute. He cannot therefore be said to have "made known" his efforts to deny the co-ownership. Moreover, one of
the private respondents, Emeteria Asejo, is occupying a portion of the land up to the present, yet, the petitioner has not taken
pains to eject her therefrom. As a matter of fact, he sought to recover possession of that portion Emeteria is occupying only as a
counterclaim, and only after the private respondents had first sought judicial relief.

It is true that registration under the Torrens system is constructive notice of title, but it has likewise been our holding that the
10

Torrens title does not furnish a shield for fraud. It is therefore no argument to say that the act of registration is equivalent to
11
notice of repudiation, assuming there was one, notwithstanding the long-standing rule that registration operates as a universal
notice of title.

For the same reason, we cannot dismiss the private respondents' claims commenced in 1974 over the estate registered in 1955.
While actions to enforce a constructive trust prescribes in ten years, reckoned from the date of the registration of the
12

property, we, as we said, are not prepared to count the period from such a date in this case. We note the petitioner's sub
13

rosa efforts to get hold of the property exclusively for himself beginning with his fraudulent misrepresentation in his unilateral
affidavit of extrajudicial settlement that he is "the only heir and child of his mother Feliza with the consequence that he was able
to secure title in his name also." Accordingly, we hold that the right of the private respondents commenced from the time they
14

actually discovered the petitioner's act of defraudation. According to the respondent Court of Appeals, they "came to know [of
15

it] apparently only during the progress of the litigation." Hence, prescription is not a bar.
16

Moreover, and as a rule, prescription is an affirmative defense that must be pleaded either in a motion to dismiss or in the answer
otherwise it is deemed waived, and here, the petitioner never raised that defense. There are recognized exceptions to this rule,
17 18

but the petitioner has not shown why they apply.

WHEREFORE, there being no reversible error committed by the respondent Court of Appeals, the petition is DENIED. The
Decision sought to be reviewed is hereby AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED,

G.R. No. 82670 September 15, 1989

DOMETILA M. ANDRES, doing business under the name and style "IRENE'S WEARING APPAREL," petitioner,
vs.
MANUFACTURERS HANOVER & TRUST CORPORATION and COURT OF APPEALS, respondents.

Roque A. Tamayo for petitioner.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for private respondent.

CORTES, J.:

Assailed in this petition for review on certiorari is the judgment of the Court of Appeals, which, applying the doctrine of solutio
indebiti, reversed the decision of the Regional Trial Court, Branch CV, Quezon City by deciding in favor of private respondent.

Petitioner, using the business name "Irene's Wearing Apparel," was engaged in the manufacture of ladies garments, children's
wear, men's apparel and linens for local and foreign buyers. Among its foreign buyers was Facets Funwear, Inc. (hereinafter
referred to as FACETS) of the United States.

In the course of the business transaction between the two, FACETS from time to time remitted certain amounts of money to
petitioner in payment for the items it had purchased. Sometime in August 1980, FACETS instructed the First National State Bank
of New Jersey, Newark, New Jersey, U.S.A. (hereinafter referred to as FNSB) to transfer $10,000.00 to petitioner via Philippine
National Bank, Sta. Cruz Branch, Manila (hereinafter referred to as PNB).

Acting on said instruction, FNSB instructed private respondent Manufacturers Hanover and Trust Corporation to effect the
above- mentioned transfer through its facilities and to charge the amount to the account of FNSB with private respondent.
Although private respondent was able to send a telex to PNB to pay petitioner $10,000.00 through the Pilipinas Bank, where
petitioner had an account, the payment was not effected immediately because the payee designated in the telex was only
"Wearing Apparel." Upon query by PNB, private respondent sent PNB another telex dated August 27, 1980 stating that the
payment was to be made to "Irene's Wearing Apparel." On August 28, 1980, petitioner received the remittance of $10,000.00
through Demand Draft No. 225654 of the PNB.

Meanwhile, on August 25, 1980, after learning about the delay in the remittance of the money to petitioner, FACETS informed
FNSB about the situation. On September 8, 1980, unaware that petitioner had already received the remittance, FACETS informed
private respondent about the delay and at the same time amended its instruction by asking it to effect the payment through the
Philippine Commercial and Industrial Bank (hereinafter referred to as PCIB) instead of PNB.

Accordingly, private respondent, which was also unaware that petitioner had already received the remittance of $10,000.00 from
PNB instructed the PCIB to pay $10,000.00 to petitioner. Hence, on September 11, 1980, petitioner received a second $10,000.00
remittance.

Private respondent debited the account of FNSB for the second $10,000.00 remittance effected through PCIB. However, when
FNSB discovered that private respondent had made a duplication of the remittance, it asked for a recredit of its account in the
amount of $10,000.00. Private respondent complied with the request.

Private respondent asked petitioner for the return of the second remittance of $10,000.00 but the latter refused to pay. On May
12, 1982 a complaint was filed with the Regional Trial Court, Branch CV, Quezon City which was decided in favor of petitioner
as defendant. The trial court ruled that Art. 2154 of the New Civil Code is not applicable to the case because the second
remittance was made not by mistake but by negligence and petitioner was not unjustly enriched by virtue thereof [Record, p.
234]. On appeal, the Court of Appeals held that Art. 2154 is applicable and reversed the RTC decision. The dispositive portion of
the Court of Appeals' decision reads as follows:

WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and another one entered in
favor of plaintiff-appellant and against defendant-appellee Domelita (sic) M. Andres, doing business under
the name and style "Irene's Wearing Apparel" to reimburse and/or return to plaintiff-appellant the amount of
$10,000.00, its equivalent in Philippine currency, with interests at the legal rate from the filing of the
complaint on May 12, 1982 until the whole amount is fully paid, plus twenty percent (20%) of the amount
due as attomey's fees; and to pay the costs.

With costs against defendant-appellee.

SO ORDERED. [Rollo, pp. 29-30.]

Thereafter, this petition was filed. The sole issue in this case is whether or not the private respondent has the right to recover the
second $10,000.00 remittance it had delivered to petitioner. The resolution of this issue would hinge on the applicability of Art.
2154 of the New Civil Code which provides that:

Art. 2154. If something received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.

This provision is taken from Art. 1895 of the Spanish Civil Code which provided that:

Art. 1895. If a thing is received when there was no right to claim it and which, through an error, has been
unduly delivered, an obligation to restore it arises.

In Velez v. Balzarza, 73 Phil. 630 (1942), the Court, speaking through Mr. Justice Bocobo explained the nature of this article
thus:

Article 1895 [now Article 2154] of the Civil Code abovequoted, is therefore applicable. This legal provision,
which determines the quasi-contract of solution indebiti, is one of the concrete manifestations of the ancient
principle that no one shall enrich himself unjustly at the expense of another. In the Roman Law Digest the
maxim was formulated thus: "Jure naturae acquum est, neminem cum alterius detrimento et injuria fieri
locupletiorem." And the Partidas declared: "Ninguno non deue enriquecerse tortizeramente con dano de
otro." Such axiom has grown through the centuries in legislation, in the science of law and in court decisions.
The lawmaker has found it one of the helpful guides in framing statutes and codes. Thus, it is unfolded in
many articles scattered in the Spanish Civil Code. (See for example, articles, 360, 361, 464, 647, 648, 797,
1158, 1163, 1295, 1303, 1304, 1893 and 1895, Civil Code.) This time-honored aphorism has also been
adopted by jurists in their study of the conflict of rights. It has been accepted by the courts, which have not
hesitated to apply it when the exigencies of right and equity demanded its assertion. It is a part of that affluent
reservoir of justice upon which judicial discretion draws whenever the statutory laws are inadequate because
they do not speak or do so with a confused voice. [at p. 632.]
For this article to apply the following requisites must concur: "(1) that he who paid was not under obligation to do so; and, (2)
that payment was made by reason of an essential mistake of fact" [City of Cebu v. Piccio, 110 Phil. 558, 563 (1960)].

It is undisputed that private respondent delivered the second $10,000.00 remittance. However, petitioner contends that the
doctrine of solutio indebiti, does not apply because its requisites are absent.

First, it is argued that petitioner had the right to demand and therefore to retain the second $10,000.00 remittance. It is alleged
that even after the two $10,000.00 remittances are credited to petitioner's receivables from FACETS, the latter allegedly still had
a balance of $49,324.00. Hence, it is argued that the last $10,000.00 remittance being in payment of a pre-existing debt, petitioner
was not thereby unjustly enriched.

The contention is without merit.

The contract of petitioner, as regards the sale of garments and other textile products, was with FACETS. It was the latter and not
private respondent which was indebted to petitioner. On the other hand, the contract for the transmittal of dollars from the United
States to petitioner was entered into by private respondent with FNSB. Petitioner, although named as the payee was not privy to
the contract of remittance of dollars. Neither was private respondent a party to the contract of sale between petitioner and
FACETS. There being no contractual relation between them, petitioner has no right to apply the second $10,000.00 remittance
delivered by mistake by private respondent to the outstanding account of FACETS.

Petitioner next contends that the payment by respondent bank of the second $10,000.00 remittance was not made by mistake but
was the result of negligence of its employees. In connection with this the Court of Appeals made the following finding of facts:

The fact that Facets sent only one remittance of $10,000.00 is not disputed. In the written interrogatories sent
to the First National State Bank of New Jersey through the Consulate General of the Philippines in New
York, Adelaide C. Schachel, the investigation and reconciliation clerk in the said bank testified that a request
to remit a payment for Facet Funwear Inc. was made in August, 1980. The total amount which the First
National State Bank of New Jersey actually requested the plaintiff-appellant Manufacturers Hanover & Trust
Corporation to remit to Irene's Wearing Apparel was US $10,000.00. Only one remittance was requested by
First National State Bank of New Jersey as per instruction of Facets Funwear (Exhibit "J", pp. 4-5).

That there was a mistake in the second remittance of US $10,000.00 is borne out by the fact that both
remittances have the same reference invoice number which is 263 80. (Exhibits "A-1- Deposition of Mr.
Stanley Panasow" and "A-2-Deposition of Mr. Stanley Panasow").

Plaintiff-appellant made the second remittance on the wrong assumption that defendant-appellee did not
receive the first remittance of US $10,000.00. [Rollo, pp. 26-27.]

It is evident that the claim of petitioner is anchored on the appreciation of the attendant facts which petitioner would have this
Court review. The Court holds that the finding by the Court of Appeals that the second $10,000.00 remittance was made by
mistake, being based on substantial evidence, is final and conclusive. The rule regarding questions of fact being raised with this
Court in a petition for certiorari under Rule 45 of the Revised Rules of Court has been stated in Remalante v. Tibe, G.R. No.
59514, February 25, 1988, 158 SCRA 138, thus:

The rule in this jurisdiction is that only questions of law may be raised in a petition for certiorari under Rule
45 of the Revised Rules of Court. "The jurisdiction of the Supreme Court in cases brought to it from the
Court of Appeals is limited to reviewing and revising the errors of law imputed to it, its findings of fact being
conclusive" [Chan v. Court of Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 737, reiterating a long
line of decisions]. This Court has emphatically declared that "it is not the function of the Supreme Court to
analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that
might have been committed by the lower court" [Tiongco v. De la Merced, G.R. No. L-24426, July 25, 1974,
58 SCRA 89; Corona v. Court of Appeals, G.R. No. L-62482, April 28, 1983, 121 SCRA 865; Baniqued v.
Court of Appeals, G. R. No. L-47531, February 20, 1984, 127 SCRA 596]. "Barring, therefore, a showing
that the findings complained of are totally devoid of support in the record, or that they are so glaringly
erroneous as to constitute serious abuse of discretion, such findings must stand, for this Court is not expected
or required to examine or contrast the oral and documentary evidence submitted by the parties" [Santa Ana,
Jr. v. Hernandez, G.R. No. L-16394, December 17, 1966, 18 SCRA 9731. [at pp. 144-145.]
Petitioner invokes the equitable principle that when one of two innocent persons must suffer by the wrongful act of a third
person, the loss must be borne by the one whose negligence was the proximate cause of the loss.

The rule is that principles of equity cannot be applied if there is a provision of law specifically applicable to a case [Phil. Rabbit
Bus Lines, Inc. v. Arciaga, G.R. No. L-29701, March 16, 1987,148 SCRA 433; Zabat, Jr. v. Court of Appeals, G.R. No. L36958,
July 10, 1986, 142 SCRA 587; Rural Bank of Paranaque, Inc. v. Remolado, G.R. No. 62051, March 18, 1985, 135 SCRA 409;
Cruz v. Pahati, 98 Phil. 788 (1956)]. Hence, the Court in the case of De Garcia v. Court of Appeals, G.R. No. L-20264, January
30, 1971, 37 SCRA 129, citing Aznar v. Yapdiangco, G.R. No. L-18536, March 31, 1965, 13 SCRA 486, held:

... The common law principle that where one of two innocent persons must suffer by a fraud perpetrated by
another, the law imposes the loss upon the party who, by his misplaced confidence, has enabled the fraud to
be committed, cannot be applied in a case which is covered by an express provision of the new Civil Code,
specifically Article 559. Between a common law principle and a statutory provision, the latter must prevail in
this jurisdiction. [at p. 135.]

Having shown that Art. 2154 of the Civil Code, which embodies the doctrine of solutio indebiti, applies in the case at bar, the
Court must reject the common law principle invoked by petitioner.

Finally, in her attempt to defeat private respondent's claim, petitioner makes much of the fact that from the time the second
$10,000.00 remittance was made, five hundred and ten days had elapsed before private respondent demanded the return thereof.
Needless to say, private respondent instituted the complaint for recovery of the second $10,000.00 remittance well within the six
years prescriptive period for actions based upon a quasi-contract [Art. 1145 of the New Civil Code].

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals is hereby AFFIRMED.

SO ORDERED.

G.R. No. L-17447 April 30, 1963

GONZALO PUYAT & SONS, INC., plaintiff-appelle,

vs.
CITY OF MANILA AND MARCELO SARMIENTO, as City Treasurer of Manila, defendants-appellants

Feria, Manglapus & Associates for plainttiff-appelle.Asst. City Fiscal Manuel T. Reyes for defendants-appellants.

PAREDES, J.:

This is an appeal from the judgment of the CFI of Manila, the dispostive portion of which reads:

"xxx Of the payments made by the plaintiff, only that made on October 25, 1950 in the amount of P1,250.00 has
prescribed Payments made in 1951 and thereafter are still recoverable since the extra-judicial demand made on October
30, 1956 was well within the six-year prescriptive period of the New CivilCode.

In view of the foregoing considerations, judgment is hereby rendered in favor of the plaintiff, ordering the defendants
to refund the amount of P29,824.00, without interest. No costs.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this
stipulation of facts.
1ä wphï1 .ñët

Defendants' counterclaim is hereby dismissed for not having been substantiated."

On August 11, 1958, the plaintiff Gonzalo Puyat & Sons, Inc., filed an action for refund of Retail DealerlsTaxes paid by it,
corresponding to the first Quarter of 1950 up to the third Quarter of 1956, amounting to P33,785.00, against the City of Manila
and its City Treasurer.The case was submitted on the following stipulation of facts, to wit--
"1. That the plaintiff is a corporation duly organized and existing according to the laws of the Philippines, with offices
at Manila; while defendant City Manila is a Municipal Corporation duly organized in accordance with the laws of the
Philippines, and defendant Marcelino Sarmiento is the dulyqualified incumbent City Treasurer of Manila;

"2. That plaintiff is engaged in the business of manufacturing and selling all kinds of furniture at its factory at 190
Rodriguez-Arias, San Miguel, Manila, and has a display room located at 604-606 Rizal Avenue, Manila, wherein it
displays the various kind of furniture manufactured by it and sells some goods imported by it, such as billiard balls,
bowling balls and other accessories;

"3. That acting pursuant to the provisions of Sec. 1. group II, of Ordinance No. 3364, defendant City Treasurer of
Manilaassessed from plaintiff retail dealer's tax corresponding to the quarters hereunder stated on the sales of furniture
manufactured and sold by it at its factory site, all of which assessments plaintiff paid without protest in the erroneous
belief that it was liable therefor, on the dates and in the amount enumerated herein below:

Amount
Period Date Paid O.R. No. Assessed
and Paid.

First Quarter 1950 Jan. 25, 1950 436271X P1,255.00

Second Quarter 1950 Apr. 25, 1950 215895X 1,250.00

Third Quarter 1950 Jul. 25, 1950 243321X 1,250.00

Fourth Quarter 1950 Oct. 25, 1950 271165X 1,250.00

(Follows the assessment for different quarters in 1951, 1952,

1953, 1954 and 1955, fixing the same amount quarterly.) x x x..

First Quarter 1956 Jan. 25, 1956 823047X 1,250.00

Second Quarter 1956 Apr. 25, 1956 855949X 1,250.00

Third Quarter 1956 Jul. 25, 1956 880789X 1,250.00

TOTAL ............. P33,785.00

===========

"4. That plaintiff, being a manufacturer of various kinds of furniture, is exempt from the payment of taxes imposed
under the provisions of Sec. 1, Group II, of Ordinance No. 3364,which took effect on September 24, 1956, on the sale
of the various kinds of furniture manufactured by it pursuant to the provisions of Sec. 18(n) of Republic Act No. 409
(Revised Charter of Manila), as restated in Section 1 of Ordinance No.3816.

"5. That, however, plaintiff, is liable for the payment of taxes prescribed in Section 1, Group II or Ordinance No.
3364mas amended by Sec. 1, Group II of Ordinance No. 3816, which took effect on September 24, 1956, on the sales
of imported billiard balls, bowling balls and other accessories at its displayroom. The taxes paid by the plaintiff on the
sales of said article are as follows:

xxx xxx xxx

"6. That on October 30, 1956, the plaintiff filed with defendant City Treasurer of Manila, a formal request for refund of
the retail dealer's taxes unduly paid by it as aforestated in paragraph 3, hereof.

"7. That on July 24, 1958, the defendant City Treasurer of Maniladefinitely denied said request for refund.

"8. Hence on August 21, 1958, plaintiff filed the present complaint.
 "9. Based on the above stipulation of facts, the legal issues to be resolved by this Honorable Court are: (1) the period of
prescription applicable in matters of refund of municipal taxes errenously paid by a taxpayer and (2) refund of taxes not
paid under protest. x x x."

Said judgment was directly appealed to this Court on two dominant issues to wit: (1) Whether or not the amounts paid by
plaintiff-appelle, as retail dealer's taxes under Ordinance 1925, as amended by Ordinance No. 3364of the City of Manila, without
protest, are refundable;(2) Assuming arguendo, that plaintiff-appellee is entitled to the refund of the retail taxes in question,
whether or not the claim for refund filed in October 1956, in so far as said claim refers to taxes paid from 1950 to 1952 has
already prescribed. .

Under the first issue, defendants-appellants contend tht the taxes in question were voluntarily paid by appellee company and
since, in this jurisdiction, in order that a legal basis arise for claim of refund of taxes erroneously assessed, payment thereof must
be made under protest, and this being a condition sine qua non, and no protest having been made, -- verbally or in writing,
therebyindicating that the payment was voluntary, the action must fail. Cited in support of the above contention, are the cases of
Zaragoza vs. Alfonso, 46 Phil. 160-161, and Gavino v. Municipality of Calapan, 71 Phil. 438..

In refutation of the above stand of appellants, appellee avers tht the payments could not have been voluntary.At most, they were
paid "mistakenly and in good faith"and "without protest in the erroneous belief that it was liable thereof." Voluntariness is
incompatible with protest and mistake. It submits that this is a simple case of "solutio indebiti"..

Appellants do not dispute the fact that appellee-companyis exempted from the payment of the tax in question.This is manifest
from the reply of appellant City Treasurer stating that sales of manufactured products at the factory site are not taxable either
under the Wholesalers Ordinance or under the Retailers' Ordinance. With this admission, it would seem clear that the taxes
collected from appellee were paid, thru an error or mistake, which places said act of payment within the pale of the new Civil
Code provision on solutio indebiti. The appellant City of Manila, at the very start, notwithstanding the Ordinance imposing the
Retailer's Tax, had no right to demand payment thereof..

"If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligationto retun
it arises" (Art. 2154, NCC)..

Appelle categorically stated that the payment was not voluntarily made, (a fact found also by the lower court),but on the
erronoues belief, that they were due. Under this circumstance, the amount paid, even without protest is recoverable. "If the payer
was in doubt whether the debt was due, he may recover if he proves that it was not due" (Art. 2156, NCC). Appellee had duly
proved that taxes were not lawfully due. There is, therefore, no doubt that the provisions of solutio indebtiti, the new Civil Code,
apply to the admitted facts of the case..

With all, appellant quoted Manresa as saying: "x x x De la misma opinion son el Sr. Sanchez Roman y el Sr. Galcon, et cual
afirma que si la paga se hizo por error de derecho, ni existe el cuasi-contrato ni esta obligado a la restitucion el que cobro, aunque
no se debiera lo que se pago" (Manresa, Tomo 12, paginas 611-612). This opinion, however, has already lost its persuasiveness,
in view of the provisions of the Civil Code, recognizing "error de derecho" as a basis for the quasi-contract, of solutio indebiti. .

"Payment by reason of a mistake in the contruction or application of a doubtful or difficult question of law may come within the
scope of the preceding article" (Art. 21555)..

There is no gainsaying the fact that the payments made by appellee was due to a mistake in the construction of a doubtful
question of law. The reason underlying similar provisions, as applied to illegal taxation, in the United States, is expressed in the
case of Newport v. Ringo, 37 Ky. 635, 636; 10 S.W. 2, in the following manner:.

"It is too well settled in this state to need the citation of authority that if money be paid through a clear mistake of law or fact,
essentially affecting the rights of the parties, and which in law or conscience was not payable, and should not be retained by the
party receiving it, it may be recovered. Both law and sound morality so dictate. Especially should this be the rule as to illegal
taxation. The taxpayer has no voice in the impositionof the burden. He has the right to presume that the taxing power has been
lawfully exercised. He should not be required to know more than those in authority over him, nor should he suffer loss by
complying with what he bona fide believe to be his duty as a good citizen. Upon the contrary, he should be promoted to its ready
performance by refunding to him any legal exaction paid by him in ignorance of its illegality; and, certainly, in such a case, if be
subject to a penalty for nonpayment, his compliance under belief of its legality, and without awaitinga resort to judicial
proceedings should not be regrded in law as so far voluntary as to affect his right of recovery.".
"Every person who through an act or performance by another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal grounds, shall return the same to him"(Art. 22, Civil Code). It would
seems unedifying for the government, (here the City of Manila), that knowing it has no right at all to collect or to receive money
for alleged taxes paid by mistake, it would be reluctant to return the same. No one should enrich itself unjustly at the expense of
another (Art. 2125, Civil Code)..

Admittedly, plaintiff-appellee paid the tax without protest.Equally admitted is the fact that section 76 of the Charter of Manila
provides that "No court shall entertain any suit assailing the validity of tax assessed under this article until the taxpayer shall have
paid, under protest the taxes assessed against him, xx". It should be noted, however, that the article referred to in said section is
Article XXI, entitled Department of Assessment and the sections thereunder manifestly show that said article and its sections
relate to asseessment, collection and recovery of real estate taxes only. Said section 76, therefor, is not applicable to the case at
bar, which relates to the recover of retail dealer taxes..

In the opinion of the Secretary of Justice (Op. 90,Series of 1957, in a question similar to the case at bar, it was held that the
requiredment of protest refers only to the payment of taxes which are directly imposed by the charter itself, that is, real estate
taxes, which view was sustained by judicial and administrative precedents, one of which is the case of Medina, et al., v. City of
Baguio, G.R. No. L-4269, Aug. 29, 1952. In other words, protest is not necessary for the recovery of retail dealer's taxes, like the
present, because they are not directly imposed by the charter. In the Medina case, the Charter of Baguio (Chap. 61, Revised Adm.
Code), provides that "no court shall entertain any suit assailing the validity of a tax assessed unde this charter until the tax-payer
shall have paid, under protest, the taxes assessed against him (sec.25474[b], Rev. Adm. Code), a proviso similar to section 76 of
the Manila Charter. The refund of specific taxes paid under a void ordinance was ordered, although it did not appear that payment
thereof was made under protest..

In a recent case, We said: "The appellants argue that the sum the refund of which is sought by the appellee, was not paid under
protest and hence is not refundable. Again, the trial court correctly held that being unauthorized, it is not a tax assessed under the
Charter of the Appellant City of Davao and for that reason, no protest is necessary for a claim or demand for its refund" (Citing
the Medina case, supra; East Asiatic Co., Ltd. v. City of Davao, G.R. No. L-16253, Aug. 21, 1962). Lastly, being a case of
solutio indebiti, protest is not required as a condition sine qua non for its application..

The next issue in discussion is that of prescription. Appellants maintain that article 1146 (NCC), which provides for a period of
four (4) years (upon injury to the rights of the plaintiff), apply to the case. On the other hand, appellee contends that provisions of
Act 190 (Code of Civ. Procedure) should apply, insofar as payments made before the effectivity of the New Civil Code on
August 30, 1950, the period of which is ten (10) years, (Sec. 40,Act No. 190; Osorio v. Tan Jongko, 51 O.G. 6211) and article
1145 (NCC), for payments made after said effectivity, providing for a period of six (6) years (upon quasi-contracts like solutio
indebiti). Even if the provisionsof Act No. 190 should apply to those payments made before the effectivity of the new Civil Code,
because "prescription already runnig before the effectivity of this Code shall be governed by laws previously in force x x x" (art.
1116, NCC), for payments made after said effectivity,providing for a period of six (6) years (upon quasi-contracts like solutio
indebiti). Even if the provisions of Act No. 190should apply to those payments made before the effectivity of the new Civil Code,
because "prescription already running before the effectivity of of this Code shall be govern by laws previously in force xxx "
(Art. 1116, NCC), Still payments made before August 30, 1950 are no longer recoverable in view of the second paragraph of said
article (1116), which provides:"but if since the time this Code took effect the entire period herein required for prescription should
elapse the present Code shall be applicable even though by the former laws a longer period might be required". Anent the
payments made after August 30, 1950, it is abvious that the action has prescribed with respect to those made before October 30,
1950 only, considering the fact that the prescription of action is interrupted xxx when is a writteen extra-judicial demand x x x"
(Art. 1155, NCC), and the written demand in the case at bar was made on October 30, 1956 (Stipulation of Facts).MODIFIED in
the sense that only payments made on or after October 30, 1950 should be refunded, the decision appealed from is affirmed, in all
other respects. No costs. .

G.R. Nos. 193383-84, January 14, 2015

CBK POWER COMPANY LIMITED, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

[G.R. NOS. 193407-08]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CBK POWER COMPANY LIMITED, Respondent.

DECISION

PERLAS-BERNABE, J.:
Assailed in these consolidated petitions for review on certiorari1 are the Decision2 dated March 29, 2010 and the Resolution3 dated August 16, 2010 of the Court of
Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469 and 494, which affirmed the Decision4 dated August 28, 2008, the Amended Decision5 dated February 12, 2009,
and the Resolution6 dated May 7, 2009 of the CTA First Division in CTA Case Nos. 6699, 6884, and 7166 granting CBK Power Company Limited (CBK Power) a
refund of its excess final withholding tax for the taxable years 2001 to 2003. cralawred

The Facts

CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and primarily engaged in the development and operation of the
Caliraya, Botocan, and Kalayaan hydroelectric power generating plants in Laguna (CBK Project). It is registered with the Board of Investments (BOI) as engaged in a
preferred pioneer area of investment under the Omnibus Investment Code of 1987. 7 chanRoblesvir tualLawlib rary

To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from several foreign banks, 8 i.e., BNP Paribas, Dai-ichi Kangyo Bank, Limited,
Industrial Bank of Japan, Limited, and Societe General (original lenders), acting through an Inter-Creditor Agent, Dai-ichi Kangyo Bank, a Japanese bank that
subsequently merged with the Industrial Bank of Japan, Limited (Industrial Bank of Japan) and the Fuji Bank, Limited (Fuji Bank), with the merged entity being
named as Mizuho Corporate Bank (Mizuho Bank). One of the merged banks, Fuji Bank, had a branch in the Philippines, which became a branch of Mizuho Bank as a
result of the merger. The Industrial Bank of Japan and Mizuho Bank are residents of Japan for purposes of income taxation, and recognized as such under the relevant
provisions of the income tax treaties between the Philippines and Japan. 9 chanRob lesvirtualLawlibrary

Certain portions of the loan were subsequently assigned by the original lenders to various other banks, including Fortis Bank (Nederland) N.V. (Fortis-Netherlands)
and Raiffesen Zentral Bank Osterreich AG (Raiffesen Bank). Fortis-Netherlands, in turn, assigned its portion of the loan to Fortis Bank S.A./N.V. (Fortis-Belgium), a
resident of Belgium. Fortis-Netherlands and Raiffesen Bank, on the other hand, are residents of Netherlands and Austria, respectively.10 chanRobles virtualLawlibrary

In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands, Raiffesen Bank, Fortis-Belgium, and Mizuho Bank for which it
remitted interest payments from May 2001 to May 2003.11 It allegedly withheld final taxes from said payments based on the following rates, and paid the same to the
Revenue District Office No. 55 of the Bureau of Internal Revenue (BIR): (a) fifteen percent (15%) for Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and
(b) twenty percent (20%) for Industrial Bank of Japan and Mizuho Bank. 12 chanRobles virtualLawlibrary

However, according to CBK Power, under the relevant tax treaties between the Philippines and the respective countries in which each of the banks is a resident, the
interest income derived by the aforementioned banks are subject only to a preferential tax rate of 10%, viz.:13 chanRoblesv irtualLawlibrary

BANK COUNTRY OF PREFERENTIAL RATE

RESIDENCE UNDER THE RELEVANT TAX TREATY
Fortis Bank S.A./N.V. Belgium 10% (Article 111, RP-Belgium Tax Treaty)
Industrial Bank of Japan Japan 10% (Article 113, RP-Japan Tax Treaty)
Raiffesen Zentral Bank Austria 10% (Article 113, RP-Austria Tax Treaty)
Osterreich AG
Mizuho Corporate Bank Japan 10% (Article 113, RP-Japan Tax Treaty)
Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes allegedly erroneously withheld and collected for the years
2001 and 2002 with the BIR Revenue Region No. 9. The claim for refund of excess final withholding taxes in 2003 was subsequently filed on March 4, 2005.14 chanRoblesvirtualLawlibrary

The Commissioner of Internal Revenue’s (Commissioner) inaction on said claims prompted CBK Power to file petitions for review before the CTA, viz.: 15
chanRoblesvirtualLawlibrary

(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the refund of excess final withholding tax in the total amount of P6,393,267.20 covering
the year 2001 with respect to interest income derived by [Fortis-Belgium], Industrial Bank of Japan, and [Raiffesen Bank]. An Answer was filed by the Commissioner
on July 25, 2003.

(2) CTA Case No. 6884 was filed by CBK Power on March 5, 2004 seeking for the refund of the amount of P8,136,174.31 covering [the] year 2002 with respect to
interest income derived by [Fortis-Belgium], Industrial Bank of Japan, [Mizuho Bank], and [Raiffesen Bank]. The Commissioner filed his Answer on May 7, 2004.

xxxx

(3) CTA Case No. 7166 was filed by CBK [Power] on March 9, 2005 seeking for the refund of [the amount of] P1,143,517.21 covering [the] year 2003 with respect
to interest income derived by [Fortis-Belgium], and [Raiffesen Bank]. The Commissioner filed his Answer on May 9, 2005. (Emphases supplied)

CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004. Subsequently, however, all three cases – CTA Case Nos. 6699, 6884, and 7166 – were
consolidated in a Resolution dated August 3, 2005. 16
chanRoblesvirtualLawlibrary

The CTA First Division Rulings

17
In a Decision dated August 28, 2008, the CTA First Division granted the petitions and ordered the refund of the amount of P15,672,958.42 upon a finding that the
relevant tax treaties were applicable to the case. 18 It cited DA-ITAD Ruling No. 099-0319 dated July 16, 2003, issued by the BIR, confirming CBK Power’s claim that
the interest payments it made to Industrial Bank of Japan and Raiffesen Bank were subject to a final withholding tax rate of only 10% of the gross amount of interest,
pursuant to Article 11 of the Republic of the Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling No. 126-0320 dated August 18, 2003,
also issued by the BIR, interest payments to Fortis-Belgium were likewise subjected to the same rate pursuant to the Protocol Amending the RP-Belgium Tax Treaty,
the provisions of which apply on income derived or which accrued beginning January 1, 2000. With respect to interest payments made to Fortis-Netherlands before it
assigned its portion of the loan to Fortis-Belgium, the CTA First Division likewise granted the preferential rate. 21 chanRoblesvirtualLawlibrary

The CTA First Division categorically declared in the August 28, 2008 Decision that the required International Tax Affairs Division (ITAD) ruling was not a
condition sine qua non for the entitlement of the tax relief sought by CBK Power, 22 however, upon motion for reconsideration23 filed by the Commissioner, the CTA
First Division amended its earlier decision by reducing the amount of the refund from P15,672,958.42 to P14,835,720.39 on the ground that CBK Power failed to
obtain an ITAD ruling with respect to its transactions with Fortis-Netherlands.24 In its Amended Decision25 dated February 12, 2009, the CTA First Division
adopted26 the ruling in the case of Mirant (Philippines) Operations Corporation (formerly: Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner
of Internal Revenue (Mirant),27 cited by the Commissioner in his motion for reconsideration, where the Court categorically pronounced in its Resolution dated
February 18, 2008 that an ITAD ruling must be obtained prior to availing a preferential tax rate.

CBK Power moved for the reconsideration28 of the Amended Decision dated February 12, 2009, arguing in the main that the Mirant case, which was resolved in a
minute resolution, did not establish a legal precedent. The motion was denied, however, in a Resolution29 dated May 7, 2009 for lack of merit.

Undaunted, CBK Power elevated the matter to the CTA En Banc on petition for review,30 docketed as C.T.A E.B. No. 494. The Commissioner likewise filed his own
petition for review,31 which was docketed as C.T.A. E.B. No. 469. Said petitions were subsequently consolidated. 32 chanRoblesv irtualLawlibrary

CBK Power raised the lone issue of whether or not an ITAD ruling is required before it can avail of the preferential tax rate. On the other hand, the Commissioner
claimed that CBK Power failed to exhaust administrative remedies when it filed its petitions before the CTA First Division, and that said petitions were not filed
within the two-year prescriptive period for initiating judicial claims for refund. 33 chanRoblesvirtualLawlibrary

The CTA En Banc Ruling

In a Decision34 dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA First Division that a prior application with the ITAD is indeed required by
Revenue Memorandum Order (RMO) 1-2000,35which administrative issuance has the force and effect of law and is just as binding as a tax treaty. The CTA En
Banc declared the Mirant case as without any binding effect on CBK Power, having been resolved by this Court merely through minute resolutions, and relied instead
on the mandatory wording of RMO 1-2000, as follows:36 chanRobles virtualLawlibrary

III. Policies:

xxxx

2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation)
with ITAD at least 15 days before the transaction i.e. payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief. x x
x.

The CTA En Banc further held that CBK Power’s petitions for review were filed within the two-year prescriptive period provided under Section 22937 of the National
Internal Revenue Code of 199738 (NIRC), and that it was proper for CBK Power to have filed said petitions without awaiting the final resolution of its administrative
claims for refund before the BIR; otherwise, it would have completely lost its right to seek judicial recourse if the two-year prescriptive period lapsed with no judicial
claim filed.

CBK Power’s motion for partial reconsideration and the Commissioner’s motion for reconsideration of the foregoing Decision were both denied in a
Resolution39 dated August 16, 2010 for lack of merit; hence, the present consolidated petitions.

The Issues Before the Court

In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may add a requirement – prior application for an ITAD ruling – that is not found
in the income tax treaties signed by the Philippines before a taxpayer can avail of preferential tax rates under said treaties. 40 chanRoblesvirtualLawlibrary

On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK Power is not entitled to a refund in the amount of P1,143,517.21 for the period
covering taxable year 2003 as it allegedly failed to exhaust administrative remedies before seeking judicial redress. 41 chanRoblesvirtualLawlibrary

The Court’s Ruling

The Court resolves the foregoing in seriatim.

A. G.R. Nos. 193383-84

The Philippine Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international
principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. In this jurisdiction,
treaties have the force and effect of law. 42 chanRoblesvir tualLawlibrary

The issue of whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty was squarely addressed in
the recent case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue 43 (Deutsche Bank), where the Court emphasized that the obligation to
comply with a tax treaty must take precedence over the objective of RMO No. 1-2000, viz.: chanroblesvirtuallawlibrary

We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief for failure to strictly comply with
the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled
persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to
divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax
relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative
implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an
administrative procedure, these may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we cannot totally
deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax
treaty relief.44 (Emphases and underscoring supplied)
The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a party’s availment of the preferential rate under a tax treaty is to
avert the consequences of any erroneous interpretation and/or application of treaty provisions, such as claims for refund/credit for overpayment of taxes, or deficiency
tax liabilities for underpayment.45 However, as pointed out in Deutsche Bank, the underlying principle of prior application with the BIR becomes moot in refund
cases – as in the present case – where the very basis of the claim is erroneous or there is excessive payment arising from the non-availment of a tax treaty relief at
the first instance. Just as Deutsche Bank was not faulted by the Court for not complying with RMO No. 1-2000 prior to the transaction,46 so should CBK Power. In
parallel, CBK Power could not have applied for a tax treaty relief 15 days prior to its payment of the final withholding tax on the interest paid to its lenders precisely
because it erroneously paid said tax on the basis of the regular rate as prescribed by the NIRC, and not on the preferential tax rate provided under the different
treaties. As stressed by the Court, the prior application requirement under RMO No. 1-2000 then becomes illogical.47 chanRobles virtualLawlibrary

Not only is the requirement illogical, but it is also an imposition that is not found at all in the applicable tax treaties. In Deutsche Bank, the Court categorically held
that the BIR should not impose additional requirements that would negate the availment of the reliefs provided for under international agreements, especially since
said tax treaties do not provide for any prerequisite at all for the availment of the benefits under said agreements. 48 chanRoblesvirtualLawlibrary

It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. 49 Since CBK
Power had requested for confirmation from the ITAD on June 8, 2001 and October 28, 2002 50 before it filed on April 14, 2003 its administrative claim for refund of its
excess final withholding taxes, the same should be deemed substantial compliance with RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the
purpose of Section 229 of the NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the ground of failure to make prior application for tax treaty
relief.51 As the Court exhorted in Republic v. GST Philippines, Inc.,52 while the taxpayer has an obligation to honestly pay the right taxes, the government has a
corollary duty to implement tax laws in good faith; to discharge its duty to collect what is due to it; and to justly return what has been erroneously and excessively
given to it.53
chanRoblesv irtualLawlibrary

In view of the foregoing, the Court holds that the CTA En Banc committed reversible error in affirming the reduction of the amount of refund to CBK Power from
P15,672,958.42 to P14,835,720.39 to exclude its transactions with Fortis-Netherlands for which no ITAD ruling was obtained.54 CBK Power’s petition in G.R. Nos.
193383-84 is therefore granted.

The opposite conclusion is, however, reached with respect to the Commissioner’s petition in G.R. Nos. 193407-08.

B. G.R. Nos. 193407-08

The Commissioner laments55 that he was deprived of the opportunity to act on the administrative claim for refund of excess final withholding taxes covering taxable
year 2003 which CBK Power filed on March 4, 2005, a Friday, then the following Wednesday, March 9, 2005, the latter hastily elevated the case on petition for
review before the CTA. He argues56 that the failure on the part of CBK Power to give him a reasonable time to act on said claim is violative of the doctrines of
exhaustion of administrative remedies and of primary jurisdiction.

For its part, CBK Power maintains57 that it would be prejudicial to wait for the Commissioner’s ruling before it files its judicial claim since it only has 2 years from
the payment of the tax within which to file both its administrative and judicial claims.

The Court rules for CBK Power.

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section 204 applies to administrative claims for refund, while
Section 229 to judicial claims for refund. In both instances, the taxpayer’s claim must be filed within two (2) years from the date of payment of the tax or penalty.
However, Section 229 of the NIRC further states the condition that a judicial claim for refund may not be maintained until a claim for refund or credit has been duly
filed with the Commissioner. These provisions respectively read: chanrob lesvirtuallawlibrary

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The Commissioner may -

xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned
in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of
destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within
two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit
or refund.

xxxx

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any
sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such
tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: x x x. (Emphases and underscoring supplied)

Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final withholding taxes covering taxable year 2003 were filed within the two-
year prescriptive period, as shown by the table below:58 chanRoblesv irtualLawlibrary

WHEN FINAL WHEN LAST DAY OF WHEN WHEN

INCOME REMITTANCE THE 2-YEAR PETITION
TAXES WERE RETURN ADMINISTRATIVE FOR REVIEW
WITHHELD FILED PRESCRIPTIVE CLAIM WAS WAS FILED
PERIOD FILED
 February 2003 03/10/03 03/10/05 March 4, 2005 03/09/05
May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05

With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the CTA En Banc in debunking the alleged failure to exhaust
administrative remedies. Had CBK Power awaited the action of the Commissioner on its claim for refund prior to taking court action knowing fully well that the
prescriptive period was about to end, it would have lost not only its right to seek judicial recourse but its right to recover the final withholding taxes it erroneously paid
to the government thereby suffering irreparable damage. 59 chanRoblesv irtualLawlibrary

Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on June 10, 2005, CBK Power could have waited for, at the most,
three (3) months from the filing of the administrative claim on March 4, 2005 until the last day of the two-year prescriptive period ending June 10, 2005, that is, if
only to give the BIR at the administrative level an opportunity to act on said claim, the Court cannot, on that basis alone, deny a legitimate claim that was, for all
intents and purposes, timely filed in accordance with Section 229 of the NIRC. There was no violation of Section 229 since the law, as worded, only requires that an
administrative claim be priorly filed.

In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener Co., Ltd. v. David60(Kiener), wherein it was held that in no wise does the
law, i.e., Section 306 of the old Tax Code (now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the taxpayer’s claim, and that
the taxpayer shall not go to court before he is notified of the Collector’s action. In Kiener, the Court went on to say that the claim with the Collector of Internal
Revenue was intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action
will follow, viz.: chanroblesvirtuallawlibrary

The controversy centers on the construction of the aforementioned section of the Tax Code which reads: ChanRoblesVirtualawlibrary

SEC. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any
sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Collector of Internal
Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty.
The preceding provisions seem at first blush conflicting. It will be noticed that, whereas the first sentence requires a claim to be filed with the Collector of Internal
Revenue before any suit is commenced, the last makes imperative the bringing of such suit within two years from the date of collection. But the conflict is only
apparent and the two provisions easily yield to reconciliation, which it is the office of statutory construction to effectuate, where possible, to give effect to the entire
enactment.

To this end, and bearing in mind that the Legislature is presumed to have understood the language it used and to have acted with full idea of what it wanted to
accomplish, it is fair and reasonable to say without doing violence to the context or either of the two provisions, that by the first is meant simply that the Collector of
Internal Revenue shall be given an opportunity to consider his mistake, if mistake has been committed, before he is sued, but not, as the appellant contends that
pending consideration of the claim, the period of two years provided in the last clause shall be deemed interrupted. Nowhere and in no wise does the law imply that
the Collector of Internal Revenue must act upon the claim, or that the taxpayer shall not go to court before he is notified of the Collector’s action. x x x. We
understand the filing of the claim with the Collector of Internal Revenue to be intended primarily as a notice of warning that unless the tax or penalty
alleged to have been collected erroneously or illegally is refunded, court action will follow. x x x.61 (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should all be granted, and, the petition of the Commissioner in G.R. Nos. 193407-08 be denied for lack of
merit.chanrobleslaw

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED. The Decision dated March 29, 2010 and the Resolution dated August 16, 2010 of the Court of
Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469 and 494 are hereby REVERSED and SET ASIDE and a new one entered REINSTATING the Decision of the
CTA First Division dated August 28, 2008 ordering the refund in favor of CBK Power Company Limited the amount of P15,672,958.42 representing its excess final
withholding taxes for the taxable years 2001 to 2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED for lack of merit.

SO ORDERED. cralawlawlibrary

G.R. No. L-12191 October 14, 1918

JOSE CANGCO, plaintiff-appellant,

vs.
MANILA RAILROAD CO., defendant-appellee.

Ramon Sotelo for appellant.

Kincaid & Hartigan for appellee.

FISHER, J.:

At the time of the occurrence which gave rise to this litigation the plaintiff, Jose Cangco, was in the employment of Manila
Railroad Company in the capacity of clerk, with a monthly wage of P25. He lived in the pueblo of San Mateo, in the province of
Rizal, which is located upon the line of the defendant railroad company; and in coming daily by train to the company's office in
the city of Manila where he worked, he used a pass, supplied by the company, which entitled him to ride upon the company's
trains free of charge. Upon the occasion in question, January 20, 1915, the plaintiff arose from his seat in the second class-car
where he was riding and, making, his exit through the door, took his position upon the steps of the coach, seizing the upright
guardrail with his right hand for support.

On the side of the train where passengers alight at the San Mateo station there is a cement platform which begins to rise with a
moderate gradient some distance away from the company's office and extends along in front of said office for a distance
sufficient to cover the length of several coaches. As the train slowed down another passenger, named Emilio Zuñiga, also an
employee of the railroad company, got off the same car, alighting safely at the point where the platform begins to rise from the
level of the ground. When the train had proceeded a little farther the plaintiff Jose Cangco stepped off also, but one or both of his
feet came in contact with a sack of watermelons with the result that his feet slipped from under him and he fell violently on the
platform. His body at once rolled from the platform and was drawn under the moving car, where his right arm was badly crushed
and lacerated. It appears that after the plaintiff alighted from the train the car moved forward possibly six meters before it came to
a full stop.

The accident occurred between 7 and 8 o'clock on a dark night, and as the railroad station was lighted dimly by a single light
located some distance away, objects on the platform where the accident occurred were difficult to discern especially to a person
emerging from a lighted car.

The explanation of the presence of a sack of melons on the platform where the plaintiff alighted is found in the fact that it was the
customary season for harvesting these melons and a large lot had been brought to the station for the shipment to the market. They
were contained in numerous sacks which has been piled on the platform in a row one upon another. The testimony shows that this
row of sacks was so placed of melons and the edge of platform; and it is clear that the fall of the plaintiff was due to the fact that
his foot alighted upon one of these melons at the moment he stepped upon the platform. His statement that he failed to see these
objects in the darkness is readily to be credited.

The plaintiff was drawn from under the car in an unconscious condition, and it appeared that the injuries which he had received
were very serious. He was therefore brought at once to a certain hospital in the city of Manila where an examination was made
and his arm was amputated. The result of this operation was unsatisfactory, and the plaintiff was then carried to another hospital
where a second operation was performed and the member was again amputated higher up near the shoulder. It appears in
evidence that the plaintiff expended the sum of P790.25 in the form of medical and surgical fees and for other expenses in
connection with the process of his curation.

Upon August 31, 1915, he instituted this proceeding in the Court of First Instance of the city of Manila to recover damages of the
defendant company, founding his action upon the negligence of the servants and employees of the defendant in placing the sacks
of melons upon the platform and leaving them so placed as to be a menace to the security of passenger alighting from the
company's trains. At the hearing in the Court of First Instance, his Honor, the trial judge, found the facts substantially as above
stated, and drew therefrom his conclusion to the effect that, although negligence was attributable to the defendant by reason of
the fact that the sacks of melons were so placed as to obstruct passengers passing to and from the cars, nevertheless, the plaintiff
himself had failed to use due caution in alighting from the coach and was therefore precluded form recovering. Judgment was
accordingly entered in favor of the defendant company, and the plaintiff appealed.

It can not be doubted that the employees of the railroad company were guilty of negligence in piling these sacks on the platform
in the manner above stated; that their presence caused the plaintiff to fall as he alighted from the train; and that they therefore
constituted an effective legal cause of the injuries sustained by the plaintiff. It necessarily follows that the defendant company is
liable for the damage thereby occasioned unless recovery is barred by the plaintiff's own contributory negligence. In resolving
this problem it is necessary that each of these conceptions of liability, to-wit, the primary responsibility of the defendant company
and the contributory negligence of the plaintiff should be separately examined.

It is important to note that the foundation of the legal liability of the defendant is the contract of carriage, and that the obligation
to respond for the damage which plaintiff has suffered arises, if at all, from the breach of that contract by reason of the failure of
defendant to exercise due care in its performance. That is to say, its liability is direct and immediate, differing essentially, in legal
viewpoint from that presumptive responsibility for the negligence of its servants, imposed by article 1903 of the Civil Code,
which can be rebutted by proof of the exercise of due care in their selection and supervision. Article 1903 of the Civil Code is not
applicable to obligations arising ex contractu, but only to extra-contractual obligations — or to use the technical form of
expression, that article relates only to culpa aquiliana and not to culpa contractual.

Manresa (vol. 8, p. 67) in his commentaries upon articles 1103 and 1104 of the Civil Code, clearly points out this distinction,
which was also recognized by this Court in its decision in the case of Rakes vs. Atlantic, Gulf and Pacific Co. (7 Phil. rep., 359).
In commenting upon article 1093 Manresa clearly points out the difference between "culpa, substantive and independent, which
of itself constitutes the source of an obligation between persons not formerly connected by any legal tie" and culpa considered as
an accident in the performance of an obligation already existing . . . ."

In the Rakes case (supra) the decision of this court was made to rest squarely upon the proposition that article 1903 of the Civil
Code is not applicable to acts of negligence which constitute the breach of a contract.

Upon this point the Court said:

The acts to which these articles [1902 and 1903 of the Civil Code] are applicable are understood to be those not
growing out of pre-existing duties of the parties to one another. But where relations already formed give rise to duties,
whether springing from contract or quasi-contract, then breaches of those duties are subject to article 1101, 1103, and
1104 of the same code. (Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. Rep., 359 at 365.)

This distinction is of the utmost importance. The liability, which, under the Spanish law, is, in certain cases imposed upon
employers with respect to damages occasioned by the negligence of their employees to persons to whom they are not bound by
contract, is not based, as in the English Common Law, upon the principle of respondeat superior — if it were, the master would
be liable in every case and unconditionally — but upon the principle announced in article 1902 of the Civil Code, which imposes
upon all persons who by their fault or negligence, do injury to another, the obligation of making good the damage caused. One
who places a powerful automobile in the hands of a servant whom he knows to be ignorant of the method of managing such a
vehicle, is himself guilty of an act of negligence which makes him liable for all the consequences of his imprudence. The
obligation to make good the damage arises at the very instant that the unskillful servant, while acting within the scope of his
employment causes the injury. The liability of the master is personal and direct. But, if the master has not been guilty of any
negligence whatever in the selection and direction of the servant, he is not liable for the acts of the latter, whatever done within
the scope of his employment or not, if the damage done by the servant does not amount to a breach of the contract between the
master and the person injured.

It is not accurate to say that proof of diligence and care in the selection and control of the servant relieves the master from
liability for the latter's acts — on the contrary, that proof shows that the responsibility has never existed. As Manresa says (vol. 8,
p. 68) the liability arising from extra-contractual culpa is always based upon a voluntary act or omission which, without willful
intent, but by mere negligence or inattention, has caused damage to another. A master who exercises all possible care in the
selection of his servant, taking into consideration the qualifications they should possess for the discharge of the duties which it is
his purpose to confide to them, and directs them with equal diligence, thereby performs his duty to third persons to whom he is
bound by no contractual ties, and he incurs no liability whatever if, by reason of the negligence of his servants, even within the
scope of their employment, such third person suffer damage. True it is that under article 1903 of the Civil Code the law creates
a presumption that he has been negligent in the selection or direction of his servant, but the presumption is rebuttable and yield to
proof of due care and diligence in this respect.

The supreme court of Porto Rico, in interpreting identical provisions, as found in the Porto Rico Code, has held that these articles
are applicable to cases of extra-contractual culpa exclusively. (Carmona vs. Cuesta, 20 Porto Rico Reports, 215.)

This distinction was again made patent by this Court in its decision in the case of Bahia vs. Litonjua and Leynes, (30 Phil. rep.,
624), which was an action brought upon the theory of the extra-contractual liability of the defendant to respond for the damage
caused by the carelessness of his employee while acting within the scope of his employment. The Court, after citing the last
paragraph of article 1903 of the Civil Code, said:

From this article two things are apparent: (1) That when an injury is caused by the negligence of a servant or employee
there instantly arises a presumption of law that there was negligence on the part of the master or employer either in
selection of the servant or employee, or in supervision over him after the selection, or both; and (2) that that
presumption is juris tantum and not juris et de jure, and consequently, may be rebutted. It follows necessarily that if the
employer shows to the satisfaction of the court that in selection and supervision he has exercised the care and diligence
of a good father of a family, the presumption is overcome and he is relieved from liability.

This theory bases the responsibility of the master ultimately on his own negligence and not on that of his servant. This
is the notable peculiarity of the Spanish law of negligence. It is, of course, in striking contrast to the American doctrine
that, in relations with strangers, the negligence of the servant in conclusively the negligence of the master.

The opinion there expressed by this Court, to the effect that in case of extra-contractual culpa based upon negligence, it is
necessary that there shall have been some fault attributable to the defendant personally, and that the last paragraph of article 1903
merely establishes a rebuttable presumption, is in complete accord with the authoritative opinion of Manresa, who says (vol. 12,
p. 611) that the liability created by article 1903 is imposed by reason of the breach of the duties inherent in the special relations of
authority or superiority existing between the person called upon to repair the damage and the one who, by his act or omission,
was the cause of it.

On the other hand, the liability of masters and employers for the negligent acts or omissions of their servants or agents, when
such acts or omissions cause damages which amount to the breach of a contact, is not based upon a mere presumption of the
master's negligence in their selection or control, and proof of exercise of the utmost diligence and care in this regard does not
relieve the master of his liability for the breach of his contract.

Every legal obligation must of necessity be extra-contractual or contractual. Extra-contractual obligation has its source in the
breach or omission of those mutual duties which civilized society imposes upon it members, or which arise from these relations,
other than contractual, of certain members of society to others, generally embraced in the concept of status. The legal rights of
each member of society constitute the measure of the corresponding legal duties, mainly negative in character, which the
existence of those rights imposes upon all other members of society. The breach of these general duties whether due to willful
intent or to mere inattention, if productive of injury, give rise to an obligation to indemnify the injured party. The fundamental
distinction between obligations of this character and those which arise from contract, rests upon the fact that in cases of non-
contractual obligation it is the wrongful or negligent act or omission itself which creates the vinculum juris, whereas in
contractual relations the vinculum exists independently of the breach of the voluntary duty assumed by the parties when entering
into the contractual relation.

With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the
legislature to elect — and our Legislature has so elected — whom such an obligation is imposed is morally culpable, or, on the
contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to include
responsibility for the negligence of those person who acts or mission are imputable, by a legal fiction, to others who are in a
position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit
extra-contractual liability — with certain well-defined exceptions — to cases in which moral culpability can be directly imputed
to the persons to be charged. This moral responsibility may consist in having failed to exercise due care in the selection and
control of one's agents or servants, or in the control of persons who, by reason of their status, occupy a position of dependency
with respect to the person made liable for their conduct.

The position of a natural or juridical person who has undertaken by contract to render service to another, is wholly different from
that to which article 1903 relates. When the sources of the obligation upon which plaintiff's cause of action depends is a negligent
act or omission, the burden of proof rests upon plaintiff to prove the negligence — if he does not his action fails. But when the
facts averred show a contractual undertaking by defendant for the benefit of plaintiff, and it is alleged that plaintiff has failed or
refused to perform the contract, it is not necessary for plaintiff to specify in his pleadings whether the breach of the contract is
due to willful fault or to negligence on the part of the defendant, or of his servants or agents. Proof of the contract and of its
nonperformance is sufficient prima facie to warrant a recovery.

As a general rule . . . it is logical that in case of extra-contractual culpa, a suing creditor should assume the burden of
proof of its existence, as the only fact upon which his action is based; while on the contrary, in a case of negligence
which presupposes the existence of a contractual obligation, if the creditor shows that it exists and that it has been
broken, it is not necessary for him to prove negligence. (Manresa, vol. 8, p. 71 [1907 ed., p. 76]).

As it is not necessary for the plaintiff in an action for the breach of a contract to show that the breach was due to the negligent
conduct of defendant or of his servants, even though such be in fact the actual cause of the breach, it is obvious that proof on the
part of defendant that the negligence or omission of his servants or agents caused the breach of the contract would not constitute a
defense to the action. If the negligence of servants or agents could be invoked as a means of discharging the liability arising from
contract, the anomalous result would be that person acting through the medium of agents or servants in the performance of their
contracts, would be in a better position than those acting in person. If one delivers a valuable watch to watchmaker who contract
to repair it, and the bailee, by a personal negligent act causes its destruction, he is unquestionably liable. Would it be logical to
free him from his liability for the breach of his contract, which involves the duty to exercise due care in the preservation of the
watch, if he shows that it was his servant whose negligence caused the injury? If such a theory could be accepted, juridical
persons would enjoy practically complete immunity from damages arising from the breach of their contracts if caused by
negligent acts as such juridical persons can of necessity only act through agents or servants, and it would no doubt be true in most
instances that reasonable care had been taken in selection and direction of such servants. If one delivers securities to a banking
corporation as collateral, and they are lost by reason of the negligence of some clerk employed by the bank, would it be just and
reasonable to permit the bank to relieve itself of liability for the breach of its contract to return the collateral upon the payment of
the debt by proving that due care had been exercised in the selection and direction of the clerk?
This distinction between culpa aquiliana, as the source of an obligation, and culpa contractual as a mere incident to the
performance of a contract has frequently been recognized by the supreme court of Spain. (Sentencias of June 27, 1894;
November 20, 1896; and December 13, 1896.) In the decisions of November 20, 1896, it appeared that plaintiff's action arose ex
contractu, but that defendant sought to avail himself of the provisions of article 1902 of the Civil Code as a defense. The Spanish
Supreme Court rejected defendant's contention, saying:

These are not cases of injury caused, without any pre-existing obligation, by fault or negligence, such as those to which
article 1902 of the Civil Code relates, but of damages caused by the defendant's failure to carry out the undertakings
imposed by the contracts . . . .

A brief review of the earlier decision of this court involving the liability of employers for damage done by the negligent acts of
their servants will show that in no case has the court ever decided that the negligence of the defendant's servants has been held to
constitute a defense to an action for damages for breach of contract.

In the case of Johnson vs. David (5 Phil. Rep., 663), the court held that the owner of a carriage was not liable for the damages
caused by the negligence of his driver. In that case the court commented on the fact that no evidence had been adduced in the trial
court that the defendant had been negligent in the employment of the driver, or that he had any knowledge of his lack of skill or
carefulness.

In the case of Baer Senior & Co's Successors vs. Compania Maritima (6 Phil. Rep., 215), the plaintiff sued the defendant for
damages caused by the loss of a barge belonging to plaintiff which was allowed to get adrift by the negligence of defendant's
servants in the course of the performance of a contract of towage. The court held, citing Manresa (vol. 8, pp. 29, 69) that if the
"obligation of the defendant grew out of a contract made between it and the plaintiff . . . we do not think that the provisions of
articles 1902 and 1903 are applicable to the case."

In the case of Chapman vs. Underwood (27 Phil. Rep., 374), plaintiff sued the defendant to recover damages for the personal
injuries caused by the negligence of defendant's chauffeur while driving defendant's automobile in which defendant was riding at
the time. The court found that the damages were caused by the negligence of the driver of the automobile, but held that the
master was not liable, although he was present at the time, saying:

. . . unless the negligent acts of the driver are continued for a length of time as to give the owner a reasonable
opportunity to observe them and to direct the driver to desist therefrom. . . . The act complained of must be continued in
the presence of the owner for such length of time that the owner by his acquiescence, makes the driver's acts his own.

In the case of Yamada vs. Manila Railroad Co. and Bachrach Garage & Taxicab Co. (33 Phil. Rep., 8), it is true that the court
rested its conclusion as to the liability of the defendant upon article 1903, although the facts disclosed that the injury complaint of
by plaintiff constituted a breach of the duty to him arising out of the contract of transportation. The express ground of the
decision in this case was that article 1903, in dealing with the liability of a master for the negligent acts of his servants "makes the
distinction between private individuals and public enterprise;" that as to the latter the law creates a rebuttable presumption of
negligence in the selection or direction of servants; and that in the particular case the presumption of negligence had not been
overcome.

It is evident, therefore that in its decision Yamada case, the court treated plaintiff's action as though founded in tort rather than as
based upon the breach of the contract of carriage, and an examination of the pleadings and of the briefs shows that the questions
of law were in fact discussed upon this theory. Viewed from the standpoint of the defendant the practical result must have been
the same in any event. The proof disclosed beyond doubt that the defendant's servant was grossly negligent and that his
negligence was the proximate cause of plaintiff's injury. It also affirmatively appeared that defendant had been guilty of
negligence in its failure to exercise proper discretion in the direction of the servant. Defendant was, therefore, liable for the injury
suffered by plaintiff, whether the breach of the duty were to be regarded as constituting culpa aquiliana or culpa contractual. As
Manresa points out (vol. 8, pp. 29 and 69) whether negligence occurs an incident in the course of the performance of a
contractual undertaking or its itself the source of an extra-contractual undertaking obligation, its essential characteristics are
identical. There is always an act or omission productive of damage due to carelessness or inattention on the part of the defendant.
Consequently, when the court holds that a defendant is liable in damages for having failed to exercise due care, either directly, or
in failing to exercise proper care in the selection and direction of his servants, the practical result is identical in either case.
Therefore, it follows that it is not to be inferred, because the court held in the Yamada case that defendant was liable for the
damages negligently caused by its servants to a person to whom it was bound by contract, and made reference to the fact that the
defendant was negligent in the selection and control of its servants, that in such a case the court would have held that it would
have been a good defense to the action, if presented squarely upon the theory of the breach of the contract, for defendant to have
proved that it did in fact exercise care in the selection and control of the servant.
The true explanation of such cases is to be found by directing the attention to the relative spheres of contractual and extra-
contractual obligations. The field of non- contractual obligation is much more broader than that of contractual obligations,
comprising, as it does, the whole extent of juridical human relations. These two fields, figuratively speaking, concentric; that is to
say, the mere fact that a person is bound to another by contract does not relieve him from extra-contractual liability to such
person. When such a contractual relation exists the obligor may break the contract under such conditions that the same act which
constitutes the source of an extra-contractual obligation had no contract existed between the parties.

The contract of defendant to transport plaintiff carried with it, by implication, the duty to carry him in safety and to provide safe
means of entering and leaving its trains (civil code, article 1258). That duty, being contractual, was direct and immediate, and its
non-performance could not be excused by proof that the fault was morally imputable to defendant's servants.

The railroad company's defense involves the assumption that even granting that the negligent conduct of its servants in placing an
obstruction upon the platform was a breach of its contractual obligation to maintain safe means of approaching and leaving its
trains, the direct and proximate cause of the injury suffered by plaintiff was his own contributory negligence in failing to wait
until the train had come to a complete stop before alighting. Under the doctrine of comparative negligence announced in the
Rakes case (supra), if the accident was caused by plaintiff's own negligence, no liability is imposed upon defendant's negligence
and plaintiff's negligence merely contributed to his injury, the damages should be apportioned. It is, therefore, important to
ascertain if defendant was in fact guilty of negligence.

It may be admitted that had plaintiff waited until the train had come to a full stop before alighting, the particular injury suffered
by him could not have occurred. Defendant contends, and cites many authorities in support of the contention, that it is
negligence per se for a passenger to alight from a moving train. We are not disposed to subscribe to this doctrine in its absolute
form. We are of the opinion that this proposition is too badly stated and is at variance with the experience of every-day life. In
this particular instance, that the train was barely moving when plaintiff alighted is shown conclusively by the fact that it came to
stop within six meters from the place where he stepped from it. Thousands of person alight from trains under these conditions
every day of the year, and sustain no injury where the company has kept its platform free from dangerous obstructions. There is
no reason to believe that plaintiff would have suffered any injury whatever in alighting as he did had it not been for defendant's
negligent failure to perform its duty to provide a safe alighting place.

We are of the opinion that the correct doctrine relating to this subject is that expressed in Thompson's work on Negligence (vol.
3, sec. 3010) as follows:

The test by which to determine whether the passenger has been guilty of negligence in attempting to alight from a
moving railway train, is that of ordinary or reasonable care. It is to be considered whether an ordinarily prudent person,
of the age, sex and condition of the passenger, would have acted as the passenger acted under the circumstances
disclosed by the evidence. This care has been defined to be, not the care which may or should be used by the prudent
man generally, but the care which a man of ordinary prudence would use under similar circumstances, to avoid injury."
(Thompson, Commentaries on Negligence, vol. 3, sec. 3010.)

Or, it we prefer to adopt the mode of exposition used by this court in Picart vs. Smith (37 Phil. rep., 809), we may say that the test
is this; Was there anything in the circumstances surrounding the plaintiff at the time he alighted from the train which would have
admonished a person of average prudence that to get off the train under the conditions then existing was dangerous? If so, the
plaintiff should have desisted from alighting; and his failure so to desist was contributory negligence. 1awph!l. net

As the case now before us presents itself, the only fact from which a conclusion can be drawn to the effect that plaintiff was
guilty of contributory negligence is that he stepped off the car without being able to discern clearly the condition of the platform
and while the train was yet slowly moving. In considering the situation thus presented, it should not be overlooked that the
plaintiff was, as we find, ignorant of the fact that the obstruction which was caused by the sacks of melons piled on the platform
existed; and as the defendant was bound by reason of its duty as a public carrier to afford to its passengers facilities for safe
egress from its trains, the plaintiff had a right to assume, in the absence of some circumstance to warn him to the contrary, that
the platform was clear. The place, as we have already stated, was dark, or dimly lighted, and this also is proof of a failure upon
the part of the defendant in the performance of a duty owing by it to the plaintiff; for if it were by any possibility concede that it
had right to pile these sacks in the path of alighting passengers, the placing of them adequately so that their presence would be
revealed.

As pertinent to the question of contributory negligence on the part of the plaintiff in this case the following circumstances are to
be noted: The company's platform was constructed upon a level higher than that of the roadbed and the surrounding ground. The
distance from the steps of the car to the spot where the alighting passenger would place his feet on the platform was thus reduced,
thereby decreasing the risk incident to stepping off. The nature of the platform, constructed as it was of cement material, also
assured to the passenger a stable and even surface on which to alight. Furthermore, the plaintiff was possessed of the vigor and
agility of young manhood, and it was by no means so risky for him to get off while the train was yet moving as the same act
would have been in an aged or feeble person. In determining the question of contributory negligence in performing such act —
that is to say, whether the passenger acted prudently or recklessly — the age, sex, and physical condition of the passenger are
circumstances necessarily affecting the safety of the passenger, and should be considered. Women, it has been observed, as a
general rule are less capable than men of alighting with safety under such conditions, as the nature of their wearing apparel
obstructs the free movement of the limbs. Again, it may be noted that the place was perfectly familiar to the plaintiff as it was his
daily custom to get on and of the train at this station. There could, therefore, be no uncertainty in his mind with regard either to
the length of the step which he was required to take or the character of the platform where he was alighting. Our conclusion is
that the conduct of the plaintiff in undertaking to alight while the train was yet slightly under way was not characterized by
imprudence and that therefore he was not guilty of contributory negligence.

The evidence shows that the plaintiff, at the time of the accident, was earning P25 a month as a copyist clerk, and that the injuries
he has suffered have permanently disabled him from continuing that employment. Defendant has not shown that any other
gainful occupation is open to plaintiff. His expectancy of life, according to the standard mortality tables, is approximately thirty-
three years. We are of the opinion that a fair compensation for the damage suffered by him for his permanent disability is the sum
of P2,500, and that he is also entitled to recover of defendant the additional sum of P790.25 for medical attention, hospital
services, and other incidental expenditures connected with the treatment of his injuries.

The decision of lower court is reversed, and judgment is hereby rendered plaintiff for the sum of P3,290.25, and for the costs of
both instances. So ordered.

G.R. No. 34840 September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,

vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO VELASCO, and
SATURNINO CORTEZ, defendants-appellants.

L.D. Lockwood for appellants Velasco and Cortez.

San Agustin and Roxas for other appellants.
Ramon Diokno for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five defendants, to recover damages
in the amount of P10,000, for physical injuries suffered as a result of an automobile accident. On judgment being rendered as
prayed for by the plaintiff, both sets of defendants appealed.

On February 2, 1930, a passenger truck and an automobile of private ownership collided while attempting to pass each other on
the Talon bridge on the Manila South Road in the municipality of Las Piñas, Province of Rizal. The truck was driven by the
chauffeur Abelardo Velasco, and was owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a
lad 18 years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At the time of the
collision, the father was not in the car, but the mother, together will several other members of the Gutierrez family, seven in all,
were accommodated therein. A passenger in the autobus, by the name of Narciso Gutierrez, was en route from San Pablo,
Laguna, to Manila. The collision between the bus and the automobile resulted in Narciso Gutierrez suffering a fracture right leg
which required medical attendance for a considerable period of time, and which even at the date of the trial appears not to have
healed properly.

It is conceded that the collision was caused by negligence pure and simple. The difference between the parties is that, while the
plaintiff blames both sets of defendants, the owner of the passenger truck blames the automobile, and the owner of the
automobile, in turn, blames the truck. We have given close attention to these highly debatable points, and having done so, a
majority of the court are of the opinion that the findings of the trial judge on all controversial questions of fact find sufficient
support in the record, and so should be maintained. With this general statement set down, we turn to consider the respective legal
obligations of the defendants.

In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may be explained that the youth
Bonifacio was in incompetent chauffeur, that he was driving at an excessive rate of speed, and that, on approaching the bridge
and the truck, he lost his head and so contributed by his negligence to the accident. The guaranty given by the father at the time
the son was granted a license to operate motor vehicles made the father responsible for the acts of his son. Based on these facts,
pursuant to the provisions of article 1903 of the Civil Code, the father alone and not the minor or the mother, would be liable for
the damages caused by the minor.

We are dealing with the civil law liability of parties for obligations which arise from fault or negligence. At the same time, we
believe that, as has been done in other cases, we can take cognizance of the common law rule on the same subject. In the United
States, it is uniformly held that the head of a house, the owner of an automobile, who maintains it for the general use of his family
is liable for its negligent operation by one of his children, whom he designates or permits to run it, where the car is occupied and
being used at the time of the injury for the pleasure of other members of the owner's family than the child driving it. The theory
of the law is that the running of the machine by a child to carry other members of the family is within the scope of the owner's
business, so that he is liable for the negligence of the child because of the relationship of master and servant. (Huddy On
Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Atl., 322.) The liability of Saturnino Cortez, the owner of the truck,
and of his chauffeur Abelardo Velasco rests on a different basis, namely, that of contract which, we think, has been sufficiently
demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason for this conclusion reaches to
the findings of the trial court concerning the position of the truck on the bridge, the speed in operating the machine, and the lack
of care employed by the chauffeur. While these facts are not as clearly evidenced as are those which convict the other defendant,
we nevertheless hesitate to disregard the points emphasized by the trial judge. In its broader aspects, the case is one of two drivers
approaching a narrow bridge from opposite directions, with neither being willing to slow up and give the right of way to the
other, with the inevitable result of a collision and an accident.

The defendants Velasco and Cortez further contend that there existed contributory negligence on the part of the plaintiff,
consisting principally of his keeping his foot outside the truck, which occasioned his injury. In this connection, it is sufficient to
state that, aside from the fact that the defense of contributory negligence was not pleaded, the evidence bearing out this theory of
the case is contradictory in the extreme and leads us far afield into speculative matters.

The last subject for consideration relates to the amount of the award. The appellee suggests that the amount could justly be raised
to P16,517, but naturally is not serious in asking for this sum, since no appeal was taken by him from the judgment. The other
parties unite in challenging the award of P10,000, as excessive. All facts considered, including actual expenditures and damages
for the injury to the leg of the plaintiff, which may cause him permanent lameness, in connection with other adjudications of this
court, lead us to conclude that a total sum for the plaintiff of P5,000 would be fair and reasonable. The difficulty in
approximating the damages by monetary compensation is well elucidated by the divergence of opinion among the members of
the court, three of whom have inclined to the view that P3,000 would be amply sufficient, while a fourth member has argued that
P7,500 would be none too much.

In consonance with the foregoing rulings, the judgment appealed from will be modified, and the plaintiff will have judgment in
his favor against the defendants Manuel Gutierrez, Abelardo Velasco, and Saturnino Cortez, jointly and severally, for the sum of
P5,000, and the costs of both instances.

G.R. No. 178610 November 17, 2010

HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF RETIREMENT PLAN, Retirement Trust Fund,
Inc.) Petitioner,
vs.
SPOUSES BIENVENIDO AND EDITHA BROQUEZA, Respondents.

DECISION

CARPIO, J.:

G.R. No. 178610 is a petition for review1 assailing the Decision2 promulgated on 30 March 2006 by the Court of Appeals (CA) in
CA-G.R. SP No. 62685. The appellate court granted the petition filed by Fe Gerong (Gerong) and Spouses Bienvenido and
Editha Broqueza (spouses Broqueza) and dismissed the consolidated complaints filed by Hongkong and Shanghai Banking
Corporation, Ltd. - Staff Retirement Plan (HSBCL-SRP) for recovery of sum of money. The appellate court reversed and set
aside the Decision3 of Branch 139 of the Regional Trial Court of Makati City (RTC) in Civil Case No. 00-787 dated 11
December 2000, as well as its Order4 dated 5 September 2000. The RTC’s decision affirmed the Decision 5 dated 28 December
1999 of Branch 61 of the Metropolitan Trial Court (MeTC) of Makati City in Civil Case No. 52400 for Recovery of a Sum of
Money.

The Facts
The appellate court narrated the facts as follows:

Petitioners Gerong and [Editha] Broqueza (defendants below) are employees of Hongkong and Shanghai Banking Corporation
(HSBC). They are also members of respondent Hongkong Shanghai Banking Corporation, Ltd. Staff Retirement Plan (HSBCL-
SRP, plaintiff below). The HSBCL-SRP is a retirement plan established by HSBC through its Board of Trustees for the benefit of
the employees.

On October 1, 1990, petitioner [Editha] Broqueza obtained a car loan in the amount of Php175,000.00. On December 12, 1991,
she again applied and was granted an appliance loan in the amount of Php24,000.00. On the other hand, petitioner Gerong
applied and was granted an emergency loan in the amount of Php35,780.00 on June 2, 1993. These loans are paid through
automatic salary deduction.

Meanwhile [in 1993], a labor dispute arose between HSBC and its employees. Majority of HSBC’s employees were terminated,
among whom are petitioners Editha Broqueza and Fe Gerong. The employees then filed an illegal dismissal case before the
National Labor Relations Commission (NLRC) against HSBC. The legality or illegality of such termination is now pending
before this appellate Court in CA G.R. CV No. 56797, entitled Hongkong Shanghai Banking Corp. Employees Union, et al. vs.
National Labor Relations Commission, et al.

Because of their dismissal, petitioners were not able to pay the monthly amortizations of their respective loans. Thus, respondent
HSBCL-SRP considered the accounts of petitioners delinquent. Demands to pay the respective obligations were made upon
petitioners, but they failed to pay.6

HSBCL-SRP, acting through its Board of Trustees and represented by Alejandro L. Custodio, filed Civil Case No. 52400 against
the spouses Broqueza on 31 July 1996. On 19 September 1996, HSBCL-SRP filed Civil Case No. 52911 against Gerong. Both
suits were civil actions for recovery and collection of sums of money.

The Metropolitan Trial Court’s Ruling

On 28 December 1999, the MeTC promulgated its Decision 7 in favor of HSBCL-SRP. The MeTC ruled that the nature of
HSBCL-SRP’s demands for payment is civil and has no connection to the ongoing labor dispute. Gerong and Editha Broqueza’s
termination from employment resulted in the loss of continued benefits under their retirement plans. Thus, the loans secured by
their future retirement benefits to which they are no longer entitled are reduced to unsecured and pure civil obligations. As
unsecured and pure obligations, the loans are immediately demandable.

The dispositive portion of the MeTC’s decision reads:

WHEREFORE, premises considered and in view of the foregoing, the Court finds that the plaintiff was able to prove by a
preponderance of evidence the existence and immediate demandability of the defendants’ loan obligations as judgment is hereby
rendered in favor of the plaintiff and against the defendants in both cases, ordering the latter:

1. In Civil Case No. 52400, to pay the amount of Php116,740.00 at six percent interest per annum from the time of
demand and in Civil Case No. 52911, to pay the amount of Php25,344.12 at six percent per annum from the time of the
filing of these cases, until the amount is fully paid;

2. To pay the amount of Php20,000.00 each as reasonable attorney’s fees;

3. Cost of suit.

SO ORDERED.8

Gerong and the spouses Broqueza filed a joint appeal of the MeTC’s decision before the RTC. Gerong’s case was docketed Civil
Case No. 00-786, while the spouses Broqueza’s case was docketed as Civil Case No. 00-787.

The Regional Trial Court’s Ruling

The RTC initially denied the joint appeal because of the belated filing of Gerong and the spouses Broqueza’s memorandum. The
RTC later reconsidered the order of denial and resolved the issues in the interest of justice.

On 11 December 2000, the RTC affirmed the MeTC’s decision in toto.9

The RTC ruled that Gerong and Editha Broqueza’s termination from employment disqualified them from availing of benefits
under their retirement plans. As a consequence, there is no longer any security for the loans. HSBCL-SRP has a legal right to
demand immediate settlement of the unpaid balance because of Gerong and Editha Broqueza’s continued default in payment and
their failure to provide new security for their loans. Moreover, the absence of a period within which to pay the loan allows
HSBCL-SRP to demand immediate payment. The loan obligations are considered pure obligations, the fulfillment of which are
demandable at once.

Gerong and the spouses Broqueza then filed a Petition for Review under Rule 42 before the CA.

The Ruling of the Court of Appeals

On 30 March 2006, the CA rendered its Decision10 which reversed the 11 December 2000 Decision of the RTC. The CA ruled
that the HSBCL-SRP’s complaints for recovery of sum of money against Gerong and the spouses Broqueza are premature as the
loan obligations have not yet matured. Thus, no cause of action accrued in favor of HSBCL-SRP. The dispositive portion of the
appellate court’s Decision reads as follows:

WHEREFORE, the assailed Decision of the RTC is REVERSED and SET ASIDE. A new one is hereby rendered DISMISSING
the consolidated complaints for recovery of sum of money.

SO ORDERED.11

HSBCL-SRP filed a motion for reconsideration which the CA denied for lack of merit in its Resolution 12 promulgated on 19 June
2007.

On 6 August 2007, HSBCL-SRP filed a manifestation withdrawing the petition against Gerong because she already settled her
obligations. In a Resolution13 of this Court dated 10 September 2007, this Court treated the manifestation as a motion to withdraw
the petition against Gerong, granted the motion, and considered the case against Gerong closed and terminated.

Issues

HSBCL-SRP enumerated the following grounds to support its Petition:

I. The Court of Appeals has decided a question of substance in a way not in accord with law and applicable decisions of
this Honorable Court; and

II. The Court of Appeals has departed from the accepted and usual course of judicial proceedings in reversing the
decision of the Regional Trial Court and the Metropolitan Trial Court. 14

The Court’s Ruling

The petition is meritorious. We agree with the rulings of the MeTC and the RTC.

The Promissory Notes uniformly provide:

PROMISSORY NOTE

P_____ Makati, M.M. ____ 19__

FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to pay to THE HSBC RETIREMENT PLAN (hereinafter
called the "PLAN") at its office in the Municipality of Makati, Metro Manila, on or before until fully paid the sum of
PESOS ___ (P___) Philippine Currency without discount, with interest from date hereof at the rate of Six per cent (6%) per
annum, payable monthly.

I/WE agree that the PLAN may, upon written notice, increase the interest rate stipulated in this note at any time depending on
prevailing conditions.

I/WE hereby expressly consent to any extensions or renewals hereof for a portion or whole of the principal without notice to the
other(s), and in such a case our liability shall remain joint and several.
1avvphi1

In case collection is made by or through an attorney, I/WE jointly and severally agree to pay ten percent (10%) of the amount due
on this note (but in no case less than P200.00) as and for attorney’s fees in addition to expenses and costs of suit.

In case of judicial execution, I/WE hereby jointly and severally waive our rights under the provisions of Rule 39, Section 12 of
the Rules of Court.15

In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil Code:

Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown
to the parties, is demandable at once.

x x x. (Emphasis supplied.)

We affirm the findings of the MeTC and the RTC that there is no date of payment indicated in the Promissory Notes. The RTC is
correct in ruling that since the Promissory Notes do not contain a period, HSBCL-SRP has the right to demand immediate
payment. Article 1179 of the Civil Code applies. The spouses Broqueza’s obligation to pay HSBCL-SRP is a pure obligation.
The fact that HSBCL-SRP was content with the prior monthly check-off from Editha Broqueza’s salary is of no moment. Once
Editha Broqueza defaulted in her monthly payment, HSBCL-SRP made a demand to enforce a pure obligation.

In their Answer, the spouses Broqueza admitted that prior to Editha Broqueza’s dismissal from HSBC in December 1993, she
"religiously paid the loan amortizations, which HSBC collected through payroll check-off."16 A definite amount is paid to
HSBCL-SRP on a specific date. Editha Broqueza authorized HSBCL-SRP to make deductions from her payroll until her loans
are fully paid. Editha Broqueza, however, defaulted in her monthly loan payment due to her dismissal. Despite the spouses
Broqueza’s protestations, the payroll deduction is merely a convenient mode of payment and not the sole source of payment for
the loans. HSBCL-SRP never agreed that the loans will be paid only through salary deductions. Neither did HSBCL-SRP agree
that if Editha Broqueza ceases to be an employee of HSBC, her obligation to pay the loans will be suspended. HSBCL-SRP can
immediately demand payment of the loans at anytime because the obligation to pay has no period. Moreover, the spouses
Broqueza have already incurred in default in paying the monthly installments.

Finally, the enforcement of a loan agreement involves "debtor-creditor relations founded on contract and does not in any way
concern employee relations. As such it should be enforced through a separate civil action in the regular courts and not before the
Labor Arbiter."17

WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-G.R. SP No. 62685 promulgated on 30
March 2006 is REVERSED and SET ASIDE. The decision of Branch 139 of the Regional Trial Court of Makati City in Civil
Case No. 00-787, as well as the decision of Branch 61 of the Metropolitan Trial Court of Makati City in Civil Case No. 52400
against the spouses Bienvenido and Editha Broqueza, are AFFIRMED. Costs against respondents.

SO ORDERED.

G.R. No. L-29900 June 28, 1974

IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE PAY, petitioner-
appellant,
vs.
SEGUNDINA CHUA VDA. DE PALANCA, oppositor-appellee.

Florentino B. del Rosario for petitioner-appellant.

Manuel V. San Jose for oppositor-appellee.

FERNANDO, J.:p

There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While several points were raised, the decisive issue is
whether a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen years earlier with the debtor sued
promising to pay either upon receipt by him of his share from a certain estate or upon demand, the basis for the action being the latter alternative. The
lower court held that the ten-year period of limitation of actions did apply, the note being immediately due and demandable, the creditor admitting
expressly that he was relying on the wording "upon demand." On the above facts as found, and with the law being as it is, it cannot be said that its decision
is infected with error. We affirm.

From the appealed decision, the following appears: "The parties in this case agreed to submit the matter for resolution on the
basis of their pleadings and annexes and their respective memoranda submitted. Petitioner George Pay is a creditor of the Late
Justo Palanca who died in Manila on July 3, 1963. The claim of the petitioner is based on a promissory note dated January 30,
1952, whereby the late Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca promised to pay George Pay the amount of
P26,900.00, with interest thereon at the rate of 12% per annum. George Pay is now before this Court, asking that Segundina Chua
vda. de Palanca, surviving spouse of the late Justo Palanca, he appointed as administratrix of a certain piece of property which is
a residential dwelling located at 2656 Taft Avenue, Manila, covered by Tax Declaration No. 3114 in the name of Justo Palanca,
assessed at P41,800.00. The idea is that once said property is brought under administration, George Pay, as creditor, can file his
claim against the administratrix." It then stated that the petition could not prosper as there was a refusal on the part of Segundina
1

Chua Vda. de Palanca to be appointed as administratrix; that the property sought to be administered no longer belonged to the
debtor, the late Justo Palanca; and that the rights of petitioner-creditor had already prescribed. The promissory note, dated
January 30, 1962, is worded thus: " `For value received from time to time since 1947, we [jointly and severally promise to] pay to
Mr. [George Pay] at his office at the China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos]
(P26,900.00), with interest thereon at the rate of 12% per annum upon receipt by either of the undersigned of cash payment from
the Estate of the late Don Carlos Palanca or upon demand'. . . . As stated, this promissory note is signed by Rosa Gonzales Vda.
de Carlos Palanca and Justo Palanca." Then came this paragraph: "The Court has inquired whether any cash payment has been
2

received by either of the signers of this promissory note from the Estate of the late Carlos Palanca. Petitioner informed that he
does not insist on this provision but that petitioner is only claiming on his right under the promissory note ." After which, came 3

the ruling that the wording of the promissory note being "upon demand," the obligation was immediately due. Since it was dated
January 30, 1952, it was clear that more "than ten (10) years has already transpired from that time until to date. The action,
therefore, of the creditor has definitely prescribed." The result, as above noted, was the dismissal of the petition.
4

In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the correctness of the rulings of the
lower court as to the effect of the refusal of the surviving spouse of the late Justo Palanca to be appointed as administratrix, as to
the property sought to be administered no longer belonging to the debtor, the late Justo Palanca, and as to the rights of petitioner-
creditor having already prescribed. As noted at the outset, only the question of prescription need detain us in the disposition of
this appeal. Likewise, as intimated, the decision must be affirmed, considering the clear tenor of the promissory note.

From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of
his credit could he realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca
presumptively as one of the heirs, or, as expressed therein, "upon demand." There is nothing in the record that would indicate
whether or not the first alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen years after the
execution of the promissory note on January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit
is rather obvious. Article 1179 of the Civil Code provides: "Every obligation whose performance does not depend upon a future
or uncertain event, or upon a past event unknown to the parties, is demandable at once." This used to be Article 1113 of the
Spanish Civil Code of 1889. As far back as Floriano v. Delgado, a 1908 decision, it has been applied according to its express
5

language. The well-known Spanish commentator, Manresa, on this point, states: "Dejando con acierto, el caracter mas teorico y
grafico del acto, o sea la perfeccion de este, se fija, para determinar el concepto de la obligacion pura, en el distinctive de esta, y
que es consecuencia de aquel: la exigibilidad immediata." 6

The obligation being due and demandable, it would appear that the filing of the suit after fifteen years was much too late. For
again, according to the Civil Code, which is based on Section 43 of Act No. 190, the prescriptive period for a written contract is
that of ten years. This is another instance where this Court has consistently adhered to the express language of the applicable
7

norm. There is no necessity therefore of passing upon the other legal questions as to whether or not it did suffice for the petition
8

to fail just because the surviving spouse refuses to be made administratrix, or just because the estate was left with no other
property. The decision of the lower court cannot be overturned.
WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.

G.R. No. L-16570 March 9, 1922

SMITH, BELL & CO., LTD., plaintiff-appellant,

vs.
VICENTE SOTELO MATTI, defendant-appellant.

Ross and Lawrence and Ewald E. Selph for plaintiff-appellant.

Ramon Sotelo for defendant-appellant.

ROMUALDEZ, J.:

In August, 1918, the plaintiff corporation and the defendant, Mr. Vicente Sotelo, entered into contracts whereby the former
obligated itself to sell, and the latter to purchase from it, two steel tanks, for the total price of twenty-one thousand pesos
(P21,000), the same to be shipped from New York and delivered at Manila "within three or four months;" two expellers at the
price of twenty five thousand pesos (P25,000) each, which were to be shipped from San Francisco in the month of September,
1918, or as soon as possible; and two electric motors at the price of two thousand pesos (P2,000) each, as to the delivery of which
stipulation was made, couched in these words: "Approximate delivery within ninety days. — This is not guaranteed."

The tanks arrived at Manila on the 27th of April, 1919: the expellers on the 26th of October, 1918; and the motors on the 27th of
February, 1919.

The plaintiff corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr. Sotelo refused to receive them
and to pay the prices stipulated.

The plaintiff brought suit against the defendant, based on four separate causes of action, alleging, among other facts, that it
immediately notified the defendant of the arrival of the goods, and asked instructions from him as to the delivery thereof, and that
the defendant refused to receive any of them and to pay their price. The plaintiff, further, alleged that the expellers and the motors
were in good condition. (Amended complaint, pages 16-30, Bill of Exceptions.)

In their answer, the defendant, Mr. Sotelo, and the intervenor, the Manila Oil Refining and By-Products Co., Inc., denied the
plaintiff's allegations as to the shipment of these goods and their arrival at Manila, the notification to the defendant, Mr. Sotelo,
the latter's refusal to receive them and pay their price, and the good condition of the expellers and the motors, alleging as special
defense that Mr. Sotelo had made the contracts in question as manager of the intervenor, the Manila Oil Refining and By-
Products Co., Inc which fact was known to the plaintiff, and that "it was only in May, 1919, that it notified the intervenor that
said tanks had arrived, the motors and the expellers having arrived incomplete and long after the date stipulated." As a
counterclaim or set-off, they also allege that, as a consequence of the plaintiff's delay in making delivery of the goods, which the
intervenor intended to use in the manufacture of cocoanut oil, the intervenor suffered damages in the sums of one hundred sixteen
thousand seven hundred eighty-three pesos and ninety-one centavos (P116,783.91) for the nondelivery of the tanks, and twenty-
one thousand two hundred and fifty pesos (P21,250) on account of the expellers and the motors not having arrived in due time.

The case having been tried, the court below absolved the defendants from the complaint insofar as the tanks and the electric
motors were concerned, but rendered judgment against them, ordering them to "receive the aforesaid expellers and pay the
plaintiff the sum of fifty thousand pesos (P50,00), the price of the said goods, with legal interest thereon from July 26, 1919, and
costs."

Both parties appeal from this judgment, each assigning several errors in the findings of the lower court.

The principal point at issue in this case is whether or not, under the contracts entered into and the circumstances established in the
record, the plaintiff has fulfilled, in due time, its obligation to bring the goods in question to Manila. If it has, then it is entitled to
the relief prayed for; otherwise, it must be held guilty of delay and liable for the consequences thereof.

To solve this question, it is necessary to determine what period was fixed for the delivery of the goods.

As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both of them we find this clause:
 To be delivered within 3 or 4 months — The promise or indication of shipment carries with it absolutely no obligation
on our part — Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirement of
the United States Government, or a number of causes may act to entirely vitiate the indication of shipment as stated. In
other words, the order is accepted on the basis of shipment at Mill's convenience, time of shipment being merely an
indication of what we hope to accomplish.

In the contract Exhibit C (page 63 of the record), with reference to the expellers, the following stipulation appears:

The following articles, hereinbelow more particularly described, to be shipped at San Francisco within the month of
September /18, or as soon as possible. — Two Anderson oil expellers . . . .

And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears:

Approximate delivery within ninety days. — This is not guaranteed. — This sale is subject to our being able to obtain
Priority Certificate, subject to the United States Government requirements and also subject to confirmation of
manufactures.

In all these contracts, there is a final clause as follows:

The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes or other causes known as
"Force Majeure" entirely beyond the control of the sellers or their representatives.

Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the goods. As to the tanks, the
agreement was that the delivery was to be made "within 3 or 4 months," but that period was subject to the contingencies referred
to in a subsequent clause. With regard to the expellers, the contract says "within the month of September, 1918," but to this is
added "or as soon as possible." And with reference to the motors, the contract contains this expression, "Approximate delivery
within ninety days," but right after this, it is noted that "this is not guaranteed."

The oral evidence falls short of fixing such period.

From the record it appears that these contracts were executed at the time of the world war when there existed rigid restrictions on
the export from the United States of articles like the machinery in question, and maritime, as well as railroad, transportation was
difficult, which fact was known to the parties; hence clauses were inserted in the contracts, regarding "Government regulations,
railroad embargoes, lack of vessel space, the exigencies of the requirements of the United States Government," in connection
with the tanks and "Priority Certificate, subject to the United State Government requirements," with respect to the motors. At the
time of the execution of the contracts, the parties were not unmindful of the contingency of the United States Government not
allowing the export of the goods, nor of the fact that the other foreseen circumstances therein stated might prevent it.

Considering these contracts in the light of the civil law, we cannot but conclude that the term which the parties attempted to fix is
so uncertain that one cannot tell just whether, as a matter of fact, those articles could be brought to Manila or not. If that is the
case, as we think it is, the obligations must be regarded as conditional.

Obligations for the performance of which a day certain has been fixed shall be demandable only when the day arrives.

A day certain is understood to be one which must necessarily arrive, even though its date be unknown.

If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is conditional and shall be
governed by the rules of the next preceding section. (referring to pure and conditional obligations). (Art. 1125, Civ.
Code.)

And as the export of the machinery in question was, as stated in the contract, contingent upon the sellers obtaining certificate of
priority and permission of the United States Government, subject to the rules and regulations, as well as to railroad embargoes,
then the delivery was subject to a condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but
upon the will of third persons who could in no way be compelled to fulfill the condition. In cases like this, which are not
expressly provided for, but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently performed his
part of the obligation, if he has done all that was in his power, even if the condition has not been fulfilled in reality.
 In such cases, the decisions prior to the Civil Code have held that the obligee having done all that was in his power,
was entitled to enforce performance of the obligation. This performance, which is fictitious — not real — is not
expressly authorized by the Code, which limits itself only to declare valid those conditions and the obligation thereby
affected; but it is neither disallowed, and the Code being thus silent, the old view can be maintained as a doctrine.
(Manresa's commentaries on the Civil Code [1907], vol. 8, page 132.)

The decisions referred to by Mr. Manresa are those rendered by the supreme court of Spain on November 19, 1896, and February
23, 1871.

In the former it is held:

First. That when the fulfillment of the conditions does not depend on the will of the obligor, but on that of a third
person who can in no way be compelled to carry it out, and it is found by the lower court that the obligor has done all in
his power to comply with the obligation, the judgment of the said court, ordering the other party to comply with his part
of the contract, is not contrary to the law of contracts, or to Law 1, Tit. I, Book 10, of the "Novísima Recopilación," or
Law 12, Tit. 11, of Partida 5, when in the said finding of the lower court, no law or precedent is alleged to have been
violated. (Jurisprudencia Civil published by the directors of the Revista General de Legislacion y
Jurisprudencia [1866], vol. 14, page 656.)

In the second decision, the following doctrine is laid down:

Second. That when the fulfillment of the condition does not depend on the will of the obligor, but on that of a third
person, who can in no way be compelled to carry it out, the obligor's part of the contract is complied withalf Belisario
not having exercised his right of repurchase reserved in the sale of Basilio Borja mentioned in paragraph (13) hereof,
the affidavit of Basilio Borja for the consolidacion de dominio was presented for record in the registry of deeds and
recorded in the registry on the same date.

(32) The Maximo Belisario left a widow, the opponent Adelina Ferrer and three minor children, Vitaliana, Eugenio,
and Aureno Belisario as his only heirs.

(33) That in the execution and sales thereunder, in which C. H. McClure appears as the judgment creditor, he was
represented by the opponent Peter W. Addison, who prepared and had charge of publication of the notices of the
various sales and that in none of the sales was the notice published more than twice in a newspaper.

The claims of the opponent-appellant Addison have been very fully and ably argued by his counsel but may, we think,
be disposed of in comparatively few words. As will be seen from the foregoing statement of facts, he rest his title (1) on
the sales under the executions issued in cases Nos. 435, 450, 454, and 499 of the court of the justice of the peace of
Dagupan with the priority of inscription of the last two sales in the registry of deeds, and (2) on a purchase from the
Director of Lands after the land in question had been forfeited to the Government for non-payment of taxes under Act
No. 1791.

The sheriff's sales under the execution mentioned are fatally defective for what of sufficient publication of the notice of
sale. Section 454 of the Code of civil Procedure reads in part as follows:

SEC. 454. Before the sale of property on execution, notice thereof must be given, as follows:

1. In case of perishable property, by posing written notice of the time and place of the sale in three public places of the
municipality or city where the sale is to take place, for such time as may be reasonable, considering the character and
condition of the property;

2. * * * * * * *

3. In cases of real property, by posting a similar notice particularly describing the property, for twenty days in three
public places of the municipality or city where the property is situated, and also where the property is to be sold, and
publishing a copy thereof once a week, for the same period, in some newspaper published or having general circulation
in the province, if there be one. If there are newspaper published in the province in both the Spanish and English
languages, then a like publication for a like period shall be made in one newspaper published in the Spanish language,
 and in one published in the English language: Provided, however, That such publication in a newspaper will not be
required when the assessed valuation of the property does not exceed four hundred pesos;

4. * * * * * * *

Examining the record, we find that in cases Nos. 435 and 450 the sales took place on October 14, 1916; the notice first published
gave the date of the sale as October 15th, but upon discovering that October 15th was a Sunday, the date was changed to October
14th. The correct notice was published twice in a local newspaper, the first publication was made on October 7th and the second
and last on October 14th, the date of the sale itself. The newspaper is a weekly periodical published every Saturday afternoon.

In case No. 454 there were only two publications of the notice in a newspaper, the first publication being made only fourteen
days before the date of the sale. In case No. 499, there were also only two publications, the first of which was made thirteen days
before the sale. In the last case the sale was advertised for the hours of from 8:30 in the morning until 4:30 in the afternoon, in
violation of section 457 of the Code of Civil Procedure. In cases Nos. 435 and 450 the hours advertised were from 9:00 in the
morning until 4.30 in the afternoon. In all of the cases the notices of the sale were prepared by the judgment creditor or his agent,
who also took charged of the publication of such notices.

In the case of Campomanes vs. Bartolome and Germann & Co. (38 Phil., 808), this court held that if a sheriff sells without the
notice prescribe by the Code of Civil Procedure induced thereto by the judgment creditor and the purchaser at the sale is
the judgment creditor, the sale is absolutely void and not title passes. This must now be regarded as the settled doctrine in this
jurisdiction whatever the rule may be elsewhere.

It appears affirmatively from the evidence in the present case that there is a newspaper published in the province where the sale in
question took place and that the assessed valuation of the property disposed of at each sale exceeded P400. Comparing the
requirements of section 454, supra, with what was actually done, it is self-evident that notices of the sales mentioned were not
given as prescribed by the statute and taking into consideration that in connection with these sales the appellant Addison was
either the judgment creditor or else occupied a position analogous to that of a judgment creditor, the sales must be held invalid.

The conveyance or reconveyance of the land from the Director of Lands is equally invalid. The provisions of Act No. 1791
pertinent to the purchase or repurchase of land confiscated for non-payment of taxes are found in section 19 of the Act and read:

. . . In case such redemption be not made within the time above specified the Government of the Philippine Islands shall
have an absolute, indefeasible title to said real property. Upon the expiration of the said ninety days, if redemption be
not made, the provincial treasurer shall immediately notify the Director of Lands of the forfeiture and furnish him with
a description of the property, and said Director of Lands shall have full control and custody thereof to lease or sell the
same or any portion thereof in the same manner as other public lands are leased or sold: Provided, That the original
owner, or his legal representative, shall have the right to repurchase the entire amount of his said real property, at any
time before a sale or contract of sale has been made by the director of Lands to a third party, by paying therefore the
whole sum due thereon at the time of ejectment together with a penalty of ten per centum . . . .

The appellant Addison repurchased under the final proviso of the section quoted and was allowed to do so as the successor in
interest of the original owner under the execution sale above discussed. As we have seen, he acquired no rights under these sales,
was therefore not the successor of the original owner and could only have obtained a valid conveyance of such titles as the
Government might have by following the procedure prescribed by the Public Land Act for the sale of public lands. he is entitled
to reimbursement for the money paid for the redemption of the land, with interest, but has acquired no title through the
redemption.

The question of the priority of the record of the sheriff's sales over that of the sale from Belisario to Borja is extensively argued in
the briefs, but from our point of view is of no importance; void sheriff's or execution sales cannot be validated through inscription
in the Mortgage Law registry.

The opposition of Adelina Ferrer must also be overruled. She maintained that the land in question was community property of the
marriage of Eulalio Belisario and Paula Ira: that upon the death of Paula Ira inealed from is modified, and the defendant Mr.
Vicente Sotelo Matti, sentenced to accept and receive from the plaintiff the tanks, the expellers and the motors in question, and to
pay the plaintiff the sum of ninety-six thousand pesos (P96,000), with legal interest thereon from July 17, 1919, the date of the
filing of the complaint, until fully paid, and the costs of both instances. So ordered.

[G.R. NO. 168338 : February 15, 2008]

 FRANCISCO CHAVEZ, Petitioner, v. RAUL M. GONZALES, in his capacity as the Secretary of the Department of Justice; and NATIONAL
TELECOMMUNICATIONS COMMISSION (NTC),Respondents.

DECISION

PUNO, C.J.:

A. Precis

In this jurisdiction, it is established that freedom of the press is crucial and so inextricably woven into the right to free speech and free expression, that any attempt to
restrict it must be met with an examination so critical that only a danger that is clear and present would be allowed to curtail it.

Indeed, we have not wavered in the duty to uphold this cherished freedom. We have struck down laws and issuances meant to curtail this right, as in Adiong v.
COMELEC,1 Burgos v. Chief of Staff,2 Social Weather Stations v. COMELEC,3 and Bayan v. Executive Secretary Ermita.4 When on its face, it is clear that a
governmental act is nothing more than a naked means to prevent the free exercise of speech, it must be nullified.

B. The Facts

1. The case originates from events that occurred a year after the 2004 national and local elections. On June 5, 2005, Press Secretary Ignacio Bunye told reporters that
the opposition was planning to destabilize the administration by releasing an audiotape of a mobile phone conversation allegedly between the President of the
Philippines, Gloria Macapagal Arroyo, and a high-ranking official of the Commission on Elections (COMELEC). The conversation was audiotaped allegedly through
wire-tapping.5Later, in a Malacañang press briefing, Secretary Bunye produced two versions of the tape, one supposedly the complete version, and the other, a
spliced, "doctored" or altered version, which would suggest that the President had instructed the COMELEC official to manipulate the election results in the
President's favor.6 It seems that Secretary Bunye admitted that the voice was that of President Arroyo, but subsequently made a retraction. 7

2. On June 7, 2005, former counsel of deposed President Joseph Estrada, Atty. Alan Paguia, subsequently released an alleged authentic tape recording of the wiretap.
Included in the tapes were purported conversations of the President, the First Gentleman Jose Miguel Arroyo, COMELEC Commissioner Garcillano, and the late
Senator Barbers.8

3. On June 8, 2005, respondent Department of Justice (DOJ) Secretary Raul Gonzales warned reporters that those who had copies of the compact disc (CD) and those
broasting or publishing its contents could be held liable under the Anti-Wiretapping Act. These persons included Secretary Bunye and Atty. Paguia. He also stated that
persons possessing or airing said tapes were committing a continuing offense, subject to arrest by anybody who had personal knowledge if the crime was committed
or was being committed in their presence.9

4. On June 9, 2005, in another press briefing, Secretary Gonzales ordered the National Bureau of Investigation (NBI) to go after media organizations "found to have
caused the spread, the playing and the printing of the contents of a tape" of an alleged wiretapped conversation involving the President about fixing votes in the 2004
national elections. Gonzales said that he was going to start with Inq7.net,a joint venture between the Philippine Daily Inquirer and GMA7 television network,
because by the very nature of the Internet medium, it was able to disseminate the contents of the tape more widely. He then expressed his intention of inviting the
editors and managers of Inq7.net and GMA7 to a probe, and supposedly declared, "I [have] asked the NBI to conduct a tactical interrogation of all concerned." 10

5. On June 11, 2005, the NTC issued this press release: 11

NTC GIVES FAIR WARNING TO RADIO AND TELEVISION OWNERS/OPERATORS TO OBSERVE ANTI-WIRETAPPING LAW AND PERTINENT
CIRCULARS ON PROGRAM STANDARDS

xxx : xxx : xxx

Taking into consideration the country's unusual situation, and in order not to unnecessarily aggravate the same, the NTC warns all radio stations and television
network owners/operators that the conditions of the authorization and permits issued to them by Government like the Provisional Authority and/or Certificate of
Authority explicitly provides that said companies shall not use [their] stations for the broasting or telecasting of false information or willful misrepresentation.
Relative thereto, it has come to the attention of the [NTC] that certain personalities are in possession of alleged taped conversations which they claim involve the
President of the Philippines and a Commissioner of the COMELEC regarding supposed violation of election laws.

These personalities have admitted that the taped conversations are products of illegal wiretapping operations.

Considering that these taped conversations have not been duly authenticated nor could it be said at this time that the tapes contain an accurate or truthful
representation of what was recorded therein, it is the position of the [NTC] that the continuous airing or broast of the said taped conversations by radio and television
stations is a continuing violation of the Anti-Wiretapping Law and the conditions of the Provisional Authority and/or Certificate of Authority issued to these radio and
television stations. It has been subsequently established that the said tapes are false and/or fraudulent after a prosecution or appropriate investigation, the concerned
radio and television companies are hereby warned that their broast/airing of such false information and/or willful misrepresentation shall be just cause for the
suspension, revocation and/or cancellation of the licenses or authorizations issued to the said companies.

In addition to the above, the [NTC] reiterates the pertinent NTC circulars on program standards to be observed by radio and television stations. NTC Memorandum
Circular 111-12-85 explicitly states, among others, that "all radio broasting and television stations shall, during any broast or telecast, cut off from the air the speech,
play, act or scene or other matters being broast or telecast the tendency thereof is to disseminate false information or such other willful misrepresentation, or to
propose and/or incite treason, rebellion or sedition." The foregoing directive had been reiterated by NTC Memorandum Circular No. 22-89, which, in addition thereto,
prohibited radio, broasting and television stations from using their stations to broast or telecast any speech, language or scene disseminating false information or
willful misrepresentation, or inciting, encouraging or assisting in subversive or treasonable acts.

The [NTC] will not hesitate, after observing the requirements of due process, to apply with full force the provisions of said Circulars and their
accompanying sanctions on erring radio and television stations and their owners/operators.

6. On June 14, 2005, NTC held a dialogue with the Board of Directors of the Kapisanan ng mga Brodkaster sa Pilipinas (KBP). NTC allegedly assured the KBP that
the press release did not violate the constitutional freedom of speech, of expression, and of the press, and the right to information. Accordingly, NTC and KBP issued
a Joint Press Statement which states, among others, that: 12

NTC respects and will not hinder freedom of the press and the right to information on matters of public concern. KBP & its members have always been committed to
the exercise of press freedom with high sense of responsibility and discerning judgment of fairness and honesty.
NTC did not issue any MC [Memorandum Circular] or Order constituting a restraint of press freedom or censorship. The NTC further denies and does not intend to
limit or restrict the interview of members of the opposition or free expression of views.
What is being asked by NTC is that the exercise of press freedom [be] done responsibly.
KBP has program standards that KBP members will observe in the treatment of news and public affairs programs. These include verification of sources, non-airing of
materials that would constitute inciting to sedition and/or rebellion.
The KBP Codes also require that no false statement or willful misrepresentation is made in the treatment of news or commentaries.
The supposed wiretapped tapes should be treated with sensitivity and handled responsibly giving due consideration to the process being undertaken to verify and
validate the authenticity and actual content of the same."

C. The Petition

Petitioner Chavez filed a petition under Rule 65 of the Rules of Court against respondents Secretary Gonzales and the NTC, "praying for the issuance of the writs
of certiorari and prohibition, as extraordinary legal remedies, to annul void proceedings, and to prevent the unlawful, unconstitutional and oppressive exercise of
authority by the respondents."13

Alleging that the acts of respondents are violations of the freedom on expression and of the press, and the right of the people to information on matters of public
concern,14 petitioner specifically asked this Court:

[F]or [the] nullification of acts, issuances, and orders of respondents committed or made since June 6, 2005 until the present that curtail the public's rights to freedom
of expression and of the press, and to information on matters of public concern specifically in relation to information regarding the controversial taped conversion of
President Arroyo and for prohibition of the further commission of such acts, and making of such issuances, and orders by respondents.15

Respondents16 denied that the acts transgress the Constitution, and questioned petitioner's legal standing to file the petition. Among the arguments they raised as to the
validity of the "fair warning" issued by respondent NTC, is that broast media enjoy lesser constitutional guarantees compared to print media, and the warning was
issued pursuant to the NTC's mandate to regulate the telecommunications industry.17 It was also stressed that "most of the [television] and radio stations continue,
even to this date, to air the tapes, but of late within the parameters agreed upon between the NTC and KBP." 18

D. The Procedural Threshold: Legal Standing

To be sure, the circumstances of this case make the constitutional challenge peculiar. Petitioner, who is not a member of the broast media, prays that we strike down
the acts and statements made by respondents as violations of the right to free speech, free expression and a free press. For another, the recipients of the press
statements have not come forward neither intervening nor joining petitioner in this action. Indeed, as a group, they issued a joint statement with respondent NTC that
does not complain about restraints on freedom of the press.

It would seem, then, that petitioner has not met the requisite legal standing, having failed to allege "such a personal stake in the outcome of the controversy as to
assure that concrete adverseness which sharpens the presentation of issues upon which the Court so largely depends for illumination of difficult constitutional
questions." 19

But as early as half a century ago, we have already held that where serious constitutional questions are involved, "the transcendental importance to the public of these
cases demands that they be settled promptly and definitely, brushing aside if we must, technicalities of procedure." 20 Subsequently, this Court has repeatedly and
consistently refused to wield procedural barriers as impediments to its addressing and resolving serious legal questions that greatly impact on public interest,21 in
keeping with the Court's duty under the 1987 Constitution to determine whether or not other branches of government have kept themselves within the limits of the
Constitution and the laws and that they have not abused the discretion given to them.

Thus, in line with the liberal policy of this Court on locus standi when a case involves an issue of overarching significance to our society, 22 we therefore brush aside
technicalities of procedure and take cognizance of this petition, 23 seeing as it involves a challenge to the most exalted of all the civil rights, the freedom of
expression. The petition raises other issues like the extent of the right to information of the public. It is fundamental, however, that we need not address all
issues but only the most decisive one which in the case at bar is whether the acts of the respondents abridge freedom of speech and of the press.

But aside from the primordial issue of determining whether free speech and freedom of the press have been infringed, the case at bar also gives this Court the
opportunity: (1) to distill the essence of freedom of speech and of the press now beclouded by the vagaries of motherhood statements; (2) to clarify the types of
speeches and their differing restraints allowed by law; (3) to discuss the core concepts of prior restraint, content-neutral and content-based regulations and their
constitutional standard of review; (4) to examine the historical difference in the treatment of restraints between print and broast media and stress the standard of
review governing both; and (5) to call attention to the ongoing blurring of the lines of distinction between print and broast media.

E. Re-examining The law on freedom of speech,

of expression and of the press
No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peaceably to assemble and petition the government
for redress of grievances.24

Freedom of expression has gained recognition as a fundamental principle of every democratic government, and given a preferred right that stands on a higher level
than substantive economic freedom or other liberties. The cognate rights codified by Article III, Section 4 of the Constitution, copied almost verbatim from the First
Amendment of the U.S. Bill of Rights,25 were considered the necessary consequence of republican institutions and the complement of free speech. 26 This preferred
status of free speech has also been codified at the international level, its recognition now enshrined in international law as a customary norm that binds all nations. 27

In the Philippines, the primacy and high esteem accorded freedom of expression is a fundamental postulate of our constitutional system. 28 This right was elevated to
constitutional status in the 1935, the 1973 and the 1987 Constitutions, reflecting our own lesson of history, both political and legal, that freedom of speech is an
indispensable condition for nearly every other form of freedom. 29 Moreover, our history shows that the struggle to protect the freedom of speech, expression and the
press was, at bottom, the struggle for the indispensable preconditions for the exercise of other freedoms. 30 For it is only when the people have unbridled access to
information and the press that they will be capable of rendering enlightened judgments. In the oft-quoted words of Thomas Jefferson, we cannot both be free and
ignorant.

E.1. Abstraction of Free Speech

Surrounding the freedom of speech clause are various concepts that we have adopted as part and parcel of our own Bill of Rights provision on this basic
freedom.31 What is embraced under this provision was discussed exhaustively by the Court in Gonzales v. Commission on Elections, 32 in which it was held:

'At the very least, free speech and free press may be identified with the liberty to discuss publicly and truthfully any matter of public interest without censorship and
punishment. There is to be no previous restraint on the communication of views or subsequent liability whether in libel suits, prosecution for sedition, or action for
damages, or contempt proceedings unless there be a clear and present danger of substantive evil that Congress has a right to prevent.33

Gonzales further explained that the vital need of a constitutional democracy for freedom of expression is undeniable, whether as a means of assuring individual self-
fulfillment; of attaining the truth; of assuring participation by the people in social, including political, decision-making; and of maintaining the balance between
stability and change.34 As early as the 1920s, the trend as reflected in Philippine and American decisions was to recognize the broadest scope and assure the widest
latitude for this constitutional guarantee. The trend represents a profound commitment to the principle that debate on public issue should be uninhibited, robust, and
wide-open.35

Freedom of speech and of the press means something more than the right to approve existing political beliefs or economic arrangements, to lend support to official
measures, and to take refuge in the existing climate of opinion on any matter of public consequence. 36 When atrophied, the right becomes meaningless. 37 The right
belongs as well - - if not more - to those who question, who do not conform, who differ. 38 The ideas that may be expressed under this freedom are confined not only to
those that are conventional or acceptable to the majority. To be truly meaningful, freedom of speech and of the press should allow and even encourage the articulation
of the unorthodox view, though it be hostile to or derided by others; or though such view "induces a condition of unrest, creates dissatisfaction with conditions as they
are, or even stirs people to anger."39 To paraphrase Justice Holmes, it is freedom for the thought that we hate, no less than for the thought that agrees with us. 40

The scope of freedom of expression is so broad that it extends protection to nearly all forms of communication. It protects speech, print and assembly regarding
secular as well as political causes, and is not confined to any particular field of human interest. The protection covers myriad matters of public interest or concern
embracing all issues, about which information is needed or appropriate, so as to enable members of society to cope with the exigencies of their period. The
constitutional protection assures the broadest possible exercise of free speech and free press for religious, political, economic, scientific, news, or informational ends,
inasmuch as the Constitution's basic guarantee of freedom to advocate ideas is not confined to the expression of ideas that are conventional or shared by a majority.

The constitutional protection is not limited to the exposition of ideas. The protection afforded free speech extends to speech or publications that are entertaining as
well as instructive or informative. Specifically, in Eastern Broasting Corporation (DYRE) v. Dans,41 this Court stated that all forms of media, whether print or broast,
are entitled to the broad protection of the clause on freedom of speech and of expression.

While all forms of communication are entitled to the broad protection of freedom of expression clause, the freedom of film, television and radio broasting is
somewhat lesser in scope than the freedom accorded to newspapers and other print media, as will be subsequently discussed.

E.2. Differentiation: The Limits & Restraints of Free Speech

From the language of the specific constitutional provision, it would appear that the right to free speech and a free press is not susceptible of any limitation. But the
realities of life in a complex society preclude a literal interpretation of the provision prohibiting the passage of a law that would abridge such freedom. For freedom of
expression is not an absolute, 42 nor is it an "unbridled license that gives immunity for every possible use of language and prevents the punishment of those who abuse
this freedom."

Thus, all speech are not treated the same. Some types of speech may be subjected to some regulation by the State under its pervasive police power, in order that it
may not be injurious to the equal right of others or those of the community or society. 43 The difference in treatment is expected because the relevant interests of one
type of speech, e.g., political speech, may vary from those of another, e.g.,obscene speech. Distinctions have therefore been made in the treatment, analysis, and
evaluation of the permissible scope of restrictions on various categories of speech. 44 We have ruled, for example, that in our jurisdiction slander or libel, lewd and
obscene speech, as well as "fighting words" are not entitled to constitutional protection and may be penalized.45

Moreover, the techniques of reviewing alleged restrictions on speech (overbreadth, vagueness, and so on) have been applied differently to each category, either
consciously or unconsciously.46 A study of free speech jurisprudence whether here or abroad will reveal that courts have developed different tests as to specific types
or categories of speech in concrete situations; i.e., subversive speech; obscene speech; the speech of the broast media and of the traditional print media; libelous
speech; speech affecting associational rights; speech before hostile audiences; symbolic speech; speech that affects the right to a fair trial; and speech associated with
rights of assembly and petition.47
Generally, restraints on freedom of speech and expression are evaluated by either or a combination of three tests, i.e., (a) the dangerous tendency doctrine which
permits limitations on speech once a rational connection has been established between the speech restrained and the danger contemplated; 48(b) the balancing of
interests tests, used as a standard when courts need to balance conflicting social values and individual interests, and requires a conscious and detailed consideration of
the interplay of interests observable in a given situation of type of situation; 49 and (c) the clear and present danger rule which rests on the premise that speech may
be restrained because there is substantial danger that the speech will likely lead to an evil the government has a right to prevent. This rule requires that the evil
consequences sought to be prevented must be substantive, "extremely serious and the degree of imminence extremely high." 50

As articulated in our jurisprudence, we have applied either the dangerous tendency doctrine or clear and present danger test to resolve free speech challenges.
More recently, we have concluded that we have generally adhered to the clear and present danger test.51

E.3. In Focus: Freedom of the Press

Much has been written on the philosophical basis of press freedom as part of the larger right of free discussion and expression. Its practical importance, though, is
more easily grasped. It is the chief source of information on current affairs. It is the most pervasive and perhaps most powerful vehicle of opinion on public questions.
It is the instrument by which citizens keep their government informed of their needs, their aspirations and their grievances. It is the sharpest weapon in the fight to
keep government responsible and efficient. Without a vigilant press, the mistakes of every administration would go uncorrected and its abuses unexposed. As Justice
Malcolm wrote in United States v. Bustos:52

The interest of society and the maintenance of good government demand a full discussion of public affairs. Complete liberty to comment on the conduct of public men
is a scalpel in the case of free speech. The sharp incision of its probe relieves the abscesses of officialdom. Men in public life may suffer under a hostile and unjust
accusation; the wound can be assuaged with the balm of clear conscience.

Its contribution to the public weal makes freedom of the press deserving of extra protection. Indeed, the press benefits from certain ancillary rights. The productions of
writers are classified as intellectual and proprietary. Persons who interfere or defeat the freedom to write for the press or to maintain a periodical publication are liable
for damages, be they private individuals or public officials.

E.4. Anatomy of Restrictions: Prior Restraint, Content-Neutral and Content-Based Regulations

Philippine jurisprudence, even as early as the period under the 1935 Constitution, has recognized four aspects of freedom of the press. These are (1) freedom from
prior restraint; (2) freedom from punishment subsequent to publication; 53 (3) freedom of access to information; 54 and (4) freedom of circulation.55

Considering that petitioner has argued that respondents' press statement constitutes a form of impermissible prior restraint, a closer scrutiny of this principle is in
order, as well as its sub-specie of content-based (as distinguished from content-neutral) regulations.

At this point, it should be noted that respondents in this case deny that their acts constitute prior restraints. This presents a unique tinge to the present challenge,
considering that the cases in our jurisdiction involving prior restrictions on speech never had any issue of whether the governmental act or
issuance actually constituted prior restraint. Rather, the determinations were always about whether the restraint was justified by the Constitution.

Be that as it may, the determination in every case of whether there is an impermissible restraint on the freedom of speech has always been based on the circumstances
of each case, including the nature of the restraint. And in its application in our jurisdiction, the parameters of this principle have been etched on a case-to-case
basis, always tested by scrutinizing the governmental issuance or act against the circumstances in which they operate, and then determining the appropriate
test with which to evaluate.

Prior restraint refers to official governmental restrictions on the press or other forms of expression in advance of actual publication or dissemination.56 Freedom from
prior restraint is largely freedom from government censorship of publications, whatever the form of censorship, and regardless of whether it is wielded by the
executive, legislative or judicial branch of the government. Thus, it precludes governmental acts that required approval of a proposal to publish; licensing or permits as
prerequisites to publication including the payment of license taxes for the privilege to publish; and even injunctions against publication. Even the closure of the
business and printing offices of certain newspapers, resulting in the discontinuation of their printing and publication, are deemed as previous restraint or
censorship.57Any law or official that requires some form of permission to be had before publication can be made, commits an infringement of the constitutional right,
and remedy can be had at the courts.

Given that deeply ensconced in our fundamental law is the hostility against all prior restraints on speech, and any act that restrains speech is presumed invalid,58 and
"any act that restrains speech is hobbled by the presumption of invalidity and should be greeted with furrowed brows," 59 it is important to stress not all prior restraints
on speech are invalid. Certain previous restraints may be permitted by the Constitution, but determined only upon a careful evaluation of the challenged act as
against the appropriate test by which it should be measured against.

Hence, it is not enough to determine whether the challenged act constitutes some form of restraint on freedom of speech. A distinction has to be made whether the
restraint is (1) a content-neutralregulation, i.e., merely concerned with the incidents of the speech, or one that merely controls the time, place or manner, and under
well defined standards;60 or (2) a content-based restraint or censorship, i.e., the restriction is based on the subject matter of the utterance or speech. 61 The cast of the
restriction determines the test by which the challenged act is assayed with.

When the speech restraints take the form of a content-neutral regulation, only a substantial governmental interest is required for its validity. 62 Because regulations of
this type are not designed to suppress any particular message, they are not subject to the strictest form of judicial scrutiny but an intermediate approach'somewhere
between the mere rationality that is required of any other law and the compelling interest standard applied to content-based restrictions.63 The test is
called intermediatebecause the Court will not merely rubberstamp the validity of a law but also require that the restrictions be narrowly-tailored to promote an
important or significant governmental interest that is unrelated to the suppression of expression. The intermediate approach has been formulated in this manner:
A governmental regulation is sufficiently justified if it is within the constitutional power of the Government, if it furthers an important or substantial governmental
interest; if the governmental interest is unrelated to the suppression of free expression; and if the incident restriction on alleged [freedom of speech & expression] is no
greater than is essential to the furtherance of that interest. 64

On the other hand, a governmental action that restricts freedom of speech or of the press based on content is given the strictest scrutiny in light of its inherent and
invasive impact. Only when the challenged act has overcome the clear and present danger rule will it pass constitutional muster, 65with the government having the
burden of overcoming the presumed unconstitutionality.

Unless the government can overthrow this presumption, the content-based restraint will be struck down.66

With respect to content-based restrictions, the government must also show the type of harm the speech sought to be restrained would bring about' especially the
gravity and the imminence of the threatened harm - otherwise the prior restraint will be invalid. Prior restraint on speech based on its content cannot be justified by
hypothetical fears, "but only by showing a substantive and imminent evil that has taken the life of a reality already on ground."67 As formulated, "the question in every
case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive
evils that Congress has a right to prevent. It is a question of proximity and degree." 68

The regulation which restricts the speech content must also serve an important or substantial government interest, which is unrelated to the suppression of free
expression.69

Also, the incidental restriction on speech must be no greater than what is essential to the furtherance of that interest. 70 A restriction that is so broad that it encompasses
more than what is required to satisfy the governmental interest will be invalidated. 71 The regulation, therefore, must be reasonable and narrowly drawn to fit the
regulatory purpose, with the least restrictive means undertaken. 72

Thus, when the prior restraint partakes of a content-neutral regulation, it is subjected to an intermediate review. A content-based regulation,73 however, bears a
heavy presumption of invalidity and is measured against the clear and present danger rule. The latter will pass constitutional muster only if justified by a compelling
reason, and the restrictions imposed are neither overbroad nor vague. 74

Applying the foregoing, it is clear that the challenged acts in the case at bar need to be subjected to the clear and present danger rule, as they are content-based
restrictions. The acts of respondents focused solely on but one object a specific content' fixed as these were on the alleged taped conversations between the President
and a COMELEC official. Undoubtedly these did not merely provide regulations as to the time, place or manner of the dissemination of speech or expression.

E.5. Dichotomy of Free Press: Print v. Broast Media

Finally, comes respondents' argument that the challenged act is valid on the ground that broast media enjoys free speech rights that are lesser in scope to that of print
media. We next explore and test the validity of this argument, insofar as it has been invoked to validate a content-based restriction on broast media.

The regimes presently in place for each type of media differ from one other. Contrasted with the regime in respect of books, newspapers, magazines and
traditional printed matter, broasting, film and video have been subjected to regulatory schemes.

The dichotomy between print and broast media traces its origins in the United States. There, broast radio and television have been held to have limited First
Amendment protection,75 and U.S. Courts have excluded broast media from the application of the "strict scrutiny" standard that they would otherwise apply to
content-based restrictions.76 According to U.S. Courts, the three major reasons why broast media stands apart from print media are: (a) the scarcity of the frequencies
by which the medium operates [i.e., airwaves are physically limited while print medium may be limitless]; 77 (b) its "pervasiveness" as a medium; and (c) its unique
accessibility to children.78 Because cases involving broast media need not follow "precisely the same approach that [U.S. courts] have applied to other media," nor go
"so far as to demand that such regulations serve 'compelling' government interests,"79they are decided on whether the "governmental restriction" is narrowly
tailored to further a substantial governmental interest,"80 or the intermediate test.

As pointed out by respondents, Philippine jurisprudence has also echoed a differentiation in treatment between broast and print media. Nevertheless, a review of
Philippine case law on broast media will show that as we have deviated with the American conception of the Bill of Rights 81 - we likewise did not adopt
en masse the U.S. conception of freespeech as it relates to broast media, particularly as to which test would govern content-based prior restraints.

Our cases show two distinct features of this dichotomy. First, the difference in treatment, in the main, is in the regulatory scheme applied to broast media that is not
imposed on traditional print media, and narrowly confined to unprotected speech (e.g., obscenity, pornography, seditious and inciting speech), or is based on a
compelling government interest that also has constitutional protection, such as national security or the electoral process.

Second, regardless of the regulatory schemes that broast media is subjected to, the Court has consistently held that the clear and present danger test applies to content-
based restrictions on media, without making a distinction as to traditional print or broast media.

The distinction between broast and traditional print media was first enunciated in Eastern Broasting Corporation (DYRE) v. Dans,82 wherein it was held that "[a]ll
forms of media, whether print or broast, are entitled to the broad protection of the freedom of speech and expression clause. The test for limitations on freedom of
expression continues to be the clear and present danger rule' "83

Dans was a case filed to compel the reopening of a radio station which had been summarily closed on grounds of national security. Although the issue had become
moot and academic because the owners were no longer interested to reopen, the Court still proceeded to do an analysis of the case and made formulations to serve as
guidelines for all inferior courts and bodies exercising quasi-judicial functions. Particularly, the Court made a detailed exposition as to what needs be considered in
cases involving broast media. Thus:84
xxx xxx xxx

(3) All forms of media, whether print or broast, are entitled to the broad protection of the freedom of speech and expression clause. The test for limitations on
freedom of expression continues to be the clear and present danger rule, that words are used in such circumstances and are of such a nature as to create a clear and
present danger that they will bring about the substantive evils that the lawmaker has a right to prevent, In his Constitution of the Philippines (2nd Edition, pp. 569-
570) Chief Justice Enrique M. Fernando cites at least nine of our decisions which apply the test. More recently, the clear and present danger test was applied in J.B.L.
Reyes in behalf of the Anti-Bases Coalition v. Bagatsing. (4) The clear and present danger test, however, does not lend itself to a simplistic and all embracing
interpretation applicable to all utterances in all forums.

Broasting has to be licensed. Airwave frequencies have to be allocated among qualified users. A broast corporation cannot simply appropriate a certain frequency
without regard for government regulation or for the rights of others.

All forms of communication are entitled to the broad protection of the freedom of expression clause. Necessarily, however, the freedom of television and radio
broasting is somewhat lesser in scope than the freedom accorded to newspaper and print media.

The American Court in Federal Communications Commission v. Pacifica Foundation (438 U.S. 726), confronted with a patently offensive and indecent regular radio
program, explained why radio broasting, more than other forms of communications, receives the most limited protection from the free expression clause. First, broast
media have established a uniquely pervasive presence in the lives of all citizens, Material presented over the airwaves confronts the citizen, not only in public, but in
the privacy of his home. Second, broasting is uniquely accessible to children. Bookstores and motion picture theaters may be prohibited from making certain material
available to children, but the same selectivity cannot be done in radio or television, where the listener or viewer is constantly tuning in and out.

Similar considerations apply in the area of national security.

The broast media have also established a uniquely pervasive presence in the lives of all Filipinos. Newspapers and current books are found only in metropolitan areas
and in the poblaciones of municipalities accessible to fast and regular transportation. Even here, there are low income masses who find the cost of books, newspapers,
and magazines beyond their humble means. Basic needs like food and shelter perforce enjoy high priorities.

On the other hand, the transistor radio is found everywhere. The television set is also becoming universal. Their message may be simultaneously received by a
national or regional audience of listeners including the indifferent or unwilling who happen to be within reach of a blaring radio or television set. The materials broast
over the airwaves reach every person of every age, persons of varying susceptibilities to persuasion, persons of different I.Q.s and mental capabilities, persons whose
reactions to inflammatory or offensive speech would be difficult to monitor or predict. The impact of the vibrant speech is forceful and immediate. Unlike readers of
the printed work, the radio audience has lesser opportunity to cogitate analyze, and reject the utterance.

(5) The clear and present danger test, therefore, must take the particular circumstances of broast media into account. The supervision of radio stations-whether by
government or through self-regulation by the industry itself calls for thoughtful, intelligent and sophisticated handling.

The government has a right to be protected against broasts which incite the listeners to violently overthrow it. Radio and television may not be used to organize a
rebellion or to signal the start of widespread uprising. At the same time, the people have a right to be informed. Radio and television would have little reason for
existence if broasts are limited to bland, obsequious, or pleasantly entertaining utterances. Since they are the most convenient and popular means of disseminating
varying views on public issues, they also deserve special protection.

(6) The freedom to comment on public affairs is essential to the vitality of a representative democracy. In the 1918 case of United States v. Bustos (37 Phil. 731) this
Court was already stressing that.

The interest of society and the maintenance of good government demand a full discussion of public affairs. Complete liberty to comment on the conduct of public men
is a scalpel in the case of free speech. The sharp incision of its probe relieves the abscesses of officialdom. Men in public life may suffer under a hostile and an unjust
accusation; the wound can be assuaged with the balm of a clear conscience. A public officer must not be too thin-skinned with reference to comment upon his official
acts. Only thus can the intelligence and dignity of the individual be exalted.

(7) Broast stations deserve the special protection given to all forms of media by the due process and freedom of expression clauses of the Constitution. [Citations
omitted]

It is interesting to note that the Court in Dans adopted the arguments found in U.S. jurisprudence to justify differentiation of treatment (i.e., the scarcity, pervasiveness
and accessibility to children), but only after categorically declaring that "the test for limitations on freedom of expression continues to be the clear and present
danger rule," for all forms of media, whether print or broast. Indeed, a close reading of the above-quoted provisions would show that the differentiation that the
Court in Dans referred to was narrowly restricted to what is otherwise deemed as "unprotected speech" (e.g., obscenity, national security, seditious and inciting
speech), or to validate a licensing or regulatory scheme necessary to allocate the limited broast frequencies, which is absent in print media. Thus, when this Court
declared in Dans that the freedom given to broast media was "somewhat lesser in scope than the freedom accorded to newspaper and print media," it was not as to
what test should be applied, but the context by which requirements of licensing, allocation of airwaves, and application of norms to unprotected speech.85

In the same year that the Dans case was decided, it was reiterated in Gonzales v. Katigbak,86 that the test to determine free expression challenges was the clear and
present danger, again without distinguishing the media. 87 Katigbak, strictly speaking, does not treat of broast media but motion pictures. Although the issue involved
obscenity standards as applied to movies,88 the Court concluded its decision with the following obiter dictum that a less liberal approach would be used to resolve
obscenity issues in television as opposed to motion pictures:

All that remains to be said is that the ruling is to be limited to the concept of obscenity applicable to motion pictures. It is the consensus of this Court that where
television is concerned, a less liberal approach calls for observance. This is so because unlike motion pictures where the patrons have to pay their way, television
reaches every home where there is a set. Children then will likely be among the avid viewers of the programs therein shown'. .It cannot be denied though that the State
as parens patriae is called upon to manifest an attitude of caring for the welfare of the young.
More recently, in resolving a case involving the conduct of exit polls and dissemination of the results by a broast company, we reiterated that the clear and present
danger rule is the test we unquestionably adhere to issues that involve freedoms of speech and of the press. 89

This is not to suggest, however, that the clear and present danger rule has been applied to all cases that involve the broast media. The rule applies to all media,
including broast, but only when the challenged act is a content-based regulation that infringes on free speech, expression and the press. Indeed, in Osmena v.
COMELEC,90 which also involved broast media, the Court refused to apply the clear and present danger rule to a COMELEC regulation of time and manner of
advertising of political advertisements because the challenged restriction was content-neutral.91 And in a case involving due process and equal protection issues, the
Court in Telecommunications and Broast Attorneys of the Philippines v. COMELEC 92 treated a restriction imposed on a broast media as a reasonable condition for the
grant of the media's franchise, without going into which test would apply.

That broast media is subject to a regulatory regime absent in print media is observed also in other jurisdictions, where the statutory regimes in place over broast media
include elements of licensing, regulation by administrative bodies, and censorship. As explained by a British author:

The reasons behind treating broast and films differently from the print media differ in a number of respects, but have a common historical basis. The stricter system of
controls seems to have been adopted in answer to the view that owing to their particular impact on audiences, films, videos and broasting require a system of prior
restraints, whereas it is now accepted that books and other printed media do not. These media are viewed as beneficial to the public in a number of respects, but are
also seen as possible sources of harm.93

Parenthetically, these justifications are now the subject of debate. Historically, the scarcity of frequencies was thought to provide a rationale. However, cable and
satellite television have enormously increased the number of actual and potential channels. Digital technology will further increase the number of channels available.
But still, the argument persists that broasting is the most influential means of communication, since it comes into the home, and so much time is spent watching
television. Since it has a unique impact on people and affects children in a way that the print media normally does not, that regulation is said to be necessary in order
to preserve pluralism. It has been argued further that a significant main threat to free expression in terms of diversity comes not from government, but from private
corporate bodies. These developments show a need for a reexamination of the traditional notions of the scope and extent of broast media regulation.94

The emergence of digital technology - - which has led to the convergence of broasting, telecommunications and the computer industry - - has likewise led to the
question of whether the regulatory model for broasting will continue to be appropriate in the converged environment. 95 Internet, for example, remains largely
unregulated, yet the Internet and the broast media share similarities, 96and the rationales used to support broast regulation apply equally to the Internet. 97 Thus, it has
been argued that courts, legislative bodies and the government agencies regulating media must agree to regulate both, regulate neither or develop a new regulatory
framework and rationale to justify the differential treatment. 98

F. The Case At Bar

Having settled the applicable standard to content-based restrictions on broast media, let us go to its application to the case at bar. To recapitulate, a governmental
action that restricts freedom of speech or of the press based on content is given the strictest scrutiny, with the government having the burden of overcoming the
presumed unconstitutionality by the clear and present danger rule. This rule applies equally to all kinds of media, including broast media.

This outlines the procedural map to follow in cases like the one at bar as it spells out the following: (a) the test; (b) the presumption; (c) the burden of proof; (d) the
party to discharge the burden; and (e) the quantum of evidence necessary. On the basis of the records of the case at bar, respondents who have the burden to show that
these acts do not abridge freedom of speech and of the press failed to hurdle the clear and present danger test. It appears that the great evil which government wants to
prevent is the airing of a tape recording in alleged violation of the anti-wiretapping law. The records of the case at bar, however, are confused and confusing, and
respondents' evidence falls short of satisfying the clear and present danger test. Firstly, the various statements of the Press Secretary obfuscate the identity of the
voices in the tape recording. Secondly, the integrity of the taped conversation is also suspect. The Press Secretary showed to the public two versions, one supposed to
be a "complete" version and the other, an "altered" version. Thirdly, the evidence of the respondents on the who's and the how's of the wiretapping act is ambivalent,
especially considering the tape's different versions. The identity of the wire-tappers, the manner of its commission and other related and relevant proofs are some of
the invisibles of this case. Fourthly, given all these unsettled facets of the tape, it is even arguable whether its airing would violate the anti-wiretapping law.

We rule that not every violation of a law will justify straitjacketing the exercise of freedom of speech and of the press. Our laws are of different kinds and
doubtless, some of them provide norms of conduct which even if violated have only an adverse effect on a person's private comfort but does not endanger national
security. There are laws of great significance but their violation, by itself and without more, cannot support suppression of free speech and free press. In
fine, violation of law is just a factor, a vital one to be sure, which should be weighed in adjudging whether to restrain freedom of speech and of the press.
The totality of the injurious effects of the violation to private and public interest must be calibrated in light of the preferred status accorded by the Constitution and
by related international covenants protecting freedom of speech and of the press. In calling for a careful and calibrated measurement of the circumference of all these
factors to determine compliance with the clear and present danger test, the Court should not be misinterpreted as devaluing violations of law. By all means,
violations of law should be vigorously prosecuted by the State for they breed their own evil consequence. But to repeat, the need to prevent their violation cannot
per se trump the exercise of free speech and free press, a preferred right whose breach can lead to greater evils. For this failure of the respondents alone to offer
proof to satisfy the clear and present danger test, the Court has no option but to uphold the exercise of free speech and free press. There is no showing that the feared
violation of the anti-wiretapping law clearly endangers the national security of the State.

This is not all the faultline in the stance of the respondents. We slide to the issue of whether the mere press statements of the Secretary of Justice and of the NTC in
question constitute a form of content-based prior restraint that has transgressed the Constitution. In resolving this issue, we hold that it is not decisive that the press
statements made by respondents were not reduced in or followed up with formal orders or circulars. It is sufficient that the press statements were made by
respondents while in the exercise of their official functions. Undoubtedly, respondent Gonzales made his statements as Secretary of Justice, while the NTC issued
its statement as the regulatory body of media. Any act done, such as a speech uttered, for and on behalf of the government in an official capacity is covered by
the rule on prior restraint. The concept of an "act" does not limit itself to acts already converted to a formal order or official circular. Otherwise, the non
formalization of an act into an official order or circular will result in the easy circumvention of the prohibition on prior restraint. The press statements at bar
are acts that should be struck down as they constitute impermissible forms of prior restraints on the right to free speech and press.

There is enough evidence of chilling effect of the complained acts on record. The warnings given to media came from no less the NTC, a regulatory agency that can
cancel the Certificate of Authority of the radio and broast media. They also came from the Secretary of Justice, the alter ego of the Executive, who wields the
awesome power to prosecute those perceived to be violating the laws of the land. After the warnings, the KBP inexplicably joined the NTC in issuing an ambivalent
Joint Press Statement. After the warnings, petitioner Chavez was left alone to fight this battle for freedom of speech and of the press. This silence on the sidelines on
the part of some media practitioners is too deafening to be the subject of misinterpretation.

The constitutional imperative for us to strike down unconstitutional acts should always be exercised with care and in light of the distinct facts of each case. For there
are no hard and fast rules when it comes to slippery constitutional questions, and the limits and construct of relative freedoms are never set in stone. Issues revolving
on their construct must be decided on a case to case basis, always based on the peculiar shapes and shadows of each case. But in cases where the challenged acts are
patent invasions of a constitutionally protected right, we should be swift in striking them down as nullities per se. A blow too soon struck for freedom is preferred
than a blow too late.

In VIEW WHEREOF, the petition is GRANTED. The writs of certiorari and prohibition are hereby issued, nullifying the official statements made by respondents
on June 8, and 11, 2005 warning the media on airing the alleged wiretapped conversation between the President and other personalities, for constituting
unconstitutional prior restraint on the exercise of freedom of speech and of the press

SO ORDERED.

G.R. No. L-264 October 4, 1946

VICENTE SINGSON ENCARNACION, plaintiff-appellee,

vs.
JACINTA BALDOMAR, ET AL., defendants-appellants.

Bausa and Ampil for appellants.

Tolentino and Aguas for appellee.

HILADO, J.:

Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila, some six years ago leased said house to
Jacinto Baldomar and her son, Lefrado Fernando, upon a month-to-month basis for the monthly rental of P35. After Manila was
liberated in the last war, specifically on March 16, 1945, and on April 7, of the same year, plaintiff Singson Encarnacion notified
defendants, the said mother and son, to vacate the house above-mentioned on or before April 15, 1945, because plaintiff needed it
for his offices as a result of the destruction of the building where said plaintiff had said offices before. Despite this demand,
defendants insisted on continuing their occupancy. When the original action was lodged with the Municipal Court of Manila on
April 20, 1945, defendants were in arrears in the payment of the rental corresponding to said month, the agrees rental being
payable within the first five days of each month. That rental was paid prior to the hearing of the case in the municipal court, as a
consequence of which said court entered judgment for restitution and payment of rentals at the rate of P35 a month from May 1,
1945, until defendants completely vacate the premises. Although plaintiff included in said original complaint a claim for P500
damages per month, that claim was waived by him before the hearing in the municipal court, on account of which nothing was
said regarding said damages in the municipal court's decision.

When the case reached the Court of First Instance of Manila upon appeal, defendants filed therein a motion to dismiss (which
was similar to a motion to dismiss filed by them in the municipal court) based upon the ground that the municipal court had no
jurisdiction over the subject matter due to the aforesaid claim for damages and that, therefore, the Court of First Instance had no
appellate jurisdiction over the subject matter of the action. That motion to dismiss was denied by His Honor, Judge Mamerto
Roxas, by order dated July 21, 1945, on the ground that in the municipal court plaintiff had waived said claim for damages and
that, therefore, the same waiver was understood also to have been made in the Court of First Instance. lawph il.net

In the Court of First Instance the graveman of the defense interposed by defendants, as it was expressed defendant Lefrado
Fernando during the trial, was that the contract which they had celebrated with plaintiff since the beginning authorized them to
continue occupying the house indefinetly and while they should faithfully fulfill their obligations as respects the payment of the
rentals, and that this agreement had been ratified when another ejectment case between the parties filed during the Japanese
regime concerning the same house was allegedly compounded in the municipal court. The Court of First Instance gave more
credit to plaintiff's witness, Vicente Singson Encarnacion, jr., who testified that the lease had always and since the beginning
been upon a month-to-month basis. The court added in its decision that this defense which was put up by defendant's answer, for
which reason the Court considered it as indicative of an eleventh-hour theory. We think that the Court of First Instance was right
in so declaring. Furthermore, carried to its logical conclusion, the defense thus set up by defendant Lefrado Fernando would leave
to the sole and exclusive will of one of the contracting parties (defendants in this case) the validity and fulfillment of the contract
of lease, within the meaning of article 1256 of the Civil Code, since the continuance and fulfillment of the contract would then
depend solely and exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely
depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to continue the lease
by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should
desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the
simple expedient of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8
Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil., 100.)

During the pendency of the appeal in the Court of First Instance and before the judgment appealed from was rendered on October
31, 1945, the rentals in areas were those pertaining to the month of August, 1945, to the date of said judgment at the rate of P35 a
month. During the pendency of the appeal in that court, certain deposits were made by defendants on account of rentals with the
clerk of said court, and in said judgment it is disposed that the amounts thus deposited should be delivered to plaintiff.

Upon the whole, we are clearly of opinion that the judgment appealed from should be, as it is hereby, affirmed, with the costs of
the three instances to appellants. So ordered.

G.R. No. 967 May 19, 1903

DARIO AND GAUDENCIO ELEIZEGUI, plaintiffs-appellees,

vs.
THE MANILA LAWN TENNIS CLUB, defendant-appellant.

Pillsburry and Sutro for appellant.

Manuel Torres Vergara for appellee.

ARELLANO, C. J.:

This suit concerns the lease of a piece of land for a fixed consideration and to endure at the will of the lessee. By the contract of
lease the lessee is expressly authorized to make improvements upon the land, by erecting buildings of both permanent and
temporary character, by making fills, laying pipes, and making such other improvements as might be considered desirable for the
comfort and amusement of the members.

With respect to the term of the lease the present question has arisen. In its decision three theories have been presented: One which
makes the duration depend upon the will of the lessor, who, upon one month's notice given to the lessee, may terminate the lease
so stipulated; another which, on the contrary, makes it dependent upon the will of the lessee, as stipulated; and the third, in
accordance with which the right is reversed to the courts to fix the duration of the term.

The first theory is that which has prevailed in the judgment below, as appears from the language in which the basis of the
decision is expressed: "The court is of the opinion that the contract of lease was terminated by the notice given by the plaintiff on
August 28 of last year . . . ." And such is the theory maintained by the plaintiffs, which expressly rests upon article 1581 of the
Civil Code, the law which was in force at the time the contract was entered into (January 25, 1890). The judge, in giving to this
notice the effect of terminating the lease, undoubtedly considers that it is governed by the article relied upon by the plaintiffs,
which is of the following tenor: "When the term has not been fixed for the lease, it is understood to be for years when an annual
rental has been fixed, for months when the rent is monthly. . . ." The second clause of the contract provides as follows: "The rent
of the said land is fixed at 25 pesos per month." (P. 11, Bill of Exceptions.)

In accordance with such a theory, the plaintiffs might have terminated the lease the month following the making of the contract
— at any time after the first month, which, strictly speaking, would be the only month with respect to which they
were expressly bound, they not being bound for each successive month except by a tacit renewal (art. 1566) — an effect which
they might prevent by giving the required notice.

Although the relief asked for in the complaint, drawn in accordance with the new form of procedure established by the prevailing
Code, is the restitution of the land to the plaintiffs (a formula common to various actions), nevertheless the action which is
maintained can be no other than that of desahucio, in accordance with the substantive law governing the contract. The lessor —
says article 1569 of the Civil Code — may judicially dispossess the lessee upon the expiration of the conventional term or of the
legal term; the conventional term — that is, the one agreed upon by the parties; the legal term, in defect of the conventional, fixed
for leases by articles 1577 and 1581. We have already seen what this legal term is with respect to urban properties, in accordance
with article 1581.
Hence, it follows that the judge has only to determine whether there is or is not conventional term. If there be a conventional
term, he can not apply the legal term fixed in subsidium to cover a case in which the parties have made no agreement whatsoever
with respect to the duration of the lease. In this case the law interprets the presumptive intention of the parties, they having said
nothing in the contract with respect to its duration. "Obligations arising from contracts have the force of law between the
contracting parties and must be complied with according to the tenor of the contracts." (Art. 1091 of the Civil Code.)

The obligations which, with the force of law, the lessors assumed by the contract entered into, so far as pertaining to the issues,
are the following: "First. . . . They lease the above-described land to Mr. Williamson, who takes it on lease, . . . for all the
time the members of the said club may desire to use it . . . Third. . . . the owners of the land undertake to maintain the club as
tenant as long as the latter shall see fit, without altering in the slightest degree the conditions of this contract, even though the
estate be sold."

It is necessary, therefore, to answer the first question: Was there, or was there not, a conventional term, a duration, agreed upon in
the contract in question? If there was an agreed duration, a conventional term, then the legal term — the term fixed in article
1581 — has no application; the contract is the supreme law of the contracting parties. Over and above the general law is the
special law, expressly imposed upon themselves by the contracting parties. Without these clauses 1 and 3, the contract would
contain no stipulation with respect to the duration of the lease, and then article 1581, in connection with article 1569, would
necessarily be applicable. In view of these clauses, however, it can not be said that there is no stipulation with respect to the
duration of the lease, or that, notwithstanding these clauses, article 1581, in connection with article 1569, can be applied. If this
were so, it would be necessary to hold that the lessors spoke in vain — that their words are to be disregarded — a claim which
can not be advanced by the plaintiffs nor upheld by any court without citing the law which detracts all legal force from such
words or despoils them of their literal sense.

It having been demonstrated that the legal term can not be applied, there being a conventional term, this destroys the assumption
that the contract of lease was wholly terminated by the notice given by the plaintiffs, this notice being necessary only when it
becomes necessary to have recourse to the legal term. Nor had the plaintiffs, under the contract, any right to give such notice. It is
evident that they had no intention of stipulating that they reserved the right to give such notice. Clause 3 begins as follows: "Mr.
Williamson, or whoever may succeed him as secretary of said club, may terminate this lease whenever desired without other
formality than that of giving a month's notice. The owners of the land undertake to maintain the club as tenant as long as the latter
shall see fit." The right of the one and the obligation of the others being thus placed in antithesis, there is something more, much
more, than the inclusio unius, exclusio alterius. It is evident that the lessors did not intend to reserve to themselves the right to
rescind that which they expressly conferred upon the lessee by establishing it exclusively in favor of the latter.

It would be the greatest absurdity to conclude that in a contract by which the lessor has left the termination of the lease to the will
of the lessee, such a lease can or should be terminated at the will of the lessor.

It would appear to follow, from the foregoing, that, if such is the force of the agreement, there can be no other mode of
terminating the lease than by the will of the lessee, as stipulated in this case. Such is the conclusion maintained by the defendant
in the demonstration of the first error of law in the judgment, as alleged by him. He goes so far, under this theory, as to maintain
the possibility of a perpetual lease, either as such lease, if the name can be applied, or else as an innominate contract, or under
any other denomination, in accordance with the agreement of the parties, which is, in fine, the law of the contract, superior to all
other law, provided that there be no agreement against any prohibitive statute, morals, or public policy.

It is unnecessary here to enter into a discussion of a perpetual lease in accordance with the law and doctrine prior to the Civil
Code now in force, and which has been operative since 1889. Hence the judgment of the supreme court of Spain of January 2,
1891, with respect to a lease made in 1887, cited by the defendant, and a decision stated by him to have been rendered by the
Audiencia of Pamplona in 1885 (it appears to be rather a decision by the head office of land registration of July 1, 1885), and any
other decision which might be cited based upon the constitutions of Cataluna, according to which a lease of more than ten years
is understood to create a life tenancy, or even a perpetual tenancy, are entirely out of point in this case, in which the subject-
matter is a lease entered into under the provisions of the present Civil Code, in accordance with the principles of which alone can
this doctrine be examined.

It is not to be understood that we admit that the lease entered into was stipulated as a life tenancy, and still less as a perpetual
lease. The terms of the contract express nothing to this effect. They do, whatever, imply this idea. If the lease could last during
such time as the lessee might see fit, because it has been so stipulated by the lessor, it would last, first, as long as the will of the
lessee — that is, all his life; second, during all the time that he may have succession, inasmuch as he who contracts does so for
himself and his heirs. (Art. 1257 of the Civil Code.) The lease in question does not fall within any of the cases in which the rights
and obligations arising from a contract can not be transmitted to heirs, either by its nature, by agreement, or by provision of law.
Furthermore, the lessee is an English association.
Usufruct is a right of superior degree to that which arises from a lease. It is a real right and includes all the jus utendi and jus
fruendi. Nevertheless, the utmost period for which a usufruct can endure, if constituted in favor a natural person, is the lifetime of
the usufructuary (art. 513, sec. 1); and if in favor of juridical person, it can not be created for more than thirty years. (Art. 515.) If
the lease might be perpetual, in what would it be distinguished from an emphyteusis? Why should the lessee have a greater right
than the usufructuary, as great as that of an emphyteuta, with respect to the duration of the enjoyment of the property of another?
Why did they not contract for a usufruct or an emphyteusis? It was repeatedly stated in the document that it was a lease, and
nothing but a lease, which was agreed upon: "Being in the full enjoyment of the necessary legal capacity to enter into this
contract of lease . . . they have agreed upon the lease of said estate . . . They lease to Mr. Williamson, who receives it as such. . . .
The rental is fixed at 25 pesos a month. . . . The owners bind themselves to maintain the club as tenant. . . . Upon the foregoing
conditions they make the present contract of lease. . . ." (Pp. 9, 11, and 12, bill of exceptions.) If it is a lease, then it must be for
a determinate period. (Art. 1543.) By its very nature it must be temporary, just as by reason of its nature an emphyteusis must be
perpetual, or for an unlimited period. (Art. 1608.)

On the other hand, it can not be concluded that the termination of the contract is to be left completely at the will of the lessee,
because it has been stipulated that its duration is to be left to his will.

The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of obligations with a term it
has supplied the deficiency of the former law with respect to the "duration of the term when it has been left to the will of the
debtor," and provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every contract, as laid down by
the authorities, there is always a creditor who is entitled to demand the performance, and a debtor upon whom rests the obligation
to perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in this contract
of lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the debtor with respect to the
obligations imposed by articles 1555 and 1561. The term within which performance of the latter obligation is due is what has
been left to the will of the debtor. This term it is which must be fixed by the courts.

The only action which can be maintained under the terms of the contract is that by which it is sought to obtain from the judge the
determination of this period, and not the unlawful detainer action which has been brought — an action which presupposes the
expiration of the term and makes it the duty of the judge to simply decree an eviction. To maintain the latter action it is sufficient
to show the expiration of the term of the contract, whether conventional or legal; in order to decree the relief to be granted in the
former action it is necessary for the judge to look into the character and conditions of the mutual undertakings with a view to
supplying the lacking element of a time at which the lease is to expire. In the case of a loan of money or a commodatum of
furniture, the payment or return to be made when the borrower "can conveniently do so" does not mean that he is to be allowed to
enjoy the money or to make use of the thing indefinitely or perpetually. The courts will fix in each case, according to the
circumstances, the time for the payment or return. This is the theory also maintained by the defendant in his demonstration of the
fifth assignment of error. "Under article 1128 of the Civil Code," thus his proposition concludes, "contracts whose term is left to
the will of one of the contracting parties must be fixed by the courts, . . . the conditions as to the term of this lease has a direct
legislative sanction," and he cites articles 1128. "In place of the ruthless method of annihilating a solemn obligation, which the
plaintiffs in this case have sought to pursue, the Code has provided a legitimate and easily available remedy. . . . The Code has
provided for the proper disposition of those covenants, and a case can hardly arise more clearly demonstrating the usefulness of
that provision than the case at bar." (Pp. 52 and 53 of appellant's brief.)

The plaintiffs, with respect to this conclusion on the part of their opponents, only say that article 1128 "expressly refers to
obligations in contracts in general, and that it is well known that a lease is included among special contracts." But they do not
observe that if contracts, simply because special rules are provided for them, could be excepted from the provisions of the articles
of the Code relative to obligations and contracts in general, such general provisions would be wholly without application. The
system of the Code is that of establishing general rules applicable to all obligations and contracts, and then special provisions
peculiar to each species of contract. In no part of Title VI of Book IV, which treats of the contract of lease, are there any special
rules concerning pure of conditional obligations which may be stipulated in a lease, because, with respect to these matters, the
provisions of section 1, chapter 3, Title I, on the subject of obligations are wholly sufficient. With equal reason should we refer to
section 2, which deals with obligations with a term, in the same chapter and title, if a question concerning the term arises out of a
contract of lease, as in the present case, and within this section we find article 1128, which decides the question.

The judgment was entered below upon the theory of the expiration of a legal term which does not exist, as the case requires that a
term be fixed by the courts under the provisions of article 1128 with respect to obligations which, as is the present, are terminable
at the will of the obligee. It follows, therefore, that the judgment below is erroneous.

The judgment is reversed and the case will be remanded to the court below with directions to enter a judgment of dismissal of the
action in favor of the defendant, the Manila Lawn Tennis Club, without special allowance as to the recovery of costs. So ordered.
Mapa and Ladd, JJ., concur.
Torres, J., disqualified.

Separate Opinions

WILLARD, J., concurring:

I concur in the foregoing opinion so far as it holds that article 1581 has no application to the case and that the action can not be
maintained. But as to the application of article 1128 I do not concur. That article is as follows:

Should the obligation not fix a period, but it can be inferred from its nature and circumstances that there was an
intention to grant it to the debtor, the courts shall fix the duration of the same.

The court shall also fix the duration of the period when it may have been left to the will of the debtor.

The court has applied the last paragraph of the article to the case of a lease. But, applying the first paragraph to leases, we have a
direct conflict between this article and article 1581. Let us suppose the lease of a house for 50 pesos a month. Nothing is said
about the number of months during which the lessee shall occupy it. If article 1581 is applicable to this case, the law fixes the
duration of the term and the courts have no power to change it. If article 1128 is applied to it, the courts fix the duration of the
lease without reference to article 1581. It will, I think, be agreed by everyone that article 1581 is the law applicable to the case,
and that article 1128 has nothing to do with it.

It seems clear that both parts of the article must refer to the same kind of obligations. The first paragraph relates to obligations in
which the parties have named no period, the second to the same kind of obligations in which the period is left to the will of the
debtor. If the first paragraph is not applicable to leases, the second is not.

The whole article was, I think, intended to apply generally to unilateral contracts — to those in which the creditor had parted with
something of value, leaving it to the debtor to say when it should be returned. In such cases the debtor might never return it, and
the creditor might thus be deprived of his property and entirely defeated in his rights. It was to prevent such a wrong that the
article was adopted. But it has no application to this case. The plaintiffs are not deprived of their rights. They get every month the
value which they themselves put upon the use of the property. The time of the payment of this rent has not been left by the
contract to the will of the debtor. It is expressly provided in the contract that it shall be paid "within the first five days after the
expiration of each month."

Article 1255 of the Civil Code is as follows:

The contracting parties may make the agreement and establish the clauses and conditions which they may deem
advisable, provided they are not in contravention of law, morals, or public order.

That the parties to this contract distinctly agreed that the defendant should have this property so long as he was willing to pay 25
pesos a month for it, is undisputed.

I find nothing in the Code to show that when a natural person is the tenant such an agreement would be contrary to law, morality,
or public policy. In such a case the contract would terminate at the death of the tenant. Such is the doctrine of the French Cour de
Cassation. (Houet vs. Lamarge, July 20, 1840.)

The tenant is the only person who has been given the right to say how long the contract shall continue. That right is personal to
him, and is not property in such a sense as to pass to his heirs.

In this case the question is made more difficult by the fact that the tenant is said to be juridical person, and it is said that the lease
is therefore a perpetual one. Just what kind of a partnership or association the defendant is does not appear, and without knowing
what kind of an entity it is we can not say that this contract is a perpetual lease. Even if the defendant has perpetual succession,
the lease would not necessarily last forever. A breach of any one of the obligations imposed upon the lessee by article 1555 of the
Civil Code would give the landlord the right to terminate it.

G.R. No. L-17587 September 12, 1967

PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINA SANTOS Y CANON FAUSTINO,
deceased, plaintiff-appellant,
vs.
LUI SHE in her own behalf and as administratrix of the intestate estate of Wong Heng, deceased, defendant-appellant.

Nicanor S. Sison for plaintiff-appellant.

Ozaeta, Gibbs & Ozaeta for defendant-appellant.

CASTRO, J.:

Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in Manila. This parcel,
with an area of 2,582.30 square meters, is located on Rizal Avenue and opens into Florentino Torres street at the back and
Katubusan street on one side. In it are two residential houses with entrance on Florentino Torres street and the Hen Wah
Restaurant with entrance on Rizal Avenue. The sisters lived in one of the houses, while Wong Heng, a Chinese, lived with his
family in the restaurant. Wong had been a long-time lessee of a portion of the property, paying a monthly rental of P2,620.

On September 22, 1957 Justina Santos became the owner of the entire property as her sister died with no other heir. Then already
well advanced in years, being at the time 90 years old, blind, crippled and an invalid, she was left with no other relative to live
with. Her only companions in the house were her 17 dogs and 8 maids. Her otherwise dreary existence was brightened now and
then by the visits of Wong's four children who had become the joy of her life. Wong himself was the trusted man to whom she
delivered various amounts for safekeeping, including rentals from her property at the corner of Ongpin and Salazar streets and the
rentals which Wong himself paid as lessee of a part of the Rizal Avenue property. Wong also took care of the payment; in her
behalf, of taxes, lawyers' fees, funeral expenses, masses, salaries of maids and security guard, and her household expenses.

"In grateful acknowledgment of the personal services of the lessee to her," Justina Santos executed on November 15, 1957 a
contract of lease (Plff Exh. 3) in favor of Wong, covering the portion then already leased to him and another portion fronting
Florentino Torres street. The lease was for 50 years, although the lessee was given the right to withdraw at any time from the
agreement; the monthly rental was P3,120. The contract covered an area of 1,124 square meters. Ten days later (November 25),
the contract was amended (Plff Exh. 4) so as to make it cover the entire property, including the portion on which the house of
Justina Santos stood, at an additional monthly rental of P360. For his part Wong undertook to pay, out of the rental due from him,
an amount not exceeding P1,000 a month for the food of her dogs and the salaries of her maids.

On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the leased premises for P120,000,
payable within ten years at a monthly installment of P1,000. The option, written in Tagalog, imposed on him the obligation to
pay for the food of the dogs and the salaries of the maids in her household, the charge not to exceed P1,800 a month. The option
was conditioned on his obtaining Philippine citizenship, a petition for which was then pending in the Court of First Instance of
Rizal. It appears, however, that this application for naturalization was withdrawn when it was discovered that he was not a
resident of Rizal. On October 28, 1958 she filed a petition to adopt him and his children on the erroneous belief that adoption
would confer on them Philippine citizenship. The error was discovered and the proceedings were abandoned.

On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the lease to 99 years, and
another (Plff Exh. 6) fixing the term of the option of 50 years. Both contracts are written in Tagalog.

In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279), she bade her legatees to respect the contracts she had
entered into with Wong, but in a codicil (Plff Exh. 17) of a later date (November 4, 1959) she appears to have a change of heart.
Claiming that the various contracts were made by her because of machinations and inducements practiced by him, she now
directed her executor to secure the annulment of the contracts.

On November 18 the present action was filed in the Court of First Instance of Manila. The complaint alleged that the contracts
were obtained by Wong "through fraud, misrepresentation, inequitable conduct, undue influence and abuse of confidence and
trust of and (by) taking advantage of the helplessness of the plaintiff and were made to circumvent the constitutional provision
prohibiting aliens from acquiring lands in the Philippines and also of the Philippine Naturalization Laws." The court was asked to
direct the Register of Deeds of Manila to cancel the registration of the contracts and to order Wong to pay Justina Santos the
additional rent of P3,120 a month from November 15, 1957 on the allegation that the reasonable rental of the leased premises was
P6,240 a month.

In his answer, Wong admitted that he enjoyed her trust and confidence as proof of which he volunteered the information that, in
addition to the sum of P3,000 which he said she had delivered to him for safekeeping, another sum of P22,000 had been
deposited in a joint account which he had with one of her maids. But he denied having taken advantage of her trust in order to
secure the execution of the contracts in question. As counterclaim he sought the recovery of P9,210.49 which he said she owed
him for advances.

Wong's admission of the receipt of P22,000 and P3,000 was the cue for the filing of an amended complaint. Thus on June 9,
1960, aside from the nullity of the contracts, the collection of various amounts allegedly delivered on different occasions was
sought. These amounts and the dates of their delivery are P33,724.27 (Nov. 4, 1957); P7,344.42 (Dec. 1, 1957); P10,000 (Dec. 6,
1957); P22,000 and P3,000 (as admitted in his answer). An accounting of the rentals from the Ongpin and Rizal Avenue
properties was also demanded.

In the meantime as a result of a petition for guardianship filed in the Juvenile and Domestic Relations Court, the Security Bank &
Trust Co. was appointed guardian of the properties of Justina Santos, while Ephraim G. Gochangco was appointed guardian of
her person.

In his answer, Wong insisted that the various contracts were freely and voluntarily entered into by the parties. He likewise
disclaimed knowledge of the sum of P33,724.27, admitted receipt of P7,344.42 and P10,000, but contended that these amounts
had been spent in accordance with the instructions of Justina Santos; he expressed readiness to comply with any order that the
court might make with respect to the sums of P22,000 in the bank and P3,000 in his possession.

The case was heard, after which the lower court rendered judgment as follows:

[A]ll the documents mentioned in the first cause of action, with the exception of the first which is the lease contract of
15 November 1957, are declared null and void; Wong Heng is condemned to pay unto plaintiff thru guardian of her
property the sum of P55,554.25 with legal interest from the date of the filing of the amended complaint; he is also
ordered to pay the sum of P3,120.00 for every month of his occupation as lessee under the document of lease herein
sustained, from 15 November 1959, and the moneys he has consigned since then shall be imputed to that; costs against
Wong Heng.

From this judgment both parties appealed directly to this Court. After the case was submitted for decision, both parties died,
Wong Heng on October 21, 1962 and Justina Santos on December 28, 1964. Wong was substituted by his wife, Lui She, the
other defendant in this case, while Justina Santos was substituted by the Philippine Banking Corporation.

Justina Santos maintained — now reiterated by the Philippine Banking Corporation — that the lease contract (Plff Exh. 3) should
have been annulled along with the four other contracts (Plff Exhs. 4-7) because it lacks mutuality; because it included a portion
which, at the time, was in custodia legis; because the contract was obtained in violation of the fiduciary relations of the parties;
because her consent was obtained through undue influence, fraud and misrepresentation; and because the lease contract, like the
rest of the contracts, is absolutely simulated.

Paragraph 5 of the lease contract states that "The lessee may at any time withdraw from this agreement." It is claimed that this
stipulation offends article 1308 of the Civil Code which provides that "the contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them."

We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor v. Uy Tieng Piao.1 We
said in that case:

Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the insertion in a contract for
personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a
stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon
the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed
that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as any other act which
 may have been the subject of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed
upon beforehand is fulfillment.2

And so it was held in Melencio v. Dy Tiao Lay 3 that a "provision in a lease contract that the lessee, at any time before he erected
any building on the land, might rescind the lease, can hardly be regarded as a violation of article 1256 [now art. 1308] of the Civil
Code."

The case of Singson Encarnacion v. Baldomar 4 cannot be cited in support of the claim of want of mutuality, because of a
difference in factual setting. In that case, the lessees argued that they could occupy the premises as long as they paid the rent.
This is of course untenable, for as this Court said, "If this defense were to be allowed, so long as defendants elected to continue
the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the
owner should desire the lease to continue the lessees could effectively thwart his purpose if they should prefer to terminate the
contract by the simple expedient of stopping payment of the rentals." Here, in contrast, the right of the lessee to continue the lease
or to terminate it is so circumscribed by the term of the contract that it cannot be said that the continuance of the lease depends
upon his will. At any rate, even if no term had been fixed in the agreement, this case would at most justify the fixing of a
period5 but not the annulment of the contract.

Nor is there merit in the claim that as the portion of the property formerly owned by the sister of Justina Santos was still in the
process of settlement in the probate court at the time it was leased, the lease is invalid as to such portion. Justina Santos became
the owner of the entire property upon the death of her sister Lorenzo on September 22, 1957 by force of article 777 of the Civil
Code. Hence, when she leased the property on November 15, she did so already as owner thereof. As this Court explained in
upholding the sale made by an heir of a property under judicial administration:

That the land could not ordinarily be levied upon while in custodia legis does not mean that one of the heirs may not
sell the right, interest or participation which he has or might have in the lands under administration. The ordinary
execution of property in custodia legis is prohibited in order to avoid interference with the possession by the court. But
the sale made by an heir of his share in an inheritance, subject to the result of the pending administration, in no wise
stands in the way of such administration.6

It is next contended that the lease contract was obtained by Wong in violation of his fiduciary relationship with Justina Santos,
contrary to article 1646, in relation to article 1941 of the Civil Code, which disqualifies "agents (from leasing) the property
whose administration or sale may have been entrusted to them." But Wong was never an agent of Justina Santos. The relationship
of the parties, although admittedly close and confidential, did not amount to an agency so as to bring the case within the
prohibition of the law.

Just the same, it is argued that Wong so completely dominated her life and affairs that the contracts express not her will but only
his. Counsel for Justina Santos cites the testimony of Atty. Tomas S. Yumol who said that he prepared the lease contract on the
basis of data given to him by Wong and that she told him that "whatever Mr. Wong wants must be followed."7

The testimony of Atty. Yumol cannot be read out of context in order to warrant a finding that Wong practically dictated the terms
of the contract. What this witness said was:

Q Did you explain carefully to your client, Doña Justina, the contents of this document before she signed it?

A I explained to her each and every one of these conditions and I also told her these conditions were quite onerous for
her, I don't really know if I have expressed my opinion, but I told her that we would rather not execute any contract
anymore, but to hold it as it was before, on a verbal month to month contract of lease.

Q But, she did not follow your advice, and she went with the contract just the same?

A She agreed first . . .

Q Agreed what?

A Agreed with my objectives that it is really onerous and that I was really right, but after that, I was called again by her
and she told me to follow the wishes of Mr. Wong Heng.
 xxx xxx xxx

Q So, as far as consent is concerned, you were satisfied that this document was perfectly proper?

xxx xxx xxx

A Your Honor, if I have to express my personal opinion, I would say she is not, because, as I said before, she told me
— "Whatever Mr. Wong wants must be followed."8

Wong might indeed have supplied the data which Atty. Yumol embodied in the lease contract, but to say this is not to detract
from the binding force of the contract. For the contract was fully explained to Justina Santos by her own lawyer. One incident,
related by the same witness, makes clear that she voluntarily consented to the lease contract. This witness said that the original
term fixed for the lease was 99 years but that as he doubted the validity of a lease to an alien for that length of time, he tried to
persuade her to enter instead into a lease on a month-to-month basis. She was, however, firm and unyielding. Instead of heeding
the advice of the lawyer, she ordered him, "Just follow Mr. Wong Heng." 9 Recounting the incident, Atty. Yumol declared on
cross examination:

Considering her age, ninety (90) years old at the time and her condition, she is a wealthy woman, it is just natural when
she said "This is what I want and this will be done." In particular reference to this contract of lease, when I said "This is
not proper," she said — "You just go ahead, you prepare that, I am the owner, and if there is any illegality, I am the
only one that can question the illegality."10

Atty. Yumol further testified that she signed the lease contract in the presence of her close friend, Hermenegilda Lao, and her
maid, Natividad Luna, who was constantly by her side.11 Any of them could have testified on the undue influence that Wong
supposedly wielded over Justina Santos, but neither of them was presented as a witness. The truth is that even after giving his
client time to think the matter over, the lawyer could not make her change her mind. This persuaded the lower court to uphold the
validity of the lease contract against the claim that it was procured through undue influence.

Indeed, the charge of undue influence in this case rests on a mere inference 12 drawn from the fact that Justina Santos could not
read (as she was blind) and did not understand the English language in which the contract is written, but that inference has been
overcome by her own evidence.

Nor is there merit in the claim that her consent to the lease contract, as well as to the rest of the contracts in question, was given
out of a mistaken sense of gratitude to Wong who, she was made to believe, had saved her and her sister from a fire that
destroyed their house during the liberation of Manila. For while a witness claimed that the sisters were saved by other persons
(the brothers Edilberto and Mariano Sta. Ana)13 it was Justina Santos herself who, according to her own witness, Benjamin C.
Alonzo, said "very emphatically" that she and her sister would have perished in the fire had it not been for Wong. 14 Hence the
recital in the deed of conditional option (Plff Exh. 7) that "[I]tong si Wong Heng ang siyang nagligtas sa aming dalawang
magkapatid sa halos ay tiyak na kamatayan", and the equally emphatic avowal of gratitude in the lease contract (Plff Exh. 3).

As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs. 4-7) — the consent of Justina
Santos was given freely and voluntarily. As Atty. Alonzo, testifying for her, said:

[I]n nearly all documents, it was either Mr. Wong Heng or Judge Torres and/or both. When we had conferences, they
used to tell me what the documents should contain. But, as I said, I would always ask the old woman about them and
invariably the old woman used to tell me: "That's okay. It's all right."15

But the lower court set aside all the contracts, with the exception of the lease contract of November 15, 1957, on the ground that
they are contrary to the expressed wish of Justina Santos and that their considerations are fictitious. Wong stated in his deposition
that he did not pay P360 a month for the additional premises leased to him, because she did not want him to, but the trial court
did not believe him. Neither did it believe his statement that he paid P1,000 as consideration for each of the contracts (namely,
the option to buy the leased premises, the extension of the lease to 99 years, and the fixing of the term of the option at 50 years),
but that the amount was returned to him by her for safekeeping. Instead, the court relied on the testimony of Atty. Alonzo in
reaching the conclusion that the contracts are void for want of consideration.

Atty. Alonzo declared that he saw no money paid at the time of the execution of the documents, but his negative testimony does
not rule out the possibility that the considerations were paid at some other time as the contracts in fact recite. What is more, the
consideration need not pass from one party to the other at the time a contract is executed because the promise of one is the
consideration for the other.16

With respect to the lower court's finding that in all probability Justina Santos could not have intended to part with her property
while she was alive nor even to lease it in its entirety as her house was built on it, suffice it to quote the testimony of her own
witness and lawyer who prepared the contracts (Plff Exhs. 4-7) in question, Atty. Alonzo:

The ambition of the old woman, before her death, according to her revelation to me, was to see to it that these
properties be enjoyed, even to own them, by Wong Heng because Doña Justina told me that she did not have any
relatives, near or far, and she considered Wong Heng as a son and his children her grandchildren; especially her
consolation in life was when she would hear the children reciting prayers in Tagalog. 17

She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her much, and she told me
to see to it that no one could disturb Wong Heng from those properties. That is why we thought of the ninety-nine (99)
years lease; we thought of adoption, believing that thru adoption Wong Heng might acquire Filipino citizenship; being
the adopted child of a Filipino citizen.18

This is not to say, however, that the contracts (Plff Exhs. 3-7) are valid. For the testimony just quoted, while dispelling doubt as
to the intention of Justina Santos, at the same time gives the clue to what we view as a scheme to circumvent the Constitutional
prohibition against the transfer of lands to aliens. "The illicit purpose then becomes the illegal causa"19 rendering the contracts
void.

Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal an insidious pattern to
subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for a reasonable period is valid. So
is an option giving an alien the right to buy real property on condition that he is granted Philippine citizenship. As this Court said
in Krivenko v. Register of Deeds:20

[A]liens are not completely excluded by the Constitution from the use of lands for residential purposes. Since their
residence in the Philippines is temporary, they may be granted temporary rights such as a lease contract which is not
forbidden by the Constitution. Should they desire to remain here forever and share our fortunes and misfortunes,
Filipino citizenship is not impossible to acquire.

But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot
sell or otherwise dispose of his property,21 this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer
of ownership whereby the owner divests himself in stages not only of the right to enjoy the land ( jus possidendi, jus utendi, jus
fruendi and jus abutendi) but also of the right to dispose of it ( jus disponendi) — rights the sum total of which make up
ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until
ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties
in this case did within the space of one year, with the result that Justina Santos' ownership of her property was reduced to a
hollow concept. If this can be done, then the Constitutional ban against alien landholding in the Philippines, as announced
in Krivenko v. Register of Deeds,22 is indeed in grave peril.

It does not follow from what has been said, however, that because the parties are in pari delicto they will be left where they are,
without relief. For one thing, the original parties who were guilty of a violation of the fundamental charter have died and have
since been substituted by their administrators to whom it would be unjust to impute their guilt. 23 For another thing, and this is not
only cogent but also important, article 1416 of the Civil Code provides, as an exception to the rule on pari delicto, that "When the
agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for the protection of the plaintiff,
he may, if public policy is thereby enhanced, recover what he has paid or delivered." The Constitutional provision that "Save in
cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain in the Philippines"24 is an expression of public policy to
conserve lands for the Filipinos. As this Court said in Krivenko:

It is well to note at this juncture that in the present case we have no choice. We are construing the Constitution as it is
and not as we may desire it to be. Perhaps the effect of our construction is to preclude aliens admitted freely into the
Philippines from owning sites where they may build their homes. But if this is the solemn mandate of the Constitution,
we will not attempt to compromise it even in the name of amity or equity . . . .

For all the foregoing, we hold that under the Constitution aliens may not acquire private or public agricultural lands,
including residential lands, and, accordingly, judgment is affirmed, without costs. 25
That policy would be defeated and its continued violation sanctioned if, instead of setting the contracts aside and ordering the
restoration of the land to the estate of the deceased Justina Santos, this Court should apply the general rule of pari delicto. To the
extent that our ruling in this case conflicts with that laid down in Rellosa v. Gaw Chee Hun 26 and subsequent similar cases, the
latter must be considered as pro tanto qualified.

The claim for increased rentals and attorney's fees, made in behalf of Justina Santos, must be denied for lack of merit.

And what of the various amounts which Wong received in trust from her? It appears that he kept two classes of accounts, one
pertaining to amount which she entrusted to him from time to time, and another pertaining to rentals from the Ongpin property
and from the Rizal Avenue property, which he himself was leasing.

With respect to the first account, the evidence shows that he received P33,724.27 on November 8, 1957 (Plff Exh. 16); P7,354.42
on December 1, 1957 (Plff Exh. 13); P10,000 on December 6, 1957 (Plff Exh. 14) ; and P18,928.50 on August 26, 1959 (Def.
Exh. 246), or a total of P70,007.19. He claims, however, that he settled his accounts and that the last amount of P18,928.50 was
in fact payment to him of what in the liquidation was found to be due to him.

He made disbursements from this account to discharge Justina Santos' obligations for taxes, attorneys' fees, funeral services and
security guard services, but the checks (Def Exhs. 247-278) drawn by him for this purpose amount to only P38,442.84. 27 Besides,
if he had really settled his accounts with her on August 26, 1959, we cannot understand why he still had P22,000 in the bank and
P3,000 in his possession, or a total of P25,000. In his answer, he offered to pay this amount if the court so directed him. On these
two grounds, therefore, his claim of liquidation and settlement of accounts must be rejected.

After subtracting P38,442.84 (expenditures) from P70,007.19 (receipts), there is a difference of P31,564 which, added to the
amount of P25,000, leaves a balance of P56,564.35 28 in favor of Justina Santos.

As to the second account, the evidence shows that the monthly income from the Ongpin property until its sale in Rizal Avenue
July, 1959 was P1,000, and that from the Rizal Avenue property, of which Wong was the lessee, was P3,120. Against this
account the household expenses and disbursements for the care of the 17 dogs and the salaries of the 8 maids of Justina Santos
were charged. This account is contained in a notebook (Def. Exh. 6) which shows a balance of P9,210.49 in favor of Wong. But
it is claimed that the rental from both the Ongpin and Rizal Avenue properties was more than enough to pay for her monthly
expenses and that, as a matter of fact, there should be a balance in her favor. The lower court did not allow either party to recover
against the other. Said the court:

[T]he documents bear the earmarks of genuineness; the trouble is that they were made only by Francisco Wong and
Antonia Matias, nick-named Toning, — which was the way she signed the loose sheets, and there is no clear proof that
Doña Justina had authorized these two to act for her in such liquidation; on the contrary if the result of that was a
deficit as alleged and sought to be there shown, of P9,210.49, that was not what Doña Justina apparently understood for
as the Court understands her statement to the Honorable Judge of the Juvenile Court . . . the reason why she preferred
to stay in her home was because there she did not incur in any debts . . . this being the case, . . . the Court will not
adjudicate in favor of Wong Heng on his counterclaim; on the other hand, while it is claimed that the expenses were
much less than the rentals and there in fact should be a superavit, . . . this Court must concede that daily expenses are
not easy to compute, for this reason, the Court faced with the choice of the two alternatives will choose the middle
course which after all is permitted by the rules of proof, Sec. 69, Rule 123 for in the ordinary course of things, a person
will live within his income so that the conclusion of the Court will be that there is neither deficit nor superavit and will
let the matter rest here.

Both parties on appeal reiterate their respective claims but we agree with the lower court that both claims should be denied. Aside
from the reasons given by the court, we think that the claim of Justina Santos totalling P37,235, as rentals due to her after
deducting various expenses, should be rejected as the evidence is none too clear about the amounts spent by Wong for
food29 masses30 and salaries of her maids.31 His claim for P9,210.49 must likewise be rejected as his averment of liquidation is
belied by his own admission that even as late as 1960 he still had P22,000 in the bank and P3,000 in his possession.

ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled and set aside; the land subject-matter of the contracts is
ordered returned to the estate of Justina Santos as represented by the Philippine Banking Corporation; Wong Heng (as substituted
by the defendant-appellant Lui She) is ordered to pay the Philippine Banking Corporation the sum of P56,564.35, with legal
interest from the date of the filing of the amended complaint; and the amounts consigned in court by Wong Heng shall be applied
to the payment of rental from November 15, 1959 until the premises shall have been vacated by his heirs. Costs against the
defendant-appellant.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Angeles, JJ., concur.

Separate Opinions

FERNANDO, J., concurring:

With the able and well-written opinion of Justice Castro, I am in full agreement. The exposition of the facts leaves nothing to be
desired and the statement of the law is notable for its comprehensiveness and clarity. This concurring opinion has been written
solely to express what I consider to be the unfortunate and deplorable consequences of applying the pari delicto concept, as was,
to my mind, indiscriminately done, to alien landholding declared illegal under the Krivenko doctrine in some past decisions.

It is to be remembered that in Krivenko v. The Register of Deeds of Manila,1 this Court over strong dissents held
that residential and commercial lots may be considered agricultural within the meaning of the constitutional provision prohibiting
the transfer of any private agricultural land to individuals, corporations or associations not qualified to acquire or hold lands of
the public domain in the Philippines save in cases of hereditary succession.

That provision of the Constitution took effect on November 15, 1935 when the Commonwealth Government was established. The
interpretation as set forth in the Krivenko decision was only handed down on November 15, 1947. Prior to that date there were
many who were of the opinion that the phrase agricultural land should be construed strictly and not be made to
cover residential and commercial lots. Acting on that belief, several transactions were entered into transferring such lots to alien
vendees by Filipino-vendors.

After the Krivenko decision, some Filipino vendors sought recovery of the lots in question on the ground that the sales were null
and void. No definite ruling was made by this Court until September of 1953, when on the 29th of said month, Rellosa v. Gaw
Chee Hun,2 Bautista v. Uy Isabelo,3 Talento v. Makiki,4 Caoile v. Chiao Peng5 were decided.

Of the four decisions in September, 1953, the most extensive discussion of the question is found in Rellosa v. Gaw Chee Hun, the
opinion being penned by retired Justice Bautista Angelo with the concurrence only of one Justice, Justice Labrador, also retired.
Former Chief Justice Paras as well as the former Justices Tuason and Montemayor concurred in the result. The necessary sixth
vote for a decision was given by the then Justice Bengzon, who had a two-paragraph concurring opinion disagreeing with the
main opinion as to the force to be accorded to the two cases,6 therein cited. There were two dissenting opinions by former Justices
Pablo and Alex Reyes. The doctrine as announced in the Rellosa case is that while the sale by a Filipino-vendor to an alien-
vendee of a residential or a commercial lot is null and void as held in the Krivenko case, still the Filipino-vendor has no right to
recover under a civil law doctrine, the parties being in pari delicto. The only remedy to prevent this continuing violation of the
Constitution which the decision impliedly sanctions by allowing the alien vendees to retain the lots in question is either escheat or
reversion. Thus: "By following either of these remedies, or by approving an implementary law as above suggested, we can
enforce the fundamental policy of our Constitution regarding our natural resources without doing violence to the principle of pari
delicto."7

Were the parties really in pari delicto? Had the sale by and between Filipino-vendor and alien-vendee occurred after the decision
in the Krivenko case, then the above view would be correct that both Filipino-vendor and alien-vendee could not be considered as
innocent parties within the contemplation of the law. Both of them should be held equally guilty of evasion of the Constitution.

Since, however, the sales in question took place prior to the Krivenko decision, at a time when the assumption could be honestly
entertained that there was no constitutional prohibition against the sale of commercial or residential lots by Filipino-vendor to
alien-vendee, in the absence of a definite decision by the Supreme Court, it would not be doing violence to reason to free them
from the imputation of evading the Constitution. For evidently evasion implies at the very least knowledge of what is being
evaded. The new Civil Code expressly provides: "Mistakes upon a doubtful or difficult question of law may be the basis of good
faith."8
According to the Rellosa opinion, both parties are equally guilty of evasion of the Constitution, based on the broader principle
that "both parties are presumed to know the law." This statement that the sales entered into prior to the Krivenko decision were at
that time already vitiated by a guilty knowledge of the parties may be too extreme a view. It appears to ignore a postulate of a
constitutional system, wherein the words of the Constitution acquire meaning through Supreme Court adjudication. 1awphîl.nèt

Reference may be made by way of analogy to a decision adjudging a statute void. Under the orthodox theory of constitutional
law, the act having been found unconstitutional was not a law, conferred no rights, imposed no duty, afforded no protection. 9 As
pointed out by former Chief Justice Hughes though in Chicot County Drainage District v. Baxter State Bank:10 "It is quite clear,
however, that such broad statements as to the effect of a determination of unconstitutionality must be taken with qualifications.
The actual existence of a statute, prior to such a determination, is an operative fact and may have consequences which cannot
justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of subsequent ruling as to invalidity
may have to be considered in various aspects, — with respect to particular relations, individual and corporate, and particular
conduct, private and official. Questions of rights claimed to have become vested, of status, of prior determinations deemed to
have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous
application, demand examination."

After the Krivenko decision, there is no doubt that continued possession by alien-vendee of property acquired before its
promulgation is violative of the Constitution. It is as if an act granting aliens the right to acquire residential and commercial lots
were annulled by the Supreme Court as contrary to the provision of the Constitution prohibiting aliens from acquiring private
agricultural land.

The question then as now, therefore, was and is how to divest the alien of such property rights on terms equitable to both parties.
That question should be justly resolved in accordance with the mandates of the Constitution not by a wholesale condemnation of
both parties for entering into a contract at a time when there was no ban as yet arising from the Krivenko decision, which could
not have been anticipated. Unfortunately, under the Rellosa case, it was assumed that the parties, being in pari delicto, would be
left in the situation in which they were, neither being in a position to seek judicial redress.

Would it not have been more in consonance with the Constitution, if instead the decision compelled the restitution of the property
by the alien-vendee to the Filipino-vendor? Krivenko decision held in clear, explicit and unambigous language that: "We are
deciding the instant case under section 5 of Article XIII of the Constitution which is more comprehensive and more absolute in
the sense that it prohibits the transfer to aliens of any private agricultural land including residential land whatever its origin might
have been . . . . This prohibition [Rep. Act No. 133] makes no distinction between private lands that are strictly agricultural and
private lands that are residential or commercial. The prohibition embraces the sale of private lands of any kind in favor of aliens,
which is again a clear implementation and a legislative interpretation of the constitutional prohibition. . . . It is well to note at this
juncture that in the present case we have no choice. We are construing the Constitution as it is and not as we may desire it to be.
Perhaps the effect of our construction is to preclude aliens, admitted freely into the Philippines, from owning sites where they
may build their homes. But if this is the solemn mandate of the Constitution, we will not attempt to compromise it even in the
name of amity or equity."11

Alien-vendee is therefore incapacitated or disqualified to acquire and hold real estate. That incapacity and that disqualification
should date from the adoption of the Constitution on November 15, 1935. That incapacity and that disqualification, however, was
made known to Filipino-vendor and to alien-vendee only upon the promulgation of the Krivenko decision on November 15, 1947.
Alien-vendee, therefore, cannot be allowed to continue owning and exercising acts of ownership over said property, when it is
clearly included within the Constitutional prohibition. Alien-vendee should thus be made to restore the property with its fruits
and rents to Filipino-vendor, its previous owner, if it could be shown that in the utmost good faith, he transferred his title over the
same to alien-vendee, upon restitution of the purchase price of course.

The Constitution bars alien-vendees from owning the property in question. By dismissing those suits, the lots remained in alien
hands. Notwithstanding the solution of escheat or reversion offered, they are still at the moment of writing, for the most part in
alien hands. There have been after almost twenty years no proceedings for escheat or reversion.

Yet it is clear that an alien-vendee cannot consistently with the constitutional provision, as interpreted in the Krivenko decision,
continue owning and exercising acts of ownership over the real estate in question. It ought to follow then, if such a continuing
violation of the fundamental law is to be put an end to, that the Filipino-vendor, who in good faith entered into, a contract with an
incapacitated person, transferring ownership of a piece of land after the Constitution went into full force and effect, should, in the
light of the ruling in the Krivenko case, be restored to the possession and ownership thereof, where he has filed the appropriate
case or proceeding. Any other construction would defeat the ends and purposes not only of this particular provision in question
but the rest of the Constitution itself.
The Constitution frowns upon the title remaining in the alien-vendees. Restoration of the property upon payment of price
received by Filipino vendor or its reasonable equivalent as fixed by the court is the answer. To give the constitutional provision
full force and effect, in consonance with the dictates of equity and justice, the restoration to Filipino-vendor upon the payment of
a price fixed by the court is the better remedy. He thought he could transfer the property to an alien and did so. After
the Krivenko case had made clear that he had no right to sell nor an alien-vendee to purchase the property in question, the obvious
solution would be for him to reacquire the same. That way the Constitution would be given, as it ought to be given, respect and
deference.

It may be said that it is too late at this stage to hope for such a solution, the Rellosa opinion, although originally concurred in by
only one justice, being too firmly imbedded. The writer however sees a welcome sign in the adoption by the Court in this case of
the concurring opinion of the then Justice, later Chief Justice, Bengzon. Had it been followed then, the problem would not be still
with us now. Fortunately, it is never too late — not even in constitutional adjudication.

G.R. No. L-34338 November 21, 1984

LOURDES VALERIO LIM, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, respondent.

RELOVA, J.:

Petitioner Lourdes Valerio Lim was found guilty of the crime of estafa and was sentenced "to suffer an imprisonment of four (4)
months and one (1) day as minimum to two (2) years and four (4) months as maximum, to indemnify the offended party in the
amount of P559.50, with subsidize imprisonment in case of insolvency, and to pay the costs." (p. 14, Rollo)

From this judgment, appeal was taken to the then Court of Appeals which affirmed the decision of the lower court but modified
the penalty imposed by sentencing her "to suffer an indeterminate penalty of one (1) month and one (1) day of arresto mayor as
minimum to one (1) year and one (1) day of prision correccional as maximum, to indemnify the complainant in the amount of
P550.50 without subsidiary imprisonment, and to pay the costs of suit." (p. 24, Rollo)

The question involved in this case is whether the receipt, Exhibit "A", is a contract of agency to sell or a contract of sale of the
subject tobacco between petitioner and the complainant, Maria de Guzman Vda. de Ayroso, thereby precluding criminal liability
of petitioner for the crime charged.

The findings of facts of the appellate court are as follows:

... The appellant is a businesswoman. On January 10, 1966, the appellant went to the house of Maria Ayroso
and proposed to sell Ayroso's tobacco. Ayroso agreed to the proposition of the appellant to sell her tobacco
consisting of 615 kilos at P1.30 a kilo. The appellant was to receive the overprice for which she could sell the
tobacco. This agreement was made in the presence of plaintiff's sister, Salud G. Bantug. Salvador Bantug
drew the document, Exh. A, dated January 10, 1966, which reads:

To Whom It May Concern:

This is to certify that I have received from Mrs. Maria de Guzman Vda. de Ayroso. of
Gapan, Nueva Ecija, six hundred fifteen kilos of leaf tobacco to be sold at Pl.30 per kilo.
The proceed in the amount of Seven Hundred Ninety Nine Pesos and 50/100 (P 799.50)
will be given to her as soon as it was sold.

This was signed by the appellant and witnessed by the complainant's sister, Salud Bantug, and the latter's
maid, Genoveva Ruiz. The appellant at that time was bringing a jeep, and the tobacco was loaded in the jeep
and brought by the appellant. Of the total value of P799.50, the appellant had paid to Ayroso only P240.00,
and this was paid on three different times. Demands for the payment of the balance of the value of the
tobacco were made upon the appellant by Ayroso, and particularly by her sister, Salud Bantug. Salud Bantug
further testified that she had gone to the house of the appellant several times, but the appellant often eluded
her; and that the "camarin" the appellant was empty. Although the appellant denied that demands for payment
were made upon her, it is a fact that on October 19, 1966, she wrote a letter to Salud Bantug which reads as
follows:
 Dear Salud,

Hindi ako nakapunta dian noon a 17 nitong nakaraan, dahil kokonte pa ang nasisingil
kong pera, magintay ka hanggang dito sa linggo ito at tiak na ako ay magdadala sa iyo.
Gosto ko Salud ay makapagbigay man lang ako ng marami para hindi masiadong
kahiyahiya sa iyo. Ngayon kung gosto mo ay kahit konte muna ay bibigyan kita. Pupunta
lang kami ni Mina sa Maynila ngayon. Salud kung talagang kailangan mo ay bukas ay
dadalhan kita ng pera.

Medio mahirap ang maningil sa palengke ng Cabanatuan dahil nagsisilipat ang mga suki
ko ng puesto. Huwag kang mabahala at tiyak na babayaran kita.

Patnubayan tayo ng mahal na panginoon Dios. (Exh. B).

Pursuant to this letter, the appellant sent a money order for P100.00 on October 24, 1967, Exh. 4, and another
for P50.00 on March 8, 1967; and she paid P90.00 on April 18, 1967 as evidenced by the receipt Exh. 2,
dated April 18, 1967, or a total of P240.00. As no further amount was paid, the complainant filed a complaint
against the appellant for estafa. (pp. 14, 15, 16, Rollo)

In this petition for review by certiorari, Lourdes Valerio Lim poses the following questions of law, to wit:

1. Whether or not the Honorable Court of Appeals was legally right in holding that the foregoing document
(Exhibit "A") "fixed a period" and "the obligation was therefore, immediately demandable as soon as the
tobacco was sold" (Decision, p. 6) as against the theory of the petitioner that the obligation does not fix a
period, but from its nature and the circumstances it can be inferred that a period was intended in which case
the only action that can be maintained is a petition to ask the court to fix the duration thereof;

2. Whether or not the Honorable Court of Appeals was legally right in holding that "Art. 1197 of the New
Civil Code does not apply" as against the alternative theory of the petitioner that the fore. going receipt
(Exhibit "A") gives rise to an obligation wherein the duration of the period depends upon the will of the
debtor in which case the only action that can be maintained is a petition to ask the court to fix the duration of
the period; and

3. Whether or not the honorable Court of Appeals was legally right in holding that the foregoing receipt is a
contract of agency to sell as against the theory of the petitioner that it is a contract of sale. (pp. 3-4, Rollo)

It is clear in the agreement, Exhibit "A", that the proceeds of the sale of the tobacco should be turned over to the complainant as
soon as the same was sold, or, that the obligation was immediately demandable as soon as the tobacco was disposed of. Hence,
Article 1197 of the New Civil Code, which provides that the courts may fix the duration of the obligation if it does not fix a
period, does not apply.

Anent the argument that petitioner was not an agent because Exhibit "A" does not say that she would be paid the commission if
the goods were sold, the Court of Appeals correctly resolved the matter as follows:

... Aside from the fact that Maria Ayroso testified that the appellant asked her to be her agent in selling
Ayroso's tobacco, the appellant herself admitted that there was an agreement that upon the sale of the tobacco
she would be given something. The appellant is a businesswoman, and it is unbelievable that she would go to
the extent of going to Ayroso's house and take the tobacco with a jeep which she had brought if she did not
intend to make a profit out of the transaction. Certainly, if she was doing a favor to Maria Ayroso and it was
Ayroso who had requested her to sell her tobacco, it would not have been the appellant who would have gone
to the house of Ayroso, but it would have been Ayroso who would have gone to the house of the appellant
and deliver the tobacco to the appellant. (p. 19, Rollo)
The fact that appellant received the tobacco to be sold at P1.30 per kilo and the proceeds to be given to complainant as soon as it
was sold, strongly negates transfer of ownership of the goods to the petitioner. The agreement (Exhibit "A') constituted her as an
agent with the obligation to return the tobacco if the same was not sold.

ACCORDINGLY, the petition for review on certiorari is dismissed for lack of merit. With costs.

SO ORDERED.

G.R. No. L-22558 May 31, 1967

GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.

Araneta and Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Paño for respondent.

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

Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R, affirming with modification, an
amendatory decision of the Court of First Instance of Manila, in its Civil Case No. 36303, entitled "Philippine Sugar Estates
Development Co., Ltd., plaintiff, versus J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants."

As found by the Court of Appeals, the facts of this case are:

J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as the Sta. Mesa Heights
Subdivision, and covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold
a portion thereof with an area of 43,034.4 square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates
Development Co., Ltd. The parties stipulated, among in the contract of purchase and sale with mortgage, that the buyer will —

Build on the said parcel land the Sto. Domingo Church and Convent

while the seller for its part will —

Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a block surrounded
by streets on all four sides; and the street on the NE side shall be named "Sto. Domingo Avenue;"

The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and Convent, but
the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the construction of the street in the
Northeast side named (Sto. Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine Sugar Estates
Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and instance, seeking to compel the latter to comply
with their obligation, as stipulated in the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused
to perform said obligation.

Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly setting up the
principal defense that the action was premature since its obligation to construct the streets in question was without a definite
period which needs to he fixed first by the court in a proper suit for that purpose before a complaint for specific performance will
prosper.

The issues having been joined, the lower court proceeded with the trial, and upon its termination, it dismissed plaintiff's
complaint (in a decision dated May 31, 1960), upholding the defenses interposed by defendant Gregorio Araneta, Inc. 1äwphï1.ñët

Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within which defendants will
comply with their obligation to construct the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not expressly or impliedly
allege and pray for the fixing of a period to comply with its obligation and that the evidence presented at the trial was insufficient
to warrant the fixing of such a period.

On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of such a period," issued an
order granting plaintiff's motion for reconsideration and amending the dispositive portion of the decision of May 31, 1960, to
read as follows:

WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a period of two (2) years from
notice hereof, within which to comply with its obligation under the contract, Annex "A".

Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which motion, plaintiff opposed.

On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter perfected its appeal Court
of Appeals.

In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief granted, i.e., fixing of a
period, under the amendatory decision of July 16, 1960, was not justified by the pleadings and not supported by the facts
submitted at the trial of the case in the court below and that the relief granted in effect allowed a change of theory after the
submission of the case for decision.

Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and that there
was no true change of theory after the submission of the case for decision since defendant-appellant Gregorio Araneta, Inc. itself
squarely placed said issue by alleging in paragraph 7 of the affirmative defenses contained in its answer which reads —

7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time within which to
comply with its obligations to construct and complete the streets on the NE, NW and SW sides of the lot in question;
that under the circumstances, said reasonable time has not elapsed;

Disposing of the other issues raised by appellant which were ruled as not meritorious and which are not decisive in the resolution
of the legal issues posed in the instant appeal before us, said appellate court rendered its decision dated December 27, 1963, the
dispositive part of which reads —

IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given two (2) years from the
date of finality of this decision to comply with the obligation to construct streets on the NE, NW and SW sides of the
land sold to plaintiff so that the same would be a block surrounded by streets on all four sides.

Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc. resorted to a petition for
review by certiorari to this Court. We gave it due course.

We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of First Instance is legally
untenable. The fixing of a period by the courts under Article 1197 of the Civil Code of the Philippines is sought to be justified on
the basis that petitioner (defendant below) placed the absence of a period in issue by pleading in its answer that the contract with
respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable time within which
to comply with its obligation to construct and complete the streets." Neither of the courts below seems to have noticed that, on
the hypothesis stated, what the answer put in issue was not whether the court should fix the time of performance, but whether or
not the parties agreed that the petitioner should have reasonable time to perform its part of the bargain. If the contract so
provided, then there was a period fixed, a "reasonable time;" and all that the court should have done was to determine if that
reasonable time had already elapsed when suit was filed if it had passed, then the court should declare that petitioner had
breached the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had
not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically held
that under the plea above quoted, the intervention of the court to fix the period for performance was warranted, for Article 1197 is
precisely predicated on the absence of any period fixed by the parties.

Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial
court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set a
period, the court could not proceed to do so unless the complaint in as first amended; for the original decision is clear that the
complaint proceeded on the theory that the period for performance had already elapsed, that the contract had been breached and
defendant was already answerable in damages.

Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in
that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The list
paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly prescribes that —

the Court shall determine such period as may under the circumstances been probably contemplated by the parties.

All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts precisely warrant
the fixing of such a period," a statement manifestly insufficient to explain how the two period given to petitioner herein was
arrived at.

It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that "the
obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the nature and the
circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court
must then proceed to the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3). So that,
ultimately, the Court can not fix a period merely because in its opinion it is or should be reasonable, but must set the time that the
parties are shown to have intended. As the record stands, the trial Court appears to have pulled the two-year period set in its
decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code.

In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described
therein was occupied by squatters, because the fact is expressly mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp.
12-13). As the parties must have known that they could not take the law into their own hands, but must resort to legal processes
in evicting the squatters, they must have realized that the duration of the suits to be brought would not be under their control nor
could the same be determined in advance. The conclusion is thus forced that the parties must have intended to defer the
performance of the obligations under the contract until the squatters were duly evicted, as contended by the petitioner Gregorio
Araneta, Inc.

The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances
admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact
periods or dates of performance.

It follows that there is no justification in law for the setting the date of performance at any other time than that of the eviction of
the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of Appeals committed
reversible error. It is not denied that the case against one of the squatters, Abundo, was still pending in the Court of Appeals when
its decision in this case was rendered.

In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations of petitioner
Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on affected areas are finally evicted therefrom.

Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.

G.R. No. L-55480

PACIFICA MILLARE, petitioner,

vs.
HON. HAROLD M. HERNANDO, In his capacity as Presiding Judge, Court of Instance of Abra, Second Judicial
District, Branch I, ANTONIO CO and ELSA CO, respondents.

FELICIANO, J.:

On 17 June 1975, a five-year Contract of Lease was executed between petitioner Pacifica Millare as lessor and private
1

respondent Elsa Co, married to Antonio Co, as lessee. Under the written agreement, which was scheduled to expire on 31 May
1980, the lessor-petitioner agreed to rent out to thelessee at a monthly rate of P350.00 the "People's Restaurant", a commercial
establishment located at the corner of McKinley and Pratt Streets in Bangued, Abra.

The present dispute arose from events which transpired during the months of May and July in 1980. According to the Co spouses,
sometime during the last week of May 1980, the lessor informed them that they could continue leasing the People's Restaurant so
long as they were amenable to paying creased rentals of P1,200.00 a month. In response, a counteroffer of P700.00 a month was
made by the Co spouses. At this point, the lessor allegedly stated that the amount of monthly rentals could be resolved at a later
time since "the matter is simple among us", which alleged remark was supposedly taken by the spouses Co to mean that the
Contract of Lease had been renewed, prompting them to continue occupying the subject premises and to forego their search for a
substitute place to rent. In contrast, the lessor flatly denied ever having considered, much less offered, a renewal of the Contract
2

of Lease.

The variance in versions notwithstanding, the record shows that on 22 July 1980, Mrs. Millare wrote the Co spouses requesting
them to vacate the leased premises as she had no intention of renewing the Contract of Lease which had, in the meantime, already
expirecl. In reply, the Co spouses reiterated their unwillingness to pay the Pl,200.00 monthly rentals supposedly sought bv Mrs.
3

Millare which they considered "highly excessive, oppressive and contrary to existing laws". They also signified their intention to
deposit the amount of rentals in court, in view of Mrs. Millare's refusal to accept their counter-offer. Another letter of demand
4

from Mrs. Millare was received on 28 July 1980 by the Co spouses, who responded by depositing the rentals for June and July (at
700.00 a month) in court.

On 30 August 1980, a Saturday, the Co spouses jumped the gun, as it were, and filed a Complaint (docketed as Civil Case No.
5

1434) with the then Court of First Instance of Abra against Mrs. Millare and seeking judgment (a) ordering the renewal of the
Contract of Lease at a rental rate of P700.00 a nionth and for a period of ten years, (b) ordering the defendant to collect the sum
of P1,400.00 deposited by plaintiffs with the court, and (c) ordering the defendant to pay damages in the amount of P50,000.00.
The following Monday, on 1 September 1980, Mrs. Millare filed an ejectment case against the Co spouses in the Municipal Court
of Bangued, Abra, docketed as Civil Case No. 661. The spouses Co, defendants therein, sut)sequently set up lis pendens as a
Civil Case No. 661. The spouses Co, defendants therein, subsequently set up lis pendens as a defense against the complaint for
ejectment.

Mrs. Millare, defendant in Civil Case No. 1434, countered with an Omnibus Motion to Dismiss rounded on (a) lack of cause of
6

action due to plaintiffs' failure to establish a valid renewal of the Contract of Lease, and (b) lack of jurisdiction by the trial court
over the complaint for failure of plaintiffs to secure a certification from the Lupong Tagapayapa of the barangay wherein both
disputants reside attesting that no amicable settlement between them had been reached despite efforts to arrive at one, as required
by Section 6 of Presidential Decree No. 1508. The Co spouses opposed the motion to dismiss. 7

In an Order dated 15 October 1980, respondent judge denied the motion to dismiss and ordered the renewal of the Contract of
Lease. Furthermore plaintiffs were allowed to deposit all accruing monthly rentals in court, while defendant Millare was directed
to submit her answer to the complaint. A motion for reconsideration was subsequently filed which, however, was likewise
8 9

denied. Hence, on 13 November 1980, Mrs. Millare filed the instant Petition for Certiorari, Prohibition and Mandamus, seeking
10

injunctive relief from the abovementioned orders. This Court issued a temporary restraining order on 21 November 1980
enjoining respondent, judge from conducting further proceedings in Civil Case No. 1434. Apparently, before the temporary
11

restraining order could be served on the respondent judge, he rendered a "Judgment by Default" dated 26 November 1980
ordering the renewal of the lease contract for a term of 5 years counted from the expiration date of the original lease contract, and
fixing monthly rentals thereunder at P700.00 a month, payable in arrears. On18 March 1981, this Court gave due course to the
Petition for Certiorari, Prohibition and Mandamus. 12

Two issues are presented for resolution: (1) whether or not the trial court acquired jurisdiction over Civil Case No. 1434; and (2)
whether or not private respondents have a valid cause of action against petitioner.

Turning to the first issue, petitioner's attack on the jurisdiction of the trial court must fail, though for reasons different from those
cited by the respondent judge. We would note firstly that the conciliation procedure required under P.D. 1508 is not a
13

jurisdictional requirement in the sense that failure to have prior recourse to such procedure would not deprive a court of its
jurisdiction either over the subject matter or over the person of the defendant. Secondly, the acord shows that two complaints
14

were submitted to the barangay authorities for conciliation — one by petitioner for ejectment and the other by private
respondents for renewal of the Contract of Lease. It appears further that both complaints were, in fact, heard by the Lupong
Tagapayapa in the afternoon of 30 August 1980. After attempts at conciliation had proven fruitless, Certifications to File Action
authorizing the parties to pursue their respective claims in court were then issued at 5:20 p.m. of that same aftemoon, as attested
to by the Barangay Captain in a Certification presented in evidence by petitioner herself. 15
Petitioner would, nonetheless, assail the proceedings in the trial court on a technicaety, i.e., private respondents allegedly filed
their complaint at 4:00 p.m. of 30 August 1980, or one hour and twenty minutes before the issuance of the requisite certification
by the Lupng Tagapayapa. The defect in procedure admittedly initially present at that particular moment when private
respondents first filed the complaint in the trial court, was cured by the subsequent issuance of the Certifications to File Action by
the barangay Lupong Tagapayapa Such certifications in any event constituted substantial comphance with the requirement of
P.D. 1508.

We turn to the second issue, that is, whether or not the complaint in Civil Case No. 1434 filed by the respondent Co spouses
claiming renewal of the contract of lease stated a valid cause of action. Paragraph 13 of the Contract of Lease reads as follows:

13. This contract of lease is subject to the laws and regulations ofthe goverrunent; and that this contract of lease may be
renewed after a period of five (5) years under the terms and conditions as will be mutually agreed upon by the parties at
the time of renewal; ... (Emphasis supplied.)

The respondent judge, in his Answer and Comment to the Petition, urges that under paragraph 13 quoted above.

there was already a consummated and finished mutual agreement of the parties to renew the contract of lease after five
years; what is only left unsettled between the parties to the contract of lease is the amount of the monthly rental; the
lessor insists Pl,200 a month, while the lessee is begging P700 a month which doubled the P350 monthly rental under
the original contract .... In short, the lease contract has never expired because paragraph 13 thereof had expressly
mandated that it is renewable. ...
16

In the "Judgment by Default" he rendered, the respondent Judge elaborated his views — obviously highly emotional in character
— in the following extraordinary tatements:

However, it is now the negative posture of the defendant-lessor to block, reject and refuse to renew said lease contract.
It is the defendant-lessor's assertion and position that she can at the mere click of her fingers, just throw-out the
plaintiffs-lessees from the leased premises and any time after the original term of the lease contract had already
expired; This negative position of the defendantlessor, to the mind of this Court does not conform to the principles and
correct application of the philosophy underlying the law of lease; for indeed, the law of lease is impressed with public
interest, social justice and equity; reason for which, this Court cannot sanction lot owner's business and commercial
speculations by allowing them with "unbridled discretion" to raise rentals even to the extent of "extraordinary
gargantuan proportions, and calculated to unreasonably and unjustly eject the helpless lessee because he cannot afford
said inflated monthly rental and thereby said lessee is placed without any alternative, except to surrender and vacate
the premises mediately,-" Many business establishments would be closed and the public would directly suffer the direct
consequences; Nonetheless, this is not the correct concept or perspective the law of lease, that is, to place the lessee
always at the mercy of the lessor's "Merchant of Venice" and to agit the latter's personal whims and caprices; the
defendant-lessor's hostile attitude by imposing upon the lessee herein an "unreasonable and extraordinary gargantuan
monthly rental of P1,200.00", to the mind of this Court, is "fly-by night unjust enrichment" at the expense of said
lessees; but, no Man should unjustly enrich himself at the expense of another; under these facts and circumstances
surrounding this case, the action therefore to renew the lease contract! is "tenable" because it falls squarely within the
coverage and command of Articles 1197 and 1670 of the New Civil Code, to wit:

xxx xxx xxx

The term "to be renewed" as expressly stipulated by the herein parties in the original contract of lease means that the
lease may be renewed for another term of five (5) years; its equivalent to a promise made by the lessor to the lessee,
and as a unilateral stipulation, obliges the lessor to fulfill her promise; of course the lessor is free to comply and honor
her commitment or back-out from her promise to renew the lease contract; but, once expressly stipulated, the lessor
shall not be allowed to evade or violate the obligation to renew the lease because, certainly, the lessor may be held
hable for damages caused to the lessee as a consequence of the unjustifiable termination of the lease or renewal of the
same; In other words, the lessor is guilty of breach of contract: Since the original lease was fixed for five (5) years, it
follows, therefore, that the lease contract is renewable for another five (5) years and the lessee is not required before
hand to give express notice of this fact to the lessor because it was expressly stipulated in the original lease contract to
be renewed; Wherefore, the bare refusal of the lessor to renew the lease contract unless the monthly rental is P1,200.00
is contrary to law, morals, good customs, public policy, justice and equity because no one should unjustly enrich herself
at the expense of another. Article 1197 and 1670 of the New Civil Code must therefore govern the case at bar and
whereby this Court is authorized to fix the period thereof by ordering the renewal of the lease contract to another fixed
term of five (5) years.
17
Clearly, the respondent judge's grasp of both the law and the Enghsh language is tenuous at best. We are otherwise unable to
comprehend how he arrived at the reading set forth above. Paragraph 13 of the Contract of Lease can only mean that the lessor
and lessee may agree to renew the contract upon their reaching agreement on the terms and conditions to be embodied in such
renewal contract. Failure to reach agreement on the terms and conditions of the renewal contract will of course prevent the
contract from being renewed at all. In the instant case, the lessor and the lessee conspicuously failed to reach agreement both on
the amount of the rental to be payable during the renewal term, and on the term of the renewed contract.

The respondent judge cited Articles 1197 and 1670 of the Civil Code to sustain the "Judgment by Default" by which he ordered
the renewal of the lease for another term of five years and fixed monthly rentals thereunder at P700.00 a month. Article 1197 of
the Civil Code provides as follows:

If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was
intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may, under the circumstances, have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (Emphasis supplied.)

The first paragraph of Article 1197 is clearly inapplicable, since the Contract of Lease did in fact fix an original period of five
years, which had expired. It is also clear from paragraph 13 of the Contract of Lease that the parties reserved to themselves the
faculty of agreeing upon the period of the renewal contract. The second paragraph of Article 1197 is equally clearly inapplicable
since the duration of the renewal period was not left to the wiu of the lessee alone, but rather to the will of both the lessor and the
lessee. Most importantly, Article 1197 applies only where a contract of lease clearly exists. Here, the contract was not renewed at
all, there was in fact no contract at all the period of which could have been fixed.

Article 1670 of the Civil Code reads thus:

If at the end of the contract the lessee should continue enjoying the thing left for 15 days with the acquiescence of the
lessor and unless a notice to the contrary by either party has previously been given. It is understood that there is an
implied new lease, not for the period of the original contract but for the time established in Articles 1682 and 1687. The
ther terms of the original contract shall be revived. (Emphasis suplied.)

The respondents themselves, public and private, do not pretend that the continued occupancy of the leased premises after 31 May
1980, the date of expiration of the contract, was with the acquiescence of the lessor. Even if it be assumed that tacite
reconduccion had occurred, the implied new lease could not possibly have a period of five years, but rather would have been a
month-to-month lease since the rentals (under the original contract) were payable on a monthly basis. At the latest, an implied
new lease (had one arisen) would have expired as of the end of July 1980 in view of the written demands served by the petitioner
upon the private respondents to vacate the previously leased premises.

It follows that the respondent judge's decision requiring renewal of the lease has no basis in law or in fact. Save in the limited and
exceptional situations envisaged inArticles ll97 and 1670 of the Civil Code, which do not obtain here, courts have no authority to
prescribe the terms and conditions of a contract for the parties. As pointed out by Mr. Justice J.B.L. Reyes in Republic vs.
Philippine Long Distance Telephone,Co.,[[18

[P]arties cannot be coerced to enter into a contract where no agreement is had between them as to the principal terms
and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual
system, and by express provision of the statute, a contract may be annulled if tainted by violence, intimidation or undue
influence (Article 1306, 1336, 1337, Civil Code of the Philippines).

Contractual terms and conditions created by a court for two parties are a contradiction in terms. If they are imposed by a judge
who draws upon his own private notions of what morals, good customs, justice, equity and public policy" demand, the resulting
"agreement" cannot, by definition, be consensual or contractual in nature. It would also follow that such coerced terms and
conditions cannot be the law as between the parties themselves. Contracts spring from the volition of the parties. That volition
cannot be supplied by a judge and a judge who pretends to do so, acts tyrannically, arbitrarily and in excess of his jurisdiction. 19

WHEREFORE, the Petition for Certiorari, Prohibition and mandamus is granted. The Orders of the respondent judge in Civil
Case No. 1434 dated 26 September 1980 (denying petitioner's motion to dismiss) and 4 November 1980 (denying petitioner's
motion for reconsideration), and the "Judgment by Default" rendered by the respondent judge dated 26 November 1980, are
hereby annulled and set aside and Civil Case No. 1434 is hereby dismissed. The temporary restraining order dated 21 November
1980 issued by this ourt, is hereby made permanent. No pronouncement as to costs.

SO ORDERED.

G.R. No. 206806, June 25, 2014

ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS, Petitioners, v. 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. 4From February 2007 to March 2007, he delivered scrap papers worth P7,220,968.31 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 cralawred

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 P1,487,766.68 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.9cralawred

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement 10where 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: chanRo blesvirtualLawlibrary

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 P18.50 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 P6.50 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 cralawred

14
Dan T. Lim filed a complaint 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 cralawred

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 cralawred

18
Dan T. Lim appealed 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 cralawred

20 21
On January 11, 2013, the Court of Appeals rendered a decision 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 P7,220,968.31 with interest at 12% per annum from the time of demand; P50,000.00 moral damages;
P50,000.00 exemplary damages; and P50,000.00 attorney’s fees. 22 cralawred

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 cralawred

25 26
Its motion for reconsideration having been denied, 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 cralawred

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 cralawred

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 cralawred

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 cralawred

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

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: chan Robles virtualLawlibrary

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: chanRob lesvirtualLawlibrary

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
P7,220,968.31 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 cralawred

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: chanRo blesvirtualLawlibrary

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 cralawred

37
Novation was extensively discussed by this court in Garcia v. Llamas: cralawred
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) expromisionand (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: chan RoblesvirtualLawlibrary

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 to be 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: chanRob lesvirtualLawlibrary

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: chanRoblesv irtualLawlibrary

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 P7,220,968.31.

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: chanRo blesvirtualLawlibrary

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: chanRo blesvirtualLawlibrary

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: chan Roblesv irtualLa wlibrary

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 P7,220,968.31 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: chanRoblesv irtualLawlibrary

Article 2219. Moral damages may be recovered in the following and analogous cases: Chan Rob lesVirtualawlibrary

(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: chanRob lesvirtualLawlibrary

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: chanRob lesvirtualLawlibrary

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: chanRob lesvirtualLawlibrary

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:chanRo blesvirtualLawlibrary

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: chanRob lesvirtualLawlibrary

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 cralawred

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: chanRobles virtualLawlibrary
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: chanRo blesvirtualLawlibrary

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.
Rante citing People v. Dalisay held that: Chan RoblesV irtualawlibrary

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: Chan Rob lesVirtualawlibrary

(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: chanRob lesvirtualLawlibrary

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: chanRob lesvirtualLawlibrary

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 cralawred
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: chan Roblesv irtualLawlibrary

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 P1,487,766.68 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 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 cralawred

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: chanRob lesvirtua lLawlibrary

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are 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 courtat 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 P7,220,968.31 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 P7,220,968.31 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 P50,000.00, exemplary damages in the
amount of P50,000.00, and attorney’s fees in the amount of P50,000.00.

SO ORDERED.

G.R. No. L-55138 September 28, 1984

ERNESTO V. RONQUILLO, petitioner,

vs.
HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.

Gloria A. Fortun for petitioner.

Roselino Reyes Isler for respondents.

CUEVAS, J.:

This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now the Intermediate Appellate
Court) in CA-G.R. No. SP-10573, entitled "Ernesto V. Ronquillo versus the Hon. Florellana Castro-Bartolome, etc." and the
Order of said court dated August 20, 1980, denying petitioner's motion for reconsideration of the above resolution.

Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then Court of First Instance of
Rizal (now the Regional Trial Court), Branch XV filed by private respondent Antonio P. So, on July 23, 1979, for the collection
of the sum of P17,498.98 plus attorney's fees and costs. The other defendants were Offshore Catertrade Inc., Johnny Tan and
Pilar Tan. The amount of P117,498.98 sought to be collected represents the value of the checks issued by said defendants in
payment for foodstuffs delivered to and received by them. The said checks were dishonored by the drawee bank.

On December 13, 1979, the lower court rendered its Decision 1 based on the compromise agreement submitted by the parties, the pertinent
portion of which reads as follows:

1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .00 and defendants agree to
acknowledge the validity of such claim and further bind themselves to initially pay out of the total
indebtedness of P10,000.00 the amount of P55,000.00 on or before December 24, 1979, the balance of
P55,000.00, defendants individually and jointly agree to pay within a period of six months from January
1980, or before June 30, 1980; (Emphasis supplied)

xxx xxx xxx

4. That both parties agree that failure on the part of either party to comply with the foregoing terms and
conditions, the innocent party will be entitled to an execution of the decision based on this compromise
agreement and the defaulting party agrees and hold themselves to reimburse the innocent party for attorney's
fees, execution fees and other fees related with the execution.

xxx xxx xxx

On December 26, 1979, herein private respondent (then plaintiff filed a Motion for Execution on the ground that defendants
failed to make the initial payment of P55,000.00 on or before December 24, 1979 as provided in the Decision. Said motion for
execution was opposed by herein petitioner (as one of the defendants) contending that his inability to make the payment was due
to private respondent's own act of making himself scarce and inaccessible on December 24, 1979. Petitioner then prayed that
private respondent be ordered to accept his payment in the amount of P13,750.00. 2

During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980, petitioner, as one of the four
defendants, tendered the amount of P13,750.00, as his prorata share in the P55,000.00 initial payment. Another defendant, Pilar
P. Tan, offered to pay the same amount. Because private respondent refused to accept their payments, demanding from them the
full initial installment of P 55,000.00, petitioner and Pilar Tan instead deposited the said amount with the Clerk of Court. The
amount deposited was subsequently withdrawn by private respondent. 3

On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for the balance of the initial
amount payable, against the other two defendants, Offshore Catertrade Inc. and Johnny Tan who did not pay their shares.
4

On January 22, 1980, private respondent moved for the reconsideration and/or modification of the aforesaid Order of execution
and prayed instead for the "execution of the decision in its entirety against all defendants, jointly and severally." Petitioner
5

opposed the said motion arguing that under the decision of the lower court being executed which has already become final, the
liability of the four (4) defendants was not expressly declared to be solidary, consequently each defendant is obliged to pay only
his own pro-rata or 1/4 of the amount due and payable.

On March 17, 1980, the lower court issued an Order reading as follows:
 ORDER

Regardless of whatever the compromise agreement has intended the payment whether jointly or individually,
or jointly and severally, the fact is that only P27,500.00 has been paid. There appears to be a non-payment in
accordance with the compromise agreement of the amount of P27,500.00 on or before December 24, 1979.
The parties are reminded that the payment is condition sine qua non to the lifting of the preliminary
attachment and the execution of an affidavit of desistance.

WHEREFORE, let writ of execution issue as prayed for

On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was set for hearing on March
25,1980.

Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the satisfaction of the sum of P82,500.00
as against the properties of the defendants (including petitioner), "singly or jointly hable."6

On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale, for the sale of certain furnitures
and appliances found in petitioner's residence to satisfy the sum of P82,500.00. The public sale was scheduled for April 2, 1980
at 10:00 a.m. 7

Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was set for hearing on March 25,
1980, was upon motion of private respondent reset to April 2, 1980 at 8:30 a.m. Realizing the actual threat to property rights
poised by the re-setting of the hearing of s motion for reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for
reconsideration would be denied he would have no more time to obtain a writ from the appellate court to stop the scheduled
public sale of his personal properties at 10:00 a.m. of the same day, April 2, 1980, petitioner filed on March 26, 1980 a petition
for certiorari and prohibition with the then Court of Appeals (CA-G.R. No. SP-10573), praying at the same time for the issuance
of a restraining order to stop the public sale. He raised the question of the validity of the order of execution, the writ of execution
and the notice of public sale of his properties to satisfy fully the entire unpaid obligation payable by all of the four (4) defendants,
when the lower court's decision based on the compromise agreement did not specifically state the liability of the four (4)
defendants to be solidary.

On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled public sale in that same day did
not proceed in view of the pendency of a certiorari proceeding before the then Court of Appeals.

On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as follows:

This Court, however, finds the present petition to have been filed prematurely. The rule is that before a
petition for certiorari can be brought against an order of a lower court, all remedies available in that court
must first be exhausted. In the case at bar, herein petitioner filed a petition without waiting for a resolution of
the Court on the motion for reconsideration, which could have been favorable to the petitioner. The fact that
the hearing of the motion for reconsideration had been reset on the same day the public sale was to take place
is of no moment since the motion for reconsideration of the Order of March 17, 1980 having been seasonably
filed, the scheduled public sale should be suspended. Moreover, when the defendants, including herein
petitioner, defaulted in their obligation based on the compromise agreement, private respondent had become
entitled to move for an execution of the decision based on the said agreement.

WHEREFORE, the instant petition for certiorari and prohibition with preliminary injunction is hereby denied
due course. The restraining order issued in our resolution dated April 9, 1980 is hereby lifted without
pronouncement as to costs.

SO ORDERED.

Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower court had already denied the
motion referred to and consequently, the legal issues being raised in the petition were already "ripe" for determination. The said
8

motion was however denied by the Court of Appeals in its Resolution dated August 20, 1980.

Hence, this petition for review, petitioner contending that the Court of Appeals erred in
(a) declaring as premature, and in denying due course to the petition to restrain implementation of a writ of execution issued at
variance with the final decision of the lower court filed barely four (4) days before the scheduled public sale of the attached
movable properties;

(b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature the filing of the petition, although
there is proof on record that as of April 2, 1980, the motion referred to was already denied by the lower court and there was no
more motion pending therein;

(c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the defendants, under the final
decision of the lower court, to be only joint;

(d) not holding the lower court's order of execution dated March 17, 1980, the writ of execution and the notice of sheriff's sale,
executing the lower court's decision against "all defendants, singly and jointly", to be at variance with the lower court's final
decision which did not provide for solidary obligation; and

(e) not declaring as invalid and unlawful the threatened execution, as against the properties of petitioner who had paid his pro-
rata share of the adjudged obligation, of the total unpaid amount payable by his joint co-defendants.

The foregoing assigned errors maybe synthesized into the more important issues of —

1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order of Execution issued by the lower
court, dated March 17, 1980, proper, despite the pendency of a motion for reconsideration of the same questioned Order?

2. What is the nature of the liability of the defendants (including petitioner), was it merely joint, or was it several or solidary?

Anent the first issue raised, suffice it to state that while as a general rule, a motion for reconsideration should precede recourse to
certiorari in order to give the trial court an opportunity to correct the error that it may have committed, the said rule is not
absolutes and may be dispensed with in instances where the filing of a motion for reconsideration would serve no useful
9

purpose, such as when the motion for reconsideration would raise the same point stated in the motion 10 or where the error is patent for
the order is void 11 or where the relief is extremely urgent, as in cases where execution had already been ordered 12 where the issue raised is one purely of
law. 13

In the case at bar, the records show that not only was a writ of execution issued but petitioner's properties were already scheduled
to be sold at public auction on April 2, 1980 at 10:00 a.m. The records likewise show that petitioner's motion for reconsideration
of the questioned Order of Execution was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m., but
upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very same clay when petitioner's
properties were to be sold at public auction. Needless to state that under the circumstances, petitioner was faced with imminent
danger of his properties being immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted
recourse to the Court of Appeals and the adequate and speedy remedy for petitioner under the situation was to file a petition for
certiorari with prayer for restraining order to stop the sale. For him to wait until after the hearing of the motion for
reconsideration on April 2, 1980 before taking recourse to the appellate court may already be too late since without a restraining
order, the public sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower court in its
order dated April 2, 1980 and were it not for the pendency of the petition with the Court of Appeals and the restraining order
issued thereafter, the public sale scheduled that very same morning could have proceeded.

The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in Civil Case No. 33958, that is
whether or not he is liable jointly or solidarily.

In this regard, Article 1207 and 1208 of the Civil Code provides —

Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each
one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance
with the prestation. Then is a solidary liability only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity.

Art. 1208. If from the law,or the nature or the wording of the obligation to which the preceding article refers
the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as
 there are creditors and debtors, the credits or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of quits.

The decision of the lower court based on the parties' compromise agreement, provides:

1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants agree to
acknowledge the validity of such claim and further bind themselves to initially pay out of the total
indebtedness of P110,000.00, the amount of P5,000.00 on or before December 24, 1979, the balance of
P55,000.00, defendants individually and jointly agree to pay within a period of six months from January 1980
or before June 30, 1980. (Emphasis supply)

Clearly then, by the express term of the compromise agreement and the decision based upon it, the defendants obligated
themselves to pay their obligation "individually and jointly".

The term "individually" has the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An
agreement to be "individually liable" undoubtedly creates a several obligation, 14 and a "several obligation is one by which one individual
binds himself to perform the whole obligation. 15

In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente or in the promissory note is an express statement
making each of the persons who signed it individually liable for the payment of the fun amount of the obligation contained therein." Likewise in Un Pak
Leung vs. Negorra 17 We held that "in the absence of a finding of facts that the defendants made themselves individually hable for the debt incurred they
are each liable only for one-half of said amount

The obligation in the case at bar being described as "individually and jointly", the same is therefore enforceable against one of the
numerous obligors.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED. Cost against petitioner.

SO ORDERED.

G.R. No. L-36413 September 26, 1988

MALAYAN INSURANCE CO., INC., petitioner,

vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE
MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.

Freqillana Jr. for petitioner.

B.F. Estrella & Associates for respondent Martin Vallejos.

Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.

Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

PADILLA, J.:

Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February 1973, which affirmed, with some
modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.

The antecedent facts of the case are as follows:

On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy Private Car
Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor
No. ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not
to exceed P600.00 and "third-party liability" in the amount of P20,000.00.

During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in the
afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the respondent San Leon Rice Mill, Inc.,
collided with a passenger bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the
national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the insured vehicle and injuries to the driver, Juan
P. Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep.

As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO
before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He prayed therein that the
defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital
expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's fees.

Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped the
PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it had
observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its
employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability.

Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming that the
fault in the accident was solely imputable to the PANTRANCO.

Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged that he had
actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and, in his cross-
claim against the herein petitioner, he alleged that the petitioner had issued in his favor a private car comprehensive policy
wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as
for any liability to third persons arising out of any accident during the effectivity of such insurance contract, which policy was in
full force and effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by the insurance
company for the amount that he may be ordered to pay.

Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice Mill, Inc.
for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon Rice
Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the San Leon
Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant
to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be rendered against the San Leon Rice Mill, Inc.,
making it liable for the amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and
indemnify the petitioner for any sum that it may be ordered to pay the plaintiff.

After trial, judgment was rendered as follows:

WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the
plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice
Mill, Inc., as follows:

(a) P4,103 as actual damages;

(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3)
years;

(c) P5,000.00 as moral damages;

(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.

The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable.
With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00.
 As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award should
be made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved. 1

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill, Inc.
and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C. Vallejos. It
ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company
for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of
insurance between Sio Choy and the insurance company. 2

Hence, the present recourse by petitioner insurance company.

The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon Rice Mill, Inc.
to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages, petitioner may be ordered to pay
jointly and severally with Sio Choy.

The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability of
respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the Court of Appeals
shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos against the respondents, without
prejudice to the determination of whether or not petitioner shall be entitled to reimbursement by respondent San Leon Rice Mill,
Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos." 3

However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important to
determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of respondents Sio
Choy and San Leon Rice Mill, Inc.

Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals, was
correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos;
and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has
been adjudged to pay respondent Vallejos on its insurance policy.

As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents Sio
Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.

We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to
the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.

It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to
Article 2184 of the Civil Code which provides:

Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in
the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a
driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least
twice within the next preceding two months.

If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.

On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former
being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code
which reads:

Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions,
but also for those of persons for whom one is responsible.

xxx xxx xxx

Employers shall be liable for the damages caused by their employees and household helpers acting within the
scope of their assigned tasks, even though the former are not engaged ill any business or industry.
 xxx xxx xxx

The responsibility treated in this article shall cease when the persons herein mentioned proved that they
observed all the diligence of a good father of a family to prevent damage.

It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to
respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily. 4

On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to
pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio
Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and
respondent Sio Choy at the time of the complained vehicular accident.

In Guingon vs. Del Monte, a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger
5

jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the
jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial
court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of
the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay
the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner and
driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault, not including the
insurance company, who were held solidarily liable to the heirs of the victim.

While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can
directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third party liability does not
6

mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the
insurer is based on contract; that of the insured is based on tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial
court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc.
For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third
party liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles
underlying solidary obligation and insurance contracts.

In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand,
7

insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or
liability arising from an unknown or contingent event." 8

In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable
to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00.
In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of
P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire
obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is
only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to
pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a
solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily
liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.

As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled to be
reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of insurance
existing between petitioner and respondent Sio Choy. We disagree.

The appellate court overlooked the principle of subrogation in insurance contracts. Thus —

... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L.
ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action
which the insured may have against the third person whose negligence or wrongful act caused the loss (44
Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75
L. ed. 1037).
 The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after
reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing
Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).

Although many policies including policies in the standard form, now provide for subrogation, and thus
determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of
payment inures to the insurer without any formal assignment or any express stipulation to that effect in the
policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such
payment operates as an equitable assignment to the insurer of the property and all remedies which the insured
may have for the recovery thereof. That right is not dependent upon , nor does it grow out of any privity of
contract (emphasis supplied) or upon written assignment of claim, and payment to the insured makes the
insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d
18). 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall become the
subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent
San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to
be reimbursed by his co-debtors for the share which corresponds to each.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the
interest for the payment already made. If the payment is made before the debt is due, no interest for the
intervening period may be demanded.

xxx xxx xxx

In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of solidary
debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.

To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the respondent
Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of said solidary debtors.
If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is
compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon
Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 )

WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby
AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs.

SO ORDERED.

G.R. No. L-28046 May 16, 1983

PHILIPPINE NATIONAL BANK, plaintiff-appellant,

vs.
INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO, CEFERINO
VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO, AURELIO VALENCIA, LAURO LEVISTE, GAVINO
GONZALES, LOPE GEVANA and BONIFACIO LAUREANA, defendants-appellees.

Basa, Ilao, del Rosario Diaz for plaintiff-appellant.

Laurel Law Office for Dimayuga.

Tomas Yumol for Fajardo, defendant-appellee.

PLANA, J.:

Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of First Instance of Manila (Branch XX) in
its Civil Case No. 46741 dismissing PNB's complaint against several solidary debtors for the collection of a sum of money on the
ground that one of the defendants (Ceferino Valencia) died during the pendency of the case (i.e., after the plaintiff had presented
its evidence) and therefore the complaint, being a money claim based on contract, should be prosecuted in the testate or intestate
proceeding for the settlement of the estate of the deceased defendant pursuant to Section 6 of Rule 86 of the Rules of Court which
reads:

SEC. 6. Solidary obligation of decedent.— the obligation of the decedent is solidary with another debtor, the
claim shall be filed against the decedent as if he were the only debtor, without prejudice to the right of the
estate to recover contribution from the other debtor. In a joint obligation of the decedent, the claim shall be
confined to the portion belonging to him.

The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its solidary debtors under
Article 1216 of the Civil Code —

ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected.

The sole issue thus raised is whether in an action for collection of a sum of money based on contract against all the solidary
debtors, the death of one defendant deprives the court of jurisdiction to proceed with the case against the surviving defendants.

It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of his credit from one,
some or all of his solidary debtors, as he deems fit or convenient for the protection of his interests; and if, after instituting a
collection suit based on contract against some or all of them and, during its pendency, one of the defendants dies, the court retains
jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants. Thus in Manila Surety &
Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court ruled:

Construing Section 698 of the Code of Civil Procedure from whence the aforequoted provision (Sec. 6, Rule
86) was taken, this Court held that where two persons are bound in solidum for the same debt and one of
them dies, the whole indebtedness can be proved against the estate of the latter, the decedent's liability being
absolute and primary; and if the claim is not presented within the time provided by the rules, the same will be
barred as against the estate. It is evident from the foregoing that Section 6 of Rule 87 (now Rule 86) provides
the procedure should the creditor desire to go against the deceased debtor, but there is certainly nothing in
the said provision making compliance with such procedure a condition precedent before an ordinary action
against the surviving solidary debtors, should the creditor choose to demand payment from the latter, could
be entertained to the extent that failure to observe the same would deprive the court jurisdiction to take
cognizance of the action against the surviving debtors. Upon the other hand, the Civil Code expressly allows
the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously. There
is, therefore, nothing improper in the creditor's filing of an action against the surviving solidary debtors alone,
instead of instituting a proceeding for the settlement of the estate of the deceased debtor wherein his claim
could be filed.

Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice Makasiar, reiterated the doctrine.

A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that
nothing therein prevents a creditor from proceeding against the surviving solidary
debtors. Said provision merely sets up the procedure in enforcing collection in case a
creditor chooses to pursue his claim against the estate of the deceased solidary, debtor.

It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in
this matter. Said provision gives the creditor the right to 'proceed against anyone of the
solidary debtors or some or all of them simultaneously.' The choice is undoubtedly left to
the solidary, creditor to determine against whom he will enforce collection. In case of the
death of one of the solidary debtors, he (the creditor) may, if he so chooses, proceed
against the surviving solidary debtors without necessity of filing a claim in the estate of
 the deceased debtors. It is not mandatory for him to have the case dismissed against the
surviving debtors and file its claim in the estate of the deceased solidary debtor . . .

As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court

were applied literally, Article 1216 of the New Civil Code would, in effect, be repealed
since under the Rules of Court, petitioner has no choice but to proceed against the estate
of Manuel Barredo only. Obviously, this provision diminishes the Bank's right under the
New Civil, Code to proceed against any one, some or all of the solidary debtors. Such a
construction is not sanctioned by the principle, which is too well settled to require
citation, that a substantive law cannot be amended by a procedural rule. Otherwise stared,
Section 6, Rule 86 of the Revised Rules of Court cannot be made to prevail over Article
1216 of the New Civil Code, the former being merely procedural, while the latter,
substantive.

WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is hereby set aside in respect of the
surviving defendants; and the case is remanded to the corresponding Regional Trial Court for proceedings. proceedings. No costs.

SO ORDERED.

G.R. No. 190696 August 3, 2010

ROLITO CALANG and PHILTRANCO SERVICE ENTERPRISES, INC., Petitioners,

vs.
PEOPLE OF THE PHILIPPINES, Respondent.

RESOLUTION

BRION, J.:

We resolve the motion for reconsideration filed by the petitioners, Philtranco Service Enterprises, Inc. (Philtranco) and Rolito
Calang, to challenge our Resolution of February 17, 2010. Our assailed Resolution denied the petition for review on certiorari for
failure to show any reversible error sufficient to warrant the exercise of this Court’s discretionary appellate jurisdiction.

Antecedent Facts

At around 2:00 p.m. of April 22, 1989, Rolito Calang was driving Philtranco Bus No. 7001, owned by Philtranco along Daang
Maharlika Highway in Barangay Lambao, Sta. Margarita, Samar when its rear left side hit the front left portion of a Sarao jeep
coming from the opposite direction. As a result of the collision, Cresencio Pinohermoso, the jeep’s driver, lost control of the
vehicle, and bumped and killed Jose Mabansag, a bystander who was standing along the highway’s shoulder. The jeep turned
turtle three (3) times before finally stopping at about 25 meters from the point of impact. Two of the jeep’s passengers, Armando
Nablo and an unidentified woman, were instantly killed, while the other passengers sustained serious physical injuries.

The prosecution charged Calang with multiple homicide, multiple serious physical injuries and damage to property thru reckless
imprudence before the Regional Trial Court (RTC), Branch 31, Calbayog City. The RTC, in its decision dated May 21, 2001,
found Calang guilty beyond reasonable doubt of reckless imprudence resulting to multiple homicide, multiple physical injuries
and damage to property, and sentenced him to suffer an indeterminate penalty of thirty days of arresto menor, as minimum, to
four years and two months of prision correccional, as maximum. The RTC ordered Calang and Philtranco, jointly and severally,
to pay ₱50,000.00 as death indemnity to the heirs of Armando; ₱50,000.00 as death indemnity to the heirs of Mabansag; and
₱90,083.93 as actual damages to the private complainants.

The petitioners appealed the RTC decision to the Court of Appeals (CA), docketed as CA-G.R. CR No. 25522. The CA, in its
decision dated November 20, 2009, affirmed the RTC decision in toto. The CA ruled that petitioner Calang failed to exercise due
care and precaution in driving the Philtranco bus. According to the CA, various eyewitnesses testified that the bus was traveling
fast and encroached into the opposite lane when it evaded a pushcart that was on the side of the road. In addition, he failed to
slacken his speed, despite admitting that he had already seen the jeep coming from the opposite direction when it was still half a
kilometer away. The CA further ruled that Calang demonstrated a reckless attitude when he drove the bus, despite knowing that it
was suffering from loose compression, hence, not roadworthy.
The CA added that the RTC correctly held Philtranco jointly and severally liable with petitioner Calang, for failing to prove that
it had exercised the diligence of a good father of the family to prevent the accident.

The petitioners filed with this Court a petition for review on certiorari. In our Resolution dated February 17, 2010, we denied the
petition for failure to sufficiently show any reversible error in the assailed decision to warrant the exercise of this Court’s
discretionary appellate jurisdiction.

The Motion for Reconsideration

In the present motion for reconsideration, the petitioners claim that there was no basis to hold Philtranco jointly and severally
liable with Calang because the former was not a party in the criminal case (for multiple homicide with multiple serious physical
injuries and damage to property thru reckless imprudence) before the RTC.

The petitioners likewise maintain that the courts below overlooked several relevant facts, supported by documentary exhibits,
which, if considered, would have shown that Calang was not negligent, such as the affidavit and testimony of witness Celestina
Cabriga; the testimony of witness Rodrigo Bocaycay; the traffic accident sketch and report; and the jeepney’s registration receipt.
The petitioners also insist that the jeep’s driver had the last clear chance to avoid the collision.

We partly grant the motion.

Liability of Calang

We see no reason to overturn the lower courts’ finding on Calang’s culpability. The finding of negligence on his part by the trial
court, affirmed by the CA, is a question of fact that we cannot pass upon without going into factual matters touching on the
finding of negligence. In petitions for review on certiorari under Rule 45 of the Revised Rules of Court, this Court is limited to
reviewing only errors of law, not of fact, unless the factual findings complained of are devoid of support by the evidence on
record, or the assailed judgment is based on a misapprehension of facts.

Liability of Philtranco

We, however, hold that the RTC and the CA both erred in holding Philtranco jointly and severally liable with Calang. We
emphasize that Calang was charged criminally before the RTC. Undisputedly, Philtranco was not a direct party in this case. Since
the cause of action against Calang was based on delict, both the RTC and the CA erred in holding Philtranco jointly and severally
liable with Calang, based on quasi-delict under Articles 21761 and 21802 of the Civil Code. Articles 2176 and 2180 of the Civil
Code pertain to the vicarious liability of an employer for quasi-delicts that an employee has committed. Such provision of law
does not apply to civil liability arising from delict.

If at all, Philtranco’s liability may only be subsidiary. Article 102 of the Revised Penal Code states the subsidiary civil liabilities
of innkeepers, tavernkeepers and proprietors of establishments, as follows:

In default of the persons criminally liable, innkeepers, tavernkeepers, and any other persons or corporations shall be civilly liable
for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some general or special
police regulations shall have been committed by them or their employees. 1avvphil

Innkeepers are also subsidiary liable for the restitution of goods taken by robbery or theft within their houses from guests lodging
therein, or for the payment of the value thereof, provided that such guests shall have notified in advance the innkeeper himself, or
the person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions
which such innkeeper or his representative may have given them with respect to the care of and vigilance over such goods. No
liability shall attach in case of robbery with violence against or intimidation of persons unless committed by the innkeeper’s
employees.

The foregoing subsidiary liability applies to employers, according to Article 103 of the Revised Penal Code, which reads:

The subsidiary liability established in the next preceding article shall also apply to employers, teachers, persons, and corporations
engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the
discharge of their duties.
The provisions of the Revised Penal Code on subsidiary liability – Articles 102 and 103 – are deemed written into the judgments
in cases to which they are applicable. Thus, in the dispositive portion of its decision, the trial court need not expressly pronounce
the subsidiary liability of the employer.3 Nonetheless, before the employers’ subsidiary liability is enforced, adequate evidence
must exist establishing that (1) they are indeed the employers of the convicted employees; (2) they are engaged in some kind of
industry; (3) the crime was committed by the employees in the discharge of their duties; and (4) the execution against the latter
has not been satisfied due to insolvency. The determination of these conditions may be done in the same criminal action in which
the employee’s liability, criminal and civil, has been pronounced, in a hearing set for that precise purpose, with due notice to the
employer, as part of the proceedings for the execution of the judgment. 4

WHEREFORE, we PARTLY GRANT the present motion. The Court of Appeals decision that affirmed in toto the RTC decision,
finding Rolito Calang guilty beyond reasonable doubt of reckless imprudence resulting in multiple homicide, multiple serious
physical injuries and damage to property, is AFFIRMED, with the MODIFICATION that Philtranco’s liability should only be
subsidiary. No costs.

SO ORDERED.

G.R. No. 204866, January 21, 2015

RUKS KONSULT AND CONSTRUCTION, Petitioner, v. ADWORLD SIGN AND ADVERTISING CORPORATION* AND TRANSWORLD MEDIA ADS,
INC., Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated November 16, 2011 and the Resolution3 dated December 10, 2012 of the Court of Appeals
(CA) in CA-G.R. CV No. 94693 which affirmed the Decision4 dated August 25, 2009 of the Regional Trial Court of Makati City, Branch 142 (RTC) in Civil Case No.
03-1452 holding, inter alia, petitioner Ruks Konsult and Construction (Ruks) and respondent Transworld Media Ads, Inc. (Transworld) jointly and severally liable to
respondent Adworld Sign and Advertising Corporation (Adworld) for damages. cralawred

The Facts

The instant case arose from a complaint for damages filed by Adworld against Transworld and Comark International Corporation (Comark) before the RTC.5 In the
complaint, Adworld alleged that it is the owner of a 75 ft. x 60 ft. billboard structure located at EDSA Tulay, Guadalupe, Barangka Mandaluyong, which was
misaligned and its foundation impaired when, on August 11, 2003, the adjacent billboard structure owned by Transworld and used by Comark collapsed and crashed
against it. Resultantly, on August 19, 2003, Adworld sent Transworld and Comark a letter demanding payment for the repairs of its billboard as well as loss of rental
income. On August 29, 2003, Transworld sent its reply, admitting the damage caused by its billboard structure on Adworld’s billboard, but nevertheless, refused and
failed to pay the amounts demanded by Adworld. As Adworld’s final demand letter also went unheeded, it was constrained to file the instant complaint, praying for
damages in the aggregate amount of P474,204.00, comprised of P281,204.00 for materials, P72,000.00 for labor, and P121,000.00 for indemnity for loss of
income.6 chanRoblesvir tualLawlibrary

In its Answer with Counterclaim, Transworld averred that the collapse of its billboard structure was due to extraordinarily strong winds that occurred instantly and
unexpectedly, and maintained that the damage caused to Adworld’s billboard structure was hardly noticeable. Transworld likewise filed a Third-Party Complaint
against Ruks, the company which built the collapsed billboard structure in the former’s favor. It was alleged therein that the structure constructed by Ruks had a weak
and poor foundation not suited for billboards, thus, prone to collapse, and as such, Ruks should ultimately be held liable for the damages caused to Adworld’s
billboard structure.7 chanRob lesvirtualLawlibrary

For its part, Comark denied liability for the damages caused to Adworld’s billboard structure, maintaining that it does not have any interest on Transworld’s collapsed
billboard structure as it only contracted the use of the same. In this relation, Comark prayed for exemplary damages from Transworld for unreasonably including it as
a party-defendant in the complaint.8 chanRob lesvirtualLawlibrary

Lastly, Ruks admitted that it entered into a contract with Transworld for the construction of the latter’s billboard structure, but denied liability for the damages caused
by its collapse. It contended that when Transworld hired its services, there was already an existing foundation for the billboard and that it merely finished the structure
according to the terms and conditions of its contract with the latter. 9 chanRoblesv irtualLawli brary

The RTC Ruling

In a Decision dated August 25, 2009, the RTC ultimately ruled in Adworld’s favor, and accordingly, declared, inter alia, Transworld and Ruks jointly and severally
10

liable to Adworld in the amount of P474,204.00 as actual damages, with legal interest from the date of the filing of the complaint until full payment thereof, plus
attorney’s fees in the amount of P50,000.00. 11 chanRoblesvirtualLawlibrary

The RTC found both Transworld and Ruks negligent in the construction of the collapsed billboard as they knew that the foundation supporting the same was weak and
would pose danger to the safety of the motorists and the other adjacent properties, such as Adworld’s billboard, and yet, they did not do anything to remedy the
situation.12 In particular, the RTC explained that Transworld was made aware by Ruks that the initial construction of the lower structure of its billboard did not have
the proper foundation and would require additional columns and pedestals to support the structure. Notwithstanding, however, Ruks proceeded with the construction
of the billboard’s upper structure and merely assumed that Transworld would reinforce its lower structure. 13 The RTC then concluded that these negligent acts were
the direct and proximate cause of the damages suffered by Adworld’s billboard.14 chanRoblesvirtualLawlibrary

Aggrieved, both Transworld and Ruks appealed to the CA. In a Resolution dated February 3, 2011, the CA dismissed Transworld’s appeal for its failure to file an
appellant’s brief on time.15 Transworld elevated its case before the Court, docketed as G.R. No. 197601. 16 However, in a Resolution17 dated November 23, 2011, the
Court declared the case closed and terminated for failure of Transworld to file the intended petition for review on certiorari within the extended reglementary period.
Subsequently, the Court issued an Entry of Judgment18 dated February 22, 2012 in G.R. No. 197601 declaring the Court’s November 23, 2011 Resolution final and
executory.

The CA Ruling

In a Decision19 dated November 16, 2011, the CA denied Ruks’s appeal and affirmed the ruling of the RTC. It adhered to the RTC’s finding of negligence on the part
of Transworld and Ruks which brought about the damage to Adworld’s billboard. It found that Transworld failed to ensure that Ruks will comply with the approved
plans and specifications of the structure, and that Ruks continued to install and finish the billboard structure despite the knowledge that there were no adequate
columns to support the same.20 chanRoblesvirtualLawlibrary

Dissatisfied, Ruks moved for reconsideration, 21 which was, however, denied in a Resolution22 dated December 10, 2012, hence, this petition.

On the other hand, Transworld filed another appeal before the Court, docketed as G.R. No. 205120. 23However, the Court denied outright Transworld’s petition in a
Resolution24 dated April 15, 2013, holding that the same was already bound by the dismissal of its petition filed in G.R. No. 197601.

The Issue Before the Court

The primordial issue for the Court’s resolution is whether or not the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and severally liable with
Transworld for damages sustained by Adworld.

The Court’s Ruling

The petition is without merit.

At the outset, it must be stressed that factual findings of the RTC, when affirmed by the CA, are entitled to great weight by the Court and are deemed final and
conclusive when supported by the evidence on record.25 Absent any exceptions to this rule – such as when it is established that the trial court ignored, overlooked,
misconstrued, or misinterpreted cogent facts and circumstances that, if considered, would change the outcome of the case 26 – such findings must stand.

After a judicious perusal of the records, the Court sees no cogent reason to deviate from the findings of the RTC and the CA and their uniform conclusion that both
Transworld and Ruks committed acts resulting in the collapse of the former’s billboard, which in turn, caused damage to the adjacent billboard of Adworld.

Jurisprudence defines negligence as the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a prudent and reasonable man would not do.27 It is the failure to observe for the protection of the interest of
another person that degree of care, precaution, and vigilance which the circumstances justly demand, whereby such other person suffers injury.28 chanRoblesvir tualLawlibrary

In this case, the CA correctly affirmed the RTC’s finding that Transworld’s initial construction of its billboard’s lower structure without the proper foundation, and
that of Ruks’s finishing its upper structure and just merely assuming that Transworld would reinforce the weak foundation are the two (2) successive acts which were
the direct and proximate cause of the damages sustained by Adworld. Worse, both Transworld and Ruks were fully aware that the foundation for the former’s
billboard was weak; yet, neither of them took any positive step to reinforce the same. They merely relied on each other’s word that repairs would be done to such
foundation, but none was done at all. Clearly, the foregoing circumstances show that both Transworld and Ruks are guilty of negligence in the construction of the
former’s billboard, and perforce, should be held liable for its collapse and the resulting damage to Adworld’s billboard structure. As joint tortfeasors, therefore, they
are solidarily liable to Adworld. Verily, “[j]oint tortfeasors are those who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or approve of it after it is done, if done for their benefit. They are also referred to as those who act together in committing wrong or whose acts,
if independent of each other, unite in causing a single injury. Under Article 219429 of the Civil Code, joint tortfeasors are solidarily liable for the resulting damage. In
other words, joint tortfeasors are each liable as principals, to the same extent and in the same manner as if they had performed the wrongful act themselves.” 30 The
Court’s pronouncement in People v. Velasco31 is instructive on this matter, to wit:32 chanRob lesvirtualLawlibr ary

Where several causes producing an injury are concurrent and each is an efficient cause without which the injury would not have happened, the injury may
be attributed to all or any of the causes and recovery may be had against any or all of the responsible persons although under the circumstances of the case, it
may appear that one of them was more culpable, and that the duty owed by them to the injured person was not same. No actor’s negligence ceases to be a proximate
cause merely because it does not exceed the negligence of other actors. Each wrongdoer is responsible for the entire result and is liable as though his acts were the sole
cause of the injury.

There is no contribution between joint [tortfeasors] whose liability is solidary since both of them are liable for the total damage. Where the concurrent or successive
negligent acts or omissions of two or more persons, although acting independently, are in combination the direct and proximate cause of a single injury to a
third person, it is impossible to determine in what proportion each contributed to the injury and either of them is responsible for the whole injury. x x x.
(Emphases and underscoring supplied)

In conclusion, the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and severally liable with Transworld for damages sustained by Adworld. chanrobleslaw

WHEREFORE, the petition is DENIED. The Decision dated November 16, 2011 and the Resolution dated December 10, 2012 of the Court of Appeals in CA-G.R.
CV No. 94693 are hereby AFFIRMED.

SO ORDERED. cralawlawl

G.R. No. 194121, July 11, 2016

TORRES-MADRID BROKERAGE, INC., Petitioner, v. FEB MITSUI MARINE INSURANCE CO., INC. AND BENJAMIN P. MANALASTAS, DOING
BUSINESS UNDER THE NAME OF BMT TRUCKING SERVICES, Respondents.

DECISION

BRION, J.:
We resolve the petition for review on certiorari challenging the Court of Appeals' (CA) October 14, 2010 decision in CA-G.R. CV No. 91829. 1 chanrobleslaw

The CA affirmed the Regional Trial Court's (RTC) decision in Civil Case No. 01-1596, and found petitioner Torres-Madrid Brokerage, Inc. (TMBI) and respondent
Benjamin P. Manalastas jointly and solidarily liable to respondent FEB Mitsui Marine Insurance Co., Inc. (Mitsui) for damages from the loss of transported cargo.

Antecedents

On October 7, 2000, a shipment of various electronic goods from Thailand and Malaysia arrived at the Port of Manila for Sony Philippines, Inc. (Sony). Previous to
the arrival, Sony had engaged the services of TMBI to facilitate, process, withdraw, and deliver the shipment from the port to its warehouse in Binan, Laguna.2 chanrobleslaw

TMBI - who did not own any delivery trucks - subcontracted the services of Benjamin Manalastas' company, BMT Trucking Services (BMT), to transport the
shipment from the port to the Binan warehouse. 3 Incidentally, TMBI notified Sony who had no objections to the arrangement.4 chanrobleslaw

Four BMT trucks picked up the shipment from the port at about 11:00 a.m. of October 7, 2000. However, BMT could not immediately undertake the delivery because
of the truck ban and because the following day was a Sunday. Thus, BMT scheduled the delivery on October 9, 2000.

In the early morning of October 9, 2000, the four trucks left BMT's garage for Laguna. 5 However, only three trucks arrived at Sony's Binan warehouse.

At around 12:00 noon, the truck driven by Rufo Reynaldo Lapesura (NSF-391) was found abandoned along the Diversion Road in Filinvest, Alabang, Muntinlupa
City.6 Both the driver and the shipment were missing.

Later that evening, BMT's Operations Manager Melchor Manalastas informed Victor Torres, TMBI's General Manager, of the development. 7 They went to
Muntinlupa together to inspect the truck and to report the matter to the police. 8 chanrobleslaw

Victor Torres also filed a complaint with the National Bureau of Investigation (NBI) against Lapesura for "hijacking." 9 The complaint resulted in a recommendation
by the NBI to the Manila City Prosecutor's Office to prosecute Lapesura for qualified theft. 10 chanrobleslaw

TMBI notified Sony of the loss through a letter dated October 10, 2000,11 It also sent BMT a letter dated March 29, 2001, demanding payment for the lost shipment.
BMT refused to pay, insisting that the goods were "hijacked."

In the meantime, Sony filed an insurance claim with the Mitsui, the insurer of the goods. After evaluating the merits of the claim, Mitsui paid
Sony PHP7,293,386.23 corresponding to the value of the lost goods. 12 chanrobleslaw

After being subrogated to Sony's rights, Mitsui sent TMBI a demand letter dated August 30, 2001 for payment of the lost goods. TMBI refused to pay Mitsui's claim.
As a result, Mitsui filed a complaint against TMBI on November 6, 2001,

TMBI, in turn, impleaded Benjamin Manalastas, the proprietor of BMT, as a third-party defendant. TMBI alleged that BMT's driver, Lapesura, was responsible for the
theft/hijacking of the lost cargo and claimed BMT's negligence as the proximate cause of the loss. TMBI prayed that in the event it is held liable to Mitsui for the loss,
it should be reimbursed by BMT,

At the trial, it was revealed that BMT and TMBI have been doing business with each other since the early 80's. It also came out that there had been a previous
hijacking incident involving Sony's cargo in 1997, but neither Sony nor its insurer filed a complaint against BMT or TMBI.13 chanrobleslaw

On August 5, 2008, the RTC found TMBI and Benjamin Manalastas jointly and solidarity liable to pay Mitsui PHP 7,293,386.23 as actual damages, attorney's fees
equivalent to 25% of the amount claimed, and the costs of the suit. 14 The RTC held that TMBI and Manalastas were common carriers and had acted negligently.

Both TMBI and BMT appealed the RTC's verdict.

TMBI denied that it was a common carrier required to exercise extraordinary diligence. It maintains that it exercised the diligence of a good father of a family and
should be absolved of liability because the truck was "hijacked" and this was a fortuitous event.

BMT claimed that it had exercised extraordinary diligence over the lost shipment, and argued as well that the loss resulted from a fortuitous event.

On October 14, 2010, the CA affirmed the RTC's decision but reduced the award of attorney's fees to PHP 200,000.

The CA held: (1) that "hijacking" is not necessarily a fortuitous event because the term refers to the general stealing of cargo during transit;15 (2) that TMBI is a
common carrier engaged in the business of transporting goods for the general public for a fee; 16 (3) even if the "hijacking" were a fortuitous event, TMBI's failure to
observe extraordinary diligence in overseeing the cargo and adopting security measures rendered it liable for the loss; 17 and (4) even if TMBI had not been negligent
in the handling, transport and the delivery of the shipment, TMBI still breached its contractual obligation to Sony when it failed to deliver the shipment.18 chanrobleslaw

TMBI disagreed with the CA's ruling and filed the present petition on December 3, 2010.

The Arguments

TMBI's Petition

TMBI insists that the hijacking of the truck was a fortuitous event. It contests the CA's finding that neither force nor intimidation was used in the taking of the cargo.
Considering Lapesura was never found, the Court should not discount the possibility that he was a victim rather than a perpetrator.19 chanrobleslaw

TMBI denies being a common carrier because it does not own a single truck to transport its shipment and it does not offer transport services to the public for
compensation.20 It emphasizes that Sony knew TMBI did not have its own vehicles and would subcontract the delivery to a third-party.

Further, TMBI now insists that the service it offered was limited to the processing of paperwork attendant to the entry of Sony's goods. It denies that delivery of the
shipment was a part of its obligation.21
chanrobleslaw

TMBI solely blames BMT as it had full control and custody of the cargo when it was lost. 22 BMT, as a common carrier, is presumed negligent and should be
responsible for the loss.

BhtT's Comment
BMT insists that it observed the required standard of care. 23 Like the petitioner, BMT maintains that the hijacking was a fortuitous event - a force majeure - that
exonerates it from liability.24 It points out that Lapesura has never been seen again and his fate remains a mystery. BMT likewise argues that the loss of the cargo
necessarily showed that the taking was with the use of force or intimidation. 25 cralawredchanrobleslaw

If there was any attendant negligence, BMT points the finger on TMBI who failed to send a representative to accompany the shipment.26 BMT further blamed TMBI
for the latter's failure to adopt security measures to protect Sony's cargo. 27 chanrobleslaw

Mitsui's Comment

Mitsui counters that neither TMBI nor BMT alleged or proved during the trial that the taking of the cargo was accompanied with grave or irresistible threat, violence,
or force.28 Hence, the incident cannot be considered "force majeure" and TMBI remains liable for breach of contract.

Mitsui emphasizes that TMBI's theory - that force or intimidation must have been used because Lapesura was never found - was only raised for the first time before
this Court.29 It also discredits the theory as a mere conjecture for lack of supporting evidence.

Mitsui adopts the CA's reasons to conclude that TMBI is a common carrier. It also points out Victor Torres' admission during the trial that TMBI's brokerage service
includes the eventual delivery of the cargo to the consignee. 30 chanrobleslaw

Mitsui invokes as well the legal presumption of negligence against TMBI, pointing out that TMBI simply entrusted the cargo to BMT without adopting any security
measures despite: (1) a previous hijacking incident, when TMBI lost Sony's cargo; and (2) TMBI's knowledge that the cargo was worth more than 10 million
pesos.31 chanrobleslaw

Mitsui affirms that TMBI breached the contract of carriage through its negligent handling of the cargo, resulting in its loss.

The Court's Ruling

A brokerage may be considered a common

carrier if it also undertakes to deliver the
goods for its customers

Common carriers are persons, corporations, firms or associations engaged in the business of transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public. 32 By the nature of their business and for reasons of public policy, they are bound to observe extraordinary diligence
in the vigilance over the goods and in the safety of their passengers. 33 chanrobleslaw

In A.F. Sanchez Brokerage Inc. v. Court of Appeals,34we held that a customs broker - whose principal business is the preparation of the correct customs declaration
and the proper shipping documents - is still considered a common carrier if it also undertakes to deliver the goods for its customers. The law does not distinguish
between one whose principal business activity is the carrying of goods and one who undertakes this task only as an ancillary activity. 35 This ruling has been reiterated
in Schmitz Transport &Brokerage Corp. v. Transport Venture, Inc.,36 Loadmasters Customs Services, Inc. v. Glodel Brokerage Corporation, 37 and Wesrwind
Shipping Corporation v. UCPB General Insurance Co., Inc.38 chanrobleslaw

Despite TMBI's present denials, we find that the delivery of the goods is an integral, albeit ancillary, part of its brokerage services. TMBI admitted that it was
contracted to facilitate, process, and clear the shipments from the customs authorities, withdraw them from the pier, then transport and deliver them to Sony's
warehouse in Laguna.39 chanrobleslaw

Further, TMBI's General Manager Victor Torres described the nature of its services as follows:
chanRoblesvirtualLawlibrary

ATTY. VIRTUDAZO: Could you please tell the court what is the nature of the business of [TMBI]?

Witness MR. Victor Torres of Torres Madrid: We are engaged in customs brokerage business. We acquire the release documents from the Bureau of Customs
and eventually deliver the cargoes to the consignee's warehouse and we are engaged in that kind of business, sir. 40

That TMBI does not own trucks and has to subcontract the delivery of its clients' goods, is immaterial. As long as an entity holds itself to the public for the transport
of goods as a business, it is considered a common carrier regardless of whether it owns the vehicle used or has to actually hire one.41 chanrobleslaw

Lastly, TMBI's customs brokerage services - including the transport/delivery of the cargo - are available to anyone willing to pay its fees. Given these circumstances,
we find it undeniable that TMBI is a common carrier.

Consequently, TMBI should be held responsible for the loss, destruction, or deterioration of the goods it transports unless it results from:
chanRoblesvirtualLawlibrary

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act of omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority. 42 chanroblesvirtuallawlibrary

For all other cases - such as theft or robbery - a common carrier is presumed to have been at fault or to have acted negligently, unless it can prove that it
observed extraordinary diligence.43 chanrobleslaw

Simply put, the theft or the robbery of the goods is not considered a fortuitous event or a force majeure. Nevertheless, a common carrier may absolve itself of liability
for a resulting loss: (1) if it proves that it exercised extraordinary diligence in transporting and safekeeping the goods;44 or (2) if it stipulated with the shipper/owner of
the goods to limit its liability for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence.45 chanrobleslaw

However, a stipulation diminishing or dispensing with the common carrier's liability for acts committed by thieves or robbers who do not act with grave or irresistible
threat, violence, or force is void under Article 1745 of the Civil Code for being contrary to public policy. 46Jurisprudence, too, has expanded Article 1734's five
exemptions. De Guzman v. Court of Appeals47 interpreted Article 1745 to mean that a robbery attended by "grave or irresistible threat, violence or force" is a
fortuitous event that absolves the common carrier from liability.

In the present case, the shipper, Sony, engaged the services of TMBI, a common carrier, to facilitate the release of its shipment and deliver the goods to its warehouse.
In turn, TMBI subcontracted a portion of its obligation - the delivery of the cargo - to another common carrier, BMT.

Despite the subcontract, TMBI remained responsible for the cargo. Under Article 1736, a common carrier's extraordinary responsibility over the shipper's goods lasts
from the time these goods are unconditionally placed in the possession of, and received by, the carrier for transportation, until they are delivered, actually or
constructively, by the carrier to the consignee. 48 chanrobleslaw

That the cargo disappeared during transit while under the custody of BMT - TMBI's subcontractor - did not diminish nor terminate TMBFs responsibility over the
cargo. Article 1735 of the Civil Code presumes that it was at fault.

Instead of showing that it had acted with extraordinary diligence, TMBI simply argued that it was not a common carrier bound to observe extraordinary diligence. Its
failure to successfully establish this premise carries with it the presumption of fault or negligence, thus rendering it liable to Sony/Mitsui for breach of contract.

Specifically, TMBI's current theory - that the hijacking was attended by force or intimidation - is untenable.

First, TMBI alleged in its Third Party Complaint against BMT that Lapesura was responsible for hijacking the shipment. 49 Further, Victor Torres filed a criminal
complaint against Lapesura with the NBI.50 These actions constitute direct and binding admissions that Lapesura stole the cargo. Justice and fair play dictate that
TMBI should not be allowed to change its legal theory on appeal.

Second, neither TMBI nor BMT succeeded in substantiating this theory through evidence. Thus, the theory remained an unsupported allegation no better than
speculations and conjectures. The CA therefore correctly disregarded the defense of force majeure.

TMBI and BMT are not solidarity liable

to Mitsui

We disagree with the lower courts" ruling that TMBI and BMT are solidarity liable to Mitsui for the loss as joint tortfeasors. The ruling was based on Article 2194 of
the Civil Code:
chanRoblesvirtualLawlibrary

Art. 2194. The responsibility of two or more persons who are liable for quasi-delict is solidary.

Notably, TMBI's liability to Mitsui does not stem from a quasi-delict (culpa aquiliana) but from its breach of contract (culpa contractual). The tie that binds TMBI
with Mitsui is contractual, albeit one that passed on to Mitsui as a result of TMBI's contract of carriage with Sony to which Mitsui had been subrogated as an insurer
who had paid Sony's insurance claim. The legal reality that results from this contractual tie precludes the application of quasi-delict based Article 2194.

A third party may recover from a

common carrier for quasi-delict
but must prove actual n egligence

We likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the loss of the cargo. While it is undisputed that the cargo was lost under the
actual custody of BMT (whose employee is the primary suspect in the hijacking or robbery of the shipment), no direct contractual relationship existed between
Sony/Mitsui and BMT. If at all, Sony/Mitsui's cause of action against BMT could only arise from quasi-delict, as a third party suffering damage from the action of
another due to the latter's fault or negligence, pursuant to Article 2176 of the Civil Code. 51 chanrobleslaw

We have repeatedly distinguished between an action for breach of contract {culpa contractual) and an action for quasi-delict (culpa aquiliana).

In culpa contractual, the plaintiff only needs to establish the existence of the contract and the obligor's failure to perform his obligation. It is not necessary for the
plaintiff to prove or even allege that the obligor's non- compliance was due to fault or negligence because Article 1735 already presumes that the common carrier is
negligent. The common carrier can only free itself from liability by proving that it observed extraordinary diligence. It cannot discharge this liability by shifting the
blame on its agents or servants.52 chanrobleslaw

On the other hand, the plaintiff in culpa aquiliana must clearly establish the defendant's fault or negligence because this is the very basis of the action.53 Moreover, if
the injury to the plaintiff resulted from the act or omission of the defendant's employee or servant, the defendant may absolve himself by proving that he observed the
diligence of a good father of a family to prevent the damage, 54 chanrobleslaw

In the present case, Mitsui's action is solely premised on TMBl's breach of contract. Mitsui did not even sue BMT, much less prove any negligence on its part. If BMT
has entered the picture at all, it 'is because TMBI sued it for reimbursement for the liability that TMBI might incur from its contract of carriage with Sony/Mitsui.
Accordingly, there is no basis to directly hold BMT liable to Mitsui for quasi-delict.

BMT is liable to TMBI for breach

of their contract of carriage

We do not hereby say that TMBI must absorb the loss. By subcontracting the cargo delivery to BMT, TMBI entered into its own contract of carriage with a fellow
common carrier.

The cargo was lost after its transfer to BMT's custody based on its contract of carriage with TMBI. Following Article 1735, BMT is presumed to be at fault. Since
BMT failed to prove that it observed extraordinary diligence in the performance of its obligation to TMBI, it is liable to TMBI for breach of their contract of carriage.

In these lights, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract of carriage. In turn, TMBI is entitled to reimbursement from BMT due to the
latter's own breach of its contract of carriage with TMBI. The proverbial buck stops with BMT who may either: (a) absorb the loss, or (b) proceed after its missing
driver, the suspected culprit, pursuant to Article 2181, 55 chanrobleslaw

WHEREFORE, the Court hereby ORDERS petitioner Torres- Madrid Brokerage, Inc. to pay the respondent FEB Mitsui Marine Insurance Co., Inc. the following:
chanRoblesvirtualLawlibrary

a. Actual damages in the amount of PHP 7,293,386.23 plus legal interest from the time the complaint was filed until it is fully paid;
 b. Attorney's fees in the amount of PHP 200,000.00; and cralawlawlibrary

c. Costs of suit.

Respondent Benjamin P. Manalastas is in turn ORDERED to REIMBURSE Torres-Madrid Brokerage, Inc. of the above-mentioned amounts.

SO ORDERED

G.R. No. 167615

SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the Name and Style "COLORKWIK
LABORATORIES" AND "COLORKWIK PHOTO SUPPLY", Petitioners,
vs.
KODAK PHILIPPINES, LTD., Respondent.

DECISION

LEONEN, J.:

This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the March 30, 2005 Decision and September 9, 2005
1

Amended Decision of the Court of Appeals, which modified the February 26, 1999 Decision of the Regional Trial Court by
2 3

reducing the amount of damages awarded to petitioners Spouses Alexander and Julie Lam (Lam Spouses). The Lam Spouses 4

argue that respondent Kodak Philippines, Ltd.’s breach of their contract of sale entitles them to damages more than the amount
awarded by the Court of Appeals. 5

On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into an agreement (Letter Agreement) for the sale of
three (3) units of the Kodak Minilab System 22XL (Minilab Equipment) in the amount of ₱1,796,000.00 per unit, with the
6 7

following terms:

This confirms our verbal agreement for Kodak Phils., Ltd. To provide Colorkwik Laboratories, Inc. with three (3) units Kodak
Minilab System 22XL . . . for your proposed outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your existing
Multicolor photo counter in Cotabato City under the following terms and conditions:

1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on prevailing equipment
price provided said equipment packages will be purchased not later than June 30, 1992.

2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in advance immediately
after signing of the contract.

* Also includes start-up packages worth P61,000.00.

3. NO DOWNPAYMENT.

4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE THOUSAND PESOS
(P35,000.00) inclusive of 24% interest rate for the first 12 months; the balance shall be re-amortized for the remaining
36 months and the prevailing interest shall be applied.

5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION SEVEN HUNDRED
NINETY SIX THOUSAND PESOS.

6. Price is subject to change without prior notice.

*Secured with PDCs; 1st monthly amortization due 45 days after installation[.] 8
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab Equipment in Tagum, Davao Province. The 9

delivered unit was installed by Noritsu representatives on March 9, 1992. The Lam Spouses issued postdated checks amounting
10

to ₱35,000.00 each for 12 months as payment for the first delivered unit, with the first check due on March 31, 1992. 11

The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated March 31, 1992 allegedly due to
insufficiency of funds. The same request was made for the check due on April 30, 1992. However, both checks were negotiated
12

by Kodak Philippines, Ltd. and were honored by the depository bank. The 10 other checks were subsequently dishonored after
13

the Lam Spouses ordered the depository bank to stop payment. 14

Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the unit it delivered together with its
accessories. The Lam Spouses ignored the demand but also rescinded the contract through the letter dated November 18, 1992
15

on account of Kodak Philippines, Ltd.’s failure to deliver the two (2) remaining Minilab Equipment units. 16

On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin and/or recovery of sum of money. The case was
raffled to Branch 61 of the Regional Trial Court, Makati City. The Summons and a copy of Kodak Philippines, Ltd.’s Complaint
17

was personally served on the Lam Spouses. 18

The Lam Spouses failed to appear during the pre-trial conference and submit their pre-trial brief despite being given
extensions. Thus, on July 30, 1993, they were declared in default. Kodak Philippines, Ltd. presented evidence ex-parte. The
19 20 21

trial court issued the Decision in favor of Kodak Philippines, Ltd. ordering the seizure of the Minilab Equipment, which included
the lone delivered unit, its standard accessories, and a separate generator set. Based on this Decision, Kodak Philippines, Ltd.
22

was able to obtain a writ of seizure on December 16, 1992 for the Minilab Equipment installed at the Lam Spouses’ outlet in
Tagum, Davao Province. The writ was enforced on December 21, 1992, and Kodak Philippines, Ltd. gained possession of the
23

Minilab Equipment unit, accessories, and the generator set. 24

The Lam Spouses then filed before the Court of Appeals a Petition to Set Aside the Orders issued by the trial court dated July 30,
1993 and August 13, 1993. These Orders were subsequently set aside by the Court of Appeals Ninth Division, and the case was
remanded to the trial court for pre-trial.
25

On September 12, 1995, an Urgent Motion for Inhibition was filed against Judge Fernando V. Gorospe, Jr., who had issued the
26

writ of seizure. The ground for the motion for inhibition was not provided. Nevertheless, Judge Fernando V. Gorospe Jr.
27

inhibited himself, and the case was reassigned to Branch 65 of the Regional Trial Court, Makati City on October 3, 1995. 28

In the Decision dated February 26, 1999, the Regional Trial Court found that Kodak Philippines, Ltd. defaulted in the
performance of its obligation under its Letter Agreement with the Lam Spouses. It held that Kodak Philippines, Ltd.’s failure to
29

deliver two (2) out of the three (3) units of the Minilab Equipment caused the Lam Spouses to stop paying for the rest of the
installments. The trial court noted that while the Letter Agreement did not specify a period within which the delivery of all units
30

was to be made, the Civil Code provides "reasonable time" as the standard period for compliance:

The second paragraph of Article 1521 of the Civil Code provides:

Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is
bound to send them within a reasonable time.

What constitutes reasonable time is dependent on the circumstances availing both on the part of the seller and the buyer. In this
case, delivery of the first unit was made five (5) days after the date of the agreement. Delivery of the other two (2) units,
however, was never made despite the lapse of at least three (3) months. 31

Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to deliver all three (3) purchased units within a
reasonable time. 32

The trial court found:

Kodak would have the court believe that it did not deliver the other two (2) units due to the failure of defendants to make good
the installments subsequent to the second. The court is not convinced. First of all, there should have been simultaneous delivery
on account of the circumstances surrounding the transaction. . . . Even after the first delivery . . . no delivery was made despite
repeated demands from the defendants and despite the fact no installments were due. Then in March and in April (three and four
months respectively from the date of the agreement and the first delivery) when the installments due were both honored, still no
delivery was made.

Second, although it might be said that Kodak was testing the waters with just one delivery - determining first defendants’
capacity to pay - it was not at liberty to do so. It is implicit in the letter agreement that delivery within a reasonable time was of
the essence and failure to so deliver within a reasonable time and despite demand would render the vendor in default.

....

Third, at least two (2) checks were honored. If indeed Kodak refused delivery on account of defendants’ inability to pay, non-
delivery during the two (2) months that payments were honored is unjustified. 33

Nevertheless, the trial court also ruled that when the Lam Spouses accepted delivery of the first unit, they became liable for the
fair value of the goods received:

On the other hand, defendants accepted delivery of one (1) unit. Under Article 1522 of the Civil Code, in the event the buyer
accepts incomplete delivery and uses the goods so delivered, not then knowing that there would not be any further delivery by the
seller, the buyer shall be liable only for the fair value to him of the goods received. In other words, the buyer is still liable for the
value of the property received. Defendants were under obligation to pay the amount of the unit. Failure of delivery of the other
units did not thereby give unto them the right to suspend payment on the unit delivered. Indeed, in incomplete deliveries, the
buyer has the remedy of refusing payment unless delivery is first made. In this case though, payment for the two undelivered
units have not even commenced; the installments made were for only one (1) unit.

Hence, Kodak is right to retrieve the unit delivered. 34

The Lam Spouses were under obligation to pay for the amount of one unit, and the failure to deliver the remaining units did not
give them the right to suspend payment for the unit already delivered. However, the trial court held that since Kodak
35

Philippines, Ltd. had elected to cancel the sale and retrieve the delivered unit, it could no longer seek payment for any
deterioration that the unit may have suffered while under the custody of the Lam Spouses. 36

As to the generator set, the trial court ruled that Kodak Philippines, Ltd. attempted to mislead the court by claiming that it had
delivered the generator set with its accessories to the Lam Spouses, when the evidence showed that the Lam Spouses had
purchased it from Davao Ken Trading, not from Kodak Philippines, Ltd. Thus, the generator set that Kodak Philippines, Ltd.
37

wrongfully took from the Lam Spouses should be replaced. 38

The dispositive portion of the Regional Trial Court Decision reads:

PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to pay the following:

1) PHP 130,000.00 representing the amount of the generator set, plus legal interest at 12% per annum from December
1992 until fully paid; and

2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum, Davao and Rizal Ave., Manila outlets.

SO ORDERED. 39

On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal, raising as an issue the Regional Trial Court’s failure to
order Kodak Philippines, Ltd. to pay: (1) ₱2,040,000 in actual damages; (2) ₱50,000,000 in moral damages; (3) ₱20,000,000 in
exemplary damages; (4) ₱353,000 in attorney’s fees; and (5) ₱300,000 as litigation expenses. The Lam Spouses did not appeal
40

the Regional Trial Court’s award for the generator set and the renovation expenses. 41

Kodak Philippines, Ltd. also filed an appeal. However, the Court of Appeals dismissed it on December 16, 2002 for Kodak
42

Philippines, Ltd.’s failure to file its appellant’s brief, without prejudice to the continuation of the Lam Spouses’ appeal. The
43

Court of Appeals’ December 16, 2002 Resolution denying Kodak Philippines, Ltd.’s appeal became final and executory on
January 4, 2003. 44
In the Decision dated March 30, 2005, the Court of Appeals Special Fourteenth Division modified the February 26, 1999
45

Decision of the Regional Trial Court:

WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the Regional Trial Court,
Branch 65 in Civil Case No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is ordered to pay the following:

1. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per annum from December 1992
until fully paid; and

2. P440,000.00 as actual damages;

3. P25,000.00 as moral damages; and

4. P50,000.00 as exemplary damages.

SO ORDERED. (Emphasis supplied)

46

The Court of Appeals agreed with the trial court’s Decision, but extensively discussed the basis for the modification of the
dispositive portion.

The Court of Appeals ruled that the Letter Agreement executed by the parties showed that their obligations were susceptible of
partial performance. Under Article 1225 of the New Civil Code, their obligations are divisible:

In determining the divisibility of an obligation, the following factors may be considered, to wit: (1) the will or intention of the
parties, which may be expressed or presumed; (2) the objective or purpose of the stipulated prestation; (3) the nature of the thing;
and (4) provisions of law affecting the prestation.

Applying the foregoing factors to this case, We found that the intention of the parties is to be bound separately for each Minilab
Equipment to be delivered as shown by the separate purchase price for each of the item, by the acceptance of Sps. Lam of
separate deliveries for the first Minilab Equipment and for those of the remaining two and the separate payment arrangements
for each of the equipment. Under this premise, Sps. Lam shall be liable for the entire amount of the purchase price of the Minilab

Equipment delivered considering that Kodak had already completely fulfilled its obligation to deliver the same. . . .

Third, it is also evident that the contract is one that is severable in character as demonstrated by the separate purchase price for
each of the minilab equipment. "If the part to be performed by one party consists in several distinct and separate items and the
price is apportioned to each of them, the contract will generally be held to be severable. In such case, each distinct stipulation
relating to a separate subject matter will be treated as a separate contract." Considering this, Kodak's breach of its obligation to
deliver the other two (2) equipment cannot bar its recovery for the full payment of the equipment already delivered. As far as
Kodak is concerned, it had already fully complied with its separable obligation to deliver the first unit of Minilab
Equipment. (Emphasis supplied)
47

The Court of Appeals held that the issuance of a writ of replevin is proper insofar as the delivered Minilab Equipment unit and its
standard accessories are concerned, since Kodak Philippines, Ltd. had the right to possess it:48

The purchase price of said equipment is P1,796,000.00 which, under the agreement is payable with forty eight (48) monthly
amortization. It is undisputed that Sps. Lam made payments which amounted to Two Hundred Seventy Thousand Pesos
(P270,000.00) through the following checks: Metrobank Check Nos. 00892620 and 00892621 dated 31 March 1992 and 30 April
1992 respectively in the amount of Thirty Five Thousand Pesos (P35,000.00) each, and BPI Family Check dated 31 July 1992
amounting to Two Hundred Thousand Pesos (P200,000.00). This being the case, Sps. Lam are still liable to Kodak in the amount
of One Million Five Hundred Twenty Six Thousand Pesos (P1,526,000.00), which is payable in several monthly amortization,
pursuant to the Letter Agreement. However, Sps. Lam admitted that sometime in May 1992, they had already ordered their
drawee bank to stop the payment on all the other checks they had issued to Kodak as payment for the Minilab Equipment
delivered to them. Clearly then, Kodak ha[d] the right to repossess the said equipment, through this replevin suit. Sps. Lam
cannot excuse themselves from paying in full the purchase price of the equipment delivered to them on account of Kodak’s
breach of the contract to deliver the other two (2) Minilab Equipment, as contemplated in the Letter Agreement. (Emphasis
49

supplied)
Echoing the ruling of the trial court, the Court of Appeals held that the liability of the Lam Spouses to pay the remaining balance
for the first delivered unit is based on the second sentence of Article 1592 of the New Civil Code. The Lam Spouses’ receipt and
50

use of the Minilab Equipment before they knew that Kodak Philippines, Ltd. would not deliver the two (2) remaining units has
made them liable for the unpaid portion of the purchase price. 51

The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission of its contract with the Lam Spouses in the letter
dated October 14, 1992. The rescission was based on Article 1191 of the New Civil Code, which provides: "The power to
52

rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon
him." In its letter, Kodak Philippines, Ltd. demanded that the Lam Spouses surrender the lone delivered unit of Minilab
53

Equipment along with its standard accessories. 54

The Court of Appeals likewise noted that the Lam Spouses rescinded the contract through its letter dated November 18, 1992 on
account of Kodak Philippines, Inc.’s breach of the parties’ agreement to deliver the two (2) remaining units. 55

As a result of this rescission under Article 1191, the Court of Appeals ruled that "both parties must be restored to their original
situation, as far as practicable, as if the contract was never entered into." The Court of Appeals ratiocinated that Article 1191 had
56

the effect of extinguishing the obligatory relation as if one was never created: 57

To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It is not merely to terminate
it and to release parties from further obligations to each other but abrogate it from the beginning and restore parties to relative
positions which they would have occupied had no contract been made. 58

The Lam Spouses were ordered to relinquish possession of the Minilab Equipment unit and its standard accessories, while Kodak
Philippines, Ltd. was ordered to return the amount of ₱270,000.00, tendered by the Lam Spouses as partial payment. 59

As to the actual damages sought by the parties, the Court of Appeals found that the Lam Spouses were able to substantiate the
following:

Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to the contract of lease which made the Sps. Lam liable,
by way of advance payment, in the amount of P40,000.00, the same being intended for the repair of the flooring of the leased
premises; and lastly, the payment of P300,000.00, as compromise agreement for the pre-termination of the contract of lease with
Ruales. 60

The total amount is ₱440,000.00. The Court of Appeals found that all other claims made by the Lam Spouses were not supported
by evidence, either through official receipts or check payments. 61

As regards the generator set improperly seized from Kodak Philippines, Ltd. on the basis of the writ of replevin, the Court of
Appeals found that there was no basis for the Lam Spouses’ claim for reasonable rental of ₱5,000.00. It held that the trial court’s
award of 12% interest, in addition to the cost of the generator set in the amount of ₱130,000.00, is sufficient compensation for
whatever damage the Lam Spouses suffered on account of its improper seizure. 62

The Court of Appeals also ruled on the Lam Spouses’ entitlement to moral and exemplary damages, as well as attorney’s fees and
litigation expenses:

In seeking recovery of the Minilab Equipment, Kodak cannot be considered to have manifested bad faith and malevolence
because as earlier ruled upon, it was well within its right to do the same. However, with respect to the seizure of the generator set,
where Kodak misrepresented to the court a quo its alleged right over the said item, Kodak’s bad faith and abuse of judicial
processes become self-evident. Considering the off-setting circumstances attendant, the amount of P25,000.00 by way of moral
damages is considered sufficient.

In addition, so as to serve as an example to the public that an application for replevin should not be accompanied by any false
claims and misrepresentation, the amount of P50,000.00 by way of exemplary damages should be pegged against Kodak.

With respect to the attorney’s fees and litigation expenses, We find that there is no basis to award Sps. Lam the amount sought
for.
63
Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals Decision, but it was denied for lack of
merit. However, the Court of Appeals noted that the Lam Spouses’ Opposition correctly pointed out that the additional award of
64

₱270,000.00 made by the trial court was not mentioned in the decretal portion of the March 30, 2005 Decision:

Going over the Decision, specifically page 12 thereof, the Court noted that, in addition to the amount of Two Hundred Seventy
Thousand (P270,000.00) which plaintiff-appellant should return to the defendantsappellants, the Court also ruled that defendants-
appellants should, in turn, relinquish possession of the Minilab Equipment and the standard accessories to plaintiff-appellant.
Inadvertently, these material items were not mentioned in the decretal portion of the Decision. Hence, the proper correction
should herein be made. 65

The Lam Spouses filed this Petition for Review on April 14, 2005. On the other hand, Kodak Philippines, Ltd. filed its Motion
for Reconsideration before the Court of Appeals on April 22, 2005.
66

While the Petition for Review on Certiorari filed by the Lam Spouses was pending before this court, the Court of Appeals Special
Fourteenth Division, acting on Kodak Philippines, Ltd.’s Motion for Reconsideration, issued the Amended Decision dated
67

September 9, 2005. The dispositive portion of the Decision reads:

WHEREFORE, premises considered, this Court resolved that:

A. Plaintiff-appellant’s Motion for Reconsideration is hereby DENIED for lack of merit.

B. The decretal portion of the 30 March 2005 Decision should now read as follows:

"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the Regional Trial Court, Branch
65 in Civil Cases No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is ordered to pay the following:

a. P270,000.00 representing the partial payment made on the Minilab equipment.

b. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per annum from December 1992
until fully paid;

c. P440,000.00 as actual damages;

d. P25,000.00 as moral damages; and

e. P50,000.00 as exemplary damages.

Upon the other hand, defendants-appellants are hereby ordered to return to plaintiff-appellant the Minilab equipment and the
standard accessories delivered by plaintiff-appellant.

SO ORDERED."

SO ORDERED. (Emphasis in the original)

68

Upon receiving the Amended Decision of the Court of Appeals, Kodak Philippines, Ltd. filed a Motion for Extension of Time to
File an Appeal by Certiorari under Rule 45 of the 1997 Rules of Civil Procedure before this court. 69

This was docketed as G.R. No. 169639. In the Motion for Consolidation dated November 2, 2005, the Lam Spouses moved that
G.R. No. 167615 and G.R. No. 169639 be consolidated since both involved the same parties, issues, transactions, and essential
facts and circumstances. 70

In the Resolution dated November 16, 2005, this court noted the Lam Spouses’ September 23 and September 30, 2005
Manifestations praying that the Court of Appeals’ September 9, 2005 Amended Decision be considered in the resolution of the
Petition for Review on Certiorari. It also granted the Lam Spouses’ Motion for Consolidation.
71 72
In the Resolution dated September 20, 2006, this court deconsolidated G.R No. 167615 from G.R. No. 169639 and declared
73

G.R. No. 169639 closed and terminated since Kodak Philippines, Ltd. failed to file its Petition for Review.

II

We resolve the following issues:

First, whether the contract between petitioners Spouses Alexander and Julie Lam and respondent Kodak Philippines, Ltd.
pertained to obligations that are severable, divisible, and susceptible of partial performance under Article 1225 of the New Civil
Code; and

Second, upon rescission of the contract, what the parties are entitled to under Article 1190 and Article 1522 of the New Civil
Code.

Petitioners argue that the Letter Agreement it executed with respondent for three (3) Minilab Equipment units was not severable,
divisible, and susceptible of partial performance. Respondent’s recovery of the delivered unit was unjustified. 74

Petitioners assert that the obligations of the parties were not susceptible of partial performance since the Letter Agreement was
for a package deal consisting of three (3) units. For the delivery of these units, petitioners were obliged to pay 48 monthly
75

payments, the total of which constituted one debt. Having relied on respondent’s assurance that the three units would be
76

delivered at the same time, petitioners simultaneously rented and renovated three stores in anticipation of simultaneous
operations. Petitioners argue that the divisibility of the object does not necessarily determine the divisibility of the obligation
77

since the latter is tested against its susceptibility to a partial performance. They argue that even if the object is susceptible of
78

separate deliveries, the transaction is indivisible if the parties intended the realization of all parts of the agreed obligation.
79

Petitioners support the claim that it was the parties’ intention to have an indivisible agreement by asserting that the payments they
made to respondent were intended to be applied to the whole package of three units. The postdated checks were also intended as
80

initial payment for the whole package. The separate purchase price for each item was merely intended to particularize the unit
81

prices, not to negate the indivisible nature of their transaction. As to the issue of delivery, petitioners claim that their acceptance
82

of separate deliveries of the units was solely due to the constraints faced by respondent, who had sole control over delivery
matters.83

With the obligation being indivisible, petitioners argue that respondent’s failure to comply with its obligation to deliver the two
(2) remaining Minilab Equipment units amounted to a breach. Petitioners claim that the breach entitled them to the remedy of
rescission and damages under Article 1191 of the New Civil Code. 84

Petitioners also argue that they are entitled to moral damages more than the ₱50,000.00 awarded by the Court of Appeals since
respondent’s wrongful act of accusing them of non-payment of their obligations caused them sleepless nights, mental anguish,
and wounded feelings. They further claim that, to serve as an example for the public good, they are entitled to exemplary
85

damages as respondent, in making false allegations, acted in evident bad faith and in a wanton, oppressive, capricious, and
malevolent manner. 86

Petitioners also assert that they are entitled to attorney’s fees and litigation expenses under Article 2208 of the New Civil Code
since respondent’s act of bringing a suit against them was baseless and malicious. This prompted them to engage the services of a
lawyer.87

Respondent argues that the parties’ Letter Agreement contained divisible obligations susceptible of partial performance as
defined by Article 1225 of the New Civil Code. In respondent’s view, it was the intention of the parties to be bound separately
88

for each individually priced Minilab Equipment unit to be delivered to different outlets: 89

The three (3) Minilab Equipment are intended by petitioners LAM for install[a]tion at their Tagum, Davao del Norte, Sta. Cruz,
Manila and Cotabato City outlets. Each of these units [is] independent from one another, as many of them may perform its own
job without the other. Clearly the objective or purpose of the prestation, the obligation is divisible.

The nature of each unit of the three (3) Minilab Equipment is such that one can perform its own functions, without awaiting for
the other units to perform and complete its job. So much so, the nature of the object of the Letter Agreement is susceptible of
partial performance, thus the obligation is divisible. 90
With the contract being severable in character, respondent argues that it performed its obligation when it delivered one unit of the
Minilab Equipment. Since each unit could perform on its own, there was no need to await the delivery of the other units to
91

complete its job. Respondent then is of the view that when petitioners ordered the depository bank to stop payment of the issued
92

checks covering the first delivered unit, they violated their obligations under the Letter Agreement since respondent was already
entitled to full payment. 93

Respondent also argues that petitioners benefited from the use of the Minilab Equipment for 10 months—from March to
December 1992— despite having paid only two (2) monthly installments. Respondent avers that the two monthly installments
94

amounting to ₱70,000.00 should be the subject of an offset against the amount the Court of Appeals awarded to petitioners. 95

Respondent further avers that petitioners have no basis for claiming damages since the seizure and recovery of the Minilab
Equipment was not in bad faith and respondent was well within its right. 96

III

The Letter Agreement contained an indivisible obligation.

Both parties rely on the Letter Agreement as basis of their respective obligations. Written by respondent’s Jeffrey T. Go and
97

Antonio V. Mines and addressed to petitioner Alexander Lam, the Letter Agreement contemplated a "package deal" involving
three (3) units of the Kodak Minilab System 22XL, with the following terms and conditions:

This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik Laboratories, Inc. with three (3) units Kodak
Minilab System 22XL . . . for your proposed outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your existing
Multicolor photo counter in Cotabato City under the following terms and conditions:

1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on prevailing equipment
price provided said equipment packages will be purchased not later than June 30, 1992.

2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in advance immediately
after signing of the contract.

* Also includes start-up packages worth P61,000.00.

3. NO DOWNPAYMENT.

4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE THOUSAND PESOS
(P35,000.00) inclusive of 24% interest rate for the first 12 months; the balance shall be re-amortized for the remaining
36 months and the prevailing interest shall be applied.

5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION SEVEN HUNDRED
NINETY SIX THOUSAND PESOS.

6. Price is subject to change without prior notice.

*Secured with PDCs; 1st monthly amortization due 45 days after installation[.] 98

Based on the foregoing, the intention of the parties is for there to be a single transaction covering all three (3) units of the Minilab
Equipment. Respondent’s obligation was to deliver all products purchased under a "package," and, in turn, petitioners’ obligation
was to pay for the total purchase price, payable in installments.

The intention of the parties to bind themselves to an indivisible obligation can be further discerned through their direct acts in
relation to the package deal. There was only one agreement covering all three (3) units of the Minilab Equipment and their
accessories. The Letter Agreement specified only one purpose for the buyer, which was to obtain these units for three different
outlets. If the intention of the parties were to have a divisible contract, then separate agreements could have been made for each
Minilab Equipment unit instead of covering all three in one package deal. Furthermore, the 19% multiple order discount as
contained in the Letter Agreement was applied to all three acquired units. The "no downpayment" term contained in the Letter
99
Agreement was also applicable to all the Minilab Equipment units. Lastly, the fourth clause of the Letter Agreement clearly
referred to the object of the contract as "Minilab Equipment Package."

In ruling that the contract between the parties intended to cover divisible obligations, the Court of Appeals highlighted: (a) the
separate purchase price of each item; (b) petitioners’ acceptance of separate deliveries of the units; and (c) the separate payment
arrangements for each unit. However, through the specified terms and conditions, the tenor of the Letter Agreement indicated an
100

intention for a single transaction. This intent must prevail even though the articles involved are physically separable and capable
of being paid for and delivered individually, consistent with the New Civil Code:

Article 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of
partial performance shall be deemed to be indivisible.

When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical
units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible.

However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or
intended by the parties. (Emphasis supplied)

In Nazareno v. Court of Appeals, the indivisibility of an obligation is tested against whether it can be the subject of partial
101

performance:

An obligation is indivisible when it cannot be validly performed in parts, whatever may be the nature of the thing which is the
object thereof. The indivisibility refers to the prestation and not to the object thereof. In the present case, the Deed of Sale of
January 29, 1970 supposedly conveyed the six lots to Natividad. The obligation is clearly indivisible because the performance of
the contract cannot be done in parts, otherwise the value of what is transferred is diminished. Petitioners are therefore mistaken in
basing the indivisibility of a contract on the number of obligors. (Emphasis supplied, citation omitted)
102

There is no indication in the Letter Agreement that the units petitioners ordered were covered by three (3) separate transactions.
The factors considered by the Court of Appeals are mere incidents of the execution of the obligation, which is to deliver three
units of the Minilab Equipment on the part of respondent and payment for all three on the part of petitioners. The intention to
create an indivisible contract is apparent from the benefits that the Letter Agreement afforded to both parties. Petitioners were
given the 19% discount on account of a multiple order, with the discount being equally applicable to all units that they sought to
acquire. The provision on "no downpayment" was also applicable to all units. Respondent, in turn, was entitled to payment of all
three Minilab Equipment units, payable by installments.

IV

With both parties opting for rescission of the contract under Article 1191, the Court of Appeals correctly ordered for restitution.

The contract between the parties is one of sale, where one party obligates himself or herself to transfer the ownership and deliver
a determinate thing, while the other pays a certain price in money or its equivalent. A contract of sale is perfected upon the
103

meeting of minds as to the object and the price, and the parties may reciprocally demand the performance of their respective
obligations from that point on. 104

The Court of Appeals correctly noted that respondent had rescinded the parties’ Letter Agreement through the letter dated
October 14, 1992. It likewise noted petitioners’ rescission through the letter dated November 18, 1992. This rescission from
105 106

both parties is founded on Article 1191 of the New Civil Code:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.

The injured party may choose between the fulfilment and the rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen fulfilment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

Rescission under Article 1191 has the effect of mutual restitution. In Velarde v. Court of Appeals:
107 108
Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received.

....

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands
rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put
an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other,
but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been
made. (Emphasis supplied, citations omitted)
109

The Court of Appeals correctly ruled that both parties must be restored to their original situation as far as practicable, as if the
contract was never entered into. Petitioners must relinquish possession of the delivered Minilab Equipment unit and accessories,
while respondent must return the amount tendered by petitioners as partial payment for the unit received. Further, respondent
cannot claim that the two (2) monthly installments should be offset against the amount awarded by the Court of Appeals to
petitioners because the effect of rescission under Article 1191 is to bring the parties back to their original positions before the
contract was entered into. Also in Velarde:

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of
the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses
stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this
controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring
back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of ₱800,000 and
the corresponding mortgage payments in the amounts of ₱27,225, ₱23,000 and ₱23,925 (totaling ₱874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the
former. (Emphasis supplied)
110

When rescission is sought under Article 1191 of the Civil Code, it need not be judicially invoked because the power to resolve is
implied in reciprocal obligations. The right to resolve allows an injured party to minimize the damages he or she may suffer on
111

account of the other party’s failure to perform what is incumbent upon him or her. When a party fails to comply with his or her
112

obligation, the other party’s right to resolve the contract is triggered. The resolution immediately produces legal effects if the
113

non-performing party does not question the resolution. Court intervention only becomes necessary when the party who
114

allegedly failed to comply with his or her obligation disputes the resolution of the contract. Since both parties in this case have
115

exercised their right to resolve under Article 1191, there is no need for a judicial decree before the resolution produces effects.

The issue of damages is a factual one. A petition for review on certiorari under Rule 45 shall only pertain to questions of law. It
116

is not the duty of this court to re-evaluate the evidence adduced before the lower courts. Furthermore, unless the petition clearly
117

shows that there is grave abuse of discretion, the findings of fact of the trial court as affirmed by the Court of Appeals are
conclusive upon this court. In Lorzano v. Tabayag, Jr.:
118 119

For a question to be one of law, the same must not involve an examination of the probative value of the evidence presented by the
litigants or any of them. The resolution of the issue must rest solely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact.

....

For the same reason, we would ordinarily disregard the petitioner’s allegation as to the propriety of the award of moral
damages and attorney’s fees in favor of the respondent as it is a question of fact. Thus, questions on whether or not there was a
preponderance of evidence to justify the award of damages or whether or not there was a causal connection between the given
set of facts and the damage suffered by the private complainant or whether or not the act from which civil liability might arise
exists are questions of fact.

Essentially, the petitioner is questioning the award of moral damages and attorney’s fees in favor of the respondent as the same
is supposedly not fully supported by evidence. However, in the final analysis, the question of whether the said award is fully
supported by evidence is a factual question as it would necessitate whether the evidence adduced in support of the same has any
probative value. For a question to be one of law, it must involve no examination of the probative value of the evidence presented
by the litigants or any of them. (Emphasis supplied, citations omitted)
120

The damages awarded by the Court of Appeals were supported by documentary evidence. Petitioners failed to show any reason
121

why the factual determination of the Court of Appeals must be reviewed, especially in light of their failure to produce receipts or
check payments to support their other claim for actual damages. 122

Furthermore, the actual damages amounting to ₱2,040,000.00 being sought by petitioners must be tempered on account of their
123

own failure to pay the rest of the installments for the delivered unit. This failure on their part is a breach of their obligation, for
which the liability of respondent, for its failure to deliver the remaining units, shall be equitably tempered on account of Article
1192 of the New Civil Code. In Central Bank of the Philippines v. Court of Appeals:
124 125

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank
failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to
pay his ₱17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the
liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for
damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties
and surcharges, for not paying his overdue ₱17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his ₱17,000.00
debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use
of the ₱17,000.00, it is just that he should account for the interest thereon. (Emphasis supplied)
126

The award for moral and exemplary damages also appears to be sufficient. Moral damages are granted to alleviate the moral
suffering suffered by a party due to an act of another, but it is not intended to enrich the victim at the defendant’s expense. It is
127

not meant to punish the culpable party and, therefore, must always be reasonable vis-a-vis the injury caused. Exemplary
128

damages, on the other hand, are awarded when the injurious act is attended by bad faith. In this case, respondent was found to
129

have misrepresented its right over the generator set that was seized. As such, it is properly liable for exemplary damages as an
example to the public. 130

However, the dispositive portion of the Court of Appeals Amended Decision dated September 9, 2005 must be modified to
include the recovery of attorney’s fees and costs of suit in favor of petitioners. In Sunbanun v. Go: 131

Furthermore, we affirm the award of exemplary damages and attorney’s fees. Exemplary damages may be awarded when a
wrongful act is accompanied by bad faith or when the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner which would justify an award of exemplary damages under Article 2232 of the Civil Code. Since the award
of exemplary damages is proper in this case, attorney’s fees and cost of the suit may also be recovered as provided under Article
2208 of the Civil Code. (Emphasis supplied, citation omitted)
132

Based on the amount awarded for moral and exemplary damages, it is reasonable to award petitioners ₱20,000.00 as attorney’s
fees.

WHEREFORE, the Petition is DENIED. The Amended Decision dated September 9, 2005 is AFFIRMED with
MODIFICATION. Respondent Kodak Philippines, Ltd. is ordered to pay petitioners Alexander and Julie Lam:

(a) P270,000.00, representing the partial payment made on the Minilab Equipment;

(b) P130,000.00, representing the amount of the generator set, plus legal interest at 12% .per annum from December
1992 until fully paid;

(c) P440,000.00 as actual damages;

(d) P25,000.00 as moral damages;

(e) P50,000.00 as exemplary damages; and

(f) P20,000.00 as attorney's fees.

Petitioners are ordered to return the Kodak Minilab System 22XL unit and its standard accessories to respondent.

SO ORDERED.

G.R. No. L-28497 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
FAUSTINO ESPIRITU, defendant-appellant.

------------------------------

G.R. No. L-28498 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
FAUSTINO ESPIRITU, defendant-appellant, and
ROSARIO ESPIRITU, intervenor-appellant.

Ernesto Zaragoza and Simeon Ramos for defendant-appellant.

Benito Soliven and Jose Varela Calderon for intervenor-appellant.
B. Francisco for appellee.

AVANCEÑA, C. J.:

These two cases, Nos. 28497 and 28948, were tried together.

It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino Espiritu purchased of the plaintiff
corporation a two-ton White truck for P11,983.50, paying P1,000 down to apply on account of this price, and obligating himself
to pay the remaining P10,983.50 within the periods agreed upon. To secure the payment of this sum, the defendants mortgaged
the said truck purchased and, besides, three others, two of which are numbered 77197 and 92744 respectively, and all of
the White make (Exhibit A). These two trucks had been purchased from the same plaintiff and were fully paid for by the
defendant and his brother Rosario Espiritu. The defendant failed to pay P10,477.82 of the price secured by this mortgage.

In connection with case 28498, it appears that on February 18, 1925 the defendant bought a one-ton White truck of the plaintiff
corporation for the sum of P7,136.50, and after having deducted the P500 cash payment and the 12 per cent annual interest on the
unpaid principal, obligated himself to make payment of this sum within the periods agreed upon. To secure this payment the
defendant mortgaged to the plaintiff corporation the said truck purchased and two others, numbered 77197 and 92744,
respectively, the same that were mortgaged in the purchase of the other truck referred to in the other case. The defendant failed to
pay P4,208.28 of this sum.

In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the price at the executon of the
contracts, and in case of non-payment of the total debt upon its maturity, 25 per cent thereon, as penalty.

In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff, the defendant at the same
time also signed a promissory note solidarily with his brother Rosario Espiritu for the several sums secured by the two mortgages
(Exhibits B and D).

Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive owner of the two White trucks Nos.
77197 and 92744, which appear to have been mortgaged by the defendants to the plaintiff. la wphi1. net

While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the mortgage, all of them
together bringing in, after deducting the sheriff's fees and transportation charges to Manila, the net sum of P3,269.58.
The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case 28497 the sum of P7,732.09 with
interest at the rate of 12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In
case 28498, the trial court ordered the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per
cent per annum from December 1, 1925 until fully paid, and 25 per cent thereon as penalty.

The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant signed the mortgage
deeds these trucks were not included in those documents, and were only put in later, without defendant's knowledge. But there is
positive proof that they were included at the time the defendant signed these documents. Besides, there were presented two of
defendant's letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction, acquiescing in the
inclusion of all his White trucks already paid for, in the mortgage (Exhibit H-I).

Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to the
intervenor, and that as the latter did not sign the mortgage deeds, such trucks cannot be considered as mortgaged. But the
evidence shows that while the intervenor Rosario Espiritu did not sign the two mortgage deeds (Exhibits A and C), yet, together
with the defendants Faustino Espiritu, he signed the two promissory notes (Exhibits B and D) secured by these two mortgages.
All these instruments were executed at the same time, and when the trucks 77197 and 92744 were included in the mortgages, the
intervenor Rosario Espiritu was aware of it and consented to such inclusion. These facts are supported by the testimony of
Bachrach, manager of the plaintiff corporation, of Agustin Ramirez, who witnessed the execution of all these documents, and of
Angel Hidalgo, who witnessed the execution of Exhibits B and D.

We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory notes Exhibits B and C to be
sufficient to overthrow this evidence. A comparison of his genuine signature on Exhibit AA with those appearing on promissory
notes B and C, convinces us that the latter are his signatures. And such is our conclusion, notwithstanding the evidence presented
to establish that on the date when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor was in Batac,
Ilocos Norte, many miles away from Manila. And the fact that on the 24th of said month of July, the plaintiff sent some truck
accessory parts by rail to Ilocos for the intervenor does not necessarily prove that the latter could not have been in Manila on the
25th of that month.

In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197 and 92744 and consented to
the mortgage of the same, it is immaterial whether he was or was not the exclusive owner thereof.

It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per cent per annum, makes the
contract usurious. Such a contention is not well founded. Article 1152 of the Civil Code permits the agreement upon a penalty
apart from the interest. Should there be such an agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil.,
631), does not include the interest, and which may be demamded separetely. According to this, the penalty is not to be added to
the interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the
interest. But considering that the obligation was partly performed, and making use of the power given to the court by article 1154
of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt.

With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay only 10 per cent thereon as
penalty, the judgment appealed from is affired in all other respects without special pronouncement as to costs. So ordered.

G.R. No. L-41093 October 30, 1978

ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA MILLAN, respondents.

Purugganan & Bersamin for petitioner.

Salvador N. Beltran for respondent.

MUÑOZ PALMA, J.:

This is a direct appeal on questions of law from a decision of the Court of First Instance of Rizal, Branch XXXIV, presided by
the Honorable Bernardo P. Pardo, the dispositive portion of which reads:
 WHEREFORE, judgment is hereby rendered commanding the defendant to register the deed of absolute sale
it had executed in favor of plaintiff with the Register of Deeds of Caloocan City and secure the corresponding
title in the name of plaintiff within ten (10) days after finality of this decision; if, for any reason, this not
possible, defendant is hereby sentenced to pay plaintiff the sum of P5,193.63 with interest at 4% per annum
from June 22, 1972 until fully paid.

In either case, defendant is sentenced to pay plaintiff nominal damages in the amount of P20,000.00 plus
attorney's fee in the amount of P5,000.00 and costs.

SO ORDERED.

Caloocan City, February 11, 1975. (rollo, p. 21)

Petitioner corporation questions the award for nominal damages of P20,000.00 and attorney's fee of P5,000.00 which are
allegedly excessive and unjustified.

In the Court's resolution of October 20, 1975, We gave due course to the Petition only as regards the portion of the decision
awarding nominal damages. 1

The following incidents are not in dispute:

In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner, agreed to sell to private respondent Lolita
Millan for and in consideration of the sum of P3,864.00, payable in installments, a parcel of land containing an area of
approximately 276 square meters, situated in Barrio Camarin, Caloocan City, known as Lot No. 20, Block No. 11 of its Franville
Subdivision. 2

Millan complied with her obligation under the contract and paid the installments stipulated therein, the final payment having been
made on December 22, 1971. The vendee made a total payment of P5,193.63 including interests and expenses for registration of
title.
3

Thereafter, Lolita Millan made repeated demands upon the corporation for the execution of the final deed of sale and the issuance
to her of the transfer certificate of title over the lot. On March 2, 1973, the parties executed a deed of absolute sale of the
aforementioned parcel of land. The deed of absolute sale contained, among others, this particular provision:

That the VENDOR further warrants that the transfer certificate of title of the above-described parcel of land
shall be transferred in the name of the VENDEE within the period of six (6) months from the date of full
payment and in case the VENDOR fails to issue said transfer certificate of title, it shall bear the obligation to
refund to the VENDEE the total amount already paid for, plus an interest at the rate of 4% per annum. (record
on appeal, p. 9)

Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the corporation failed to cause the issuance
of the corresponding transfer certificate of title over the lot sold to Millan, hence, the latter filed on August 14, 1974 a complaint
for specific performance and damages against Robes-Francisco Realty & Development Corporation in the Court of First Instance
of Rizal, Branch XXXIV, Caloocan City, docketed therein as Civil Case No. C-3268. 4

The complaint prayed for judgment (1) ordering the reformation of the deed of absolute sale; (2) ordering the defendant to deliver
to plaintiff the certificate of title over the lot free from any lien or encumbrance; or, should this be not possible, to pay plaintiff
the value of the lot which should not be less than P27,600.00 (allegedly the present estimated value of the lot); and (3) ordering
the defendant to pay plaintiff damages, corrective and actual in the sum of P15 000.00. 5

The corporation in its answer prayed that the complaint be dismissed alleging that the deed of absolute sale was voluntarily
executed between the parties and the interest of the plaintiff was amply protected by the provision in said contract for payment of
interest at 4% per annum of the total amount paid, for the delay in the issuance of the title. 6

At the pretrial conference the parties agreed to submit the case for decision on the pleadings after defendant further made certain
admissions of facts not contained in its answer. 7
Finding that the realty corporation failed to cause the issuance of the corresponding transfer certificate of title because the parcel
of land conveyed to Millan was included among other properties of the corporation mortgaged to the GSIS to secure an
obligation of P10 million and that the owner's duplicate certificate of title of the subdivision was in the possession of the
Government Service Insurance System (GSIS), the trial court, on February 11, 1975, rendered judgment the dispositive portion of
which is quoted in pages 1 and 2 of this Decision. We hold that the trial court did not err in awarding nominal damages; however,
the circumstances of the case warrant a reduction of the amount of P20,000.00 granted to private respondent Millan.

There can be no dispute in this case under the pleadings and the admitted facts that petitioner corporation was guilty of delay,
amounting to nonperformance of its obligation, in issuing the transfer certificate of title to vendee Millan who had fully paid up
her installments on the lot bought by her. Article 170 of the Civil Code expressly provides that those who in the performance of
their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable
for damages.

Petitioner contends that the deed of absolute sale executed between the parties stipulates that should the vendor fail to issue the
transfer certificate of title within six months from the date of full payment, it shall refund to the vendee the total amount paid for
with interest at the rate of 4% per annum, hence, the vendee is bound by the terms of the provision and cannot recover more than
what is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which provides that in obligations with a
penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary.

The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the clause in question were to
be considered as a penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty, for even
without it, pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover the amount paid by her with legal
rate of interest which is even more than the 4% provided for in the clause. -A 7

It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which will preclude an award of
damages to the vendee Millan. In fact the clause is so worded as to work to the advantage of petitioner corporation.

Unfortunately, the vendee, now private respondent, submitted her case below without presenting evidence on the actual damages
suffered by her as a result of the nonperformance of petitioner's obligation under the deed of sale. Nonetheless, the facts show
that the right of the vendee to acquire title to the lot bought by her was violated by petitioner and this entitles her at the very least
to nominal damages.

The pertinent provisions of our Civil Code follow:

Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or
invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the
plaintiff for any loss suffered by him.

Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in
article 1157, or in every case where any property right has been invaded.

Under the foregoing provisions nominal damages are not intended for indemnification of loss suffered but for the vindication or
recognition of a right violated or invaded. They are recoverable where some injury has been done the amount of which the
evidence fails to show, the assessment of damages being left to the discretion of the court according to the circumstances of the
case.8

It is true as petitioner claims that under American jurisprudence nominal damages by their very nature are small sums fixed by
the court without regard to the extent of the harm done to the injured party.

It is generally held that a nominal damage is a substantial claim, if based upon the violation of a legal right; in
such case, the law presumes a damage, although actual or compensatory damages are not proven; in truth
nominal damages are damages in name only and not in fact, and are allowed, not as an equivalent of a wrong
inflicted, but simply in recogniton of the existence of a technical injury. (Fouraker v. Kidd Springs Boating
and Fishing Club, 65 S. W. 2d 796-797, citing 17 C.J. 720, and a number of authorities). 9
In this jurisdiction, in Vda. de Medina, et al. v. Cresencia, et al. 1956, which was an action for damages arising out of a vehicular
accident, this Court had occasion to eliminate an award of P10,000.00 imposed by way of nominal damages, the Court
stating inter alia that the amount cannot, in common sense, be demeed "nominal". 10

In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court, however, through then Justice Roberto
Concepcion who later became Chief Justice of this Court, sustained an award of P20,000.00 as nominal damages in favor of
respnodent Cuenca. The Court there found special reasons for considering P20,000.00 as "nominal". Cuenca who was the holder
of a first class ticket from Manila to Tokyo was rudely compelled by an agent of petitioner Airlines to move to the tourist class
notwithstanding its knowledge that Cuenca as Commissioner of Public Highways of the Republic of the Philippines was
travelling in his official capacity as a delegate of the country to a conference in Tokyo."
11

Actually, as explained in the Court's decision in Northwest Airlines, there is no conflict between that case and Medina, for in the
latter, the P10,000.00 award for nominal damages was eliminated principally because the aggrieved party had already been
awarded P6,000.00 as compensatory damages, P30,000.00 as moral damages and P10,000.00 as exemplary damages, and
"nominal damages cannot coexist with compensatory damages," while in the case of Commissioner Cuenca, no such
compensatory, moral, or exemplary damages were granted to the latter. 12

At any rate, the circumstances of a particular case will determine whether or not the amount assessed as nominal damages is
within the scope or intent of the law, more particularly, Article 2221 of the Civil Code.

In the situation now before Us, We are of the view that the amount of P20,000.00 is excessive. The admitted fact that petitioner
corporation failed to convey a transfer certificate of title to respondent Millan because the subdivision property was mortgaged to
the GSIS does not in itself show that there was bad faith or fraud. Bad faith is not to be presumed. Moreover, there was the
expectation of the vendor that arrangements were possible for the GSIS to make partial releases of the subdivision lots from the
overall real estate mortgage. It was simply unfortunate that petitioner did not succeed in that regard.

For that reason We cannot agree with respondent Millan Chat the P20,000.00 award may be considered in the nature of
exemplary damages.

In case of breach of contract, exemplary damages may be awarded if the guilty party acted in wanton, fraudulent, reckless,
oppressive or malevolent manner. Furthermore, exemplary or corrective damages are to be imposed by way of example or
13

correction for the public good, only if the injured party has shown that he is entitled to recover moral, temperate or compensatory
damages."

Here, respondent Millan did not submit below any evidence to prove that she suffered actual or compensatory damages. 14

To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal damages is fair and just under the
following circumstances, viz: respondent Millan bought the lot from petitioner in May, 1962, and paid in full her installments on
December 22, 1971, but it was only on March 2, 1973, that a deed of absolute sale was executed in her favor, and
notwithstanding the lapse of almost three years since she made her last payment, petitioner still failed to convey the
corresponding transfer certificate of title to Millan who accordingly was compelled to file the instant complaint in August of
1974.

PREMISES CONSIDERED, We modify the decision of the trial court and reduce the nominal damages to Ten Thousand Pesos
(P10,000.00). In all other respects the aforesaid decision stands.

Without pronouncement as to costs.

SO ORDERED.

G.R. No. L-26339 December 14, 1979

MARIANO C. PAMINTUAN, petitioner-appellant,

vs.
COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees.

V. E. del Rosario & Associates for appellant.

Sangco & Sangalang for private respondent.

AQUINO, J.:

This case is about the recovery compensatory, damages for breach of a contract of sale in addition to liquidated damages.

Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he was ordered to deliver to Yu Ping Kun
Co., Inc. certain plastic sheetings and, if he could not do so, to pay the latter P100,559.28 as damages with six percent interest
from the date of the filing of the complaint. The facts and the findings of the Court of Appeals are as follows:

In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan one thousand metric tons of
white flint corn valued at forty-seven thousand United States dollars in exchange for a collateral importation of plastic sheetings
of an equivalent value.

By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd. of Osaka, Japan in exchange
for plastic sheetings. He contracted to sell the plastic sheetings to Yu Ping Kun Co., Inc. for two hundred sixty-five thousand five
hundred fifty pesos. The company undertook to open an irrevocable domestic letter of credit for that amount in favor of
Pamintuan.

It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its bodegas in Manila or suburbs
directly from the piers "within one month upon arrival of" the carrying vessels. Any violation of the contract of sale would entitle
the aggreived party to collect from the offending party liquidated damages in the sum of ten thousand pesos (Exh. A).

On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka Kaisha, Ltd. confirming the
acceptance by Japanese suppliers of firm offers for the consignment to Pamintuan of plastic sheetings valued at forty-seven
thousand dollars. Acting on that information, the company lost no time in securing in favor of Pamintuan an irrevocable letter of
credit for two hundred sixty-five thousand five hundred fifty pesos.

Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference to the delivery to Yu Ping
Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic sheetings (p. 21, Record on Appeal).

On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan, through Toyo Menka Kaisha, Ltd.,
the plastic sheetings in four shipments to wit: (1) Firm Offer No. 327 for 50,000 yards valued at $9,000; (2) Firm Offer No. 328
for 70,000 yards valued at $8,050; (3) Firm Offers Nos. 329 and 343 for 175,000 and 18,440 yards valued at $22,445 and $2,305,
respectively, and (4) Firm Offer No. 330 for 26,000 yards valued at $5,200, or a total of 339,440 yards with an aggregate value of
$47,000 (pp. 4-5 and 239-40, Record on Appeal).

The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments, Pamintuan delivered to the
company's warehouse only the following quantities of plastic sheetings:

November 11, 1960 — 140 cases, size 48 inches by 50 yards. November 14, 1960 — 258 cases out of 352
cases. November 15, 1960 — 11 cases out of 352 cases. November 15, 1960 — 10 cases out of 100 cases.
November 15, 1960 — 30 cases out of 100 cases.

Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at $5,200; (2) 37 cases
containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000 yards valued at $5,400 and (4) 83 cases containing
40,850 yards valued at $5,236.97. While the plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu
Ping Kun Co., Inc. that he was in dire need of cash with which to pay his obligations to the Philippine National Bank. Inasmuch
as the computation of the prices of each delivery would allegedly be a long process, Pamintuan requested that he be paid
immediately.

Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the price of the plastic sheetings
at P0.782 a yard, regardless of the kind, quality or actual invoice value thereof. The parties arrived at that figure by dividing the
total price of P265,550 by 339,440 yards, the aggregate quantity of the shipments.
After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87, he refused to deliver the
remainder of the shipments with a total value of P102,502.13 which were covered by (i) Firm Offer No. 330, containing 26,000
yards valued at P29,380; (2) Firm Offer No. 343, containing 18,440 yards valued at P13,023.25; (3) Firm Offer No. 217,
containing 30,000 yards valued at P30,510 and (4) Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp.
243-2, Record on Appeal).

As justification for his refusal, Pamintuan said that the company failed to comply with the conditions of the contract and that it
was novated with respect to the price.

On December 2, 1960, the company filed its amended complaint for damages against Pamintuan. After trial, the lower court
rendered the judgment mentioned above but including moral damages.

The unrealized profits awarded as damages in the trial court's decision were computed as follows (pp. 248-9, Record on Appeal):

(1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time of delivery of Pl.75 a
yard........................................................... P16,120.00

(2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20 per yard at the time of
delivery......................................... 9,105.67

(3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70 per yard. 20,490.00

(4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of P1.25 a yard at the time of
delivery.............................................. 21,458.50 Total unrealized profits....................... P67,174.17

The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards, which the trial court
regarded as an item of damages suffered by the company, was computed as follows (p. 71, Record on Appeal):

Liquidation value of 224,150 yards at P0.7822 a yard ..............................................................................

P175,330.13

Actual peso value of 224,150 yards as per firm offers or as per contract............................................163,047.87

Overpayment................................................................ P 12,282.26

To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment), the trial court added (a)
P10,000 as stipulated liquidated damages, (b) P10,000 as moral damages, (c) Pl,102.85 as premium paid by the company on the
bond of P102,502.13 for the issuance of the writ of preliminary attachment and (d) P10,000 as attorney's fees, or total damages of
P110,559.28) p. 250, Record on Appeal). The Court of Appeals affirmed that judgment with the modification that the moral
damages were disallowed (Resolution of June 29, 1966).

Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that the contract of sale between Pamintuan
and the company was partly consummated. The company fulfilled its obligation to obtain the Japanese suppliers' confirmation of
their acceptance of firm offers totalling $47,000. Pamintuan reaped certain benefits from the contract. Hence, he is estopped to
repudiate it; otherwise, he would unjustly enrich himself at the expense of the company.

The Court of Appeals found that the writ of attachment was properly issued. It also found that Pamintuan was guilty of fraud
because (1) he was able to make the company agree to change the manner of paying the price by falsely alleging that there was a
delay in obtaining confirmation of the suppliers' acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited
in the bonded warehouse of his brother and then required his brother to make him Pamintuan), his attorney-in-fact so that he
could control the disposal of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed to the customs broker
the warehouse receipts covering the plastic sheetings withheld by him and (4) he overpriced the plastic sheetings which he
delivered to the company.

The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting another to accommodate him by
agreeing to liquidate his deliveries on the basis of P0.7822 per yard, irrespective of invoice value, on the pretense that he would
deliver what in the first place he ought to deliver anyway, when he knew all the while that he had no such intention, and in the
process delivered only the poorer or cheaper kind or those which he had predetermined to deliver and did not conceal in his
brother's name and thus deceived the unwary party into overpaying him the sum of P 1 2,282.26 for the said deliveries, and
would thereafter refuse to make any further delivery in flagrant violation of his plighted word, would now ask us to sanction his
actuation" (pp. 61-62, Rollo).

The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated
damages. That contention is based on the stipulation "that any violation of the provisions of this contract (of sale) shall entitle the
aggrieved party to collect from the offending party liquidated damages in the sum of P10,000 ".

Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox 26 Phil. 588); that "in
obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of
non-compliance, if there is no stipulation to the contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no
such stipulation to the contrary in this case and that "liquidated damages are those agreed upon by the parties to a contract, to be
paid in case of breach thereof" (Art. 2226, Civil Code).

We hold that appellant's contention cannot be sustained because the second sentence of article 1226 itself provides that I
nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the fulfillment of the obligation". "Responsibility arising
from fraud is demandable in all obligations" (Art. 1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for an damages which may be reasonably attributed to the non-performance of the obligation" (Ibid,
art. 2201).

The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not make a complete delivery
of the plastic sheetings and he overpriced the same. That factual finding is conclusive upon this Court.

There is no justification for the Civil Code to make an apparent distinction between penalty and liquidated damages because the
settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that
either may be recovered without the necessity of proving actual damages and both may be reduced when proper (Arts. 1229,
2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251).

Castan Tobeñas notes that the penal clause in an obligation has three functions: "1. Una funcion coercitiva o de garantia,
consistente en estimular al deudor al complimiento de la obligacion principal, ante la amenaza de tener que pagar la pena. 2. Una
funcion liquidadora del daño, o sea la de evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el
incumplimiento o cumplimiento inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en sancionar o
castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias mas onerosas para el deudor que las que
normalmente lleva aparejadas la infraccion contractual. " (3 Derecho Civil Espanol, 9th Ed., p. 128).

The penalty clause is strictly penal or cumulative in character and does not partake of the nature of liquidated damages (pena
sustitutiva) when the parties agree "que el acreedor podra pedir, en el supuesto incumplimiento o mero retardo de la obligacion
principal, ademas de la pena, los danos y perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros
ordinarios, en que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).

After a conscientious consideration of the facts of the case, as found by Court of Appeals and the trial court, and after reflecting
on the/tenor of the stipulation for liquidated damages herein, the true nature of which is not easy to categorize, we further hold
that justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven
and not to award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract. The proven damages
supersede the stipulated liquidated damages.

This view finds support in the opinion of Manresa (whose comments were the bases of the new matter found in article 1226, not
found in article 1152 of the old Civil Code) that in case of fraud the difference between the proven damages and the stipulated
penalty may be recovered (Vol. 8, part. 1, Codigo Civil, 5th Ed., 1950, p. 483).

Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine pesos and twenty-eight
centavos (P90,559.28), with six percent interest a year from the filing of the complaint.

With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in this instance.

SO ORDERED
G.R. No. 196118 July 30, 2014

LEONARDO C. CASTILLO, represented by LENNARD V. CASTILLO, Petitioner,

vs.
SECURITY BANK CORPORATION, JRC POULTRY FARMS or SPOUSES LEON C. CASTILLO, JR., and
TERESITA FLORESCASTILLO, Respondents.

DECISION

PERALTA, J.:

This is a Petition for Review questioning the Decision of the Court of Appeals (CA) dated November 26, 2010, as well as its
1

Resolution dated March 17, 2011 in CA-G.R. CV No. 88914. The CA reversed and set aside the Decision of the Regional Trial
2 3

Court (RTC) of San Pablo City, Laguna, Branch 32, dated October 16, 2006 in Civil Case No. SP-5882 (02), and consequently,
upheld the validity of the real estate mortgage entered into by respondents spouses Leon C. Castillo, Jr. and Teresita Flores-
Castillo, and Security Bank Corporation (SBC).

The facts, as culled from the records, are as follows:

Petitioner Leonardo C. Castillo and respondent Leon C. Castillo, Jr. are siblings. Leon and Teresita Flores-Castillo (the Spouses
Castillo) were doing business under the name of JRC Poultry Farms. Sometime in 1994, the Spouses Castillo obtained a loan
from respondent SBC in the amount of ₱45,000,000.00. To secure said loan, they executed a real estate mortgage on August 5,
1994 over eleven (11) parcels of land belonging to different members of the Castillo family and which are all located in San
Pablo City. They also procured a second loan amounting to ₱2,500,000.00, which was covered by a mortgage on a land in Pasay
4 5

City. Subsequently, the Spouses Castillo failed to settle the loan, prompting SBC to proceed with the foreclosure of the
properties. SBC was then adjudged as the winning bidder in the foreclosure sale held on July 29, 1999. Thereafter, they were able
to redeem the foreclosed properties, withthe exception of the lots covered by Torrens Certificate of Title(TCT) Nos. 28302 and
28297.

On January 30, 2002, Leonardo filed a complaint for the partial annulment of the real estate mortgage. He alleged that he owns
the property covered by TCT No. 28297 and that the Spouses Castillo used it as one of the collaterals for a loan without his
consent. He contested his supposed Special Power of Attorney (SPA) in Leon’s favor, claiming that it is falsified. According to
him, the date of issuance of his Community Tax Certificate (CTC) as indicated on the notarization of said SPA is January 11,
1993, when he only secured the same on May 17, 1993. He also assailed the foreclosure of the lots under TCT Nos.20030 and
10073 which were still registered in the name of their deceased father. Lastly, Leonardo attacked SBC’s imposition of penalty
and interest on the loans as being arbitrary and unconscionable.

On the other hand, the Spouses Castillo insisted on the validity of Leonardo’s SPA. They alleged that they incurred the loan not
only for themselves, but also for the other members of the Castillo family who needed money at that time. Upon receipt of the
proceeds of the loan, they distributed the same to their family members, as agreed upon. However, when the loan became due,
their relatives failed to pay their respective shares such that Leon was forced to use his own money until SBC had to finally
foreclose the mortgage over the lots.6

In a Decision dated October 16, 2006, the RTC of San Pablo City ruled in Leonardo’s favor, the dispositive portion of which
reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Leonardo C. Castillo and against the defendants
SECURITY BANK CORPORATION, and JRC POULTRY FARMS or SPS. LEON C. CASTILLO, JR. and TERESITA
FLORES-CASTILLO declaring as null and void the Real Estate Mortgage dated August 5, 1994, the Memorandum of
Agreement dated October 28, 1997 and the Certificate of Sale dated August 27, 1999 insofar as plaintiff’s property with Transfer
Certificate of Title No. T-28297 is concerned. The Security Bank Corporation is likewise ordered to return the ownership of the
Transfer Certificate of Title No. T-28297 to plaintiff Leonardo Castillo. Likewise, defendants spouses Leon C. Castillo, Jr. and
Teresita Flores-Castillo are hereby ordered to pay plaintiff moral damages in the total amount of ₱500,000.00 and exemplary
damages of ₱20,000.00. All other claims for damages and attorney’s fees are DENIED for insufficiency of evidence.

SO ORDERED. 7
Both parties elevated the case to the CA. On November 26, 2010, the CA denied Leonardo’s appeal and granted that of the
Spouses Castillo and SBC. It reversed and set aside the RTC Decision, essentially ruling that the August 5, 1994 real estate
mortgage isvalid. Leonardo filed a Motion for Reconsideration, but the same was denied for lack of merit.

Hence, Leonardo brought the case to the Court and filed the instant Petition for Review. The main issue soughtto be resolved
1â wphi1

here is whether or not the real estate mortgage constituted over the property under TCT No. T-28297 is valid and binding.

The Court finds the petition to be without merit.

As a rule, the jurisdiction of the Court over appealed cases from the CA is limited to the review and revision of errors of law it
allegedly committed, as its findings of fact are deemed conclusive. Thus, the Court is not duty-bound to evaluate and weigh the
evidence all over again which were already considered in the proceedings below, except when, as in this case, the findings of fact
of the CAare contrary to the findings and conclusions of the trial court. 8

The following are the legal requisites for a mortgage to be valid:

(1) It must be constituted to secure the fulfillment of a principal obligation;

(2) The mortgagor must be the absolute owner of the thing mortgaged;

(3) The persons constituting the mortgage must have the free disposal of their property, and in the absence thereof, they
should be legally authorized for the purpose. 9

Leonardo asserts that his signature inthe SPA authorizing his brother, Leon, to mortgage his property covered by TCT No. T-
28297 was falsified. He claims that he was in America at the time of its execution. As proof of the forgery, he focuses on his
alleged CTC used for the notarization of the SPA on May 5, 1993 and points out that it appears to have been issued on January
10

11, 1993 when, in fact, he only obtained it on May 17, 1993. But it is a settled rule that allegations of forgery, like all other
allegations, must be proved by clear, positive, and convincing evidence by the party alleging it. It should not be presumed, but
must beestablished by comparing the alleged forged signature with the genuine signatures. Here, Leonardo simply relied on his
11

self-serving declarations and refused to present further corroborative evidence, saying that the falsified document itself is the best
evidence. He did not even bother comparing the alleged forged signature on the SPA with samples of his real and actual
12

signature. What he consistently utilized as lone support for his allegation was the supposed discrepancy on the date of issuance of
his CTC as reflectedon the subject SPA’s notarial acknowledgment. On the contrary, in view of the great ease with which CTCs
are obtained these days, there is reasonable ground to believe that, as the CA correctly observed, the CTC could have been
13

issued with the space for the date left blank and Leonardo merelyfilled it up to accommodate his assertions. Also, upon careful
examination, the handwriting appearing on the space for the date of issuance is different from that on the computation of fees,
which in turn was consistent with the rest of the writings on the document. He did not likewise attempt to show any evidence
14

that would back up his claim that at the time of the execution of the SPA on May 5, 1993, he was actually in America and
therefore could not have possibly appeared and signed the document before the notary.

And even if the Court were to assume, simply for the sake of argument, that Leonardo indeed secured his CTC only on May 17,
1993, this does not automatically render the SPA invalid. The appellate court aptly held that defective notarization will simply
strip the document of its public character and reduce it to a private instrument, but nonetheless, binding, provided its validity is
established by preponderance of evidence. Article 1358 of the Civil Code requires that the form of a contract that transmits or
15

extinguishes real rights over immovable property should be in a public document, yet the failure to observethe proper form does
not render the transaction invalid. The necessity of a public document for said contracts is only for convenience; it is not
16

essential for validity or enforceability. Even a sale of real property, though notcontained in a public instrument or formal
17

writing, is nevertheless valid and binding, for even a verbal contract of sale or real estate produceslegal effects between the
parties. Consequently, when there is a defect in the notarization of a document, the clear and convincing evidentiary standard
18

originally attached to a dulynotarized document is dispensed with, and the measure to test the validity of such document is
preponderance of evidence. 19

Here, the preponderance ofevidence indubitably tilts in favor of the respondents, still making the SPA binding between the
parties even with the aforementioned assumed irregularity. There are several telling circumstances that would clearly
1 âwph i1

demonstrate that Leonardo was aware of the mortgage and he indeed executed the SPA to entrust Leon with the mortgage of his
property. Leon had inhis possession all the titles covering the eleven (11) properties mortgaged, including that of
Leonardo. Leonardo and the rest of their relatives could not have just blindly ceded their respective TCTs to Leon. It is likewise
20 21

ridiculous how Leonardo seemed to have been totally oblivious to the status of his property for eight (8) long years, and would
only find outabout the mortgage and foreclosure from a nephew who himself had consented to the mortgage of his own
lot. Considering the lapse of time from the alleged forgery on May 5, 1993 and the mortgage on August 5, 1994, to the
22

foreclosure on July 29, 1999, and to the supposed discovery in 2001, it appears that the suit is a mere afterthought or a last-ditch
effort on Leonardo’s part to extend his hold over his property and to prevent SBC from consolidating ownership over the same.
More importantly, Leonardo himself admitted on cross-examination that he granted Leon authority to mortgage, only that,
according to him, he thought it was going to be with China Bank, and not SBC. But as the CA noted, there is no mention of a
23

certainbank in the subject SPA with which Leon must specifically deal. Leon, therefore, was simply acting within the bounds of
the SPA’s authority when hemortgaged the lot to SBC.

True, banks and other financing institutions, in entering into mortgage contracts, are expected to exercise due diligence. The
24

ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part
of its operations. In this case, however, no evidence was presented to show that SBC was remiss in the exercise of the standard
25

care and prudence required of it or that it was negligent in accepting the mortgage. SBC could not likewise befaulted for relying
26

on the presumption of regularity of the notarized SPA when it entered into the subject mortgage agreement.

Finally, the Court finds that the interest and penalty charges imposed by SBC are just, and not excessive or unconscionable.

Section 47 of The General Banking Law of 2000 thus provides:

27

Section 47. Foreclosure of Real Estate Mortgage.- In the event of foreclosure, whether judicially or extra-judicially, of any
mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real
property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real
estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the
mortgage, and all the costs and expenses incurred by the bank or institutionfrom the sale and custody of said property less the
income derived therefrom. However,the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure
shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the
auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint
of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the
right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure
sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is
earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption
rights until their expiration. Verily, the redemption price comprises not only the total amount due under the mortgage deed, but
28

also with interest at the rate specified in the mortgage, and all the foreclosure expenses incurred by the mortgagee bank.

To sustain Leonardo's claim that their payment of ₱45,000,000.00 had already extinguished their entire obligation with SBC
would mean that no interest ever accrued from 1994, when the loan was availed, up to the time the payment of ₱45,000,000.00
was made in 2000-2001.

SBC's 16% rate of interest is not computed per month, but rather per annum or only 1.33% per month. In Spouses Bacolor v.
Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, the Court held that the interest rate of 24% per annum on a
29

loan of ₱244,000.00 is not considered as unconscionable and excessive. As such, the Court ruled that the debtors cannot renege
on their obligation to comply with what is incumbent upon them under the contract of loan as they are bound by its stipulations.
Also, the 24o/o per annum rate or 2% per month for the penalty charges imposed on account of default, cannot be considered as
skyrocketing. The enforcement of penalty can be demanded by the creditor in case of non-performance due to the debtor's fault or
fraud. The nonperformance gives rise to the presumption of fault and in order to avoid the penalty, the debtor has the burden of
proving that the failure of the performance was due to either force majeure or the creditor's own acts. In the instant case,
30

petitioner failed to discharge said burden and thus cannot avoid the payment of the penalty charge agreed upon.

WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals, dated November 26, 2010,
as well as its Resolution dated March 17, 2011 in CA-G.R. CV No. 88914, are hereby AFFIRMED.

SO ORDERED.

G.R. No. 183794, June 13, 2016

 SPOUSES JAIME AND MATILDE POON, Petitioners, v. PRIME SAVINGS BANK REPRESENTED BY THE PHILIPPINE DEPOSIT INSURANCE
CORPORATION AS STATUTORY LIQUIDATOR, Respondent.

DECISION

SERENO, C.J.:

Before this Court is a Petition for Review on Certiorari1 assailing the Court of Appeals (CA) Decision2which affirmed the Decision3 issued by Branch 21, Regional
Trial Court (RTC) of Naga City.

The RTC ordered the partial rescission of the penal clause in the lease contract over the commercial building of Spouses Jaime and Matilde Poon (petitioners). It
directed petitioners to return to Prime Savings Bank (respondent) the sum of P1,740,000, representing one-half of the unused portion of its advance rentals, in view of
the closure of respondent's business upon order by the Bangko Sentral ng Pilipinas (BSP).

Antecedent Facts

The facts are undisputed.

Petitioners owned a commercial building in Naga City, which they used for their bakery business. On 3 November 2006, Matilde Poon and respondent executed a 10-
year Contract of Lease4 (Contract) over the building for the latter's use as its branch office in Naga City. They agreed to a fixed monthly rental of P60,000, with an
advance payment of the rentals for the first 100 months in the amount of P6,000,000. As agreed, the advance payment was to be applied immediately, while the rentals
for the remaining period of the Contract were to be paid on a monthly basis. 5 chanrobleslaw

In addition, paragraph 24 of the Contract provides: Chan RoblesV irtualawlibrary

24. Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the LESSOR shall have the right to terminate the lease without the necessity of
serving a court order and to immediately repossess the leased premises. Thereafter the LESSOR shall open and enter the leased premises in the presence of a
representative of the LESSEE (or of the proper authorities) for the purpose of taking a complete inventory of all furniture, fixtures, equipment and/or other materials
or property found within the leased premises.

The LESSOR shall thereupon have the right to enter into a new contract with another party. All advanced rentals shall be forfeited in favor of the LESSOR. 6 chanroblesvirtuallawlibrary

Barely three years later, however, the BSP placed respondent under the receivership of the Philippine Deposit Insurance Corporation (PDIC) by virtue of BSP
Monetary Board Resolution No. 22,7 which reads: ChanRob lesVirtualawlibrary

On the basis of the report of Mr. Candon B. Guerrero, Director of Thrift Banks and Non-Bank Financial Institutions (DTBNBF1), in his memorandum dated January
3, 2000, which report showed that the Prime Savings Bank, Inc. (a) is unable to pay its liabilities as they became due in the ordinary course of business; (b) has
insufficient realizable assets as determined by the Bangko Sentral ng Pilipinas to meet its liabilities; (c) cannot continue in business without involving probable losses
to its depositors and creditors; and (d) has wilfully violated cease and desist orders under Section 37 that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution; x x x.8 (Emphasis supplied)
The BSP eventually ordered respondent's liquidation under Monetary Board Resolution No. 664. 9 chanrobleslaw

On 12 May 2000, respondent vacated the leased premises and surrendered them to petitioners. Subsequently, the PDIC issued petitioners a demand letter11 asking for
10

the return of the unused advance rental amounting to P3,480,000 on the ground that paragraph 24 of the lease agreement had become inoperative, because respondent's
closure constituted force majeure. The PDIC likewise invoked the principle of rebus sic stantibus under Article 1267 of Republic Act No. 386 (Civil Code) as
alternative legal basis for demanding the refund.

Petitioners, however, refused the PDIC's demand.12 They maintained that they were entitled to retain the remainder of the advance rentals following paragraph 24 of
their Contract.

Consequently, respondent sued petitioners before the RTC of Naga City for a partial rescission of contract and/or recovery of a sum of money.

The RTC Ruling

After trial, the RTC ordered the partial rescission of the lease agreement, disposing as follows: ChanRoblesVirtualawlibrary

WHEREFORE, judgment is hereby entered ordering the partial rescission of the Contract of Lease dated November 3, 1996 particularly the second paragraph of Par.
24 thereof and directing the defendant-spouses Jaime and Matilde Poon to return or refund to the Plaintiff the sum of One Million Seven Hundred Forty Thousand
Pesos (P1,740,000) representing one-half of the unused portion of the advance rentals.

Parties' respective claims for damages and attorney's fees are dismissed.

No costs.13 chanroblesvirtuallawlibrary

The trial court ruled that the second clause in paragraph 24 of the Contract was penal in nature, and that the clause was a valid contractual
agreement.14 Citing Provident Savings Bank v. CA15 as legal precedent, it ruled that the premature termination of the lease due to the BSP's closure of respondent's
business was actually involuntary. Consequently, it would be iniquitous for petitioners to forfeit the entire amount of P 3,480,000. 16 Invoking its equity jurisdiction
under Article 1229 of the Civil Code,17 the trial court limited the forfeiture to only one-half of that amount to answer for respondent's unpaid utility bills and E-VAT,
as well as petitioner's lost business opportunity from its former bakery business. 18 chanrobleslaw

The CA Ruling

On appeal, the CA affirmed the RTC Decision, 19 but had a different rationale for applying Article 1229. The appellate court ruled that the closure of respondent's
business was not a fortuitous event. Unlike Provident Savings Bank,20 the instant case was one in which respondent was found to have committed fraudulent acts and
transactions. Lacking, therefore, was the first requisite of a fortuitous event, i.e, that the cause of the breach of obligation must be independent of the will of the
debtor.21
chanrobleslaw

Still, the CA sustained the trial court's interpretation of the proviso on the forfeiture of advance rentals as a penal clause and the consequent application of Article
1229. The appellate court found that the forfeiture clause in the Contract was intended to prevent respondent from defaulting on the latter's obligation to finish the
term of the lease. It further found that respondent had partially performed that obligation and, therefore, the reduction of the penalty was only proper. Similarly, it
ruled that the RTC had properly denied petitioners' claims for actual and moral damages for lack of basis. 22 chanrobleslaw
On 10 July 2008,23 the CA denied petitioners' Motion for Reconsideration. Hence, this Petition.

Issues

The issues to be resolved are whether (1) respondent may be released from its contractual obligations to petitioners on grounds of fortuitous event under Article 1174
of the Civil Code and unforeseen event under Article 1267 of the Civil Code; (2) the proviso in the parties' Contract allowing the forfeiture of advance rentals was a
penal clause; and (3) the penalty agreed upon by the parties may be equitably reduced under Article 1229 of the Civil Code.

COURT RULING

We DENY the Petition.

Preliminarily, we address petitioners' claim that respondent had no cause of action for rescission, because this case does not fall under any of the circumstances
enumerated in Articles 138124 and 138225 of the Civil Code. cralawred

The legal remedy of rescission, however, is by no means limited to the situations covered by the above provisions. The Civil Code uses rescission in two different
contexts, namely: (1) rescission on account of breach of contract under Article 1191; and (2) rescission by reason of lesion or economic prejudice under Article
1381.26 While the term "rescission" is used in Article 1191, "resolution" was the original term used in the old Civil Code, on which the article was based. Resolution is
a principal action based on a breach by a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of
the New Civil Code.27 chanrobleslaw

It is clear from the allegations in paragraphs 12 and 13 of the Complaint 28 that respondent's right of action rested on the alleged abuse by petitioners of their right
under paragraph 24 of the Contract. Respondent's theory before the trial court was that the tenacious enforcement by petitioners of their right to forfeit the advance
rentals was tainted with bad faith, because they knew that respondent was already insolvent. In other words, the action instituted by respondent was for the rescission
of reciprocal obligations under Article 1191. The lower courts, therefore, correctly ruled that Articles 1381 and 1382 were inapposite.

We now resolve the main issues.

The closure of respondent's business was neither a fortuitous nor an unforeseen event that rendered the lease agreement functus officio.

Respondent posits that it should be released from its contract with petitioners, because the closure of its business upon the BSP's order constituted a fortuitous event as
the Court held in Provident Savings Bank.29 chanrobleslaw

The cited case, however, must always be read in the context of the earlier Decision in Central Bank v. Court of Appeals.30 The Court ruled in that case that the
Monetary Board had acted arbitrarily and in bad faith in ordering the closure of Provident Savings Bank. Accordingly, in the subsequent case of Provident Savings
Bank it was held that fuerza mayor had interrupted the prescriptive period to file an action for the foreclosure of the subject mortgage. 31 chanrobleslaw

In contrast, there is no indication or allegation that the BSP's action in this case was tainted with arbitrariness or bad faith. Instead, its decision to place respondent
under receivership and liquidation proceedings was pursuant to Section 30 of Republic Act No. 7653.32 Moreover, respondent was partly accountable for the closure
of its banking business. It cannot be said, then, that the closure of its business was independent of its will as in the case of Provident Savings Bank. The legal effect is
analogous to that created by contributory negligence in quasi-delict actions.

The period during which the bank cannot do business due to insolvency is not a fortuitous event, 33 unless it is shown that the government's action to place a bank
under receivership or liquidation proceedings is tainted with arbitrariness, or that the regulatory body has acted without jurisdiction. 34 chanrobleslaw

As an alternative justification for its premature termination of the Contract, respondent lessee invokes the doctrine of unforeseen event under Article 1267 of the Civil
Code, which provides: Chan RoblesV irtualawlibrary

Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole
or in part.
The theory of rebus sic stantibus in public international law is often cited as the basis of the above article. Under this theory, the parties stipulate in light of certain
prevailing conditions, and the theory can be made to apply when these conditions cease to exist.35 The Court, however, has once cautioned that Article 1267 is not an
absolute application of the principle of rebus sic stantibus, otherwise, it would endanger the security of contractual relations. After all, parties to a contract are
presumed to have assumed the risks of unfavorable developments. It is only in absolutely exceptional changes of circumstance, therefore, that equity demands
assistance for the debtor.36 chanrobleslaw

Tagaytay Realty Co., Inc. v. Gacutan37 lays down the requisites for the application of Article 1267, as follows:

chanRoblesvirtualLawlibrary 1. The event or change in circumstance could not have been foreseen at the time of the execution of the contract.

2. It makes the performance of the contract extremely difficult but not impossible.

3. It must not be due to the act of any of the parties.

4. The contract is for a future prestation.38 chanroblesla w

The difficulty of performance should be such that the party seeking to be released from a contractual obligation would be placed at a disadvantage by the unforeseen
event. Mere inconvenience, unexpected impediments, increased expenses, 39 or even pecuniary inability to fulfil an engagement,40 will not relieve the obligor from an
undertaking that it has knowingly and freely contracted.

The law speaks of "service." This term should be understood as referring to the performance of an obligation or a prestation. 41 A prestation is the object of the
contract; i.e., it is the conduct (to give, to do or not to do) required of the parties.42 In a reciprocal contract such as the lease in this case, one obligation of respondent
as the lessee was to pay the agreed rents for the whole contract period. 43 It would be hard-pressed to complete the lease term since it was already out of business only
three and a half years into the 10-year contract period. Without a doubt, the second and the fourth requisites mentioned above are present in this case.

The first and the third requisites, however, are lacking. It must be noted that the lease agreement was for 10 years. As shown by the unrebutted testimony of Jaime
Poon during trial, the parties had actually considered the possibility of a deterioration or loss of respondent's business within that period: ChanRoblesVirtualawlibrary
ATTY. SALES

Q. Now to the offer of that real estate broker for possible lease of your property at No. 38
General Luna Street, Naga City which was then the Madam Poon Bakery, what did you tell
your real estate broker?

WITNESS (JAIME POON)

A. When Mrs. Lauang approached me, she told me that she has a client who wants to lease a
property in Naga City.

Q. Did she disclose to you the identity of her client?

A. Yes, Sir.

Q. What was the name of her client?

A. That is the Prime Savings Bank.

Q. After you have known that it was the Prime Savings Bank that [wanted] to lease your
property located at No. 38 General Luna St., Naga City, what did you tell Mrs. Lauang[?]

A. I told her that if the price is good, I am willing to give up the place where this bakery of
mine is situated.

Q. So, did Mrs. Lauang give you the quotation as to the price?

A. Yes, Sir.

Q. What was the amount?

A. She asked first if how much I demand for the price.

Q. What did you tell her?

A. I told her, if they can give me P100,000.00 for the rental, I will give up the place.

Q. What do you mean P100,000.00 rental?

A. That is only for the establishment [concerned].

Q. What was the period to be covered by the P100,000.00 rental?

A. That is monthly basis.

Q. So after telling Mrs. Lauang that you can be amenable to lease the place for P100,000.00
monthly, what if any, did Mrs. Lauang tell you?

A. She told me it is very high. And then she asked me if it is still negotiable, I answered, yes.

Q. So, what happened after your clarified to her that [it is] still negotiable?

A. She asked me if there is other condition, and I answered her, yes, if your client can give me
advances I can lease my property.

xxxx

Q. So what is your answer when you were asked for the amount of the advances?

A. I told her I need 7 million pesos because I need to pay my debts.

xx
xx

Q. Who was with her when she came over?

A. A certain guy name Ricci and said that he is the assistant manager of the Prime Savings
Bank.

Q. What did you and Mr. Ricci talk about?

A. I told him the same story as I talked with Mrs. Lauang.

Q. Was the agreement finally reached between you and Mr. Ricci?

A. Not yet, Sir.

Q. What happened after that?

A. He said that he [will discuss] the matter with his higher officer, the branch manager in the
person of Henry Lee.

Q. Were you able to meet this Henry Lee?

A. After a week later.

Q. Who was with Henry Lee?

A. Mrs. Lauang.

Q. Was there a final agreement on the day when you and Henry Lee met?

A. Not yet, he offered to reduce the rental and also the advances. Finally I gave way after 2 or
3 negotiations.

Q. What happened after 2 or 3 negotiations?

A. We arrived at P60,000.00 for monthly rentals and P6,000,000.00 advances for 100 months.

Q. Was the agreement between you and the representative of the Prime Savings Bank reduced
into writing?

A. Yes Sir.

xx
xx

Q. Now, Mr. Poon, I would like to direct your attention to paragraphs 4 and 5 of the contract
of lease which I read: Inasmuch as the leased property is presently mortgaged with the PCI
Bank, the Lessor and the Lessee hereby agree that another property with a clean title shall
serve as security for herein Lessee; Provided that the mortgaged property with PCI Bank is
cancelled, the Lessee agrees that the above-mentioned property shall be released to herein
Lessor; paragraph 5 says: It is hereby stipulated that should the leased property be
foreclosed by the PCI Bank or any other banking or financial institution, all unused rentals
shall be returned by the Lessor to the Lessee. Now, my question is: Who asked or
requested that paragraphs 4 and 5 be incorporated in the contract of lease?

A. Mr. Lee himself.

Q. The representative of the plaintiff?

A. Yes, Sir.

Q. Q. For what purpose did Mr. Lee ask these matters to be incorporated?

A. Because they are worried that my building might be foreclosed because it is under
 [mortgage] with the PCI Bank, that is why I gave them protection of a clean title. But
I also asked them, what will happen to me, in case your bank will be closed?

Q. When you asked that question, what did Mr. Lee tell you?

A. He told me that I don't have to worry I will have P6,000,000 advances.

Q. What was your protection as to the 6 million payment made by the plaintiff?

A. That is the protection for me because during that time I have my bakery and I myself
[spent] 2 million for the improvement of that bakery and I have sacrificed that for the sake
of the offer of lease.

Q. In what manner that you are being protected for that 6 million pesos?

A. They said that if in case the bank will be closed that advance of 6 million pesos will be
forfeited in my favor.

Q. And that is what is found in paragraph 24 of the Contract of Lease which I asked you
to read?

A. That is true.44
Clearly, the closure of respondent's business was not an unforeseen event. As the lease was long-term, it was not lost on the parties that such an eventuality might
occur, as it was in fact covered by the terms of their Contract. Besides, as We have previously discussed, the event was not independent of respondent's will.

The forfeiture clause in the Contract is penal in nature.

Petitioners claim that paragraph 24 was not intended as a penal clause. They add that respondent has not even presented any proof of that intent. It was, therefore, a
reversible error on the part of the CA to construe its forfeiture provision of the Contract as penal in nature.

It is settled that a provision is a penal clause if it calls for the forfeiture of any remaining deposit still in the possession of the lessor, without prejudice to any other
obligation still owing, in the event of the termination or cancellation of the agreement by reason of the lessee's violation of any of the terms and conditions thereof.
This kind of agreement may be validly entered into by the parties. The clause is an accessory obligation meant to ensure the performance of the principal obligation by
imposing on the debtor a special prestation in case of nonperformance or inadequate performance of the principal obligation. 45 chanrobleslaw

It is evident from the above-quoted testimony of Jaime Poon that the stipulation on the forfeiture of advance rentals under paragraph 24 is a penal clause in the sense
that it provides for liquidated damages.

Notably, paragraph 5 of the Contract also provides: ChanRob lesVirtualawlibrary

5. It is hereby stipulated that should the leased property be foreclosed by PCI Bank or any other banking or financial institution, all unused rentals shall be returned by
the LESSOR to the LESSEE; x x x.46 chanroblesvirtuallawlibrary

In effect, the penalty for the premature termination of the Contract works both ways. As the CA correctly found, the penalty was to compel respondent to complete the
10-year term of the lease. Petitioners, too, were similarly obliged to ensure the peaceful use of their building by respondent for the entire duration of the lease under
pain of losing the remaining advance rentals paid by the latter.

The forfeiture clauses of the Contract, therefore, served the two functions of a penal clause, i.e., (1) to provide for liquidated damages and (2) to strengthen the
coercive force of the obligation by the threat of greater responsibility in case of breach. 47 As the CA correctly found, the prestation secured by those clauses was the
parties' mutual obligation to observe the fixed term of the lease. For this reason, We sustain the lower courts' finding that the forfeiture clause in paragraph 24 is a
penal clause, even if it is not expressly labelled as such.

A reduction of the penalty agreed upon by the parties is warranted under Article 1129 of the Civil Code.

We have no reason to doubt that the forfeiture provisions of the Contract were deliberately and intelligently crafted. Under Article 1196 of the Civil Code, 48 the period
of the lease contract is deemed to have been set for the benefit of both parties. Its continuance, effectivity or fulfillment cannot be made to depend exclusively upon
the free and uncontrolled choice of just one party. 49 Petitioners and respondent freely and knowingly committed themselves to respecting the lease period, such that a
breach by either party would result in the forfeiture of the remaining advance rentals in favor of the aggrieved party.

If this were an ordinary contest of rights of private contracting parties, respondent lessee would be obligated to abide by its commitment to petitioners. The general
rule is that courts have no power to ease the burden of obligations voluntarily assumed by parties, just because things did not turn out as expected at the inception of
the contract.50
chanrobleslaw
It must be noted, however, that this case was initiated by the PDIC in furtherance of its statutory role as the fiduciary of Prime Savings Bank. 51 As the state-appointed
receiver and liquidator, the PDIC is mandated to recover and conserve the assets of the foreclosed bank on behalf of the latter's depositors and creditors.52 In other
words, at stake in this case are not just the rights of petitioners and the correlative liabilities of respondent lessee. Over and above those rights and liabilities is the
interest of innocent debtors and creditors of a delinquent bank establishment. These overriding considerations justify the 50% reduction of the penalty agreed upon by
petitioners and respondent lessee in keeping with Article 1229 of the Civil Code, which provides: ChanRob lesVirtualawlibrary

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been
no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.
The reasonableness of a penalty depends on the circumstances in each case, because what is iniquitous and unconscionable in one may be totally just and equitable in
another.53 In resolving this issue, courts may consider factors including but not limited to the type, extent and purpose of the penalty; the nature of the obligation; the
mode of the breach and its consequences; the supervening realities; and the standing and relationship of the parties. 54 chanrobleslaw

Under the circumstances, it is neither fair nor reasonable to deprive depositors and creditors of what could be their last chance to recoup whatever bank assets or
receivables the PDIC can still legally recover. Besides, nothing has prevented petitioners from putting their building to other profitable uses, since respondent
surrendered the premises immediately after the closure of its business. Strict adherence to the doctrine of freedom of contracts, at the expense of the rights of innocent
creditors and investors, will only work injustice rather than promote justice in this case. 55 Such adherence may even be misconstrued as condoning profligate bank
operations. We cannot allow this to happen. We are a Court of both law and equity; We cannot sanction grossly unfair results without doing violence to Our solemn
obligation to administer justice fairly and equally to all who might be affected by our decisions. 56
chanrobleslaw

Neither do We find any error in the trial court's denial of the damages and attorney's fees claimed by petitioners. No proof of the supposed expenses they have
incurred for the improvement of the leased premises and the payment of respondent's unpaid utility bills can be found in the records. Actual and compensatory
damages must be duly proven with a reasonable degree of certainty. 57 chanrobleslaw

To recover moral and exemplary damages where there is a breach of contract, the breach must be palpably wanton, reckless, malicious, in bad faith, oppressive, or
abusive. Attorney's fees are not awarded even if a claimant is compelled to litigate or to incur expenses where no sufficient showing of bad faith exists.58 None of
these circumstances have been shown in this case.

Finally, in line with prevailing jurisprudence,59 legal interest at the rate of 6% per annum is imposed on the monetary award computed from the finality of this
Decision until full payment.

WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED. The Court of Appeals Decision dated 29 November 2007 and its Resolution
dated 10 July 2008 in CA-G.R. CV No. 75349 are hereby MODIFIED in that legal interest at the rate of 6% per annum is imposed on the monetary award computed
from the finality of this Decision until full payment.

No costs.

SO ORDERED. chanRob lesvirtualLawl

G.R. No. 204702 January 14, 2015

RICARDO C. HONRADO, Petitioner,

vs.
GMA NETWORK FILMS, INC., Respondent.

DECISION

CARPIO, J.:

The Case

We review the Decision of the Court of Appeals (CA) ordering petitioner Ricardo C. Honrado (petitioner) to pay a sum of
1 2

money to respondent GMA Network Films, Inc. for breach of contract and breach of trust.

The Facts

On 11December 1998, respondent GMA Network Films, Inc. (GMA Films) entered into a "TV Rights Agreement" (Agreement)
with petitioner under which petitioner, as licensor of 36 films, granted to GMA Films, for a fee of ₱60.75 million, the exclusive
right to telecast the 36 films for a period of three years. Under Paragraph 3 of the Agreement, the parties agreed that "all betacam
copies of the [films] should pass through broadcast quality test conducted by GMA-7," the TV station operated by GMA
Network, Inc. (GMA Network), an affiliate of GMA Films. The parties also agreed to submit the films for review by the Movie
and Television Review and Classification Board (MTRCB) and stipulated on the remedies in the event that MTRCB bans the
telecasting ofany of the films (Paragraph 4):

The PROGRAMME TITLES listed above shall be subject to approval by the Movie and Television Review and Classification
Board (MTRCB) and, in the event of disapproval, LICENSOR [Petitioner] will either replace the censored PROGRAMME
TITLES with another title which is mutually acceptable to both parties or, failure to do such, a proportionate reduction from the
total price shall either be deducted or refunded whichever is the case by the LICENSOR OR LICENSEE [GMA
Films]. (Emphasis supplied)
3

Two of the films covered by the Agreement were Evangeline Katorse and Bubot for which GMA Films paid ₱1.5 million each.

In 2003, GMA Films sued petitioner in the Regional Trial Court of Quezon City (trial court) to collect ₱1.6 million representing
the fee it paid for Evangeline Katorse (₱1.5 million) and a portion of the fee it paid for Bubot (₱350,000 ). GMA Films alleged
4

that it rejected Evangeline Katorse because "its running time was too short for telecast" and petitioner only remitted ₱900,000 to
5

the owner of Bubot (Juanita Alano [Alano]), keeping for himself the balance of ₱350,000. GMA Films prayed for the return of
such amount on the theory that an implied trust arose between the parties as petitioner fraudulently kept it for himself.6

Petitioner denied liability, counter-alleging that after GMA Films rejected Evangeline Katorse, he replaced it with another film,
Winasak na Pangarap, which GMA Films accepted. As proof of such acceptance, petitioner invoked a certification of GMA
Network, dated 30 March 1999, attesting that such film "is of good broadcast quality" (Film Certification). Regarding the fee
7

GMA Films paid for Bubot, petitioner alleged that he had settled his obligation to Alano. Alternatively, petitioner alleged that
GMA Films, being a stranger to the contracts he entered into with the owners of the films in question, has no personality to
question his compliance with the terms of such contracts. Petitioner counterclaimed for attorney’s fees.

The Ruling of the Trial Court

The trial court dismissed GMA Films’ complaint and, finding merit in petitioner’s counterclaim, ordered GMA Films to pay
attorney’s fees (₱100,000). The trial court gave credence to petitioner’s defense that he replaced Evangeline Katorse with
Winasak na Pangarap. On the disposal of the fee GMA Films paid for Bubot, the trial court rejected GMA Films’ theory of
implied trust, finding insufficient GMA Films’ proof that petitioner pocketed any portion of the fee in question.

GMA Films appealed to the CA.

The Ruling of the Court of Appeals

The CA granted GMA Films’ appeal, set aside the trial court’s ruling, and ordered respondent to pay GMA Films ₱2 million as 8

principal obligation with 12% annual interest, exemplary damages (₱100,000), attorney’s fees (₱200,000), litigation expenses
(₱100,000) and the costs. Brushing aside the trial court’s appreciation of the evidence, the CA found that (1) GMA Films was
authorized under Paragraph 4 of the Agreement to reject Evangeline Katorse, and (2) GMA Films never accepted Winasak na
Pangarap as replacement because it was a "bold" film. 9

On petitioner’s liability for the fee GMA Films paid for Bubot, the CA sustained GMA Films’ contention that petitioner was
under obligation to turn over to the film owners the fullamount GMA Films paid for the films as "nowhere in the TV Rights
Agreement does it provide that the licensor is entitled to any commission x x x [hence] x x x [petitioner] Honrado cannot claim
any portion of the purchase price paid for by x x x GMA Films." The CA concluded that petitioner’s retention of a portion of the
10

fee for Bubot gave rise to an implied trust between him and GMA Films, obligating petitioner, as trustee, to return to GMA
Films, as beneficiary, the amount claimed by the latter.

Hence, this petition. Petitioner prays for the reinstatement of the trial court’s ruling while GMA Films attacks the petition for lack
of merit.

The Issue

The question is whether the CA erred in finding petitioner liable for breach of the Agreement and breach of trust.

The Ruling of the Court

We grant the petition. We find GMA Films’ complaint without merit and accordingly reinstate the trial court’s ruling dismissing
it with the modification that the award of attorney’s fees is deleted. Petitioner Committed No Breach of Contract or Trust

MTRCB Disapproval the Stipulated

Basis for Film Replacement
The parties do not quarrel on the meaning of Paragraph 4 of the Agreement which states:

The PROGRAMME TITLES listed [in the Agreement] x x x shall be subject to approval by the Movie and Television Review
and Classification Board (MTRCB) and, in the event of disapproval, LICENSOR [Petitioner] will either replace the censored
PROGRAMME TITLES with another title which is mutually acceptable to both parties or, failure to do such, a proportionate
reduction from the total price shall either be deducted or refunded whichever is the case by the LICENSOR OR LICENSEE
[GMA Films]. (Emphasis supplied)
11

Under this stipulation, what triggersthe rejection and replacement of any film listed in the Agreement is the "disapproval" of its
telecasting by MTRCB.

Nor is there any dispute that GMA Films rejected Evangeline Katorse not because it was disapproved by MTRCB but because
the film’s total running time was too short for telecast (undertime). Instead of rejecting GMA Films’ demand for falling outside
of the terms of Paragraph 4, petitioner voluntarily acceded to it and replaced such film with Winasak na Pangarap. What is
disputed is whether GMA Films accepted the replacement film offered by petitioner.

Petitioner maintains that the Film Certification issued by GMA Network attesting to the "good broadcast quality" of Winasak na
Pangarap amounted to GMA Films’ acceptance of such film. On the other hand, GMA Films insists that such clearance pertained
only to the technical quality of the film but not to its content which it rejected because it found the film as "bomba" (bold). The
12

CA, working under the assumption that the ground GMA Films invoked to reject Winasak na Pangarap was sanctioned under the
Agreement, found merit in the latter’s claim. We hold that regardless of the import of the Film Certification, GMA Films’
rejection of Winasak na Pangarap finds no basis in the Agreement.

In terms devoid of any ambiguity, Paragraph 4 of the Agreement requires the intervention of MTRCB, the state censor, before
GMA Films can reject a film and require its replacement. Specifically, Paragraph 4 requires that MTRCB, after reviewing a film
listed in the Agreement, disapprove or X-rate it for telecasting. GMA Films does not allege, and we find no proof on record
indicating, that MTRCB reviewed Winasak na Pangarap and X-rated it. Indeed, GMA Films’ own witness, Jose Marie Abacan
(Abacan), then Vice-President for Program Management of GMA Network, testified during trial that it was GMA Network which
rejected Winasak na Pangarap because the latter considered the film "bomba." In doing so, GMA Network went beyond its
13

assigned role under the Agreement of screening films to test their broadcast quality and assumed the function of MTRCB to
evaluate the films for the propriety of their content. This runs counter to the clear terms of Paragraphs 3 and 4 of the Agreement.

Disposal of the Fees Paid to

Petitioner Outside of the Terms

of the Agreement

GMA Films also seeks refund for the balance of the fees it paid to petitioner for Bubot which petitioner allegedly failed to turn-
over to the film’s owner, Alano. Implicit in GMA Films’ claim is the theory that the Agreement obliges petitioner to give to the
14

film owners the entire amount he received from GMA Films and that his failure to do so gave rise to an implied trust, obliging
petitioner to hold whatever amount he kept in trust for GMA Films. The CA sustained GMA Films’ interpretation, noting that the
Agreement "does not provide that the licensor is entitled to any commission." 15

This is error.

The Agreement, as its full title denotes ("TV Rights Agreement"), is a licensing contract, the essence of which is the transfer by
the licensor (petitioner) to the licensee (GMA Films), for a fee, of the exclusive right to telecast the films listed in the Agreement.
Stipulations for payment of "commission" to the licensor is incongruous to the nature of such contracts unless the licensor merely
acted as agent of the film owners. Nowhere in the Agreement, however, did the parties stipulate that petitioner signed the contract
in such capacity. On the contrary, the Agreement repeatedly refers to petitioner as "licensor" and GMA Films as "licensee." Nor
did the parties stipulate that the fees paid by GMA Films for the films listed in the Agreement will be turned over by petitioner to
the film owners. Instead, the Agreement merely provided that the total fees will be paid in three installments (Paragraph 3). 16

We entertain no doubt that petitioner forged separate contractual arrangements with the owners of the films listed in the
Agreement, spelling out the terms of payment to the latter. Whether or not petitioner complied with these terms, however, is a
matter to which GMA Films holds absolutely no interest. Being a stranger to such arrangements, GMA Films is no more entitled
to complain of any breach by petitioner of his contracts with the film owners than the film owners are for any breach by GMA
Films of its Agreement with petitioner.
We find it unnecessary to pass upon the question whether an implied trust arose between the parties, as held by the CA. Such
1âwphi1

conclusion was grounded on the erroneous assumption that GMA Films holds an interest in the disposition of the licensing fees it
paid to petitioner.

Award of Attorney's Fees to Petitioner Improper

The trial court awarded attorney's fees to petitioner as it "deemed it just and reasonable" to do so, using the amount provided by
17

petitioner on the witness stand (₱100,000). Undoubtedly, attorney's fees may be awarded if the trial court "deems it just and
equitable." Such ground, however, must be fully elaborated in the body of the ruling. Its mere invocation, without more, negates
18 19

the nature of attorney's fees as a form of actual damages.

WHEREFORE, we GRANT the petition. The Decision, dated 30 April 2012 and Resolution, dated 19 November 2012, of the
Court of Appeals are SET ASIDE. The Decision, dated 5 December 2008, of the Regional Trial Court of Quezon City (Branch
223) is REINSTATED with the MODIFICATION that the award of attorney's fees is DELETED.

SO ORDERED.

G.R. No. L-12191 October 14, 1918

JOSE CANGCO, plaintiff-appellant,

vs.
MANILA RAILROAD CO., defendant-appellee.

Ramon Sotelo for appellant.

Kincaid & Hartigan for appellee.

FISHER, J.:

At the time of the occurrence which gave rise to this litigation the plaintiff, Jose Cangco, was in the employment of Manila
Railroad Company in the capacity of clerk, with a monthly wage of P25. He lived in the pueblo of San Mateo, in the province of
Rizal, which is located upon the line of the defendant railroad company; and in coming daily by train to the company's office in
the city of Manila where he worked, he used a pass, supplied by the company, which entitled him to ride upon the company's
trains free of charge. Upon the occasion in question, January 20, 1915, the plaintiff arose from his seat in the second class-car
where he was riding and, making, his exit through the door, took his position upon the steps of the coach, seizing the upright
guardrail with his right hand for support.

On the side of the train where passengers alight at the San Mateo station there is a cement platform which begins to rise with a
moderate gradient some distance away from the company's office and extends along in front of said office for a distance
sufficient to cover the length of several coaches. As the train slowed down another passenger, named Emilio Zuñiga, also an
employee of the railroad company, got off the same car, alighting safely at the point where the platform begins to rise from the
level of the ground. When the train had proceeded a little farther the plaintiff Jose Cangco stepped off also, but one or both of his
feet came in contact with a sack of watermelons with the result that his feet slipped from under him and he fell violently on the
platform. His body at once rolled from the platform and was drawn under the moving car, where his right arm was badly crushed
and lacerated. It appears that after the plaintiff alighted from the train the car moved forward possibly six meters before it came to
a full stop.

The accident occurred between 7 and 8 o'clock on a dark night, and as the railroad station was lighted dimly by a single light
located some distance away, objects on the platform where the accident occurred were difficult to discern especially to a person
emerging from a lighted car.

The explanation of the presence of a sack of melons on the platform where the plaintiff alighted is found in the fact that it was the
customary season for harvesting these melons and a large lot had been brought to the station for the shipment to the market. They
were contained in numerous sacks which has been piled on the platform in a row one upon another. The testimony shows that this
row of sacks was so placed of melons and the edge of platform; and it is clear that the fall of the plaintiff was due to the fact that
his foot alighted upon one of these melons at the moment he stepped upon the platform. His statement that he failed to see these
objects in the darkness is readily to be credited.

The plaintiff was drawn from under the car in an unconscious condition, and it appeared that the injuries which he had received
were very serious. He was therefore brought at once to a certain hospital in the city of Manila where an examination was made
and his arm was amputated. The result of this operation was unsatisfactory, and the plaintiff was then carried to another hospital
where a second operation was performed and the member was again amputated higher up near the shoulder. It appears in
evidence that the plaintiff expended the sum of P790.25 in the form of medical and surgical fees and for other expenses in
connection with the process of his curation.

Upon August 31, 1915, he instituted this proceeding in the Court of First Instance of the city of Manila to recover damages of the
defendant company, founding his action upon the negligence of the servants and employees of the defendant in placing the sacks
of melons upon the platform and leaving them so placed as to be a menace to the security of passenger alighting from the
company's trains. At the hearing in the Court of First Instance, his Honor, the trial judge, found the facts substantially as above
stated, and drew therefrom his conclusion to the effect that, although negligence was attributable to the defendant by reason of
the fact that the sacks of melons were so placed as to obstruct passengers passing to and from the cars, nevertheless, the plaintiff
himself had failed to use due caution in alighting from the coach and was therefore precluded form recovering. Judgment was
accordingly entered in favor of the defendant company, and the plaintiff appealed.

It can not be doubted that the employees of the railroad company were guilty of negligence in piling these sacks on the platform
in the manner above stated; that their presence caused the plaintiff to fall as he alighted from the train; and that they therefore
constituted an effective legal cause of the injuries sustained by the plaintiff. It necessarily follows that the defendant company is
liable for the damage thereby occasioned unless recovery is barred by the plaintiff's own contributory negligence. In resolving
this problem it is necessary that each of these conceptions of liability, to-wit, the primary responsibility of the defendant company
and the contributory negligence of the plaintiff should be separately examined.

It is important to note that the foundation of the legal liability of the defendant is the contract of carriage, and that the obligation
to respond for the damage which plaintiff has suffered arises, if at all, from the breach of that contract by reason of the failure of
defendant to exercise due care in its performance. That is to say, its liability is direct and immediate, differing essentially, in legal
viewpoint from that presumptive responsibility for the negligence of its servants, imposed by article 1903 of the Civil Code,
which can be rebutted by proof of the exercise of due care in their selection and supervision. Article 1903 of the Civil Code is not
applicable to obligations arising ex contractu, but only to extra-contractual obligations — or to use the technical form of
expression, that article relates only to culpa aquiliana and not to culpa contractual.

Manresa (vol. 8, p. 67) in his commentaries upon articles 1103 and 1104 of the Civil Code, clearly points out this distinction,
which was also recognized by this Court in its decision in the case of Rakes vs. Atlantic, Gulf and Pacific Co. (7 Phil. rep., 359).
In commenting upon article 1093 Manresa clearly points out the difference between "culpa, substantive and independent, which
of itself constitutes the source of an obligation between persons not formerly connected by any legal tie" and culpa considered as
an accident in the performance of an obligation already existing . . . ."

In the Rakes case (supra) the decision of this court was made to rest squarely upon the proposition that article 1903 of the Civil
Code is not applicable to acts of negligence which constitute the breach of a contract.

Upon this point the Court said:

The acts to which these articles [1902 and 1903 of the Civil Code] are applicable are understood to be those not
growing out of pre-existing duties of the parties to one another. But where relations already formed give rise to duties,
whether springing from contract or quasi-contract, then breaches of those duties are subject to article 1101, 1103, and
1104 of the same code. (Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. Rep., 359 at 365.)

This distinction is of the utmost importance. The liability, which, under the Spanish law, is, in certain cases imposed upon
employers with respect to damages occasioned by the negligence of their employees to persons to whom they are not bound by
contract, is not based, as in the English Common Law, upon the principle of respondeat superior — if it were, the master would
be liable in every case and unconditionally — but upon the principle announced in article 1902 of the Civil Code, which imposes
upon all persons who by their fault or negligence, do injury to another, the obligation of making good the damage caused. One
who places a powerful automobile in the hands of a servant whom he knows to be ignorant of the method of managing such a
vehicle, is himself guilty of an act of negligence which makes him liable for all the consequences of his imprudence. The
obligation to make good the damage arises at the very instant that the unskillful servant, while acting within the scope of his
employment causes the injury. The liability of the master is personal and direct. But, if the master has not been guilty of any
negligence whatever in the selection and direction of the servant, he is not liable for the acts of the latter, whatever done within
the scope of his employment or not, if the damage done by the servant does not amount to a breach of the contract between the
master and the person injured.

It is not accurate to say that proof of diligence and care in the selection and control of the servant relieves the master from
liability for the latter's acts — on the contrary, that proof shows that the responsibility has never existed. As Manresa says (vol. 8,
p. 68) the liability arising from extra-contractual culpa is always based upon a voluntary act or omission which, without willful
intent, but by mere negligence or inattention, has caused damage to another. A master who exercises all possible care in the
selection of his servant, taking into consideration the qualifications they should possess for the discharge of the duties which it is
his purpose to confide to them, and directs them with equal diligence, thereby performs his duty to third persons to whom he is
bound by no contractual ties, and he incurs no liability whatever if, by reason of the negligence of his servants, even within the
scope of their employment, such third person suffer damage. True it is that under article 1903 of the Civil Code the law creates
a presumption that he has been negligent in the selection or direction of his servant, but the presumption is rebuttable and yield to
proof of due care and diligence in this respect.

The supreme court of Porto Rico, in interpreting identical provisions, as found in the Porto Rico Code, has held that these articles
are applicable to cases of extra-contractual culpa exclusively. (Carmona vs. Cuesta, 20 Porto Rico Reports, 215.)

This distinction was again made patent by this Court in its decision in the case of Bahia vs. Litonjua and Leynes, (30 Phil. rep.,
624), which was an action brought upon the theory of the extra-contractual liability of the defendant to respond for the damage
caused by the carelessness of his employee while acting within the scope of his employment. The Court, after citing the last
paragraph of article 1903 of the Civil Code, said:

From this article two things are apparent: (1) That when an injury is caused by the negligence of a servant or employee
there instantly arises a presumption of law that there was negligence on the part of the master or employer either in
selection of the servant or employee, or in supervision over him after the selection, or both; and (2) that that
presumption is juris tantum and not juris et de jure, and consequently, may be rebutted. It follows necessarily that if the
employer shows to the satisfaction of the court that in selection and supervision he has exercised the care and diligence
of a good father of a family, the presumption is overcome and he is relieved from liability.

This theory bases the responsibility of the master ultimately on his own negligence and not on that of his servant. This
is the notable peculiarity of the Spanish law of negligence. It is, of course, in striking contrast to the American doctrine
that, in relations with strangers, the negligence of the servant in conclusively the negligence of the master.

The opinion there expressed by this Court, to the effect that in case of extra-contractual culpa based upon negligence, it is
necessary that there shall have been some fault attributable to the defendant personally, and that the last paragraph of article 1903
merely establishes a rebuttable presumption, is in complete accord with the authoritative opinion of Manresa, who says (vol. 12,
p. 611) that the liability created by article 1903 is imposed by reason of the breach of the duties inherent in the special relations of
authority or superiority existing between the person called upon to repair the damage and the one who, by his act or omission,
was the cause of it.

On the other hand, the liability of masters and employers for the negligent acts or omissions of their servants or agents, when
such acts or omissions cause damages which amount to the breach of a contact, is not based upon a mere presumption of the
master's negligence in their selection or control, and proof of exercise of the utmost diligence and care in this regard does not
relieve the master of his liability for the breach of his contract.

Every legal obligation must of necessity be extra-contractual or contractual. Extra-contractual obligation has its source in the
breach or omission of those mutual duties which civilized society imposes upon it members, or which arise from these relations,
other than contractual, of certain members of society to others, generally embraced in the concept of status. The legal rights of
each member of society constitute the measure of the corresponding legal duties, mainly negative in character, which the
existence of those rights imposes upon all other members of society. The breach of these general duties whether due to willful
intent or to mere inattention, if productive of injury, give rise to an obligation to indemnify the injured party. The fundamental
distinction between obligations of this character and those which arise from contract, rests upon the fact that in cases of non-
contractual obligation it is the wrongful or negligent act or omission itself which creates the vinculum juris, whereas in
contractual relations the vinculum exists independently of the breach of the voluntary duty assumed by the parties when entering
into the contractual relation.

With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the
legislature to elect — and our Legislature has so elected — whom such an obligation is imposed is morally culpable, or, on the
contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to include
responsibility for the negligence of those person who acts or mission are imputable, by a legal fiction, to others who are in a
position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit
extra-contractual liability — with certain well-defined exceptions — to cases in which moral culpability can be directly imputed
to the persons to be charged. This moral responsibility may consist in having failed to exercise due care in the selection and
control of one's agents or servants, or in the control of persons who, by reason of their status, occupy a position of dependency
with respect to the person made liable for their conduct.

The position of a natural or juridical person who has undertaken by contract to render service to another, is wholly different from
that to which article 1903 relates. When the sources of the obligation upon which plaintiff's cause of action depends is a negligent
act or omission, the burden of proof rests upon plaintiff to prove the negligence — if he does not his action fails. But when the
facts averred show a contractual undertaking by defendant for the benefit of plaintiff, and it is alleged that plaintiff has failed or
refused to perform the contract, it is not necessary for plaintiff to specify in his pleadings whether the breach of the contract is
due to willful fault or to negligence on the part of the defendant, or of his servants or agents. Proof of the contract and of its
nonperformance is sufficient prima facie to warrant a recovery.

As a general rule . . . it is logical that in case of extra-contractual culpa, a suing creditor should assume the burden of
proof of its existence, as the only fact upon which his action is based; while on the contrary, in a case of negligence
which presupposes the existence of a contractual obligation, if the creditor shows that it exists and that it has been
broken, it is not necessary for him to prove negligence. (Manresa, vol. 8, p. 71 [1907 ed., p. 76]).

As it is not necessary for the plaintiff in an action for the breach of a contract to show that the breach was due to the negligent
conduct of defendant or of his servants, even though such be in fact the actual cause of the breach, it is obvious that proof on the
part of defendant that the negligence or omission of his servants or agents caused the breach of the contract would not constitute a
defense to the action. If the negligence of servants or agents could be invoked as a means of discharging the liability arising from
contract, the anomalous result would be that person acting through the medium of agents or servants in the performance of their
contracts, would be in a better position than those acting in person. If one delivers a valuable watch to watchmaker who contract
to repair it, and the bailee, by a personal negligent act causes its destruction, he is unquestionably liable. Would it be logical to
free him from his liability for the breach of his contract, which involves the duty to exercise due care in the preservation of the
watch, if he shows that it was his servant whose negligence caused the injury? If such a theory could be accepted, juridical
persons would enjoy practically complete immunity from damages arising from the breach of their contracts if caused by
negligent acts as such juridical persons can of necessity only act through agents or servants, and it would no doubt be true in most
instances that reasonable care had been taken in selection and direction of such servants. If one delivers securities to a banking
corporation as collateral, and they are lost by reason of the negligence of some clerk employed by the bank, would it be just and
reasonable to permit the bank to relieve itself of liability for the breach of its contract to return the collateral upon the payment of
the debt by proving that due care had been exercised in the selection and direction of the clerk?

This distinction between culpa aquiliana, as the source of an obligation, and culpa contractual as a mere incident to the
performance of a contract has frequently been recognized by the supreme court of Spain. (Sentencias of June 27, 1894;
November 20, 1896; and December 13, 1896.) In the decisions of November 20, 1896, it appeared that plaintiff's action arose ex
contractu, but that defendant sought to avail himself of the provisions of article 1902 of the Civil Code as a defense. The Spanish
Supreme Court rejected defendant's contention, saying:

These are not cases of injury caused, without any pre-existing obligation, by fault or negligence, such as those to which
article 1902 of the Civil Code relates, but of damages caused by the defendant's failure to carry out the undertakings
imposed by the contracts . . . .

A brief review of the earlier decision of this court involving the liability of employers for damage done by the negligent acts of
their servants will show that in no case has the court ever decided that the negligence of the defendant's servants has been held to
constitute a defense to an action for damages for breach of contract.

In the case of Johnson vs. David (5 Phil. Rep., 663), the court held that the owner of a carriage was not liable for the damages
caused by the negligence of his driver. In that case the court commented on the fact that no evidence had been adduced in the trial
court that the defendant had been negligent in the employment of the driver, or that he had any knowledge of his lack of skill or
carefulness.

In the case of Baer Senior & Co's Successors vs. Compania Maritima (6 Phil. Rep., 215), the plaintiff sued the defendant for
damages caused by the loss of a barge belonging to plaintiff which was allowed to get adrift by the negligence of defendant's
servants in the course of the performance of a contract of towage. The court held, citing Manresa (vol. 8, pp. 29, 69) that if the
"obligation of the defendant grew out of a contract made between it and the plaintiff . . . we do not think that the provisions of
articles 1902 and 1903 are applicable to the case."

In the case of Chapman vs. Underwood (27 Phil. Rep., 374), plaintiff sued the defendant to recover damages for the personal
injuries caused by the negligence of defendant's chauffeur while driving defendant's automobile in which defendant was riding at
the time. The court found that the damages were caused by the negligence of the driver of the automobile, but held that the
master was not liable, although he was present at the time, saying:

. . . unless the negligent acts of the driver are continued for a length of time as to give the owner a reasonable
opportunity to observe them and to direct the driver to desist therefrom. . . . The act complained of must be continued in
the presence of the owner for such length of time that the owner by his acquiescence, makes the driver's acts his own.

In the case of Yamada vs. Manila Railroad Co. and Bachrach Garage & Taxicab Co. (33 Phil. Rep., 8), it is true that the court
rested its conclusion as to the liability of the defendant upon article 1903, although the facts disclosed that the injury complaint of
by plaintiff constituted a breach of the duty to him arising out of the contract of transportation. The express ground of the
decision in this case was that article 1903, in dealing with the liability of a master for the negligent acts of his servants "makes the
distinction between private individuals and public enterprise;" that as to the latter the law creates a rebuttable presumption of
negligence in the selection or direction of servants; and that in the particular case the presumption of negligence had not been
overcome.

It is evident, therefore that in its decision Yamada case, the court treated plaintiff's action as though founded in tort rather than as
based upon the breach of the contract of carriage, and an examination of the pleadings and of the briefs shows that the questions
of law were in fact discussed upon this theory. Viewed from the standpoint of the defendant the practical result must have been
the same in any event. The proof disclosed beyond doubt that the defendant's servant was grossly negligent and that his
negligence was the proximate cause of plaintiff's injury. It also affirmatively appeared that defendant had been guilty of
negligence in its failure to exercise proper discretion in the direction of the servant. Defendant was, therefore, liable for the injury
suffered by plaintiff, whether the breach of the duty were to be regarded as constituting culpa aquiliana or culpa contractual. As
Manresa points out (vol. 8, pp. 29 and 69) whether negligence occurs an incident in the course of the performance of a
contractual undertaking or its itself the source of an extra-contractual undertaking obligation, its essential characteristics are
identical. There is always an act or omission productive of damage due to carelessness or inattention on the part of the defendant.
Consequently, when the court holds that a defendant is liable in damages for having failed to exercise due care, either directly, or
in failing to exercise proper care in the selection and direction of his servants, the practical result is identical in either case.
Therefore, it follows that it is not to be inferred, because the court held in the Yamada case that defendant was liable for the
damages negligently caused by its servants to a person to whom it was bound by contract, and made reference to the fact that the
defendant was negligent in the selection and control of its servants, that in such a case the court would have held that it would
have been a good defense to the action, if presented squarely upon the theory of the breach of the contract, for defendant to have
proved that it did in fact exercise care in the selection and control of the servant.

The true explanation of such cases is to be found by directing the attention to the relative spheres of contractual and extra-
contractual obligations. The field of non- contractual obligation is much more broader than that of contractual obligations,
comprising, as it does, the whole extent of juridical human relations. These two fields, figuratively speaking, concentric; that is to
say, the mere fact that a person is bound to another by contract does not relieve him from extra-contractual liability to such
person. When such a contractual relation exists the obligor may break the contract under such conditions that the same act which
constitutes the source of an extra-contractual obligation had no contract existed between the parties.

The contract of defendant to transport plaintiff carried with it, by implication, the duty to carry him in safety and to provide safe
means of entering and leaving its trains (civil code, article 1258). That duty, being contractual, was direct and immediate, and its
non-performance could not be excused by proof that the fault was morally imputable to defendant's servants.

The railroad company's defense involves the assumption that even granting that the negligent conduct of its servants in placing an
obstruction upon the platform was a breach of its contractual obligation to maintain safe means of approaching and leaving its
trains, the direct and proximate cause of the injury suffered by plaintiff was his own contributory negligence in failing to wait
until the train had come to a complete stop before alighting. Under the doctrine of comparative negligence announced in the
Rakes case (supra), if the accident was caused by plaintiff's own negligence, no liability is imposed upon defendant's negligence
and plaintiff's negligence merely contributed to his injury, the damages should be apportioned. It is, therefore, important to
ascertain if defendant was in fact guilty of negligence.

It may be admitted that had plaintiff waited until the train had come to a full stop before alighting, the particular injury suffered
by him could not have occurred. Defendant contends, and cites many authorities in support of the contention, that it is
negligence per se for a passenger to alight from a moving train. We are not disposed to subscribe to this doctrine in its absolute
form. We are of the opinion that this proposition is too badly stated and is at variance with the experience of every-day life. In
this particular instance, that the train was barely moving when plaintiff alighted is shown conclusively by the fact that it came to
stop within six meters from the place where he stepped from it. Thousands of person alight from trains under these conditions
every day of the year, and sustain no injury where the company has kept its platform free from dangerous obstructions. There is
no reason to believe that plaintiff would have suffered any injury whatever in alighting as he did had it not been for defendant's
negligent failure to perform its duty to provide a safe alighting place.

We are of the opinion that the correct doctrine relating to this subject is that expressed in Thompson's work on Negligence (vol.
3, sec. 3010) as follows:

The test by which to determine whether the passenger has been guilty of negligence in attempting to alight from a
moving railway train, is that of ordinary or reasonable care. It is to be considered whether an ordinarily prudent person,
of the age, sex and condition of the passenger, would have acted as the passenger acted under the circumstances
disclosed by the evidence. This care has been defined to be, not the care which may or should be used by the prudent
man generally, but the care which a man of ordinary prudence would use under similar circumstances, to avoid injury."
(Thompson, Commentaries on Negligence, vol. 3, sec. 3010.)

Or, it we prefer to adopt the mode of exposition used by this court in Picart vs. Smith (37 Phil. rep., 809), we may say that the test
is this; Was there anything in the circumstances surrounding the plaintiff at the time he alighted from the train which would have
admonished a person of average prudence that to get off the train under the conditions then existing was dangerous? If so, the
plaintiff should have desisted from alighting; and his failure so to desist was contributory negligence. 1awph!l. net

As the case now before us presents itself, the only fact from which a conclusion can be drawn to the effect that plaintiff was
guilty of contributory negligence is that he stepped off the car without being able to discern clearly the condition of the platform
and while the train was yet slowly moving. In considering the situation thus presented, it should not be overlooked that the
plaintiff was, as we find, ignorant of the fact that the obstruction which was caused by the sacks of melons piled on the platform
existed; and as the defendant was bound by reason of its duty as a public carrier to afford to its passengers facilities for safe
egress from its trains, the plaintiff had a right to assume, in the absence of some circumstance to warn him to the contrary, that
the platform was clear. The place, as we have already stated, was dark, or dimly lighted, and this also is proof of a failure upon
the part of the defendant in the performance of a duty owing by it to the plaintiff; for if it were by any possibility concede that it
had right to pile these sacks in the path of alighting passengers, the placing of them adequately so that their presence would be
revealed.

As pertinent to the question of contributory negligence on the part of the plaintiff in this case the following circumstances are to
be noted: The company's platform was constructed upon a level higher than that of the roadbed and the surrounding ground. The
distance from the steps of the car to the spot where the alighting passenger would place his feet on the platform was thus reduced,
thereby decreasing the risk incident to stepping off. The nature of the platform, constructed as it was of cement material, also
assured to the passenger a stable and even surface on which to alight. Furthermore, the plaintiff was possessed of the vigor and
agility of young manhood, and it was by no means so risky for him to get off while the train was yet moving as the same act
would have been in an aged or feeble person. In determining the question of contributory negligence in performing such act —
that is to say, whether the passenger acted prudently or recklessly — the age, sex, and physical condition of the passenger are
circumstances necessarily affecting the safety of the passenger, and should be considered. Women, it has been observed, as a
general rule are less capable than men of alighting with safety under such conditions, as the nature of their wearing apparel
obstructs the free movement of the limbs. Again, it may be noted that the place was perfectly familiar to the plaintiff as it was his
daily custom to get on and of the train at this station. There could, therefore, be no uncertainty in his mind with regard either to
the length of the step which he was required to take or the character of the platform where he was alighting. Our conclusion is
that the conduct of the plaintiff in undertaking to alight while the train was yet slightly under way was not characterized by
imprudence and that therefore he was not guilty of contributory negligence.

The evidence shows that the plaintiff, at the time of the accident, was earning P25 a month as a copyist clerk, and that the injuries
he has suffered have permanently disabled him from continuing that employment. Defendant has not shown that any other
gainful occupation is open to plaintiff. His expectancy of life, according to the standard mortality tables, is approximately thirty-
three years. We are of the opinion that a fair compensation for the damage suffered by him for his permanent disability is the sum
of P2,500, and that he is also entitled to recover of defendant the additional sum of P790.25 for medical attention, hospital
services, and other incidental expenditures connected with the treatment of his injuries.

The decision of lower court is reversed, and judgment is hereby rendered plaintiff for the sum of P3,290.25, and for the costs of
both instances. So ordered.
G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,

vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO, SALVADOR CASTRO,
MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO, AGERICO CASTRO, ROLANDO CASTRO,
VIRGILIO CASTRO AND GLORIA CASTRO, and HONORABLE INTERMEDIATE APPELLATE
COURT, respondents.

PADILLA, J.:

Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R. No. CV-70245, entitled
"Ignacio Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of the other plaintiffs, passed
away in Lingayen, Pangasinan. On the same day, her daughter Sofia C. Crouch, who was then vacationing in the Philippines,
addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's
death. The telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the required fees or
charges.

The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in attendance. Neither the
husband nor any of the other children of the deceased, then all residing in the United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused the defendant to send, had not been
received. She and the other plaintiffs thereupon brought action for damages arising from defendant's breach of contract. The case
was filed in the Court of First Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the
defendant was that it was unable to transmit the telegram because of "technical and atmospheric factors beyond its control." No 1

evidence appears on record that defendant ever made any attempt to advise the plaintiff Sofia C. Crouch as to why it could not
transmit the telegram.

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay the plaintiffs (now private
respondents) damages, as follows, with interest at 6% per annum:

1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as moral damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages.

3. Ignacio Castro Jr., P20,000.00 as moral damages.

4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

8. Esmeralda C. Floro, P20,000.00 moral damages.

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

 11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of P1,000.00 to each of the
plaintiffs and costs.2

On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but eliminated the award of
P16,000.00 as compensatory damages to Sofia C. Crouch and the award of P1,000.00 to each of the private respondents as
exemplary damages. The award of P20,000.00 as moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda
C. Floro was also reduced to P120,000. 00 for each. 3

Petitioner appeals from the judgment of the appellate court, contending that the award of moral damages should be eliminated as
defendant's negligent act was not motivated by "fraud, malice or recklessness."

In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges paid by Sofia C. Crouch for the
telegram that was never sent to the addressee thereof.

Petitioner's contention is without merit.

Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for damages." Art. 2176 also provides that "whoever
by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby, for a fee, petitioner
undertook to send said private respondent's message overseas by telegram. This, petitioner did not do, despite performance by
said private respondent of her obligation by paying the required charges. Petitioner was therefore guilty of contravening its
obligation to said private respondent and is thus liable for damages.

This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in this regard would result in
an inequitous situation where petitioner will only be held liable for the actual cost of a telegram fixed thirty (30) years ago.

We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate results of the
defendant's wrongful act or omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of the suffering private
respondents had to undergo.

As the appellate court properly observed:

[Who] can seriously dispute the shock, the mental anguish and the sorrow that the overseas children must
have suffered upon learning of the death of their mother after she had already been interred, without being
given the opportunity to even make a choice on whether they wanted to pay her their last respects? There is
no doubt that these emotional sufferings were proximately caused by appellant's omission and substantive
law provides for the justification for the award of moral damages. 4

We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch representing the expenses she
incurred when she came to the Philippines from the United States to testify before the trial court. Had petitioner not been remiss
in performing its obligation, there would have been no need for this suit or for Mrs. Crouch's testimony.

The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in the amount of P1,000.00 for
each of the private respondents, as a warning to all telegram companies to observe due diligence in transmitting the messages of
their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is held liable to private
respondents in the following amounts:

(1) P10,000.00 as moral damages, to each of private respondents;

(2) P1,000.00 as exemplary damages, to each of private respondents;

(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;

(4) P5,000.00 as attorney's fees; and

(5) Costs of suit.

SO ORDERED.

G.R. No. 158911 March 4, 2008

MANILA ELECTRIC COMPANY, Petitioner,

vs.
MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS, ROSEMARIE RAMOY,
OFELIA DURIAN and CYRENE PANADO, Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that the Decision1 of the Court
of Appeals (CA) dated December 16, 2002, ordering petitioner Manila Electric Company (MERALCO) to pay Leoncio
Ramoy2 moral and exemplary damages and attorney's fees, and the CA Resolution3 dated July 1, 2003, denying petitioner's
motion for reconsideration, be reversed and set aside.

The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the facts as culled from the records, thus:

The evidence on record has established that in the year 1987 the National Power Corporation (NPC) filed with the MTC Quezon
City a case for ejectment against several persons allegedly illegally occupying its properties in Baesa, Quezon City. Among the
defendants in the ejectment case was Leoncio Ramoy, one of the plaintiffs in the case at bar. On April 28, 1989 after the
defendants failed to file an answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered judgment for the
plaintiff [MERALCO] and "ordering the defendants to demolish or remove the building and structures they built on the land of
the plaintiff and to vacate the premises." In the case of Leoncio Ramoy, the Court found that he was occupying a portion of Lot
No. 72-B-2-B with the exact location of his apartments indicated and encircled in the location map as No. 7. A copy of the
decision was furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2, 1993, p. 5).

On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of electric power supply to all residential and
commercial establishments beneath the NPC transmission lines along Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to
the letter was a list of establishments affected which included plaintiffs Leoncio and Matilde Ramoy (Exh. 9), as well as a copy
of the court decision (Exh. 2). After deliberating on NPC's letter, Meralco decided to comply with NPC's request (Exhibits 6, 6-
A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all establishments affected including plaintiffs Leoncio Ramoy
(Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde Macabagdal (Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-F), Ofelia Durian
(Exh. 3-G), Jose Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I).

In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to determine all the establishments which are
considered under NPC property in view of the fact that "the houses in the area are very close to each other" (Exh. 12). Shortly
thereafter, a joint survey was conducted and the NPC personnel pointed out the electric meters to be disconnected (Exh. 13; TSN,
October 8, 1993, p. 7; TSN, July 1994, p. 8).
In due time, the electric service connection of the plaintiffs [herein respondents] was disconnected (Exhibits D to G, with
submarkings, pp. 86-87, Record).

Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a parcel of land covered by TCT No. 326346,
a portion of which was occupied by plaintiffs Rosemarie Ramoy, Ofelia Durian, Jose Valiza and Cyrene S. Panado as lessees.
When the Meralco employees were disconnecting plaintiffs' power connection, plaintiff Leoncio Ramoy objected by informing
the Meralco foreman that his property was outside the NPC property and pointing out the monuments showing the boundaries of
his property. However, he was threatened and told not to interfere by the armed men who accompanied the Meralco employees.
After the electric power in Ramoy's apartment was cut off, the plaintiffs-lessees left the premises.

During the ocular inspection ordered by the Court and attended by the parties, it was found out that the residence of plaintiffs-
spouses Leoncio and Matilde Ramoy was indeed outside the NPC property. This was confirmed by defendant's witness R.P.
Monsale III on cross-examination (TSN, October 13, 1993, pp. 10 and 11). Monsale also admitted that he did not inform his
supervisor about this fact nor did he recommend re-connection of plaintiffs' power supply (Ibid., p. 14).

The record also shows that at the request of NPC, defendant Meralco re-connected the electric service of four customers
previously disconnected none of whom was any of the plaintiffs (Exh. 14).4

The RTC decided in favor of MERALCO by dismissing herein respondents' claim for moral damages, exemplary damages and
attorney's fees. However, the RTC ordered MERALCO to restore the electric power supply of respondents.

Respondents then appealed to the CA. In its Decision dated December 16, 2002, the CA faulted MERALCO for not requiring
from National Power Corporation (NPC) a writ of execution or demolition and in not coordinating with the court sheriff or other
proper officer before complying with the NPC's request. Thus, the CA held MERALCO liable for moral and exemplary damages
and attorney's fees. MERALCO's motion for reconsideration of the Decision was denied per Resolution dated July 1, 2003.

Hence, herein petition for review on certiorari on the following grounds:

THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT WHEN IT DISCONNECTED
THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.

II

THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY'S FEES AGAINST MERALCO UNDER THE CIRCUMSTANCES THAT THE LATTER ACTED IN GOOD
FAITH IN THE DISCONNECTION OF THE ELECTRIC SERVICES OF THE RESPONDENTS. 5

The petition is partly meritorious.

MERALCO admits6 that respondents are its customers under a Service Contract whereby it is obliged to supply respondents with
electricity. Nevertheless, upon request of the NPC, MERALCO disconnected its power supply to respondents on the ground that
they were illegally occupying the NPC's right of way. Under the Service Contract, "[a] customer of electric service must show his
right or proper interest over the property in order that he will be provided with and assured a continuous electric
service."7 MERALCO argues that since there is a Decision of the Metropolitan Trial Court (MTC) of Quezon City ruling that
herein respondents were among the illegal occupants of the NPC's right of way, MERALCO was justified in cutting off service to
respondents.

Clearly, respondents' cause of action against MERALCO is anchored on culpa contractual or breach of contract for the latter's
discontinuance of its service to respondents under Article 1170 of the Civil Code which provides:

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.

In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on the nature of culpa contractual, thus:
"In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify, prima facie,
a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from
liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the
contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves
to preserve the interests of the promissee that may include his "expectation interest," which is his interest in having the benefit of
his bargain by being put in as good a position as he would have been in had the contract been performed, or his "reliance
interest," which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position
as he would have been in had the contract not been made; or his "restitution interest," which is his interest in having restored to
him any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or for
society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to make
recompense to the one who has been injured by the failure of another to observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him
from his ensuing liability.9 (Emphasis supplied)

Article 1173 also provides that the fault or negligence of the obligor consists in the omission of that diligence which is required
by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. The Court
emphasized in Ridjo Tape & Chemical Corporation v. Court of Appeals10 that "as a public utility, MERALCO has the obligation
to discharge its functions with utmost care and diligence."11

The Court agrees with the CA that under the factual milieu of the present case, MERALCO failed to exercise the utmost degree
of care and diligence required of it. To repeat, it was not enough for MERALCO to merely rely on the Decision of the MTC
without ascertaining whether it had become final and executory. Verily, only upon finality of said Decision can it be said with
conclusiveness that respondents have no right or proper interest over the subject property, thus, are not entitled to the services of
MERALCO.

Although MERALCO insists that the MTC Decision is final and executory, it never showed any documentary evidence to
support this allegation. Moreover, if it were true that the decision was final and executory, the most prudent thing for MERALCO
to have done was to coordinate with the proper court officials in determining which structures are covered by said court order.
Likewise, there is no evidence on record to show that this was done by MERALCO.

The utmost care and diligence required of MERALCO necessitates such great degree of prudence on its part, and failure to
exercise the diligence required means that MERALCO was at fault and negligent in the performance of its obligation. In Ridjo
Tape,12 the Court explained:

[B]eing a public utility vested with vital public interest, MERALCO is impressed with certain obligations towards its customers
and any omission on its part to perform such duties would be prejudicial to its interest. For in the final analysis, the bottom line is
that those who do not exercise such prudence in the discharge of their duties shall be made to bear the consequences of such
oversight.13

This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.

The next question is: Are respondents entitled to moral and exemplary damages and attorney's fees?

Article 2220 of the Civil Code provides:

Article 2220. Willful 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.

In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding from him and his tenants the supply of
electricity to which they were entitled under the Service Contract. This is contrary to public policy because, as discussed above,
MERALCO, being a vital public utility, is expected to exercise utmost care and diligence in the performance of its obligation. It
was incumbent upon MERALCO to do everything within its power to ensure that the improvements built by respondents are
within the NPC’s right of way before disconnecting their power supply. The Court emphasized in Samar II Electric Cooperative,
Inc. v. Quijano14 that:
Electricity is a basic necessity the generation and distribution of which is imbued with public interest, and its provider is a
public utility subject to strict regulation by the State in the exercise of police power. Failure to comply with these
regulations will give rise to the presumption of bad faith or abuse of right. 15 (Emphasis supplied)

Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the performance of its obligation to Leoncio
Ramoy, its customer, is tantamount to bad faith. Leoncio Ramoy testified that he suffered wounded feelings because of
MERALCO's actions.16 Furthermore, due to the lack of power supply, the lessees of his four apartments on subject lot left the
premises.17 Clearly, therefore, Leoncio Ramoy is entitled to moral damages in the amount awarded by the CA.

Leoncio Ramoy, the lone witness for respondents, was the only one who testified regarding the effects on him of MERALCO's
electric service disconnection. His co-respondents Matilde Ramoy, Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did not
present any evidence of damages they suffered.

It is a hornbook principle that damages may be awarded only if proven. In Mahinay v. Velasquez, Jr.,18 the Court held thus:

In order that moral damages may be awarded, there must be pleading and proof of moral suffering, mental anguish, fright
and the like. While respondent alleged in his complaint that he suffered mental anguish, serious anxiety, wounded feelings and
moral shock, he failed to prove them during the trial. Indeed, respondent should have taken the witness stand and should
have testified on the mental anguish, serious anxiety, wounded feelings and other emotional and mental suffering he purportedly
suffered to sustain his claim for moral damages. Mere allegations do not suffice; they must be substantiated by clear and
convincing proof. No other person could have proven such damages except the respondent himself as they were extremely
personal to him.

In Keirulf vs. Court of Appeals, we held:

"While no proof of pecuniary loss is necessary in order that moral damages may be awarded, the amount of indemnity being left
to the discretion of the court, it is nevertheless essential that the claimant should satisfactorily show the existence of the factual
basis of damages and its causal connection to defendant’s acts. This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. In Francisco vs. GSIS, the Court held that there must be clear testimony on the anguish and other
forms of mental suffering. Thus, if the plaintiff fails to take the witness stand and testify as to his/her social humiliation,
wounded feelings and anxiety, moral damages cannot be awarded. In Cocoland Development Corporation vs. National Labor
Relations Commission, the Court held that "additional facts must be pleaded and proven to warrant the grant of moral damages
under the Civil Code, these being, x x x social humiliation, wounded feelings, grave anxiety, etc. that resulted therefrom."

x x x The award of moral damages must be anchored to a clear showing that respondent actually experienced mental anguish,
besmirched reputation, sleepless nights, wounded feelings or similar injury. There was no better witness to this experience than
respondent himself. Since respondent failed to testify on the witness stand, the trial court did not have any factual basis to
award moral damages to him.19 (Emphasis supplied)

Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may be awarded moral damages. 20

With regard to exemplary damages, Article 2232 of the Civil Code provides that in contracts and quasi-contracts, the court may
award exemplary damages if the defendant, in this case MERALCO, acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner, while Article 2233 of the same Code provides that such damages cannot be recovered as a matter of
right and the adjudication of the same is within the discretion of the court.1avvphi1

The Court finds that MERALCO fell short of exercising the due diligence required, but its actions cannot be considered wanton,
fraudulent, reckless, oppressive or malevolent. Records show that MERALCO did take some measures, i.e., coordinating with
NPC officials and conducting a joint survey of the subject area, to verify which electric meters should be disconnected although
these measures are not sufficient, considering the degree of diligence required of it. Thus, in this case, exemplary damages should
not be awarded.

Since the Court does not deem it proper to award exemplary damages in this case, then the CA's award for attorney's fees should
likewise be deleted, as Article 2208 of the Civil Code states that in the absence of stipulation, attorney's fees cannot be
recovered except in cases provided for in said Article, to wit:
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;

(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur expenses
to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s plainly valid, just and
demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

(8) In actions for indemnity under workmen’s compensation and employer’s liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney’s fees and expenses of litigation should
be recovered.

In all cases, the attorney’s fees and expenses of litigation must be reasonable.

None of the grounds for recovery of attorney's fees are present.

WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's fees is DELETED.

No costs.

SO ORDERED.

G.R. No. 162467 May 8, 2009

MINDANAO TERMINAL AND BROKERAGE SERVICE, INC. Petitioner,

vs.
PHOENIX ASSURANCE COMPANY OF NEW YORK/MCGEE & CO., INC., Respondent.

DECISION

TINGA, J.:

Before us is a petition for review on certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure of the 29 October
20032 Decision of the Court of Appeals and the 26 February 2004 Resolution3 of the same court denying petitioner’s motion for
reconsideration.

The facts of the case are not disputed.

Del Monte Philippines, Inc. (Del Monte) contracted petitioner Mindanao Terminal and Brokerage Service, Inc. (Mindanao
Terminal), a stevedoring company, to load and stow a shipment of 146,288 cartons of fresh green Philippine bananas and 15,202
cartons of fresh pineapples belonging to Del Monte Fresh Produce International, Inc. (Del Monte Produce) into the cargo hold of
the vessel M/V Mistrau. The vessel was docked at the port of Davao City and the goods were to be transported by it to the port of
Inchon, Korea in favor of consignee Taegu Industries, Inc. Del Monte Produce insured the shipment under an "open cargo
policy" with private respondent Phoenix Assurance Company of New York (Phoenix), a non-life insurance company, and private
respondent McGee & Co. Inc. (McGee), the underwriting manager/agent of Phoenix.4

Mindanao Terminal loaded and stowed the cargoes aboard the M/V Mistrau. The vessel set sail from the port of Davao City and
arrived at the port of Inchon, Korea. It was then discovered upon discharge that some of the cargo was in bad condition. The
Marine Cargo Damage Surveyor of Incok Loss and Average Adjuster of Korea, through its representative Byeong Yong Ahn
(Byeong), surveyed the extent of the damage of the shipment. In a survey report, it was stated that 16,069 cartons of the banana
shipment and 2,185 cartons of the pineapple shipment were so damaged that they no longer had commercial value. 5

Del Monte Produce filed a claim under the open cargo policy for the damages to its shipment. McGee’s Marine Claims Insurance
Adjuster evaluated the claim and recommended that payment in the amount of $210,266.43 be made. A check for the
recommended amount was sent to Del Monte Produce; the latter then issued a subrogation receipt 6 to Phoenix and McGee.

Phoenix and McGee instituted an action for damages7 against Mindanao Terminal in the Regional Trial Court (RTC) of Davao
City, Branch 12. After trial, the RTC,8 in a decision dated 20 October 1999, held that the only participation of Mindanao
Terminal was to load the cargoes on board the M/V Mistrau under the direction and supervision of the ship’s officers, who would
not have accepted the cargoes on board the vessel and signed the foreman’s report unless they were properly arranged and tightly
secured to withstand voyage across the open seas. Accordingly, Mindanao Terminal cannot be held liable for whatever happened
to the cargoes after it had loaded and stowed them. Moreover, citing the survey report, it was found by the RTC that the cargoes
were damaged on account of a typhoon which M/V Mistrau had encountered during the voyage. It was further held that Phoenix
and McGee had no cause of action against Mindanao Terminal because the latter, whose services were contracted by Del Monte,
a distinct corporation from Del Monte Produce, had no contract with the assured Del Monte Produce. The RTC dismissed the
complaint and awarded the counterclaim of Mindanao Terminal in the amount of ₱83,945.80 as actual damages and ₱100,000.00
as attorney’s fees.9 The actual damages were awarded as reimbursement for the expenses incurred by Mindanao Terminal’s
lawyer in attending the hearings in the case wherein he had to travel all the way from Metro Manila to Davao City.

Phoenix and McGee appealed to the Court of Appeals. The appellate court reversed and set aside10 the decision of the RTC in its
29 October 2003 decision. The same court ordered Mindanao Terminal to pay Phoenix and McGee "the total amount of
$210,265.45 plus legal interest from the filing of the complaint until fully paid and attorney’s fees of 20% of the claim." 11 It
sustained Phoenix’s and McGee’s argument that the damage in the cargoes was the result of improper stowage by Mindanao
Terminal. It imposed on Mindanao Terminal, as the stevedore of the cargo, the duty to exercise extraordinary diligence in loading
and stowing the cargoes. It further held that even with the absence of a contractual relationship between Mindanao Terminal and
Del Monte Produce, the cause of action of Phoenix and McGee could be based on quasi-delict under Article 2176 of the Civil
Code.12

Mindanao Terminal filed a motion for reconsideration,13 which the Court of Appeals denied in its 26 February 200414 resolution.
Hence, the present petition for review.

Mindanao Terminal raises two issues in the case at bar, namely: whether it was careless and negligent in the loading and stowage
of the cargoes onboard M/V Mistrau making it liable for damages; and, whether Phoenix and McGee has a cause of action against
Mindanao Terminal under Article 2176 of the Civil Code on quasi-delict. To resolve the petition, three questions have to be
answered: first, whether Phoenix and McGee have a cause of action against Mindanao Terminal; second, whether Mindanao
Terminal, as a stevedoring company, is under obligation to observe the same extraordinary degree of diligence in the conduct of
its business as required by law for common carriers15 and warehousemen;16 and third, whether Mindanao Terminal observed the
degree of diligence required by law of a stevedoring company.

We agree with the Court of Appeals that the complaint filed by Phoenix and McGee against Mindanao Terminal, from which the
present case has arisen, states a cause of action. The present action is based on quasi-delict, arising from the negligent and
careless loading and stowing of the cargoes belonging to Del Monte Produce. Even assuming that both Phoenix and McGee have
only been subrogated in the rights of Del Monte Produce, who is not a party to the contract of service between Mindanao
Terminal and Del Monte, still the insurance carriers may have a cause of action in light of the Court’s consistent ruling that the
act that breaks the contract may be also a tort.17 In fine, a liability for tort may arise even under a contract, where tort is that
which breaches the contract18 . In the present case, Phoenix and McGee are not suing for damages for injuries arising from the
breach of the contract of service but from the alleged negligent manner by which Mindanao Terminal handled the cargoes
belonging to Del Monte Produce. Despite the absence of contractual relationship between Del Monte Produce and Mindanao
Terminal, the allegation of negligence on the part of the defendant should be sufficient to establish a cause of action arising from
quasi-delict.19

The resolution of the two remaining issues is determinative of the ultimate result of this case.

Article 1173 of the Civil Code is very clear that if the law or contract does not state the degree of diligence which is to be
observed in the performance of an obligation then that which is expected of a good father of a family or ordinary diligence shall
be required. Mindanao Terminal, a stevedoring company which was charged with the loading and stowing the cargoes of Del
Monte Produce aboard M/V Mistrau, had acted merely as a labor provider in the case at bar. There is no specific provision of law
that imposes a higher degree of diligence than ordinary diligence for a stevedoring company or one who is charged only with the
loading and stowing of cargoes. It was neither alleged nor proven by Phoenix and McGee that Mindanao Terminal was bound by
contractual stipulation to observe a higher degree of diligence than that required of a good father of a family. We therefore
conclude that following Article 1173, Mindanao Terminal was required to observe ordinary diligence only in loading and stowing
the cargoes of Del Monte Produce aboard M/V Mistrau.

imposing a higher degree of diligence,21 on Mindanao Terminal in loading and stowing the cargoes. The case of Summa
Insurance Corporation v. CA, which involved the issue of whether an arrastre operator is legally liable for the loss of a shipment
in its custody and the extent of its liability, is inapplicable to the factual circumstances of the case at bar. Therein, a vessel owned
by the National Galleon Shipping Corporation (NGSC) arrived at Pier 3, South Harbor, Manila, carrying a shipment consigned to
the order of Caterpillar Far East Ltd. with Semirara Coal Corporation (Semirara) as "notify party." The shipment, including a
bundle of PC 8 U blades, was discharged from the vessel to the custody of the private respondent, the exclusive arrastre operator
at the South Harbor. Accordingly, three good-order cargo receipts were issued by NGSC, duly signed by the ship's checker and a
representative of private respondent. When Semirara inspected the shipment at house, it discovered that the bundle of PC8U
blades was missing. From those facts, the Court observed:

x x x The relationship therefore between the consignee and the arrastre operator must be examined. This relationship is much
akin to that existing between the consignee or owner of shipped goods and the common carrier, or that between a depositor and a
warehouseman[22 ]. In the performance of its obligations, an arrastre operator should observe the same degree of diligence as
that required of a common carrier and a warehouseman as enunciated under Article 1733 of the Civil Code and Section 3(b)
of the Warehouse Receipts Law, respectively. Being the custodian of the goods discharged from a vessel, an arrastre
operator's duty is to take good care of the goods and to turn them over to the party entitled to their possession. (Emphasis
supplied)23

There is a distinction between an arrastre and a stevedore.24 Arrastre, a Spanish word which refers to hauling of cargo,
comprehends the handling of cargo on the wharf or between the establishment of the consignee or shipper and the ship's tackle.
The responsibility of the arrastre operator lasts until the delivery of the cargo to the consignee. The service is usually performed
by longshoremen. On the other hand, stevedoring refers to the handling of the cargo in the holds of the vessel or between the
ship's tackle and the holds of the vessel. The responsibility of the stevedore ends upon the loading and stowing of the cargo in the
vessel.1avvphi1

It is not disputed that Mindanao Terminal was performing purely stevedoring function while the private respondent in
the Summa case was performing arrastre function. In the present case, Mindanao Terminal, as a stevedore, was only charged with
the loading and stowing of the cargoes from the pier to the ship’s cargo hold; it was never the custodian of the shipment of Del
Monte Produce. A stevedore is not a common carrier for it does not transport goods or passengers; it is not akin to a
warehouseman for it does not store goods for profit. The loading and stowing of cargoes would not have a far reaching public
ramification as that of a common carrier and a warehouseman; the public is adequately protected by our laws on contract and on
quasi-delict. The public policy considerations in legally imposing upon a common carrier or a warehouseman a higher degree of
diligence is not present in a stevedoring outfit which mainly provides labor in loading and stowing of cargoes for its clients.

In the third issue, Phoenix and McGee failed to prove by preponderance of evidence 25 that Mindanao Terminal had acted
negligently. Where the evidence on an issue of fact is in equipoise or there is any doubt on which side the evidence preponderates
the party having the burden of proof fails upon that issue. That is to say, if the evidence touching a disputed fact is equally
balanced, or if it does not produce a just, rational belief of its existence, or if it leaves the mind in a state of perplexity, the party
holding the affirmative as to such fact must fail.261avvphi1

We adopt the findings27 of the RTC,28 which are not disputed by Phoenix and McGee. The Court of Appeals did not make any
new findings of fact when it reversed the decision of the trial court. The only participation of Mindanao Terminal was to load the
cargoes on board M/V Mistrau.29 It was not disputed by Phoenix and McGee that the materials, such as ropes, pallets, and
cardboards, used in lashing and rigging the cargoes were all provided by M/V Mistrau and these materials meets industry
standard.30

It was further established that Mindanao Terminal loaded and stowed the cargoes of Del Monte Produce aboard the M/V
Mistrau in accordance with the stowage plan, a guide for the area assignments of the goods in the vessel’s hold, prepared by Del
Monte Produce and the officers of M/V Mistrau.31 The loading and stowing was done under the direction and supervision of the
ship officers. The vessel’s officer would order the closing of the hatches only if the loading was done correctly after a final
inspection.32 The said ship officers would not have accepted the cargoes on board the vessel if they were not properly arranged
and tightly secured to withstand the voyage in open seas. They would order the stevedore to rectify any error in its loading and
stowing. A foreman’s report, as proof of work done on board the vessel, was prepared by the checkers of Mindanao Terminal and
concurred in by the Chief Officer of M/V Mistrau after they were satisfied that the cargoes were properly loaded.33

Phoenix and McGee relied heavily on the deposition of Byeong Yong Ahn 34 and on the survey report35 of the damage to the
cargoes. Byeong, whose testimony was refreshed by the survey report, 36 found that the cause of the damage was improper
stowage37 due to the manner the cargoes were arranged such that there were no spaces between cartons, the use of cardboards as
support system, and the use of small rope to tie the cartons together but not by the negligent conduct of Mindanao Terminal in
loading and stowing the cargoes. As admitted by Phoenix and McGee in their Comment38 before us, the latter is merely a
stevedoring company which was tasked by Del Monte to load and stow the shipments of fresh banana and pineapple of Del
Monte Produce aboard the M/V Mistrau. How and where it should load and stow a shipment in a vessel is wholly dependent on
the shipper and the officers of the vessel. In other words, the work of the stevedore was under the supervision of the shipper and
officers of the vessel. Even the materials used for stowage, such as ropes, pallets, and cardboards, are provided for by the vessel.
Even the survey report found that it was because of the boisterous stormy weather due to the typhoon Seth, as encountered
by M/V Mistrau during its voyage, which caused the shipments in the cargo hold to collapse, shift and bruise in extensive
extent.39 Even the deposition of Byeong was not supported by the conclusion in the survey report that:

CAUSE OF DAMAGE

xxx

From the above facts and our survey results, we are of the opinion that damage occurred aboard the carrying vessel during sea
transit, being caused by ship’s heavy rolling and pitching under boisterous weather while proceeding from 1600 hrs on 7th
October to 0700 hrs on 12th October, 1994 as described in the sea protest.40

As it is clear that Mindanao Terminal had duly exercised the required degree of diligence in loading and stowing the cargoes,
which is the ordinary diligence of a good father of a family, the grant of the petition is in order.

However, the Court finds no basis for the award of attorney’s fees in favor of petitioner. None of the circumstances enumerated
lawphil.net

in Article 2208 of the Civil Code exists. The present case is clearly not an unfounded civil action against the plaintiff as there is
no showing that it was instituted for the mere purpose of vexation or injury. It is not sound public policy to set a premium to the
right to litigate where such right is exercised in good faith, even if erroneously. 41 Likewise, the RTC erred in awarding
₱83,945.80 actual damages to Mindanao Terminal. Although actual expenses were incurred by Mindanao Terminal in relation to
the trial of this case in Davao City, the lawyer of Mindanao Terminal incurred expenses for plane fare, hotel accommodations and
food, as well as other miscellaneous expenses, as he attended the trials coming all the way from Manila. But there is no showing
that Phoenix and McGee made a false claim against Mindanao Terminal resulting in the protracted trial of the case necessitating
the incurrence of expenditures.42

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 66121 is SET ASIDE and
the decision of the Regional Trial Court of Davao City, Branch 12 in Civil Case No. 25,311.97 is hereby REINSTATED
MINUS the awards of ₱100,000.00 as attorney’s fees and ₱83,945.80 as actual damages.

SO ORDERED.

G.R. No. 71049 May 29, 1987

BERNARDINO JIMENEZ, petitioner,

vs.
CITY OF MANILA and INTERMEDIATE APPELLATE COURT, respondents.
PARAS, J.:

This is a petition for review on certiorari of: (1) the decision * of the Intermediate Appellate Court in AC-G.R. No. 013887-CV Bernardino
Jimenez v. Asiatic Integrated Corporation and City of Manila, reversing the decision ** of the Court of First Instance of Manila, Branch XXII in Civil
Case No. 96390 between the same parties, but only insofar as holding Asiatic Integrated Corporation solely liable for damages and attorney's fees instead
of making the City of Manila jointly and solidarily liable with it as prayed for by the petitioner and (2) the resolution of the same Appellate Court denying
his Partial Motion for Reconsideration (Rollo, p. 2).

The dispositive portion of the Intermediate Appellate Court's decision is as follows:

WHEREFORE, the decision appealed from is hereby REVERSED. A new one is hereby entered ordering the
defendant Asiatic Integrated Corporation to pay the plaintiff P221.90 actual medical expenses, P900.00 for
the amount paid for the operation and management of a school bus, P20,000.00 as moral damages due to
pains, sufferings and sleepless nights and P l0,000.00 as attorney's fees.

SO ORDERED. (p. 20, Rollo)

The findings of respondent Appellate Court are as follows:

The evidence of the plaintiff (petitioner herein) shows that in the morning of August 15, 1974 he, together with his neighbors,
went to Sta. Ana public market to buy "bagoong" at the time when the public market was flooded with ankle deep rainwater.
After purchasing the "bagoong" he turned around to return home but he stepped on an uncovered opening which could not be
seen because of the dirty rainwater, causing a dirty and rusty four- inch nail, stuck inside the uncovered opening, to pierce the left
leg of plaintiff-petitioner penetrating to a depth of about one and a half inches. After administering first aid treatment at a nearby
drugstore, his companions helped him hobble home. He felt ill and developed fever and he had to be carried to Dr. Juanita
Mascardo. Despite the medicine administered to him by the latter, his left leg swelled with great pain. He was then rushed to the
Veterans Memorial Hospital where he had to be confined for twenty (20) days due to high fever and severe pain.

Upon his discharge from the hospital, he had to walk around with crutches for fifteen (15) days. His injury prevented him from
attending to the school buses he is operating. As a result, he had to engage the services of one Bienvenido Valdez to supervise his
business for an aggregate compensation of nine hundred pesos (P900.00). (Decision, AC-G.R. CV No. 01387, Rollo, pp. 13-20).

Petitioner sued for damages the City of Manila and the Asiatic Integrated Corporation under whose administration the Sta. Ana
Public Market had been placed by virtue of a Management and Operating Contract (Rollo, p. 47).

The lower court decided in favor of respondents, the dispositive portion of the decision reading:

WHEREFORE, judgment is hereby rendered in favor of the defendants and against the plaintiff dismissing
the complaint with costs against the plaintiff. For lack of sufficient evidence, the counterclaims of the
defendants are likewise dismissed. (Decision, Civil Case No. 96390, Rollo, p. 42).

As above stated, on appeal, the Intermediate Appellate Court held the Asiatic Integrated Corporation liable for damages but
absolved respondent City of Manila.

Hence this petition.

The lone assignment of error raised in this petition is on whether or not the Intermediate Appellate Court erred in not ruling that
respondent City of Manila should be jointly and severally liable with Asiatic Integrated Corporation for the injuries petitioner
suffered.

In compliance with the resolution of July 1, 1985 of the First Division of this Court (Rollo, p. 29) respondent City of Manila filed
its comment on August 13, 1985 (Rollo, p. 34) while petitioner filed its reply on August 21, 1985 (Reno, p. 51).

Thereafter, the Court in the resolution of September 11, 1985 (Rollo, p. 62) gave due course to the petition and required both
parties to submit simultaneous memoranda
Petitioner filed his memorandum on October 1, 1985 (Rollo, p. 65) while respondent filed its memorandum on October 24, 1985
(Rollo, p. 82).

In the resolution of October 13, 1986, this case was transferred to the Second Division of this Court, the same having been
assigned to a member of said Division (Rollo, p. 92).

The petition is impressed with merit.

As correctly found by the Intermediate Appellate Court, there is no doubt that the plaintiff suffered injuries when he fell into a
drainage opening without any cover in the Sta. Ana Public Market. Defendants do not deny that plaintiff was in fact injured
although the Asiatic Integrated Corporation tries to minimize the extent of the injuries, claiming that it was only a small puncture
and that as a war veteran, plaintiff's hospitalization at the War Veteran's Hospital was free. (Decision, AC-G.R. CV No. 01387,
Rollo, p. 6).

Respondent City of Manila maintains that it cannot be held liable for the injuries sustained by the petitioner because under the
Management and Operating Contract, Asiatic Integrated Corporation assumed all responsibility for damages which may be
suffered by third persons for any cause attributable to it.

It has also been argued that the City of Manila cannot be held liable under Article 1, Section 4 of Republic Act No. 409 as
amended (Revised Charter of Manila) which provides:

The City shall not be liable or held for damages or injuries to persons or property arising from the failure of
the Mayor, the Municipal Board, or any other City Officer, to enforce the provisions of this chapter, or any
other law or ordinance, or from negligence of said Mayor, Municipal Board, or any other officers while
enforcing or attempting to enforce said provisions.

This issue has been laid to rest in the case of City of Manila v. Teotico (22 SCRA 269-272 [1968]) where the Supreme Court
squarely ruled that Republic Act No. 409 establishes a general rule regulating the liability of the City of Manila for "damages or
injury to persons or property arising from the failure of city officers" to enforce the provisions of said Act, "or any other law or
ordinance or from negligence" of the City "Mayor, Municipal Board, or other officers while enforcing or attempting to enforce
said provisions."

Upon the other hand, Article 2189 of the Civil Code of the Philippines which provides that:

Provinces, cities and municipalities shall be liable for damages for the death of, or injuries suffered by any
person by reason of defective conditions of roads, streets, bridges, public buildings and other public works
under their control or supervision.

constitutes a particular prescription making "provinces, cities and municipalities ... liable for damages for the death of, or injury
suffered by any person by reason" — specifically — "of the defective condition of roads, streets, bridges, public buildings, and
other public works under their control or supervision." In other words, Art. 1, sec. 4, R.A. No. 409 refers to liability arising from
negligence, in general, regardless of the object, thereof, while Article 2189 of the Civil Code governs liability due to "defective
streets, public buildings and other public works" in particular and is therefore decisive on this specific case.

In the same suit, the Supreme Court clarified further that under Article 2189 of the Civil Code, it is not necessary for the liability
therein established to attach, that the defective public works belong to the province, city or municipality from which
responsibility is exacted. What said article requires is that the province, city or municipality has either "control or supervision"
over the public building in question.

In the case at bar, there is no question that the Sta. Ana Public Market, despite the Management and Operating Contract between
respondent City and Asiatic Integrated Corporation remained under the control of the former.

For one thing, said contract is explicit in this regard, when it provides:

II
 That immediately after the execution of this contract, the SECOND PARTY shall start the painting, cleaning,
sanitizing and repair of the public markets and talipapas and within ninety (90) days thereof, the SECOND
PARTY shall submit a program of improvement, development, rehabilitation and reconstruction of the city
public markets and talipapas subject to prior approval of the FIRST PARTY. (Rollo, p. 44)

xxx xxx xxx

VI

That all present personnel of the City public markets and talipapas shall be retained by the SECOND PARTY
as long as their services remain satisfactory and they shall be extended the same rights and privileges as
heretofore enjoyed by them. Provided, however, that the SECOND PARTY shall have the right, subject to
prior approval of the FIRST PARTY to discharge any of the present employees for cause. (Rollo, p. 45).

VII

That the SECOND PARTY may from time to time be required by the FIRST PARTY, or his duly authorized
representative or representatives, to report, on the activities and operation of the City public markets and
talipapas and the facilities and conveniences installed therein, particularly as to their cost of construction,
operation and maintenance in connection with the stipulations contained in this Contract. (lbid)

The fact of supervision and control of the City over subject public market was admitted by Mayor Ramon Bagatsing in his letter
to Secretary of Finance Cesar Virata which reads:

These cases arose from the controversy over the Management and Operating Contract entered into on
December 28, 1972 by and between the City of Manila and the Asiatic Integrated Corporation, whereby in
consideration of a fixed service fee, the City hired the services of the said corporation to undertake the
physical management, maintenance, rehabilitation and development of the City's public markets and'
Talipapas' subject to the control and supervision of the City.

xxx xxx xxx

It is believed that there is nothing incongruous in the exercise of these powers vis-a-vis the existence of the
contract, inasmuch as the City retains the power of supervision and control over its public markets
and talipapas under the terms of the contract. (Exhibit "7-A") (Emphasis supplied.) (Rollo, p. 75).

In fact, the City of Manila employed a market master for the Sta. Ana Public Market whose primary duty is to take direct
supervision and control of that particular market, more specifically, to check the safety of the place for the public.

Thus the Asst. Chief of the Market Division and Deputy Market Administrator of the City of Manila testified as follows:

Court This market master is an employee of the City of Manila?

Mr. Ymson Yes, Your Honor.

Q What are his functions?

A Direct supervision and control over the market area assigned to him."(T.s.n.,pp. 41-42,
Hearing of May 20, 1977.)

xxx xxx xxx

Court As far as you know there is or is there any specific employee assigned with the task
of seeing to it that the Sta. Ana Market is safe for the public?
 Mr. Ymson Actually, as I stated, Your Honor, that the Sta. Ana has its own market
master. The primary duty of that market master is to make the direct supervision and
control of that particular market, the check or verifying whether the place is safe for
public safety is vested in the market master. (T.s.n., pp. 2425, Hearing of July 27, 1977.)
(Emphasis supplied.) (Rollo, p. 76).

Finally, Section 30 (g) of the Local Tax Code as amended, provides:

The treasurer shall exercise direct and immediate supervision administration and control over public
markets and the personnel thereof, including those whose duties concern the maintenance and upkeep of the
market and ordinances and other pertinent rules and regulations. (Emphasis supplied.) (Rollo, p. 76)

The contention of respondent City of Manila that petitioner should not have ventured to go to Sta. Ana Public Market during a
stormy weather is indeed untenable. As observed by respondent Court of Appeals, it is an error for the trial court to attribute the
negligence to herein petitioner. More specifically stated, the findings of appellate court are as follows:

... The trial court even chastised the plaintiff for going to market on a rainy day just to buy bagoong. A
customer in a store has the right to assume that the owner will comply with his duty to keep the premises safe
for customers. If he ventures to the store on the basis of such assumption and is injured because the owner did
not comply with his duty, no negligence can be imputed to the customer. (Decision, AC-G. R. CV No. 01387,
Rollo, p. 19).

As a defense against liability on the basis of a quasi-delict, one must have exercised the diligence of a good father of a family.
(Art. 1173 of the Civil Code).

There is no argument that it is the duty of the City of Manila to exercise reasonable care to keep the public market reasonably
safe for people frequenting the place for their marketing needs.

While it may be conceded that the fulfillment of such duties is extremely difficult during storms and floods, it must however, be
admitted that ordinary precautions could have been taken during good weather to minimize the dangers to life and limb under
those difficult circumstances.

For instance, the drainage hole could have been placed under the stalls instead of on the passage ways. Even more important is
the fact, that the City should have seen to it that the openings were covered. Sadly, the evidence indicates that long before
petitioner fell into the opening, it was already uncovered, and five (5) months after the incident happened, the opening was still
uncovered. (Rollo, pp. 57; 59). Moreover, while there are findings that during floods the vendors remove the iron grills to hasten
the flow of water (Decision, AC-G.R. CV No. 0 1387; Rollo, p. 17), there is no showing that such practice has ever been
prohibited, much less penalized by the City of Manila. Neither was it shown that any sign had been placed thereabouts to warn
passersby of the impending danger.

To recapitulate, it appears evident that the City of Manila is likewise liable for damages under Article 2189 of the Civil Code,
respondent City having retained control and supervision over the Sta. Ana Public Market and as tort-feasor under Article 2176 of
the Civil Code on quasi-delicts

Petitioner had the right to assume that there were no openings in the middle of the passageways and if any, that they were
adequately covered. Had the opening been covered, petitioner could not have fallen into it. Thus the negligence of the City of
Manila is the proximate cause of the injury suffered, the City is therefore liable for the injury suffered by the peti- 4 petitioner.

Respondent City of Manila and Asiatic Integrated Corporation being joint tort-feasors are solidarily liable under Article 2194 of
the Civil Code.

PREMISES CONSIDERED, the decision of the Court of Appeals is hereby MODIFIED, making the City of Manila and the
Asiatic Integrated Corporation solidarily liable to pay the plaintiff P221.90 actual medical expenses, P900.00 for the amount paid
for the operation and management of the school bus, P20,000.00 as moral damages due to pain, sufferings and sleepless nights
and P10,000.00 as attorney's fees.

SO ORDERED.
G.R. No. L-47851 October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,

vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE
BAR ASSOCIATION, respondents.

G.R. No. L-47863 October 3, 1986

THE UNITED CONSTRUCTION CO., INC., petitioner,

vs.
COURT OF APPEALS, ET AL., respondents.

G.R. No. L-47896 October 3, 1986

PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,

vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals in CA-G.R. No.
51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in Civil Case No. 74958 dated
September 21, 1971 as modified by the Order of the lower court dated December 8, 1971. The Court of Appeals in
modifying the decision of the lower court included an award of an additional amount of P200,000.00 to the Philippine Bar
Association to be paid jointly and severally by the defendant United Construction Co. and by the third-party defendants
Juan F. Nakpil and Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest at the legal rate
from November 29, 1968, the date of the filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in favor
of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from November 29,
1968 until full payment to be paid jointly and severally by defendant United Construction Co., Inc. and
third party defendants (except Roman Ozaeta). In all other respects, the judgment dated September
 21, 1971 as modified in the December 8, 1971 Order of the lower court is hereby affirmed with COSTS
to be paid by the defendant and third party defendant (except Roman Ozaeta) in equal shares.

SO ORDERED.

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in L-47863 seek the
reversal of the decision of the Court of Appeals, among other things, for exoneration from liability while petitioner
Philippine Bar Association in L-47896 seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for
the loss of the PBA building plus four (4) times such amount as damages resulting in increased cost of the building,
P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila were consolidated by this Court
in the resolution of May 10, 1978 requiring the respective respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348; pp. 520-521; Rollo, L-
47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the Corporation Law,
decided to construct an office building on its 840 square meters lot located at the comer of Aduana and Arzobispo Streets,
Intramuros, Manila. The construction was undertaken by the United Construction, Inc. on an "administration" basis, on
the suggestion of Juan J. Carlos, the president and general manager of said corporation. The proposal was approved by
plaintiff's board of directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The plans
and specifications for the building were prepared by the other third-party defendants Juan F. Nakpil & Sons. The
building was completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs and the building in
question sustained major damage. The front columns of the building buckled, causing the building to tilt forward
dangerously. The tenants vacated the building in view of its precarious condition. As a temporary remedial measure, the
building was shored up by United Construction, Inc. at the cost of P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising from the partial collapse
of the building against United Construction, Inc. and its President and General Manager Juan J. Carlos as defendants.
Plaintiff alleges that the collapse of the building was accused by defects in the construction, the failure of the contractors
to follow plans and specifications and violations by the defendants of the terms of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans and specifications, alleging
in essence that the collapse of the building was due to the defects in the said plans and specifications. Roman Ozaeta, the
then president of the plaintiff Bar Association was included as a third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil presented a
written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party complaints and the
third-party defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint by
including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find after the trial that the
above-named defendants Juan J. Carlos and United Construction Co., Inc. are free from any blame
and liability for the collapse of the PBA Building, and should further find that the collapse of said
building was due to defects and/or inadequacy of the plans, designs, and specifications p by the third-
party defendants, or in the event that the Court may find Juan F. Nakpil and Sons and/or Juan F.
Nakpil contributorily negligent or in any way jointly and solidarily liable with the defendants,
judgment may be rendered in whole or in part. as the case may be, against Juan F. Nakpil & Sons
and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's complaint has
been duly amended by including the said Juan F. Nakpil & Sons and Juan F. Nakpil as parties
defendant and by alleging causes of action against them including, among others, the defects or
 inadequacy of the plans, designs, and specifications prepared by them and/or failure in the
performance of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record on
Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among others, the parties agreed
to refer the technical issues involved in the case to a Commissioner. Mr. Andres O. Hizon, who was ultimately appointed
by the trial court, assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake had been
caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and specifications and how said
deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of materials and workmanship in
the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected of the architect, the
contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a combination of the above-
enumerated factors, the degree or proportion in which each individual factor contributed to the
damage sustained;

3. Whether the building is now a total loss and should be completely demolished or whether it may still
be repaired and restored to a tenantable condition. In the latter case, the determination of the cost of
such restoration or repair, and the value of any remaining construction, such as the foundation, which
may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As aforestated the technical issues
were referred to the Commissioner. The non-technical issues were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple down in case of a
strong earthquake. The motions were opposed by the defendants and the matter was referred to the Commissioner.
Finally, on April 30, 1979 the building was authorized to be demolished at the expense of the plaintiff, but not another
earthquake of high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused
further damage to the property. The actual demolition was undertaken by the buyer of the damaged building. (Record on
Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on September 25, 1970 with the findings
that while the damage sustained by the PBA building was caused directly by the August 2, 1968 earthquake whose
magnitude was estimated at 7.3 they were also caused by the defects in the plans and specifications prepared by the third-
party defendants' architects, deviations from said plans and specifications by the defendant contractors and failure of the
latter to observe the requisite workmanship in the construction of the building and of the contractors, architects and even
the owners to exercise the requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered by the Commissioner.
The trial court agreed with the findings of the Commissioner except as to the holding that the owner is charged with full
nine supervision of the construction. The Court sees no legal or contractual basis for such conclusion. (Record on Appeal,
pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified by the Intermediate
Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and the Philippine Institute
of Architects filed with the Court a motion to intervene as amicus curiae. They proposed to present a position paper on
the liability of architects when a building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties. The motion having been
granted, the amicus curiae were granted a period of 60 days within which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not defective. But the
Commissioner, when asked by Us to comment, reiterated his conclusion that the defects in the plans and specifications
indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131) and the 1966 Asep
Code, the Commissioner added that even if it can be proved that the defects in the constructionalone (and not in the plans
and design) caused the damage to the building, still the deficiency in the original design and jack of specific provisions
against torsion in the original plans and the overload on the ground floor columns (found by an the experts including the
original designer) certainly contributed to the damage which occurred. (Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of errors: Philippine Bar Association
claimed that the measure of damages should not be limited to P1,100,000.00 as estimated cost of repairs or to the period of
six (6) months for loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of God
that caused the failure of the building which should exempt them from responsibility and not the defective construction,
poor workmanship, deviations from plans and specifications and other imperfections in the case of United Construction
Co., Inc. or the deficiencies in the design, plans and specifications prepared by petitioners in the case of the Nakpils. Both
UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed by the Court of Appeals.
UCCI also claimed that it should be reimbursed the expenses of shoring the building in the amount of P13,661.28 while
the Nakpils opposed the payment of damages jointly and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which caused the failure of
the building, exempts from liability, parties who are otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New Civil Code, which
provides:

Art. 1723. The engineer or architect who drew up the plans and specifications for a building is liable
for damages if within fifteen years from the completion of the structure the same should collapse by
reason of a defect in those plans and specifications, or due to the defects in the ground. The contractor
is likewise responsible for the damage if the edifice fags within the same period on account of defects in
the construction or the use of materials of inferior quality furnished by him, or due to any violation of
the terms of the contract. If the engineer or architect supervises the construction, he shall be solidarily
liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of the causes of action by
reason of any defect mentioned in the preceding paragraph.

The action must be brought within ten years following the collapse of the building.
On the other hand, the general rule is that no person shall be responsible for events which could not be foreseen or which
though foreseen, were inevitable (Article 1174, New Civil Code).

An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention,
which by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. (1 Corpus
Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of
God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the
debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or
aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA
423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam
v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay
or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil
Code, which results in loss or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the
violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief.
When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man,
whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were,
and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is
not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from
liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379;
Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the
lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made
substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party defendants were found to have
inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by both courts, the defects
in the construction and in the plans and specifications were the proximate causes that rendered the PBA building unable
to withstand the earthquake of August 2, 1968. For this reason the defendant and third-party defendants cannot claim
exemption from liability. (Decision, Court of Appeals, pp. 30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court (cases
cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1)
the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (2) the inference made is manifestly
mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings of
fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings are contrary to the
admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289, 291-292;
Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the Court of Appeals are contrary to those
of the trial court; (8) said findings of facts are conclusions without citation of specific evidence on which they are based;
(9) the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondents
(Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the
finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted by evidence on
record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan,
July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the contrary, the records
show that the lower court spared no effort in arriving at the correct appreciation of facts by the referral of technical
issues to a Commissioner chosen by the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is
not possible to state with certainty that the building would not have collapsed were those defects not present, the fact
remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was
similarly subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial collapse (and eventual
complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner that the total
amount required to repair the PBA building and to restore it to tenantable condition was P900,000.00 inasmuch as it was
not initially a total loss. However, while the trial court awarded the PBA said amount as damages, plus unrealized rental
income for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an additional sum of
P200,000.00 representing the damage suffered by the PBA building as a result of another earthquake that occurred on
April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total value of the building (L-
47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and UNITED question the additional award of
P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The
PBA further urges that the unrealized rental income awarded to it should not be limited to a period of one-half year but
should be computed on a continuing basis at the rate of P178,671.76 a year until the judgment for the principal amount
shall have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and it is undisputed that
the building could then still be repaired and restored to its tenantable condition. The PBA, however, in view of its lack of
needed funding, was unable, thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the
earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total demolition of the building
(L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage resulting from the partial and
eventual collapse of the PBA building as a result of the earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez (now an Associate
Justice of the Supreme Court) while still an Associate Justice of the Court of Appeals:

There is no question that an earthquake and other forces of nature such as cyclones, drought, floods,
lightning, and perils of the sea are acts of God. It does not necessarily follow, however, that specific
losses and suffering resulting from the occurrence of these natural force are also acts of God. We are
not convinced on the basis of the evidence on record that from the thousands of structures in Manila,
God singled out the blameless PBA building in Intramuros and around six or seven other buildings in
various parts of the city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs and plans, defective
construction, poor workmanship, deviation from plans and specifications and other imperfections.
These deficiencies are attributable to negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party defendants-appellants
presented in their briefs are premised on legal generalizations or speculations and on theological
fatalism both of which ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous events and extraordinary
fortuitous events leads to its argument that the August 2, 1968 earthquake was of such an
overwhelming and destructive character that by its own force and independent of the particular
negligence alleged, the injury would have been produced. If we follow this line of speculative reasoning,
we will be forced to conclude that under such a situation scores of buildings in the vicinity and in other
parts of Manila would have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968 knowledge and appear
inadequate only in the light of engineering information acquired after the earthquake. If this were so,
hundreds of ancient buildings which survived the earthquake better than the two-year old PBA
building must have been designed and constructed by architects and contractors whose knowledge and
foresight were unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more
down to earth explanation of the collapse. The failure of the PBA building, as a unique and distinct
construction with no reference or comparison to other buildings, to weather the severe earthquake
forces was traced to design deficiencies and defective construction, factors which are neither
mysterious nor esoteric. The theological allusion of appellant United that God acts in mysterious ways
His wonders to perform impresses us to be inappropriate. The evidence reveals defects and deficiencies
in design and construction. There is no mystery about these acts of negligence. The collapse of the PBA
building was no wonder performed by God. It was a result of the imperfections in the work of the
architects and the people in the construction company. More relevant to our mind is the lesson from
the parable of the wise man in the Sermon on the Mount "which built his house upon a rock; and the
rain descended and the floods came and the winds blew and beat upon that house; and it fen not; for it
was founded upon a rock" and of the "foolish upon the sand. And the rain descended and man which
built his house the floods came, and the winds blew, and beat upon that house; and it fell and great was
the fall of it. (St. Matthew 7: 24-27)." The requirement that a building should withstand rains, floods,
winds, earthquakes, and natural forces is precisely the reason why we have professional experts like
architects, and engineers. Designs and constructions vary under varying circumstances and conditions
but the requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational and accurate. Instead of
laying the blame solely on the motions and forces generated by the earthquake, it also examined the
ability of the PBA building, as designed and constructed, to withstand and successfully weather those
forces.

The evidence sufficiently supports a conclusion that the negligence and fault of both United and Nakpil
and Sons, not a mysterious act of an inscrutable God, were responsible for the damages. The Report of
the Commissioner, Plaintiff's Objections to the Report, Third Party Defendants' Objections to the
Report, Defendants' Objections to the Report, Commissioner's Answer to the various Objections,
Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to the Commissioner's Answer,
Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main arguments raised on appeal
were already raised during the trial and fully considered by the lower Court. A reiteration of these
same arguments on appeal fails to convince us that we should reverse or disturb the lower Court's
factual findings and its conclusions drawn from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to the physical evidence
before and after the earthquake showing the inadequacy of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila Fire Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the cross-sectional
area of each of the columns and the strength thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the rear, not only in columns
but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the
column A7 where the floor is lower by 80 cm. than the highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the design, plans and
specifications of the PBA building which involved appreciable risks with respect to the accidental
forces which may result from earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too conservative code or even a code
that does not require a design for earthquake forces mitigates in a large measure the responsibility or
liability of the architect and engineer designer.

The Third-party defendants, who are the most concerned with this portion of the Commissioner's
report, voiced opposition to the same on the grounds that (a) the finding is based on a basic erroneous
conception as to the design concept of the building, to wit, that the design is essentially that of a heavy
rectangular box on stilts with shear wan at one end; (b) the finding that there were defects and a
deficiency in the design of the building would at best be based on an approximation and, therefore,
rightly belonged to the realm of speculation, rather than of certainty and could very possibly be
outright error; (c) the Commissioner has failed to back up or support his finding with extensive,
complex and highly specialized computations and analyzes which he himself emphasizes are necessary
in the determination of such a highly technical question; and (d) the Commissioner has analyzed the
design of the PBA building not in the light of existing and available earthquake engineering knowledge
at the time of the preparation of the design, but in the light of recent and current standards.

The Commissioner answered the said objections alleging that third-party defendants' objections were
based on estimates or exhibits not presented during the hearing that the resort to engineering
references posterior to the date of the preparation of the plans was induced by the third-party
defendants themselves who submitted computations of the third-party defendants are erroneous.

The issue presently considered is admittedly a technical one of the highest degree. It involves questions
not within the ordinary competence of the bench and the bar to resolve by themselves. Counsel for the
third-party defendants has aptly remarked that "engineering, although dealing in mathematics, is not
an exact science and that the present knowledge as to the nature of earthquakes and the behaviour of
forces generated by them still leaves much to be desired; so much so "that the experts of the different
parties, who are all engineers, cannot agree on what equation to use, as to what earthquake co-
efficients are, on the codes to be used and even as to the type of structure that the PBA building (is) was
(p. 29, Memo, of third- party defendants before the Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and inquired into by the
Court itself, coupled with the intrinsic nature of the questions involved therein, constituted the reason
for the reference of the said issues to a Commissioner whose qualifications and experience have
eminently qualified him for the task, and whose competence had not been questioned by the parties
until he submitted his report. Within the pardonable limit of the Court's ability to comprehend the
meaning of the Commissioner's report on this issue, and the objections voiced to the same, the Court
sees no compelling reasons to disturb the findings of the Commissioner that there were defects and
deficiencies in the design, plans and specifications prepared by third-party defendants, and that said
defects and deficiencies involved appreciable risks with respect to the accidental forces which may
result from earthquake shocks.
(2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how said
deviations contributed to the damage sustained by the building.

(b) The alleged failure of defendants to observe the requisite quality of materials and workmanship in
the construction of the building.

These two issues, being interrelated with each other, will be discussed together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged deficiencies or defects in the
construction and violations or deviations from the plans and specifications. All these may be
summarized as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on one
face the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there are no spirals or where
spirals are cut. Columns suffered worst displacement where the eccentricity of the columnar
reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 — No spiral up to a height of 22" from the ground floor,

(3) Column D6 — Spacing of spiral over 4 l/2,

(4) Column D7 — Lack of lateral ties,

(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals are at 2" from the
exterior column face and 6" from the inner column face,

(6) Column B6 — Lack of spiral on 2 feet below the floor beams,

(7) Column B5 — Lack of spirals at a distance of 26' below the beam,

(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",

(9) Column A3 — Lack of lateral ties,

(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,

(11) Column A4 — (second floor Column is completely hollow to a height of 30"

(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel beam to a height
of 6 feet,

(13) Column A6 — No spirals up to a height of 30' above the ground floor level,

(14) Column A7— Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party defendants.

Ground floor columns.

(1) Column A4 — Spirals are cut,

(2) Column A5 — Spirals are cut,

(3) Column A6 — At lower 18" spirals are absent,

(4) Column A7 — Ties are too far apart,

(5) Column B5 — At upper fourth of column spirals are either absent or improperly spliced,

(6) Column B6 — At upper 2 feet spirals are absent,

(7) Column B7 — At upper fourth of column spirals missing or improperly spliced.

(8) Column C7— Spirals are absent at lowest 18"

(9) Column D5 — At lowest 2 feet spirals are absent,

(10) Column D6 — Spirals are too far apart and apparently improperly spliced,

(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the engineering experts for the
defendants are either contrary to general principles of engineering design for reinforced concrete or
not applicable to the requirements for ductility and strength of reinforced concrete in earthquake-
resistant design and construction.
We shall first classify and consider defects which may have appreciable bearing or relation to' the
earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the connections between columns
and girders are desirable in earthquake resistant design and construction. The omission of spirals and
ties or hoops at the bottom and/or tops of columns contributed greatly to the loss of earthquake-
resistant strength. The plans and specifications required that these spirals and ties be carried from the
floor level to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970, Reference 11).
There were several clear evidences where this was not done especially in some of the ground floor
columns which failed.

There were also unmistakable evidences that the spacings of the spirals and ties in the columns were in
many cases greater than those called for in the plans and specifications resulting again in loss of
earthquake-resistant strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of strength in the column cannot
be maintained and is certainly contrary to the general principles of column design and construction.
And even granting that there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the loss of the plastic range
or ductility in the column and it is precisely this plastic range or ductility which is desirable and
needed for earthquake-resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second floor, and although this
column did not fail, this is certainly an evidence on the part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum may
be approximated in relation to column loads and column and beam moments. The main effect of
eccentricity is to change the beam or girder span. The effect on the measured eccentricity of 2 inches,
therefore, is to increase or diminish the column load by a maximum of about 1% and to increase or
diminish the column or beam movements by about a maximum of 2%. While these can certainly be
absorbed within the factor of safety, they nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great contention between the
parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5, ground floor, is the
responsibility of the general contractor which is the UCCI. The burden of proof, therefore, that this
cutting was done by others is upon the defendants. Other than a strong allegation and assertion that it
is the plumber or his men who may have done the cutting (and this was flatly denied by the plumber)
no conclusive proof was presented. The engineering experts for the defendants asserted that they could
have no motivation for cutting the bar because they can simply replace the spirals by wrapping around
a new set of spirals. This is not quite correct. There is evidence to show that the pouring of concrete for
columns was sometimes done through the beam and girder reinforcements which were already in place
as in the case of column A4 second floor. If the reinforcement for the girder and column is to
subsequently wrap around the spirals, this would not do for the elasticity of steel would prevent the
making of tight column spirals and loose or improper spirals would result. The proper way is to
produce correct spirals down from the top of the main column bars, a procedure which can not be
done if either the beam or girder reinforcement is already in place. The engineering experts for the
defendants strongly assert and apparently believe that the cutting of the spirals did not materially
diminish the strength of the column. This belief together with the difficulty of slipping the spirals on
the top of the column once the beam reinforcement is in place may be a sufficient motivation for the
cutting of the spirals themselves. The defendants, therefore, should be held responsible for the
consequences arising from the loss of strength or ductility in column A5 which may have contributed to
the damages sustained by the building.

The lack of proper length of splicing of spirals was also proven in the visible spirals of the columns
where spalling of the concrete cover had taken place. This lack of proper splicing contributed in a
small measure to the loss of strength.
 The effects of all the other proven and visible defects although nor can certainly be accumulated so
that they can contribute to an appreciable loss in earthquake-resistant strength. The engineering
experts for the defendants submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the column the loss in strength
due to these minor defects may run to as much as ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some of the
ground floor columns contributed greatly to the collapse of the PBA building since it is at these points
where the greater part of the failure occurred. The liability for the cutting of the spirals in column A5,
ground floor, in the considered opinion of the Commissioner rests on the shoulders of the defendants
and the loss of strength in this column contributed to the damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of the plans
and specifications of the PBA building contributed to the damages which resulted during the
earthquake of August 2, 1968 and the vice of these defects and deficiencies is that they not only
increase but also aggravate the weakness mentioned in the design of the structure. In other words,
these defects and deficiencies not only tend to add but also to multiply the effects of the shortcomings in
the design of the building. We may say, therefore, that the defects and deficiencies in the construction
contributed greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of the contractor is direct
and positive, the presence of existence of all the major defects and deficiencies noted and proven
manifests an element of negligence which may amount to imprudence in the construction work. (pp.
42-49, Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the defendants voiced their
objections to the same on the grounds that the Commissioner should have specified the defects found by him to be
"meritorious"; that the Commissioner failed to indicate the number of cases where the spirals and ties were not carried
from the floor level to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties in the
columns were greater than that called for in the specifications; that the hollow in column A4, second floor, the
eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5,
ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects in the construction
were within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground floor, was done by the
plumber or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were minor only the totality of the
defects was considered. As regards the objection as to failure to state the number of cases where the spirals and ties were
not carried from the floor level to the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-
5 the first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom.
The Commissioner likewise specified the first storey columns where the spacings were greater than that called for in the
specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to
specify the number of columns where there was lack of proper length of splicing of spirals, the Commissioner mentioned
groundfloor columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were not welded, resulting in some
loss of strength which could be critical near the ends of the columns. He answered the supposition of the defendants that
the spirals and the ties must have been looted, by calling attention to the fact that the missing spirals and ties were only in
two out of the 25 columns, which rendered said supposition to be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or contribute to the damage,
but averred that it is "evidence of poor construction." On the claim that the eccentricity could be absorbed within the
factor of safety, the Commissioner answered that, while the same may be true, it also contributed to or aggravated the
damage suffered by the building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by the Commissioner by
reiterating the observation in his report that irrespective of who did the cutting of the spirals, the defendants should be
held liable for the same as the general contractor of the building. The Commissioner further stated that the loss of
strength of the cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the spiral
containment in the column and resulted in the loss of strength, as evidenced by the actual failure of this column.
Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any sufficient cause to
disregard or modify the same. As found by the Commissioner, the "deviations made by the defendants from the plans and
specifications caused indirectly the damage sustained and that those deviations not only added but also aggravated the
damage caused by the defects in the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-
142)

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

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

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

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

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

SO ORDERED.

G.R. No. 189563 April 7, 2014

GILAT SATELLITE NETWORKS, LTD., Petitioner,

vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.

DECISION

SERENO, CJ:

This is an appeal via a Petition for Review on Certiorari filed 6 November 2009 assailing the Decision and Resolution of the
1 2 3

Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the Decision of the Regional Trial Court (RTC), Branch 141,
4

Makati City in Civil Case No. 02-461, ordering respondent to pay petitioner a sum of money.

The antecedent facts, as culled from the CA, are as follows:

On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications equipment (sic),
accessories, spares, services and software, at a total purchase price of Two Million One Hundred Twenty Eight Thousand Two
Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To ensure the
prompt payment of this amount, it obtained defendant UCPB General Insurance Co., Inc.’s surety bond dated 3 December 1999,
in favor of GILAT.
During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One Virtual the purchased
products and equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of the equipment
(including the software components for which payment was secured by the surety bond, was shipped by GILAT and duly
received by One Virtual. Under an endorsement dated December 23, 1999 (Exhibit "E"), the surety issued, with One Virtual’s
conformity, an amendment to the surety bond, Annex "A" thereof, correcting its expiry date from May 30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date of May 30,
2000 in accordance with the payment schedule attached as Annex "A" to the surety bond, prompting GILAT to write the surety
defendant UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment of the said amount of US$400,000.00. No part of
the amount set forth in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed
to pay on the succeeding payment instalment date of 30 November 2000 as set out in Annex "A" of the surety bond, prompting
GILAT to send a second demand letter dated January 24, 2001, for the payment of the full amount of US$1,200,000.00
guaranteed under the surety bond, plus interests and expenses (Exhibits "H") and which letter was received by the defendant
surety on January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence,
the instant complaint." (Emphases in the original)
5

On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint against respondent UCPB General Insurance Co.,
6

Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses. After due hearing, the RTC
rendered its Decision, the dispositive portion of which is herein quoted:
7

WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and against the defendant, ordering, to
wit:

1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred Thousand Dollars
(US$1,200,000.00) representing the principal debt under the Surety Bond, with legal interest thereon at the rate of 12%
per annum computed from the time the judgment becomes final and executory until the obligation is fully settled; and

2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars and Four Cents
(US$44,004.04) representing attorney’s fees and litigation expenses.

Accordingly, defendant’s counterclaim is hereby dismissed for want of merit.

SO ORDERED. (Emphasis in the original)

In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject equipments [sic] and the
same was installed. Even with the delivery and installation made, One Virtual failed to pay any of the payments agreed upon.
Demand notwithstanding, defendant failed and refused and continued to fail and refused to settle the obligation." 8

Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed by and between One Virtual
as Principal, UCPB as Surety and GILAT as Creditor/Bond Obligee," respondent agreed and bound itself to pay in accordance
9

with the Payment Milestones. This obligation was not made dependent on any condition outside the terms and conditions of the
Surety Bond and Payment Milestones. 10

Insofar as the interests were concerned, the RTC denied petitioner’s claim on the premise that while a surety can be held liable
for interest even if it becomes more onerous than the principal obligation, the surety shall only accrue when the delay or refusal
to pay the principal obligation is without any justifiable cause. Here, respondent failed to pay its surety obligation because of the
11

advice of its principal (One Virtual) not to pay. The RTC then obligated respondent to pay petitioner the amount of
12

USD1,200,000.00 representing the principal debt under the Surety Bond, with legal interest at the rate of 12% per annum
computed from the time the judgment becomes final and executory, and USD44,004.04 representing attorney’s fees and litigation
expenses.

On 18 October 2007, respondent appealed to the CA. The appellate court rendered a Decision in the following manner:
13 14

WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial court’s Decision dated December 28, 2006 is
VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One Virtual are ordered to proceed to arbitration, the outcome
of which shall necessary bind the parties, including the surety, defendant-appellant United Coconut Planters Bank General
Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)

The CA ruled that in "enforcing a surety contract, the ‘complementary-contracts-construed-together’ doctrine finds application."
According to this doctrine, the accessory contract must be construed with the principal agreement. In this case, the appellate
15

court considered the Purchase Agreement entered into between petitioner and One Virtual as the principal contract, whose 16

stipulations are also binding on the parties to the suretyship. Bearing in mind the arbitration clause contained in the Purchase
17

Agreement and pursuant to the policy of the courts to encourage alternative dispute resolution methods, the trial court’s
18 19

Decision was vacated; petitioner and One Virtual were ordered to proceed to arbitration.

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The motion was denied for
lack of merit in a Resolution issued by the CA on 16 September 2009.
20

Hence, the instant Petition.

On 31 August 2010, respondent filed a Comment on the Petition for Review. On 24 November 2010, petitioner filed a Reply.
21 22

ISSUES

From the foregoing, we reduce the issues to the following:

1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate; and

2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by respondent of its obligation
under the Suretyship Agreement.

THE COURT’S RULING

The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an
arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.

Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it applies for this
relief. This referral, however, can only be demanded by one who is a party to the arbitration agreement. Considering that
23 24

neither petitioner nor One Virtual has asked for a referral, there is no basis for the CA’s order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code clearly provide that the creditor may proceed against the surety without
25

having first sued the principal debtor. Even the Surety Agreement itself states that respondent becomes liable upon "mere failure
26

of the Principal to make such prompt payment." Thus, petitioner should not be ordered to make a separate claim against One
27

Virtual (via arbitration) before proceeding against respondent. 28

On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist without a valid
obligation. Thus, the surety may avail itself of all the defenses available to the principal debtor and inherent in the debt – that is,
29 30

the right to invoke the arbitration clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of the principal debtor. This
undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal contract. Nevertheless,
31

although the contract of a surety is in essence secondary only to a valid principal obligation, its liability to the creditor or
"promise" of the principal is said to be direct, primary and absolute; in other words, a surety is directly and equally bound with
the principal. He becomes liable for the debt and duty of the principal obligor, even without possessing a direct or personal
32

interest in the obligations constituted by the latter. Thus, a surety is not entitled to a separate notice of default or to the benefit of
33

excussion. It may in fact be sued separately or together with the principal debtor.
34 35

After a thorough examination of the pieces of evidence presented by both parties, the RTC found that petitioner had delivered all
36

the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to pay its obligation, triggering
37
respondent’s liability to petitioner as the former’s surety. In other words, the failure of One Virtual, as the principal debtor, to
1âwphi1

fulfill its monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the surety.

Consequently, we cannot sustain respondent’s claim that the Purchase Agreement, being the principal contract to which the
Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling disputes.

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd., that "[the] acceptance [of a surety
38

agreement], however, does not change in any material way the creditor’s relationship with the principal debtor nor does it make
the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the
right to intervene in the principal contract. The surety’s role arises only upon the debtor’s default, at which time, it can be directly
held liable by the creditor for payment as a solidary obligor." Hence, the surety remains a stranger to the Purchase Agreement.
We agree with petitioner that respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is
not a party to that contract. An arbitration agreement being contractual in nature, it is binding only on the parties thereto, as
39 40

well as their assigns and heirs. 41

Second, Section 24 of Republic Act No. 9285 is clear in stating that a referral to arbitration may only take place "if at least one
42

party so requests not later than the pre-trial conference, or upon the request of both parties thereafter." Respondent has not
presented even an iota of evidence to show that either petitioner or One Virtual submitted its contesting claim for arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself. They are contracted precisely to mitigate risks
43

of non-performance on the part of the obligor. This responsibility necessarily places a surety on the same level as that of the
principal debtor. The effect is that the creditor is given the right to directly proceed against either principal debtor or surety. This
44

is the reason why excussion cannot be invoked. To require the creditor to proceed to arbitration would render the very essence of
45

suretyship nugatory and diminish its value in commerce. At any rate, as we have held in Palmares v. Court of Appeals, "if the
46

surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt
himself and become subrogated to all the rights and remedies of the creditor."

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment of the latter’s
obligation, provided that the delay is inexcusable.

Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from the time of its first
demand on respondent on 5 June 2000 or at most, from the second demand on 24 January 2001 because of the latter’s delay in
discharging its monetary obligation. Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from the
47

time it demanded the fulfilment of respondent’s obligation under the suretyship contract. Significantly, respondent does not
contest this point, but instead argues that it is only liable for legal interest of 6% per annum from the date of petitioner’s last
demand on 24 January 2001.

In rejecting petitioner’s position, the RTC stated that interests may only accrue when the delay or the refusal of a party to pay is
without any justifiable cause. In this case, respondent’s failure to heed the demand was due to the advice of One Virtual that
48

petitioner allegedly breached its undertakings as stated in the Purchase Agreement. The CA, however, made no pronouncement
49

on this matter.

We sustain petitioner.

Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money, and the debtor incurs a
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and
in the absence of stipulation, the legal interest."

Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of the obligation,
and the latter fails to comply. Delay, as used in Article 1169, is synonymous with default or mora, which means delay in the
50

fulfilment of obligations. It is the nonfulfillment of an obligation with respect to time. In order for the debtor (in this case, the
51 52

surety) to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially. 53

Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes
more than the principal obligation. The increased liability is not because of the contract, but because of the default and the
54

necessity of judicial collection. 55

However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la Hotel, citing RCPI v.
56

Verchez, we held thus:

57

In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a
corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from
liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the
contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves
to preserve the interests of the promissee that may include his "expectation interest," which is his interest in having the benefit of
his bargain by being put in as good a position as he would have been in had the contract been performed, or his "reliance
interest," which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as
he would have been in had the contract not been made; or his "restitution interest," which is his interest in having restored to him
any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or for
society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to make
RECOMPENSE to the one who has been injured by the failure of another to observe his contractual obligation unless he can
show extenuating circumstances, like proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to
excuse him from his ensuing liability. (Emphasis ours)

We agree with petitioner that records are bereft of proof to show that respondent’s delay was indeed justified by the
circumstances – that is, One Virtual’s advice regarding petitioner’s alleged breach of obligations. The lower court’s Decision
itself belied this contention when it said that "plaintiff is not disputing that it did not complete commissioning work on one of the
two systems because One Virtual at that time is already in default and has not paid GILAT." Assuming arguendo that the
58

commissioning work was not completed, respondent has no one to blame but its principal, One Virtual; if only it had paid its
obligation on time, petitioner would not have been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice
president of Gilat, repeatedly stated that petitioner had delivered all equipment, including the licensed software; and that the
equipment had been installed and in fact, gone into operation. Notwithstanding these compliances, respondent still failed to pay.
59

As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial or
extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code and
of the settled rule that where there has been an extra-judicial demand before an action for performance was filed, interest on the
amount due begins to run, not from the date of the filing of the complaint, but from the date of that extra-judicial
demand. Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the Purchase Agreement,
60

and that the extrajudicial demand of petitioner was sent on 5 June 2000, we agree with the latter that interest must start to run
61

from the time petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at that
time.

With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames, which modified the guidelines
62

established in Eastern Shipping Lines v. CA in relation to Bangko Sentral-Monetary Board Circular No. 799 (Series of 2013), to
63

wit:

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
1âwphi1

from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

xxxx

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.

Applying the above-discussed concepts and in the absence of an agreement as to interests, we are hereby compelled to award
petitioner legal interest at the rate of 6% per annum from 5 June 2000, its first date of extra judicial demand, until the satisfaction
of the debt in accordance with the revised guidelines enunciated in Nacar.

WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of the Regional Trial Court, Branch 141, Makati City is
REINSTATED, with MODIFICATION insofar as the award of legal interest is concerned. Respondent is hereby ordered to pay
legal interest at the rate of 6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship Contract
and Purchase Agreement.
SO ORDERED.

FIRST DIVISION

G.R. No. 184458, January 14, 2015

RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA CHUA, Respondents.

[G.R. NO. 184472]

SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No.
90609 which affirmed with modification the separate rulings of the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the
Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661, 3 a case for collection of a sum of money due a promissory note. While all three (3) lower
courts upheld the validity and authenticity of the promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate
court modified the trial courts’ consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to twelve percent (12%) per annum computed from the
date of judicial or extrajudicial demand, and (2) reinstatement of the award of attorney’s fees also in a reduced amount of P50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions the entire ruling of the lower courts. On the other hand,
petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the appellate court’s reduction of the stipulated interest rate of
sixty percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador are kumpadres, the former is the godfather of the Spouses Chua’s
son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua: c hanroblesvirtuallawlibrary

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty
Thousand Philippine Currency (P120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to
pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty percent (20%) of the total amount due and payable as and
for attorney’s fees which in no case shall be less than P5,000.00 and to pay in addition the cost of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as partial payment for the loan, issued and delivered to the
Spouses Chua, as payee, a check numbered 012467, dated 30 December 1998, drawn against Rivera’s current account with the Philippine Commercial International
Bank (PCIB) in the amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise drawn against Rivera’s PCIB current account, numbered
013224, duly signed and dated, but blank as to payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued in the amount
of P133,454.00 with “cash” as payee. Purportedly, both checks were simply partial payment for Rivera’s loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason “account closed.”

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal of P120,000.00 plus five percent (5%) interest per month
from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua
were constrained to file a suit on 11 June 1999. The case was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject Promissory Note; (2) in all instances when he obtained a loan
from the Spouses Chua, the loans were always covered by a security; (3) at the time of the filing of the complaint, he still had an existing indebtedness to the Spouses
Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December
1998, should have been issued in the amount of only P1,300.00, representing the amount he received from the Spouses Chua’s saleslady; (5) contrary to the supposed
agreement, the Spouses Chua presented the check for payment in the amount of P133,454.00; and (6) there was no demand for payment of the amount of P120,000.00
prior to the encashment of PCIB Check No. 0132224. 5 chanRoblesvirtualLawlibrary

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses: chanroblesvirtuallawlibrary

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the testimonies of [the spouses] Chua and NBI Senior Documents
Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner (1989); NBI Senior Document Examiner (1994 to the date
he testified); registered criminologist; graduate of 18th Basic Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended a
seminar on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar on Effective Methodology in Teaching and Instructional
design conducted by the NBI Academy; seminar lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a hundred
thousand questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the Promissory Note and compared the signature thereon with
the specimen signatures of [Rivera] appearing on several documents. After a thorough study, examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the documents submitted to him, he concluded that the questioned signature appearing in the Promissory
Note and the specimen signatures of [Rivera] appearing on the other documents submitted were written by one and the same person. In connection with his findings,
Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following conclusion: “The questioned and the standard specimen
signatures RODGRIGO RIVERA were written by one and the same person.”

[Rivera] testified as follows: he and [respondent] Salvador are “kumpadres;” in May 1998, he obtained a loan from [respondent] Salvador and executed a real estate
mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 from Salvador and
issued PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of the Promissory Note dated 24 February 1995 and alleged that the
signature appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the Promissory Note was not
true, the truth being that he delivered the check to [respondent Salvador] with the space for amount left blank as he and [respondent] Salvador had agreed that the
latter was to fill it in with the amount of ?1,300.00 which amount he owed [the spouses Chua]; however, on 29 December 1998 [respondent] Salvador called him and
told him that he had written P133,454.00 instead of P1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his
averment that the signature appearing on the Promissory Note was not his signature and that he did not execute the Promissory Note.6

After trial, the MeTC ruled in favor of the Spouses Chua: chanroblesv irtuallawlibrary

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the rate of 5% per month from 1 January 1996, and legal
interest at the rate of 12% percent per annum from 11 June 1999, as actual and compensatory damages; 20% of the whole amount due as attorney’s fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the award of attorney’s fees to the Spouses Chua: chanrob lesvirtuallawlibrary

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision dated October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.

Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the Promissory Note, reduced the imposition of interest on the loan from
60% to 12% per annum, and reinstated the award of attorney’s fees in favor of the Spouses Chua: chanrob lesvirtuallawlibrary

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the interest rate of 60% per annum is hereby reduced to
12% per annum and the award of attorney’s fees is reinstated at the reduced amount of P50,000.00 Costs against [Rivera]. 9

Hence, these consolidated petitions for review on certiorari of Rivera in G.R. No. 184458 and the Spouses Chua in G.R. No. 184472, respectively raising the
following issues:chanroblesv irtuallawlibrary

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE WAS
A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN
APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME
HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC
DELETING THE AWARD OF ATTORNEY’S FEES.10 chanRobles virtualLawlibrary

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE APPEALED
JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER
RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE,
UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID. 11

As early as 15 December 2008, we already disposed of G.R. No. 184472 and denied the petition, via a Minute Resolution, for failure to sufficiently show any
reversible error in the ruling of the appellate court specifically concerning the correct rate of interest on Rivera’s indebtedness under the Promissory Note.12 chanRoblesvirtualLawlibrary

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.

Rivera continues to deny that he executed the Promissory Note; he claims that given his friendship with the Spouses Chua who were money lenders, he has been able
to maintain a loan account with them. However, each of these loan transactions was respectively “secured by checks or sufficient collateral.”

Rivera points out that the Spouses Chua “never demanded payment for the loan nor interest thereof (sic) from [Rivera] for almost four (4) years from the time of the
alleged default in payment [i.e., after December 31, 1995].”13 chanRoblesvirtualLawlibrary

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower courts’ uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only that the signature is not his and varies from his usual
signature. He likewise makes a confusing defense of having previously obtained loans from the Spouses Chua who were money lenders and who had allowed him a
period of “almost four (4) years” before demanding payment of the loan under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of Investigation (NBI) handwriting expert on the integrity
of the promissory note.

On that score, the appellate court aptly disabled Rivera’s contention: c hanroblesvirtuallawlibrary

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a forgery. The fact of forgery cannot be presumed but must be
proved by clear, positive and convincing evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was forged. Save for the denial
of Rivera that the signature on the note was not his, there is nothing in the records to support his claim of forgery. And while it is true that resort to experts is not
mandatory or indispensable to the examination of alleged forged documents, the opinions of handwriting experts are nevertheless helpful in the court’s determination
of a document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the testimony of the NBI witness. In fact, even a perfunctory
comparison of the signatures offered in evidence would lead to the conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by preponderance of evidence, which simply means “evidence which is
of greater weight, or more convincing than that which is offered in opposition to it.”

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima facie case in their favor, hence, the burden of evidence has
shifted to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14

Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the appellate court, are accorded the highest degree of
respect and are considered conclusive between the parties.15 A review of such findings by this Court is not warranted except upon a showing of highly meritorious
circumstances, such as: (1) when the findings of a trial court are grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the findings of the
appellate court go beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered, will justify a different conclusion; (5) when there
is a misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific evidence on which they are based, are premised on the
absence of evidence, or are contradicted by evidence on record. 16 None of these exceptions obtains in this instance. There is no reason to depart from the separate
factual findings of the three (3) lower courts on the validity of Rivera’s signature reflected in the Promissory Note.

Indeed, Rivera had the burden of proving the material allegations which he sets up in his Answer to the plaintiff’s claim or cause of action, upon which issue is joined,
whether they relate to the whole case or only to certain issues in the case. 17 chanRoblesvirtualLawlibrary

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a handwriting expert from the NBI. While it is true that resort to
experts is not mandatory or indispensable to the examination or the comparison of handwriting, the trial courts in this case, on its own, using the handwriting expert
testimony only as an aid, found the disputed document valid. 18 chanRoblesvir tualLawlibrary

Hence, the MeTC ruled that: chanroblesv irtuallawlibrary

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of [respondent] Salvador that [Rivera] signed the Promissory Note
before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the Promissory Note) and
standard specimen signatures “Rodrigo Rivera” “were written by one and the same person”; actual view at the hearing of the enlarged photographs of the questioned
signature and the standard specimen signatures. 19

Specifically, Rivera insists that: “[i]f that promissory note indeed exists, it is beyond logic for a money lender to extend another loan on May 4, 1998 secured by a real
estate mortgage, when he was already in default and has not been paying any interest for a loan incurred in February 1995.” 20 chanRoblesv irtualLawlibrary

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as “kumpadres,” Rivera was allowed another loan, albeit this time secured by a
real estate mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is nothing inconsistent with the Spouses Chua’s two (2) and successive loan
accommodations to Rivera: one, secured by a real estate mortgage and the other, secured by only a Promissory Note.

Also completely plausible is that given the relationship between the parties, Rivera was allowed a substantial amount of time before the Spouses Chua demanded
payment of the obligation due under the Promissory Note.

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant defense to assail the authenticity and validity of the
Promissory Note. Although the burden of proof rested on the Spouses Chua having instituted the civil case and after they established a prima facie case against
Rivera, the burden of evidence shifted to the latter to establish his defense. 21 Consequently, Rivera failed to discharge the burden of evidence, refute the existence of
the Promissory Note duly signed by him and subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left on where the
respective evidence of the parties preponderated—in favor of plaintiffs, the Spouses Chua.

Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in order to charge him liable thereunder. Rivera argues that it
was grave error on the part of the appellate court to apply Section 70 of the Negotiable Instruments Law (NIL). 22 chanRoblesv irtualLawlibrary
We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do not apply to this case. Section 1 of the NIL requires the
concurrence of the following elements to be a negotiable instrument: chanrobles virtuallawlibrary

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: c hanroblesvirtuallaw library

SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is
drawn to the maker’s own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua, and not to order or to bearer, or to the order of the Spouses
Chua as payees.

However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore outside the coverage of Section 70 of the NIL which provides that
presentment for payment is not necessary to charge the person liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—31 December 1995. As of 1 January 1996, Rivera had
already incurred in delay when he failed to pay the amount of P120,000.00 due to the Spouses Chua on 31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides: chanroblesvirtuallawlibrary

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is an express stipulation to that effect; (2) where the law so
provides; (3) when the period is the controlling motive or the principal inducement for the creation of the obligation; and (4) where demand would be useless. In the
first two paragraphs, it is not sufficient that the law or obligation fixes a date for performance; it must further state expressly that after the period lapses, default will
commence.

We refer to the clause in the Promissory Note containing the stipulation of interest: chanroblesvirtuallawlib rary

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to
pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date of default” until the entire obligation is fully paid for. The parties evidently
agreed that the maturity of the obligation at a date certain, 31 December 1995, will give rise to the obligation to pay interest. The Promissory Note expressly provided
that after 31 December 1995, default commences and the stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due date of the obligation. On that date, Rivera became
liable for the stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not necessary before
Rivera could be held liable for the principal amount of P120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses Chua
damages, in the form of stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance of their obligations is laid down on Article 117024 of the
Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for damages when the obligor incurs in delay: chanrobles virtuallawlibrary

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the debtor, Rivera, incurred in delay when he failed to pay
on or before 31 December 1995; and (3) the Promissory Note provides for an indemnity for damages upon default of Rivera which is the payment of a 5% monthly
interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as obligor, assumed to pay additional 5% monthly interest on
the principal amount of P120,000.00 upon default.

Article 1226 of the Civil Code provides: chanroblesv irtuallawlib rary

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment and reparation. It is an exception to the general rules on
recovery of losses and damages. As an exception to the general rule, a penal clause must be specifically set forth in the obligation.25 chanRoblesv irtualLawlibrary

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal clause, and is simply an indemnity for damages incurred by
the Spouses Chua because Rivera defaulted in the payment of the amount of P120,000.00. The measure of damages for the Rivera’s delay is limited to the interest
stipulated in the Promissory Note. In apt instances, in default of stipulation, the interest is that provided by law. 26 chanRobles virtualLawlibrary

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a month or 60% per annum. On this score, the appellate court
ruled:chanroblesv irtuallawlibrary

It bears emphasizing that the undertaking based on the note clearly states the date of payment to be 31 December 1995. Given this circumstance, demand by the
creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. The mere failure of [Spouses Chua] to immediately
demand or collect payment of the value of the note does not exonerate [Rivera] from his liability therefrom. Verily, the trial court committed no reversible error when
it imposed interest from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved from making demand under Article 1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal interests and attorney’s fees is, indeed, highly iniquitous and
unreasonable. Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. Since the interest rate
agreed upon is void, the parties are considered to have no stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed from the
date of judicial or extrajudicial demand. [27 chanRobles virtualLawlibrary

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and attorney’s fees, steep, tantamount to it being illegal,
iniquitous and unconscionable.

Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to sufficiently
show any reversible error in the ruling of the appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under the Promissory
Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its concept of “bar by prior judgment” on whether the Court of Appeals correctly
reduced the interest rate stipulated in the Promissory Note.

Res judicata applies in the concept of “bar by prior judgment” if the following requisites concur: (1) the former judgment or order must be final; (2) the judgment or
order must be on the merits; (3) the decision must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4) there must be,
between the first and the second action, identity of parties, of subject matter and of causes of action. 28 chanRob lesvirtualLawlibrary

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising specifically errors in the Decision of the Court of
Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling
thereon affirming the Court of Appeals is a “bar by prior judgment.”

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then prevailing rate of legal interest was 12% per annum under
Central Bank (CB) Circular No. 416 in cases involving the loan or forbearance of money. 29 Thus, the legal interest accruing from the Promissory Note is 12% per
annum from the date of default on 1 January 1996.

However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP)
Circular No. 799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is
prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1 January 1996, the date when Rivera defaulted, to date when this Decision
becomes final and executor is divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013; and (2) 6% per
annum FROM 1 July 2013 to date when this Decision becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this Decision becomes final and executory, such is likewise
divided into two periods: (1) 12% per annumfrom 11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when
this Decision becomes final and executor.31 We base this imposition of interest on interest due earning legal interest on Article 2212 of the Civil Code which
provides that “interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on this point.”

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua could already be determined with reasonable certainty given
the wording of the Promissory Note.32 chanRoblesvirtualLawlibrary

We cite our recent ruling in Nacar v. Gallery Frames:33 chanRoblesvir tualLawlibrary

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: Chan RoblesVir tualawlibrary

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. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, we agree with the reduction thereof but not the ratiocination of
the appellate court that the attorney’s fees are in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note already answers as
liquidated damages for Rivera’s default in paying his obligation. We award attorney’s fees, albeit in a reduced amount, in recognition that the Spouses Chua were
compelled to litigate and incurred expenses to protect their interests. 34 Thus, the award of P50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the Spouses Chua: chanrob lesvirtuallawlibrary

Face value of Stipulated Interest A & B Interest due earning Attorney’s Total
the Promissory legal interest A & B fees Amount
Note
February 24, A. January 1, 1996 to A. June 11, 1999 (date Wholesale
1995 to June 30, 2013 of judicial demand) to amount
December 31, June 30, 2013
1995 B. July 1 2013 to date B. July 1, 2013 to date
when this Decision when this Decision
becomes final and becomes final and
executory executory
P120,000.00 A. 12 % per annum on A. 12% per annum on P50,000.00 Total
the principal amount of the total amount of amount of
P120,000.00 column 2 Columns 1-
B. 6% per annum on the B. 6% per annum on the 4
principal amount of total amount of column
P120,000.00 235
The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the rate of 6% per annum computed from its finality until full
payment thereof, the interim period being deemed to be a forbearance of credit. chanrobleslaw

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo
Rivera is ordered to pay respondents Spouse Salvador and Violeta Chua the following: ch anroblesvirtuallawlibrary

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annum of the principal amount of P120,000.00 reckoned from 1
January 1996 until 30 June 2013;
(3) legal interest of 6% per annum of the principal amount of P120,000.00 form 1 July 2013 to
date when this Decision becomes final and executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11 June 1999, date of
judicial demand, to 30 June 2013, as interest due earning legal interest;
(5) 6% per annum applied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date
when this Decision becomes final and executor, as interest due earning legal interest;
(6) Attorney’s fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision
until full payment thereof.
Costs against petitioner Rodrigo Rivera.

SO ORDERED. cralawlawlibrary

[G.R. No. 176868 : July 26, 2010]

SOLAR HARVEST, INC., PETITIONER, VS. DAVAO CORRUGATED CARTON CORPORATION, RESPONDENT.

DECISION

NACHURA, J.:

Petitioner seeks a review of the Court of Appeals (CA) Decision [1] dated September 21, 2006 and Resolution[2] dated February 23, 2007, which denied petitioner's
motion for reconsideration. The assailed Decision denied petitioner's claim for reimbursement for the amount it paid to respondent for the manufacture of corrugated
carton boxes.

The case arose from the following antecedents:

In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement with respondent, Davao Corrugated Carton Corporation, for the purchase of
corrugated carton boxes, specifically designed for petitioner's business of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To
get the production underway, petitioner deposited, on March 31, 1998, US$40,150.00 in respondent's US Dollar Savings Account with Westmont Bank, as full
payment for the ordered boxes.

Despite such payment, petitioner did not receive any boxes from respondent. On January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount
paid.[3] On February 19, 2001, respondent replied that the boxes had been completed as early as April 3, 1998 and that petitioner failed to pick them up from the
former's warehouse 30 days from completion, as agreed upon. Respondent mentioned that petitioner even placed an additional order of 24,000 boxes, out of which,
14,000 had been manufactured without any advanced payment from petitioner. Respondent then demanded petitioner to remove the boxes from the factory and to pay
the balance of US$15,400.00 for the additional boxes and P132,000.00 as storage fee.

On August 17, 2001, petitioner filed a Complaint for sum of money and damages against respondent. The Complaint averred that the parties agreed that the boxes will
be delivered within 30 days from payment but respondent failed to manufacture and deliver the boxes within such time. It further alleged

6. That repeated follow-up was made by the plaintiff for the immediate production of the ordered boxes, but every time, defendant [would] only show samples of
boxes and ma[k]e repeated promises to deliver the said ordered boxes.

7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff ha[d]to cancel the same and demand payment and/or refund from the defendant but
the latter refused to pay and/or refund the US$40,150.00 payment made by the former for the ordered boxes. [4]

In its Answer with Counterclaim, [5] respondent insisted that, as early as April 3, 1998, it had already completed production of the 36,500 boxes, contrary to petitioner's
allegation. According to respondent, petitioner, in fact, made an additional order of 24,000 boxes, out of which, 14,000 had been completed without waiting for
petitioner's payment. Respondent stated that petitioner was to pick up the boxes at the factory as agreed upon, but petitioner failed to do so. Respondent averred that,
on October 8, 1998, petitioner's representative, Bobby Que (Que), went to the factory and saw that the boxes were ready for pick up. On February 20, 1999, Que
visited the factory again and supposedly advised respondent to sell the boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioner's transaction
to ship bananas to China did not materialize. Respondent claimed that the boxes were occupying warehouse space and that petitioner should be made to pay storage
fee at P60.00 per square meter for every month from April 1998. As counterclaim, respondent prayed that judgment be rendered ordering petitioner to pay $15,400.00,
plus interest, moral and exemplary damages, attorney's fees, and costs of the suit.

In reply, petitioner denied that it made a second order of 24,000 boxes and that respondent already completed the initial order of 36,500 boxes and 14,000 boxes out
of the second order. It maintained that

respondent only manufactured a sample of the ordered boxes and that respondent could not have produced 14,000 boxes without the required pre-payments.[6]

During trial, petitioner presented Que as its sole witness. Que testified that he ordered the boxes from respondent and deposited the money in respondent's
account.[7] He specifically stated that, when he visited respondent's factory, he saw that the boxes had no print of petitioner's logo. [8] A few months later, he followed-
up the order and was told that the company had full production, and thus, was promised that production of the order would be rushed. He told respondent that it should
indeed rush production because the need for the boxes was urgent. Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was already late for
them to meet their commitment to ship the bananas to China. [9] On cross-examination, Que further testified that China Zero Food, the Chinese company that ordered
the bananas, was sending a ship to Davao to get the bananas, but since there were no cartons, the ship could not proceed. He said that, at that time, bananas from
Tagum Agricultural Development Corporation (TADECO) were already there. He denied that petitioner made an additional order of 24,000 boxes. He explained that
it took three years to refer the matter to counsel because respondent promised to pay. [10]

For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in Davao in October 1998 to inspect the boxes and that the latter got samples of them. In
February 2000, they inspected the boxes again and Que got more samples. Estanislao said that petitioner did not pick up the boxes because the ship did not arrive. [11]
Jaime Tan (Tan), president of respondent, also testified that his company finished production of the 36,500 boxes on April 3, 1998 and that petitioner made a second
order of 24,000 boxes. He said that the agreement was for respondent to produce the boxes and for petitioner to pick them up from the warehouse. [12] He also said
that the reason why petitioner did not pick up the boxes was that the ship that was to carry the bananas did not arrive. [13] According to him, during the last visit of Que
and Estanislao, he asked them to withdraw the boxes immediately because they were occupying a big space in his plant, but they, instead, told him to sell the cartons
as rejects. He was able to sell 5,000 boxes at P20.00 each for a total of P100,000.00. They then told him to apply the said amount to the unpaid balance.

In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did not commit any breach of faith that would justify rescission of the contract
and the consequent reimbursement of the amount paid by petitioner. The RTC said that respondent was able to produce the ordered boxes but petitioner failed to
obtain possession thereof because its ship did not arrive. It thus dismissed the complaint and respondent's counterclaims, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of defendant and against the plaintiff and, accordingly, plaintiff's complaint is hereby
ordered DISMISSED without pronouncement as to cost. Defendant's counterclaims are similarly dismissed for lack of merit.

SO ORDERED.[14]

Petitioner filed a notice of appeal with the CA.

On September 21, 2006, the CA denied the appeal for lack of merit. [15] The appellate court held that petitioner failed to discharge its burden of proving what it claimed
to be the parties' agreement with respect to the delivery of the boxes. According to the CA, it was unthinkable that, over a period of more than two years, petitioner did
not even demand for the delivery of the boxes. The CA added that even assuming that the agreement was for respondent to deliver the boxes, respondent would not be
liable for breach of contract as petitioner had not yet demanded from it the delivery of the boxes. [16]

Petitioner moved for reconsideration,[17] but the motion was denied by the CA in its Resolution of February 23, 2007. [18]

In this petition, petitioner insists that respondent did not completely manufacture the boxes and that it was respondent which was obliged to deliver the boxes to
TADECO.

We find no reversible error in the assailed Decision that would justify the grant of this petition.

Petitioner's claim for reimbursement is actually one for rescission (or resolution) of contract under Article 1191 of the Civil Code, which reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage
Law.

The right to rescind a contract arises once the other party defaults in the performance of his obligation. In determining when default occurs, Art. 1191 should be taken
in conjunction with Art. 1169 of the same law, which provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay by the other begins.

In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties' respective obligations should be simultaneous. Hence, no
demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when
different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of the present
article,[19] that is, the other party would incur in delay only from the moment the other party demands fulfillment of the former's obligation. Thus, even in reciprocal
obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and
before a cause of action for rescission will accrue.

Evident from the records and even from the allegations in the complaint was the lack of demand by petitioner upon respondent to fulfill its obligation to manufacture
and deliver the boxes. The Complaint only alleged that petitioner made a "follow-up" upon respondent, which, however, would not qualify as a demand for the
fulfillment of the obligation. Petitioner's witness also testified that they made a follow-up of the boxes, but not a demand. Note is taken of the fact that, with respect to
their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter was sent to respondent. Without a previous demand for the
fulfillment of the obligation, petitioner would not have a cause of action for rescission against respondent as the latter would not yet be considered in breach of its
contractual obligation.

Even assuming that a demand had been previously made before filing the present case, petitioner's claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.

The existence of a breach of contract is a factual matter not usually reviewed in a petition for review under Rule 45. [20] The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of fact made by the trial court, especially when reiterated by the CA, must be given
great respect if not considered as final. [21] In dealing with this petition, we will not veer away from this doctrine and will thus sustain the factual findings of the CA,
which we find to be adequately supported by the evidence on record.

As correctly observed by the CA, aside from the pictures of the finished boxes and the production report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of Estanislao who accompanied Que to the factory, attesting that, during their first visit to the company, they
saw the pile of petitioner's boxes and Que took samples thereof. Que, petitioner's witness, himself confirmed this incident. He testified that Tan pointed the boxes to
him and that he got a sample and saw that it was blank. Que's absolute assertion that the boxes were not manufactured is, therefore, implausible and suspicious.

In fact, we note that respondent's counsel manifested in court, during trial, that his client was willing to shoulder expenses for a representative of the court to visit the
plant and see the boxes.[22] Had it been true that the boxes were not yet completed, respondent would not have been so bold as to challenge the court to conduct an
ocular inspection of their warehouse. Even in its Comment to this petition, respondent prays that petitioner be ordered to remove the boxes from its factory
site,[23] which could only mean that the boxes are, up to the present, still in respondent's premises.

We also believe that the agreement between the parties was for petitioner to pick up the boxes from respondent's warehouse, contrary to petitioner's allegation. Thus, it
was due to petitioner's fault that the boxes were not delivered to TADECO.

Petitioner had the burden to prove that the agreement was, in fact, for respondent to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its
sole witness, Que, was not even competent to testify on the terms of the agreement and, therefore, we cannot give much credence to his testimony. It appeared from
the testimony of Que that he did not personally place the order with Tan, thus:

Q. No, my question is, you went to Davao City and placed your order there?
A. I made a phone call.

Q. You made a phone call to Mr. Tan?

A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact with Mr.
Tan.

Q. So, your first statement that you were the one who placed the order is not true?
A. That's true. The Solar Harvest made a contact with Mr. Tan and I deposited the money
in the bank.

Q. You said a while ago [t]hat you were the one who called Mr. Tan and placed the order
for 36,500 boxes, isn't it?
A. First time it was Mr. Alfred Ong.

Q. It was Mr. Ong who placed the order[,] not you?

A. Yes, sir.[24]

Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido Estanislao?
A. Yes, sir.[25]
Moreover, assuming that respondent was obliged to deliver the boxes, it could not have complied with such obligation. Que, insisting that the boxes had not been
manufactured, admitted that he did not give respondent the authority to deliver the boxes to TADECO:

Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the carton, the
quantity and quality. But I have not seen a single carton.

Q. Are you trying to impress upon the [c]ourt that it is only after the boxes are completed,
will you give authority to Mr. Tan to deliver the boxes to TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I asked Mr. Tan to
rush the carton but not...[26]

Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO?
A. Because I have not seen any of my carton.

Q. You don't have any authority yet given to Mr. Tan?

A. None, your Honor.[27]
Surely, without such authority, TADECO would not have allowed respondent to deposit the boxes within its premises.

In sum, the Court finds that petitioner failed to establish a cause of action for rescission, the evidence having shown that respondent did not commit any breach of its
contractual obligation. As previously stated, the subject boxes are still within respondent's premises. To put a rest to this dispute, we therefore relieve respondent from
the burden of having to keep the boxes within its premises and, consequently, give it the right to dispose of them, after petitioner is given a period of time within
which to remove them from the premises.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated September 21, 2006 and Resolution dated February 23, 2007
are AFFIRMED. In addition, petitioner is given a period of 30 days from notice within which to cause the removal of the 36,500

boxes from respondent's warehouse. After the lapse of said period and petitioner fails to effect such removal, respondent shall have the right to dispose of the boxes in
any manner it may deem fit.

SO ORDERED.
G.R. No. L-30056 August 30, 1988

MARCELO AGCAOILI, plaintiff-appellee

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.

Artemio L. Agcaoili for plaintiff-appellee.

Office of the Government Corporate Counsel for defendant-appellant.

NARVASA, J.:

The appellant Government Service Insurance System, (GSIS, for short) having approved the application of the appellee Agcaoili for the purchase of a
house and lot in the GSIS Housing Project at Nangka Marikina, Rizal, subject to the condition that the latter should forthwith occupy the house, a condition
that Agacoili tried to fulfill but could not for the reason that the house was absolutely uninhabitable; Agcaoili, after paying the first installment and other
fees, having thereafter refused to make further payment of other stipulated installments until GSIS had made the house habitable; and appellant having
refused to do so, opting instead to cancel the award and demand the vacation by Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court
of First Instance of Manila for specific performance with damages and having obtained a favorable judgment, the case was appealled to this Court by the
GSIS. Its appeal must fail.

The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for purchase was contained in a 1

letter addressed to Agcaoili and signed by GSIS Manager Archimedes Villanueva in behalf of the Chairman-General Manager,
2

reading as follows:

Please be informed that your application to purchase a house and lot in our GSIS Housing Project at Nangka,
Marikina, Rizal, has been approved by this Office. Lot No. 26, Block No. (48) 2, together with the housing
unit constructed thereon, has been allocated to you.

You are, therefore, advised to occupy the said house immediately.

If you fail to occupy the same within three (3) days from receipt of this notice, your application shall be
considered automatically disapproved and the said house and lot will be awarded to another applicant.

Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the very next day, because the
house was nothing more than a shell, in such a state of incompleteness that civilized occupation was not possible: ceiling, stairs,
double walling, lighting facilities, water connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask
a homeless friend, a certain Villanueva, to stay in the premises as some sort of watchman, pending completion of the construction
of the house. Agcaoili thereafter complained to the GSIS, to no avail.

The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first monthly installment and the
incidental fees, but refused to make further payments until and unless the GSIS completed the housing unit. What the GSIS did
3

was to cancel the award and require Agcaoili to vacate the premises. Agcaoili reacted by instituting suit in the Court of First
4

Instance of Manila for specific performance and damages. Pending the action, a written protest was lodged by other awardees of
5

housing units in the same subdivision, regarding the failure of the System to complete construction of their own
houses. Judgment was in due course rendered , on the basis of the evidence adduced by Agcaoili only, the GSIS having opted to
6 7

dispense with presentation of its own proofs. The judgment was in Agcaoili's favor and contained the following dispositions, to 8

wit:

1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff (Mariano Agcaoili) illegal
and void;

2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the plaintiff relative to Lot
No. 26, Block No. (48) 2 of the Government Service Insurance System (GSIS) low cost housing project at
Nangka Marikina, Rizal;
 3) Ordering the defendant to complete the house in question so as to make the same habitable and authorizing
it (defendant) to collect the monthly amortization thereon only after said house shall have been completed
under the terms and conditions mentioned in Exhibit A ;and

4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for attorney's fees, and costs.

Appellant GSIS would have this Court reverse this judgment on the argument that—

1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of his housing unit, since said
unit had been sold "in the condition and state of completion then existing ... (and) he is deemed to have accepted the same in the
condition he found it when he accepted the award;" and assuming indefiniteness of the contract in this regard, such circumstance
precludes a judgment for specific performance. 9

2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's immediate occupancy of the
house subject thereof, and the latter having failed to comply with the condition, no contract ever came into existence between
them ;10

3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or subsequent knowledge or consent
of the defendant (GSIS)" operated as a repudiation by Agcaoili of the award and a deprivation of the GSIS at the same time of the
reasonable rental value of the property. 11

Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled "Application to Purchase a
House and/or Lot." Agcaoili filled up the form, signed it, and submitted it. The acceptance of the application was also set out in
12

a form (mimeographed) also prepared by the GSIS. As already mentioned, this form sent to Agcaoili, duly filled up, advised him
of the approval of his "application to purchase a house and lot in our GSIS Housing Project at NANGKA, MARIKINA, RIZAL,"
and that "Lot No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has been allocated to you." Neither
the application form nor the acceptance or approval form of the GSIS — nor the notice to commence payment of a monthly
amortizations, which again refers to "the house and lot awarded" — contained any hint that the house was incomplete, and was
being sold "as is," i.e., in whatever state of completion it might be at the time. On the other hand, the condition explicitly imposed
on Agcaoili — "to occupy the said house immediately," or in any case within three (3) days from notice, otherwise his
"application shall be considered automatically disapproved and the said house and lot will be awarded to another applicant" —
would imply that construction of the house was more or less complete, and it was by reasonable standards, habitable, and that
indeed, the awardee should stay and live in it; it could not be interpreted as meaning that the awardee would occupy it in the
sense of a pioneer or settler in a rude wilderness, making do with whatever he found available in the envirornment.

There was then a perfected contract of sale between the parties; there had been a meeting of the minds upon the purchase by
Agcaoili of a determinate house and lot in the GSIS Housing Project at Nangka Marikina, Rizal at a definite price payable in
amortizations at P31.56 per month, and from that moment the parties acquired the right to reciprocally demand performance. It 13

was, to be sure, the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for
the purpose contemplated , in other words, to deliver the house subject of the contract in a reasonably livable state. This it failed
14

to do.

It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of the sale. Under the
circumstances there can hardly be any doubt that the house contemplated was one that could be occupied for purposes of
residence in reasonable comfort and convenience. There would be no sense to require the awardee to immediately occupy and
live in a shell of a house, a structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does,
that this was what was intended by the parties, since the contract did not clearly impose upon it the obligation to deliver
a habitable house, is to advocate an absurdity, the creation of an unfair situation. By any objective interpretation of its terms, the
contract can only be understood as imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in
return for his undertaking to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not willing to put the
house in habitable state, it cannot invoke Agcaoili's suspension of payment of amortizations as cause to cancel the contract
between them. It is axiomatic that "(i)n reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him." 15

Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the latter had not complied
with the condition of occupying the house within three (3) days. The record shows that Agcaoili did try to fulfill the condition; he
did try to occupy the house but found it to be so uninhabitable that he had to leave it the following day. He did however leave a
friend in the structure, who being homeless and hence willing to accept shelter even of the most rudimentary sort, agreed to stay
therein and look after it. Thus the argument that Agcaoili breached the agreement by failing to occupy the house, and by allowing
another person to stay in it without the consent of the GSIS, must be rejected as devoid of merit.

Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or imprecise as to its exact
prestation Blame for the imprecision cannot be imputed to Agcaoili; it was after all the GSIS which caused the contract to come
into being by its written acceptance of Agcaoili's offer to purchase, that offer being contained in a printed form supplied by the
GSIS. Said appellant having caused the ambiguity of which it would now make capital, the question of interpretation arising
therefrom, should be resolved against it.

It will not do, however, to dispose of the controversy by simply declaring that the contract between the parties had not been
validly cancelled and was therefore still in force, and that Agcaoili could not be compelled by the GSIS to pay the stipulated price
of the house and lot subject of the contract until and unless it had first completed construction of the house. This would leave the
contract hanging or in suspended animation, as it were, Agcaoili unwilling to pay unless the house were first completed, and the
GSIS averse to completing construction, which is precisely what has been the state of affairs between the parties for more than
twenty (20) years now. On the other hand, assuming it to be feasible to still finish the construction of the house at this time, to
compel the GSIS to do so so that Agcaoili's prestation to pay the price might in turn be demanded, without modifying the price
therefor, would not be quite fair. The cost to the GSIS of completion of construction at present prices would make the stipulated
price disproportionate, unrealistic.

The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may render complete justice to both
parties.

As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579, 589 [1978]).
"(E)quity as the complement of legal jurisdiction seeks to reach and do complete justice where courts of law,
through the inflexibility of their rules and want of power to adapt their judgments to the special
circumstances of cases, are incompetent so to do. Equity regards the spirit of and not the letter, the intent and
not the form, the substance rather than the circumstance, as it is variously expressed by different courts... " 16

In this case, the Court can not require specific performance of the contract in question according to its literal terms, as this would
result in inequity. The prevailing rule is that in decreeing specific performance equity requires —17

... not only that the contract be just and equitable in its provisions, but that the consequences of specific
performance likewise be equitable and just. The general rule is that this equitable relief will not be granted if,
under the circumstances of the case, the result of the specific enforcement of the contract would be harsh,
inequitable, oppressive, or result in an unconscionable advantage to the plaintiff . .

In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with the circumstances obtaining
at the time of rendition of judgment, when these are significantly different from those existing at the time of generation of those
rights.

The Court is not restricted to an adjustment of the rights of the parties as they existed when suit was brought,
but will give relief appropriate to events occuring ending the suit. 18

While equitable jurisdiction is generally to be determined with reference to the situation existing at the time
the suit is filed, the relief to be accorded by the decree is governed by the conditions which are shown to exist
at the time of making thereof, and not by the circumstances attending the inception of the litigation. In
making up the final decree in an equity suit the judge may rightly consider matters arising after suit was
brought. Therefore, as a general rule, equity will administer such relief as the nature, rights, facts and
exigencies of the case demand at the close of the trial or at the time of the making of the decree. 19

That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a person must act with justice,
give everyone his due, and observe honesty and good faith. Adjustment of rights has been held to be particularly applicable
20

when there has been a depreciation of currency.

Depreciation of the currency or other medium of payment contracted for has frequently been held to justify
the court in withholding specific performance or at least conditioning it upon payment of the actual value of
the property contracted for. Thus, in an action for the specific performance of a real estate contract, it has
been held that where the currency in which the plaintiff had contracted to pay had greatly depreciated before
 enforcement was sought, the relief would be denied unless the complaint would undertake to pay the
equitable value of the land. (Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59
Ala 424) 21

In determining the precise relief to give, the Court will "balance the equities" or the respective interests of the parties, and take
account of the relative hardship that one relief or another may occasion to them .22

The completion of the unfinished house so that it may be put into habitable condition, as one form of relief to the plaintiff Agcaoili, no longer appears to be
a feasible option in view of the not inconsiderable time that has already elapsed. That would require an adjustment of the price of the subject of the sale to
conform to present prices of construction materials and labor. It is more in keeping with the realities of the situation, and with equitable norms, to simply
require payment for the land on which the house stands, and for the house itself, in its unfinished state, as of the time of the contract. In fact, this is an
alternative relief proposed by Agcaoili himself, i.e., "that judgment issue . . (o)rdering the defendant (GSIS) to execute a deed of sale that would embody
and provide for a reasonable amortization of payment on the basis of the present actual unfinished and uncompleted condition, worth and value of the said
house. 23

WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the cancellation by respondent GSIS of
the award in favor of petitioner Agcaoili of Lot No. 26, Block No. (48) 2 of the GSIS low cost housing project at Nangka,
Marikina, Rizal, and orders the former to respect the aforesaid award and to pay damages in the amounts specified, is
AFFIRMED as being in accord with the facts and the law. Said judgments is however modified by deleting the requirement for
respondent GSIS "to complete the house in question so as to make the same habitable," and instead it is hereby ORDERED that
the contract between the parties relative to the property above described be modified by adding to the cost of the land, as of the
time of perfection of the contract, the cost of the house in its unfinished state also as of the time of perfection of the contract, and
correspondingly adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be effected after determination
by the Court a quo of the value of said house on the basis of the agreement of the parties, or if this is not possible by such
commissioner or commissioners as the Court may appoint. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-15645 January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

Teehankee and Carreon for plaintiffs-appellees.

The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20, 1958, awarding to the
plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract and dismissing the counterclaim and third party
complaint of the defendant-appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration (NARIC) is hereby
abolished and all its assets, liabilities, functions, powers which are not inconsistent with the provisions of this Act, and all
personnel are transferred "to the Rice and Corn Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA pursuant to the
aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply of 20,000 metric tons
of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was awarded the contract for the same. Accordingly,
on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the
terms of which the former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton,
CIF Manila. In turn, the defendant corporation committed itself to pay for the imported rice "by means of an irrevocable,
confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma,
immediately." Despite the commitment to pay immediately "by means of an irrevocable, confirmed and assignable Letter of
Credit," however, it was only on July 30, 1952, or a full month from the execution of the contract, that the defendant corporation,
thru its general manager, took the first to open a letter of credit by forwarding to the Philippine National Bank its Application for
Commercial Letter Credit. The application was accompanied by a transmittal letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to cover the amount required
to be deposited as a condition for the opening of letters of credit, we will appreciate it if this application could be
considered special case.

We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952, and in order to
comply therewith, it is imperative that the L/C be opened prior to that date. We would therefore request your full
cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of the extreme necessity for
the immediate opening of the letter credit since she had by then made a tender to her supplier in Rangoon, Burma, "equivalent to
5% of the F.O.B. price of 20,000 tons at $180.70 and in compliance with the regulations in Rangoon this 5% will be confiscated
if the required letter of credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application, "for a letter of credit for
$3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with the condition that marginal cash deposit
be paid and that drafts are to be paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the
Bank represented that it "will hold your application in abeyance pending compliance with the above stated requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the condition. As matter of fact, in a
letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its dilemma: "In this connection, please be advised that
our application for opening of the letter of credit has been presented to the bank since July 30th but the latter requires that we first
deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we are not in a position to meet."
(Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri Setkya, Rangoon,
Burma, and/or assignee for $3,614,000.00," (which is more than two months from the execution of the contract) the party named
by the appellee as beneficiary of the letter of credit.
1äwphï1.ñët

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit, amounting to 524,000
kyats or approximately P200,000.00 was forfeited. In this connection, it must be made of record that although the Burmese
authorities had set August 4, 1952, as the deadline for the remittance of the required letter of credit, the cancellation of the
allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a full half month after the
expiration of the deadline. And yet, even with the 15-day grace, appellant corporation was unable to make good its commitment
to open the disputed letter of credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of reinstating the same
became apparent, she offered to substitute Thailand rice instead to the defendant NARIC, communicating at the same time that
the offer was "a solution which should be beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25—Def., p.
38, Folder of Exhibits). This offer for substitution, however, was rejected by the appellant in a resolution dated November 15,
1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages caused her in the sum of
$286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected she instituted this case now on
appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company was brought to the suit
as a third party defendant to hold it liable on the performance bond it executed in favor of the plaintiff-appellee.

We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the allocation contracted by the appellee
herein in Rangoon, Burma, was the failure of the letter of credit to be opened with the contemplated period. This failure must,
therefore, be taken as the immediate cause for the consequent damage which resulted. As it is then, the disposition of this case
depends on a determination of who was responsible for such failure. Stated differently, the issue is whether appellant's failure to
open immediately the letter of credit in dispute amounted to a breach of the contract of July 1, 1952 for which it may be held
liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the contrary, it insists that
the fault lies with the appellee. Appellant contends that the disputed negotiable instrument was not promptly secured because the
appellee , failed to seasonably furnish data necessary and required for opening the same, namely, "(1) the amount of the letter of
credit, (2) the person, company or corporation in whose favor it is to be opened, and (3) the place and bank where it may be
negotiated." Appellant would have this Court believe, therefore, that had these informations been forthwith furnished it, there
would have been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an area of the proceedings into
which We are not at liberty to encroach. The explanation refers to a question of fact. Nothing in the record suggests any arbitrary
or abusive conduct on the part of the trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne
out by the evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to the time-honored
tradition of this Tribunal to hold trial judges better situated to make conclusions on questions of fact. For the record, We quote
hereunder the lower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to name the supplier,
the amount and the bank is not tenable. Plaintiff stated in Court that these facts were known to defendant even before
the contract was executed because these facts were necessarily revealed to the defendant before she could qualify as a
bidder. She stated too that she had given the necessary data immediately after the execution of Exh. "A" (the contract of
July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and in writing and that she
also pressed for the opening of the letter of credit on these occasions. These statements have not been controverted and
defendant NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte to testify or refute
this. ...

Secondly, from the correspondence and communications which form part of the record of this case, it is clear that what singularly
delayed the opening of the stipulated letter of credit and which, in turn, caused the cancellation of the allocation in Burma, was
the inability of the appellant corporation to meet the condition importation by the Bank for granting the same. We do not think
the appellant corporation can refute the fact that had it been able to put up the 50% marginal cash deposit demanded by the bank,
then the letter of credit would have been approved, opened and released as early as August 4, 1952. The letter of the Philippine
National Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a letter of credit ... has
been approved by the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are to be paid
upon presentment." (Emphasis supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of the bank. Its
culpability arises from its willful and deliberate assumption of contractual obligations even as it was well aware of its financial
incapacity to undertake the prestation. We base this judgment upon the letter which accompanied the application filed by the
appellant with the bank, a part of which letter was quoted earlier in this decision. In the said accompanying correspondence,
appellant admitted and owned that it did "not have sufficient deposit with your institution (the PNB) with which to cover the
amount required to be deposited as a condition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew the bank
requirements for opening letters of credit; second, that appellant also knew it could not meet those requirement. When, therefore,
despite this awareness that was financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of
the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be similarly held to
have bound itself to answer for all and every consequences that would result from the representation. aptly observed by the trial
court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it should have a
certained its ability and capacity to comply with the inevitably requirements in cash to pay for such importation.
Having announced the bid, it must be deemed to have impliedly assured suppliers of its capacity and facility to finance
the importation within the required period, especially since it had imposed the supplier the 90-day period within which
the shipment of the rice must be brought into the Philippines. Having entered in the contract, it should have taken steps
immediately to arrange for the letter of credit for the large amount involved and inquired into the possibility of its
issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 11 of the Civil Code
which provides:
 Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable in damages.

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations a decreed liable; in
general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and damages caused
thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz,
37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme
Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the tenor" of the obligation includes any illicit act
which impairs the strict and faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil
Code of the Philippines, citing authorities, p. 103.)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted
Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract.
We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to
waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case and upon which the lower
court based its award. Under the contract, the NARIC bound itself to buy 20,000 metric tons of Burmese rice at "$203.00 U.S.
Dollars per metric ton, all net shipped weight, and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and
other evidence establish with equal certainty that the plaintiff-appellee was able to secure the contracted commodity at the cost
price of $180.70 per metric ton from her supplier in Burma. Considering freights, insurance and charges incident to its shipment
here and the forfeiture of the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of the
equity of the damages awarded, We reproduce below the testimony of the appellee, adequately supported by the evidence and
record:

Q. Will you please tell the court, how much is the damage you suffered?

A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is $180.00 We had to
pay also $6.25 for shipping and about $164 for insurance. So adding the cost of the rice, the freight, the insurance, the
total would be about $187.99 that would be $15.01 gross profit per metric ton, multiply by 20,000 equals $300,200,
that is my supposed profit if I went through the contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved in the transaction. A precise and
more exact demonstration of the equity of the award herein is provided by Exhibit HH of the plaintiff and Exhibit 34 of the
defendant, hereunder quoted so far as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other communications subsequent
thereto for the opening by your corporation of the required letter of credit, Mrs. Arrieta was supposed to pay her
supplier in Burma at the rate of One Hundred Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton
plus Eight Dollars ($8.00) in the same currency per ton for shipping and other handling expenses, so that she is already
assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency, per ton or a total of Two Hundred
and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized profit damages in the
total sum of $406,000.00 from the failure of the projected contract to materialize. This counterclaim was supported by a cost
study made and submitted by the appellant itself and wherein it was illustrated how indeed had the importation pushed thru,
NARIC would have realized in profit the amount asserted in the counterclaim. And yet, the said amount of P406,000.00 was
realizable by appellant despite a number of expenses which the appellee under the contract, did not have to incur. Thus, under the
cost study submitted by the appellant, banking and unloading charges were to be shouldered by it, including an Import License
Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the disputed
transaction inspite of the extra expenditures from which the herein appellee was exempt, we are convicted of the fairness of the
judgment presently under appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the decision appeal from insofar as
it expresses the amount of damages in U.S. currency and not in Philippine Peso. Republic Act 529 specifically requires the
discharge of obligations only "in any coin or currency which at the time of payment is legal tender for public and private debts."
In view of that law, therefore, the award should be converted into and expressed in Philippine Peso.
This brings us to a consideration of what rate of exchange should apply in the conversion here decreed. Should it be at the time of
the breach, at the time the obligation was incurred or at the rate of exchange prevailing on the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for breach of contract,
even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the
indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of the judgment rather
than at the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can neither be applied nor
extended to the case at bar for the same was laid down when there was no law against stipulating foreign currencies in Philippine
contracts. But now we have Republic Act No. 529 which expressly declares such stipulations as contrary to public policy, void
and of no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R. No.
L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the
same is null and void as contrary to public policy (Republic Act 529), and the most that could be demanded is to pay said
obligation in Philippine currency "to be measured in the prevailing rate of exchange at the time the obligation was incurred (Sec.
1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification that the award should
be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred or on July 1, 1952
when the contract was executed. The appellee insurance company, in the light of this judgment, is relieved of any liability under
this suit. No pronouncement as to costs.

G.R. No. 159617 August 8, 2007

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners,

vs.
LULU V. JORGE and CESAR JORGE, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner Sicam) and Agencia de R.C. Sicam,
Inc. (petitioner corporation) seeking to annul the Decision1 of the Court of Appeals dated March 31, 2003, and its
Resolution2 dated August 8, 2003, in CA G.R. CV No. 56633.

It appears that on different dates from September to October 1987, Lulu V. Jorge (respondent Lulu) pawned several pieces of
jewelry with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF Homes Parañaque, Metro Manila, to secure a loan in the
total amount of P59,500.00.

On October 19, 1987, two armed men entered the pawnshop and took away whatever cash and jewelry were found inside the
pawnshop vault. The incident was entered in the police blotter of the Southern Police District, Parañaque Police Station as
follows:

Investigation shows that at above TDPO, while victims were inside the office, two (2) male unidentified persons
entered into the said office with guns drawn. Suspects(sic) (1) went straight inside and poked his gun toward Romeo
Sicam and thereby tied him with an electric wire while suspects (sic) (2) poked his gun toward Divina Mata and
Isabelita Rodriguez and ordered them to lay (sic) face flat on the floor. Suspects asked forcibly the case and assorted
pawned jewelries items mentioned above.

Suspects after taking the money and jewelries fled on board a Marson Toyota unidentified plate number. 3

Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing her of the loss of her jewelry due to the robbery
incident in the pawnshop. On November 2, 1987, respondent Lulu then wrote a letter4 to petitioner Sicam expressing disbelief
stating that when the robbery happened, all jewelry pawned were deposited with Far East Bank near the pawnshop since it had
been the practice that before they could withdraw, advance notice must be given to the pawnshop so it could withdraw the
jewelry from the bank. Respondent Lulu then requested petitioner Sicam to prepare the pawned jewelry for withdrawal on
November 6, 1987 but petitioner Sicam failed to return the jewelry.
On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a complaint against petitioner Sicam with the
Regional Trial Court of Makati seeking indemnification for the loss of pawned jewelry and payment of actual, moral and
exemplary damages as well as attorney's fees. The case was docketed as Civil Case No. 88-2035.

Petitioner Sicam filed his Answer contending that he is not the real party-in-interest as the pawnshop was incorporated on April
20, 1987 and known as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised due care and diligence in the
safekeeping of the articles pledged with it and could not be made liable for an event that is fortuitous.

Respondents subsequently filed an Amended Complaint to include petitioner corporation.

Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering that he is not the real party-in-
interest. Respondents opposed the same. The RTC denied the motion in an Order dated November 8, 1989. 5

After trial on the merits, the RTC rendered its Decision6 dated January 12, 1993, dismissing respondents’ complaint as well as
petitioners’ counterclaim. The RTC held that petitioner Sicam could not be made personally liable for a claim arising out of a
corporate transaction; that in the Amended Complaint of respondents, they asserted that "plaintiff pawned assorted jewelries in
defendants' pawnshop"; and that as a consequence of the separate juridical personality of a corporation, the corporate debt or
credit is not the debt or credit of a stockholder.

The RTC further ruled that petitioner corporation could not be held liable for the loss of the pawned jewelry since it had not been
rebutted by respondents that the loss of the pledged pieces of jewelry in the possession of the corporation was occasioned by
armed robbery; that robbery is a fortuitous event which exempts the victim from liability for the loss, citing the case of Austria v.
Court of Appeals;7 and that the parties’ transaction was that of a pledgor and pledgee and under Art. 1174 of the Civil Code, the
pawnshop as a pledgee is not responsible for those events which could not be foreseen.

Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the CA reversed the RTC, the
dispositive portion of which reads as follows:

WHEREFORE, premises considered, the instant Appeal is GRANTED, and the Decision dated January 12, 1993,of the
Regional Trial Court of Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering the appellees to pay
appellants the actual value of the lost jewelry amounting to P272,000.00, and attorney' fees of P27,200.00.8

In finding petitioner Sicam liable together with petitioner corporation, the CA applied the doctrine of piercing the veil of
corporate entity reasoning that respondents were misled into thinking that they were dealing with the pawnshop owned by
petitioner Sicam as all the pawnshop tickets issued to them bear the words "Agencia de R.C. Sicam"; and that there was no
indication on the pawnshop tickets that it was the petitioner corporation that owned the pawnshop which explained why
respondents had to amend their complaint impleading petitioner corporation.

The CA further held that the corresponding diligence required of a pawnshop is that it should take steps to secure and protect the
pledged items and should take steps to insure itself against the loss of articles which are entrusted to its custody as it derives
earnings from the pawnshop trade which petitioners failed to do; that Austria is not applicable to this case since the robbery
incident happened in 1961 when the criminality had not as yet reached the levels attained in the present day; that they are at least
guilty of contributory negligence and should be held liable for the loss of jewelries; and that robberies and hold-ups are
foreseeable risks in that those engaged in the pawnshop business are expected to foresee.

The CA concluded that both petitioners should be jointly and severally held liable to respondents for the loss of the pawned
jewelry.

Petitioners’ motion for reconsideration was denied in a Resolution dated August 8, 2003.

Hence, the instant petition for review with the following assignment of errors:

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL, WHEN IT
ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS OWN WITHOUT IN THE MEANTIME
ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS
PALPABLY UNSUSTAINABLE.
 THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL BY THIS
HONORABLE COURT, WHEN IT AGAIN ADOPTED UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING
IT) THE SUBMISSIONS OF THE RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING MORE
THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE
BEEN SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON RECORD.9

Anent the first assigned error, petitioners point out that the CA’s finding that petitioner Sicam is personally liable for the loss of
the pawned jewelries is "a virtual and uncritical reproduction of the arguments set out on pp. 5-6 of the Appellants’ brief."10

Petitioners argue that the reproduced arguments of respondents in their Appellants’ Brief suffer from infirmities, as follows:

(1) Respondents conclusively asserted in paragraph 2 of their Amended Complaint that Agencia de R.C. Sicam, Inc. is
the present owner of Agencia de R.C. Sicam Pawnshop, and therefore, the CA cannot rule against said conclusive
assertion of respondents;

(2) The issue resolved against petitioner Sicam was not among those raised and litigated in the trial court; and

(3) By reason of the above infirmities, it was error for the CA to have pierced the corporate veil since a corporation has
a personality distinct and separate from its individual stockholders or members.

Anent the second error, petitioners point out that the CA finding on their negligence is likewise an unedited reproduction of
respondents’ brief which had the following defects:

(1) There were unrebutted evidence on record that petitioners had observed the diligence required of them, i.e, they
wanted to open a vault with a nearby bank for purposes of safekeeping the pawned articles but was discouraged by the
Central Bank (CB) since CB rules provide that they can only store the pawned articles in a vault inside the pawnshop
premises and no other place;

(2) Petitioners were adjudged negligent as they did not take insurance against the loss of the pledged jelweries, but it is
judicial notice that due to high incidence of crimes, insurance companies refused to cover pawnshops and banks
because of high probability of losses due to robberies;

(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim of robbery was exonerated
from liability for the sum of money belonging to others and lost by him to robbers.

Respondents filed their Comment and petitioners filed their Reply thereto. The parties subsequently submitted their respective
Memoranda.

We find no merit in the petition.

To begin with, although it is true that indeed the CA findings were exact reproductions of the arguments raised in respondents’
(appellants’) brief filed with the CA, we find the same to be not fatally infirmed. Upon examination of the Decision, we find that
it expressed clearly and distinctly the facts and the law on which it is based as required by Section 8, Article VIII of the
Constitution. The discretion to decide a case one way or another is broad enough to justify the adoption of the arguments put
forth by one of the parties, as long as these are legally tenable and supported by law and the facts on records. 11

Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors of law committed by the appellate court.
Generally, the findings of fact of the appellate court are deemed conclusive and we are not duty-bound to analyze and calibrate
all over again the evidence adduced by the parties in the court a quo.12 This rule, however, is not without exceptions, such as
where the factual findings of the Court of Appeals and the trial court are conflicting or contradictory13 as is obtaining in the
instant case.

However, after a careful examination of the records, we find no justification to absolve petitioner Sicam from liability.

The CA correctly pierced the veil of the corporate fiction and adjudged petitioner Sicam liable together with petitioner
corporation. The rule is that the veil of corporate fiction may be pierced when made as a shield to perpetrate fraud and/or confuse
legitimate issues. 14 The theory of corporate entity was not meant to promote unfair objectives or otherwise to shield them.15
Notably, the evidence on record shows that at the time respondent Lulu pawned her jewelry, the pawnshop was owned by
petitioner Sicam himself. As correctly observed by the CA, in all the pawnshop receipts issued to respondent Lulu in September
1987, all bear the words "Agencia de R. C. Sicam," notwithstanding that the pawnshop was allegedly incorporated in April 1987.
The receipts issued after such alleged incorporation were still in the name of "Agencia de R. C. Sicam," thus inevitably
misleading, or at the very least, creating the wrong impression to respondents and the public as well, that the pawnshop was
owned solely by petitioner Sicam and not by a corporation.

Even petitioners’ counsel, Atty. Marcial T. Balgos, in his letter16 dated October 15, 1987 addressed to the Central Bank, expressly
referred to petitioner Sicam as the proprietor of the pawnshop notwithstanding the alleged incorporation in April 1987.

We also find no merit in petitioners' argument that since respondents had alleged in their Amended Complaint that petitioner
corporation is the present owner of the pawnshop, the CA is bound to decide the case on that basis.

Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or written, made by a party in the course of the
proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it was made
through palpable mistake or that no such admission was made.

Thus, the general rule that a judicial admission is conclusive upon the party making it and does not require proof, admits of two
exceptions, to wit: (1) when it is shown that such admission was made through palpable mistake, and (2) when it is shown that no
such admission was in fact made. The latter exception allows one to contradict an admission by denying that he made such
an admission.17

The Committee on the Revision of the Rules of Court explained the second exception in this wise:

x x x if a party invokes an "admission" by an adverse party, but cites the admission "out of context," then the one
making the "admission" may show that he made no "such" admission, or that his admission was taken out of context.

x x x that the party can also show that he made no "such admission", i.e., not in the sense in which the admission
is made to appear.

That is the reason for the modifier "such" because if the rule simply states that the admission may be contradicted by
showing that "no admission was made," the rule would not really be providing for a contradiction of the admission but
just a denial.18 (Emphasis supplied).

While it is true that respondents alleged in their Amended Complaint that petitioner corporation is the present owner of the
pawnshop, they did so only because petitioner Sicam alleged in his Answer to the original complaint filed against him that he was
not the real party-in-interest as the pawnshop was incorporated in April 1987. Moreover, a reading of the Amended Complaint in
its entirety shows that respondents referred to both petitioner Sicam and petitioner corporation where they (respondents) pawned
their assorted pieces of jewelry and ascribed to both the failure to observe due diligence commensurate with the business which
resulted in the loss of their pawned jewelry.

Markedly, respondents, in their Opposition to petitioners’ Motion to Dismiss Amended Complaint, insofar as petitioner Sicam is
concerned, averred as follows:

Roberto C. Sicam was named the defendant in the original complaint because the pawnshop tickets involved in this
case did not show that the R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his Answer, he admitted the
allegations in paragraph 1 and 2 of the Complaint. He merely added "that defendant is not now the real party in interest
in this case."

It was defendant Sicam's omission to correct the pawnshop tickets used in the subject transactions in this case which
was the cause of the instant action. He cannot now ask for the dismissal of the complaint against him simply on the
mere allegation that his pawnshop business is now incorporated. It is a matter of defense, the merit of which can only
be reached after consideration of the evidence to be presented in due course.19

Unmistakably, the alleged admission made in respondents' Amended Complaint was taken "out of context" by petitioner Sicam to
suit his own purpose. Ineluctably, the fact that petitioner Sicam continued to issue pawnshop receipts under his name and not
under the corporation's name militates for the piercing of the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing the veil of corporate fiction of petitioner
corporation, as it was not an issue raised and litigated before the RTC.

Petitioner Sicam had alleged in his Answer filed with the trial court that he was not the real party-in-interest because since April
20, 1987, the pawnshop business initiated by him was incorporated and known as Agencia de R.C. Sicam. In the pre-trial brief
filed by petitioner Sicam, he submitted that as far as he was concerned, the basic issue was whether he is the real party in interest
against whom the complaint should be directed.20 In fact, he subsequently moved for the dismissal of the complaint as to him but
was not favorably acted upon by the trial court. Moreover, the issue was squarely passed upon, although erroneously, by the trial
court in its Decision in this manner:

x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is concerned for the reason that he cannot be
made personally liable for a claim arising from a corporate transaction.

This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The amended complaint itself asserts that
"plaintiff pawned assorted jewelries in defendant's pawnshop." It has been held that " as a consequence of the separate
juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder, nor is the
stockholder's debt or credit that of a corporation.21

Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner Sicam is personally liable is
inextricably connected with the determination of the question whether the doctrine of piercing the corporate veil should or should
not apply to the case.

The next question is whether petitioners are liable for the loss of the pawned articles in their possession.

Petitioners insist that they are not liable since robbery is a fortuitous event and they are not negligent at all.

We are not persuaded.

Article 1174 of the Civil Code provides:

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not
be foreseen or which, though foreseen, were inevitable.

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee the same. 22

To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected occurrence
or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee
the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such
as to render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must be free from any
participation in the aggravation of the injury or loss. 23

The burden of proving that the loss was due to a fortuitous event rests on him who invokes it. 24 And, in order for a fortuitous
event to exempt one from liability, it is necessary that one has committed no negligence or misconduct that may have occasioned
the loss. 25

It has been held that an act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible
adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to
another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not
exempt one from liability. When the effect is found to be partly the result of a person's participation -- whether by active
intervention, neglect or failure to act -- the whole occurrence is humanized and removed from the rules applicable to acts of
God. 26

Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the robbery. He likewise testified
that when he started the pawnshop business in 1983, he thought of opening a vault with the nearby bank for the purpose of
safekeeping the valuables but was discouraged by the Central Bank since pawned articles should only be stored in a vault inside
the pawnshop. The very measures which petitioners had allegedly adopted show that to them the possibility of robbery was not
only foreseeable, but actually foreseen and anticipated. Petitioner Sicam’s testimony, in effect, contradicts petitioners’ defense of
fortuitous event.

Moreover, petitioners failed to show that they were free from any negligence by which the loss of the pawned jewelry may have
been occasioned.

Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of negligence on the part of
herein petitioners. In Co v. Court of Appeals,27 the Court held:

It is not a defense for a repair shop of motor vehicles to escape liability simply because the damage or loss of a thing
lawfully placed in its possession was due to carnapping. Carnapping per se cannot be considered as a fortuitous
event. The fact that a thing was unlawfully and forcefully taken from another's rightful possession, as in cases of
carnapping, does not automatically give rise to a fortuitous event. To be considered as such, carnapping entails
more than the mere forceful taking of another's property. It must be proved and established that the event was
an act of God or was done solely by third parties and that neither the claimant nor the person alleged to be
negligent has any participation. In accordance with the Rules of Evidence, the burden of proving that the loss
was due to a fortuitous event rests on him who invokes it — which in this case is the private
respondent. However, other than the police report of the alleged carnapping incident, no other evidence was presented
by private respondent to the effect that the incident was not due to its fault. A police report of an alleged crime, to
which only private respondent is privy, does not suffice to establish the carnapping. Neither does it prove that there was
no fault on the part of private respondent notwithstanding the parties' agreement at the pre-trial that the car was
carnapped. Carnapping does not foreclose the possibility of fault or negligence on the part of private respondent. 28

Just like in Co, petitioners merely presented the police report of the Parañaque Police Station on the robbery committed based on
the report of petitioners' employees which is not sufficient to establish robbery. Such report also does not prove that petitioners
were not at fault.

On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners are guilty of concurrent or
contributory negligence as provided in Article 1170 of the Civil Code, to wit:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are liable for damages.29

Article 2123 of the Civil Code provides that with regard to pawnshops and other establishments which are engaged in making
loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions on
pledge, mortgage and antichresis.

The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor shall take care of the thing
pledged with the diligence of a good father of a family. This means that petitioners must take care of the pawns the way a prudent
person would as to his own property.

In this connection, Article 1173 of the Civil Code further provides:

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the persons, of time and of the place. When
negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2 shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of
a good father of a family shall be required.

We expounded in Cruz v. Gangan30 that negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do; or the doing of something which a prudent and
reasonable man would not do.31 It is want of care required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were guilty of negligence in the operation of their pawnshop business.
Petitioner Sicam testified, thus:

Court:

Q. Do you have security guards in your pawnshop?

A. Yes, your honor.

Q. Then how come that the robbers were able to enter the premises when according to you there was a security guard?

A. Sir, if these robbers can rob a bank, how much more a pawnshop.

Q. I am asking you how were the robbers able to enter despite the fact that there was a security guard?

A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the afternoon and it happened on a
Saturday and everything was quiet in the area BF Homes Parañaque they pretended to pawn an article in the pawnshop,
so one of my employees allowed him to come in and it was only when it was announced that it was a hold up.

Q. Did you come to know how the vault was opened?

A. When the pawnshop is official (sic) open your honor the pawnshop is partly open. The combination is off.

Q. No one open (sic) the vault for the robbers?

A. No one your honor it was open at the time of the robbery.

Q. It is clear now that at the time of the robbery the vault was open the reason why the robbers were able to get all the
items pawned to you inside the vault.

A. Yes sir.32

revealing that there were no security measures adopted by petitioners in the operation of the pawnshop. Evidently, no sufficient
precaution and vigilance were adopted by petitioners to protect the pawnshop from unlawful intrusion. There was no clear
showing that there was any security guard at all. Or if there was one, that he had sufficient training in securing a pawnshop.
Further, there is no showing that the alleged security guard exercised all that was necessary to prevent any untoward incident or
to ensure that no suspicious individuals were allowed to enter the premises. In fact, it is even doubtful that there was a security
guard, since it is quite impossible that he would not have noticed that the robbers were armed with caliber .45 pistols each, which
were allegedly poked at the employees.33 Significantly, the alleged security guard was not presented at all to corroborate
petitioner Sicam's claim; not one of petitioners' employees who were present during the robbery incident testified in court.

Furthermore, petitioner Sicam's admission that the vault was open at the time of robbery is clearly a proof of petitioners' failure to
observe the care, precaution and vigilance that the circumstances justly demanded. Petitioner Sicam testified that once the
pawnshop was open, the combination was already off. Considering petitioner Sicam's testimony that the robbery took place on a
Saturday afternoon and the area in BF Homes Parañaque at that time was quiet, there was more reason for petitioners to have
exercised reasonable foresight and diligence in protecting the pawned jewelries. Instead of taking the precaution to protect them,
they let open the vault, providing no difficulty for the robbers to cart away the pawned articles.

We, however, do not agree with the CA when it found petitioners negligent for not taking steps to insure themselves against loss
of the pawned jewelries.

Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which took effect on July 13, 1973,
and which was issued pursuant to Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that pawns pledged must
be insured, to wit:
 Sec. 17. Insurance of Office Building and Pawns- The place of business of a pawnshop and the pawns pledged to it
must be insured against fire and against burglary as well as for the latter(sic), by an insurance company accredited by
the Insurance Commissioner.

However, this Section was subsequently amended by CB Circular No. 764 which took effect on October 1, 1980, to wit:

Sec. 17 Insurance of Office Building and Pawns – The office building/premises and pawns of a pawnshop must be
insured against fire. (emphasis supplied).

where the requirement that insurance against burglary was deleted. Obviously, the Central Bank considered it not feasible to
require insurance of pawned articles against burglary.

The robbery in the pawnshop happened in 1987, and considering the above-quoted amendment, there is no statutory duty
imposed on petitioners to insure the pawned jewelry in which case it was error for the CA to consider it as a factor in concluding
that petitioners were negligent.

Nevertheless, the preponderance of evidence shows that petitioners failed to exercise the diligence required of them under the
Civil Code.

The diligence with which the law requires the individual at all times to govern his conduct varies with the nature of the situation
in which he is placed and the importance of the act which he is to perform. 34 Thus, the cases of Austria v. Court of
Appeals,35 Hernandez v. Chairman, Commission on Audit36 and Cruz v. Gangan37 cited by petitioners in their pleadings, where the
victims of robbery were exonerated from liability, find no application to the present case.

In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to be sold on commission basis, but which
Abad failed to subsequently return because of a robbery committed upon her in 1961. The incident became the subject of a
criminal case filed against several persons. Austria filed an action against Abad and her husband (Abads) for recovery of the
pendant or its value, but the Abads set up the defense that the robbery extinguished their obligation. The RTC ruled in favor of
Austria, as the Abads failed to prove robbery; or, if committed, that Maria Abad was guilty of negligence. The CA, however,
reversed the RTC decision holding that the fact of robbery was duly established and declared the Abads not responsible for the
loss of the jewelry on account of a fortuitous event. We held that for the Abads to be relieved from the civil liability of returning
the pendant under Art. 1174 of the Civil Code, it would only be sufficient that the unforeseen event, the robbery, took place
without any concurrent fault on the debtor’s part, and this can be done by preponderance of evidence; that to be free from liability
for reason of fortuitous event, the debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or
negligence.38

We found in Austria that under the circumstances prevailing at the time the Decision was promulgated in 1971, the City of
Manila and its suburbs had a high incidence of crimes against persons and property that rendered travel after nightfall a matter to
be sedulously avoided without suitable precaution and protection; that the conduct of Maria Abad in returning alone to her house
in the evening carrying jewelry of considerable value would have been negligence per se and would not exempt her from
responsibility in the case of robbery. However we did not hold Abad liable for negligence since, the robbery happened ten years
previously; i.e., 1961, when criminality had not reached the level of incidence obtaining in 1971.

In contrast, the robbery in this case took place in 1987 when robbery was already prevalent and petitioners in fact had already
foreseen it as they wanted to deposit the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where no
negligence was committed, we found petitioners negligent in securing their pawnshop as earlier discussed.

In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the Ternate Beach Project of the Philippine
Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to Manila to encash two checks covering the wages of the
employees and the operating expenses of the project. However for some reason, the processing of the check was delayed and was
completed at about 3 p.m. Nevertheless, he decided to encash the check because the project employees would be waiting for their
pay the following day; otherwise, the workers would have to wait until July 5, the earliest time, when the main office would
open. At that time, he had two choices: (1) return to Ternate, Cavite that same afternoon and arrive early evening; or (2) take the
money with him to his house in Marilao, Bulacan, spend the night there, and leave for Ternate the following day. He chose the
second option, thinking it was the safer one. Thus, a little past 3 p.m., he took a passenger jeep bound for Bulacan. While the jeep
was on Epifanio de los Santos Avenue, the jeep was held up and the money kept by Hernandez was taken, and the robbers
jumped out of the jeep and ran. Hernandez chased the robbers and caught up with one robber who was subsequently charged with
robbery and pleaded guilty. The other robber who held the stolen money escaped. The Commission on Audit found Hernandez
negligent because he had not brought the cash proceeds of the checks to his office in Ternate, Cavite for safekeeping, which is the
normal procedure in the handling of funds. We held that Hernandez was not negligent in deciding to encash the check and
bringing it home to Marilao, Bulacan instead of Ternate, Cavite due to the lateness of the hour for the following reasons: (1) he
was moved by unselfish motive for his co-employees to collect their wages and salaries the following day, a Saturday, a non-
working, because to encash the check on July 5, the next working day after July 1, would have caused discomfort to laborers who
were dependent on their wages for sustenance; and (2) that choosing Marilao as a safer destination, being nearer, and in view of
the comparative hazards in the trips to the two places, said decision seemed logical at that time. We further held that the fact that
two robbers attacked him in broad daylight in the jeep while it was on a busy highway and in the presence of other passengers
could not be said to be a result of his imprudence and negligence.

Unlike in Hernandez where the robbery happened in a public utility, the robbery in this case took place in the pawnshop which is
under the control of petitioners. Petitioners had the means to screen the persons who were allowed entrance to the premises and to
protect itself from unlawful intrusion. Petitioners had failed to exercise precautionary measures in ensuring that the robbers were
prevented from entering the pawnshop and for keeping the vault open for the day, which paved the way for the robbers to easily
cart away the pawned articles.

In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education and Skills Development Authority
(TESDA), boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue to Monumento when her handbag was slashed and the
contents were stolen by an unidentified person. Among those stolen were her wallet and the government-issued cellular phone.
She then reported the incident to the police authorities; however, the thief was not located, and the cellphone was not recovered.
She also reported the loss to the Regional Director of TESDA, and she requested that she be freed from accountability for the
cellphone. The Resident Auditor denied her request on the ground that she lacked the diligence required in the custody of
government property and was ordered to pay the purchase value in the total amount of P4,238.00. The COA found no sufficient
justification to grant the request for relief from accountability. We reversed the ruling and found that riding the LRT cannot per
se be denounced as a negligent act more so because Cruz’s mode of transit was influenced by time and money considerations;
that she boarded the LRT to be able to arrive in Caloocan in time for her 3 pm meeting; that any prudent and rational person
under similar circumstance can reasonably be expected to do the same; that possession of a cellphone should not hinder one from
boarding the LRT coach as Cruz did considering that whether she rode a jeep or bus, the risk of theft would have also been
present; that because of her relatively low position and pay, she was not expected to have her own vehicle or to ride a taxicab; she
did not have a government assigned vehicle; that placing the cellphone in a bag away from covetous eyes and holding on to that
bag as she did is ordinarily sufficient care of a cellphone while traveling on board the LRT; that the records did not show any
specific act of negligence on her part and negligence can never be presumed.

Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop and they were negligent in not exercising the
precautions justly demanded of a pawnshop.

WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals dated March 31, 2003 and its Resolution
dated August 8, 2003, are AFFIRMED.

Costs against petitioners.

SO ORDERED.

G.R. Nos. 103442-45 May 21, 1993

NATIONAL POWER CORPORATION, ET AL., petitioners,

vs.
THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents.

The Solicitor General for plaintiff-appellee.

Ponciano G. Hernandez for private respondents.

DAVIDE, JR., J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court urging this Court to set aside the 19
August 1991 consolidated Decision of the Court of Appeals in CA.-G.R. CV Nos. 27290-93 which reversed the Decision of
1

Branch 5 of the then Court of First Instance (now Regional Trial Court) of Bulacan, and held petitioners National Power
Corporation (NPC) and Benjamin Chavez jointly and severally liable to the private respondents for actual and moral damages,
litigation expenses and attorney's fees.

This present controversy traces its beginnings to four (4) separate complaints for damages filed against the NPC and Benjamin
2

Chavez before the trial court. The plaintiffs therein, now private respondents, sought to recover actual and other damages for the
loss of lives and the destruction to property caused by the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978.
The flooding was purportedly caused by the negligent release by the defendants of water through the spillways of the Angat Dam
(Hydroelectric Plant). In said complaints, the plaintiffs alleged, inter alia, that: 1) defendant NPC operated and maintained a
multi-purpose hydroelectric plant in the Angat River at Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez was the
plant supervisor at the time of the incident in question; 3) despite the defendants' knowledge, as early as 24 October 1978, of the
impending entry of typhoon "Kading," they failed to exercise due diligence in monitoring the water level at the dam; 4) when the
said water level went beyond the maximum allowable limit at the height of the typhoon, the defendants suddenly, negligently and
recklessly opened three (3) of the dam's spillways, thereby releasing a large amount of water which inundated the banks of the
Angat River; and 5) as a consequence, members of the household of the plaintiffs, together with their animals, drowned, and their
properties were washed away in the evening of 26 October and the early hours of 27 October 1978. 3

In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised due care, diligence and prudence in the
operation and maintenance of the hydroelectric plant; 2) the NPC exercised the diligence of a good father in the selection of its
employees; 3) written notices were sent to the different municipalities of Bulacan warning the residents therein about the
impending release of a large volume of water with the onset of typhoon "Kading" and advise them to take the necessary
precautions; 4) the water released during the typhoon was needed to prevent the collapse of the dam and avoid greater damage to
people and property; 5) in spite of the precautions undertaken and the diligence exercised, they could still not contain or control
the flood that resulted and; 6) the damages incurred by the private respondents were caused by a fortuitous event or force
majeure and are in the nature and character of damnum absque injuria. By way of special affirmative defense, the defendants
averred that the NPC cannot be sued because it performs a purely governmental function. 4

Upon motion of the defendants, a preliminary hearing on the special defense was conducted. As a result thereof, the trial court
dismissed the complaints as against the NPC on the ground that the provision of its charter allowing it to sue and be sued does not
contemplate actions based on tort. The parties do not, however, dispute the fact that this Court overruled the trial court and
ordered the reinstatement of the complaints as against the NPC. 5

Being closely interrelated, the cases were consolidated and trial thereafter ensued.

The lower court rendered its decision on 30 April 1990 dismissing the complaints "for lack of sufficient and credible
evidence." Consequently, the private respondents seasonably appealed therefrom to the respondent Court which then docketed
6

the cases as CA-G.R. CV Nos. 27290-93.

In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the appealed decision and awarded damages
in favor of the private respondents. The dispositive portion of the decision reads:

CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby REVERSED and SET
ASIDE, and a new one is hereby rendered:

1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and severally, plaintiffs-
appellants, with legal interest from the date when this decision shall become final and executory, the
following:

A. Actual damages, to wit:

1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred Sixty Pesos
(P231,260.00);

2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred Pesos

(P204.500.00);
 3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos (P155,000.00);

4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos (P147,000.00);.

5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred Fifty Two Pesos
and Fifty Centavos (P143,552.50);

6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00);

7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00);

8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and

B. Litigation expenses of Ten Thousand Pesos (P10,000.00);

2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and severally, plaintiff-appellant,
with legal interest from the date when this decision shall have become final and executory, the following :

A. Actual damages of Five Hundred Twenty Thousand Pesos (P520,000.00);.

B. Moral damages of five hundred Thousand Pesos (P500,000.00); and.

C. Litigation expenses of Ten Thousand Pesos (P10,000.00);.

3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and severally, with legal interest
from the date when this decision shall have become final and executory;

A. Plaintiff-appellant Angel C. Torres:

1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty Pesos (P199,120.00);

2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00);

B. Plaintiff-appellant Norberto Torres:

1) Actual damages of Fifty Thousand Pesos (P50,000.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

C. Plaintiff-appellant Rodelio Joaquin:

1) Actual damages of One Hundred Thousand Pesos (P100,000.00);

2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and

D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos (P10,000.00);

4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and severally, with legal interest
from the date when this decision shall have become final and executory :

A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo:

1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred Pesos
(P256,600.00);
 2) Moral damages of Fifty Thousand Pesos (P50,000.00);

B. Plaintiff-appellant Consolacion Guzman :

1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

C. Plaintiff-appellant Virginia Guzman :

1) Actual damages of Two Hundred Five Hundred Twenty Pesos (205,520.00); and

D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos (10,000.00).

In addition, in all the four (4) instant cases, ordering defendants-appellees to pay, jointly and severally,
plaintiffs-appellants attorney fees in an amount equivalent to 15% of the total amount awarded.

No pronouncement as to costs. 7

The foregoing judgment is based on the public respondent's conclusion that the petitioners were guilty of:

. . . a patent gross and evident lack of foresight, imprudence and negligence . . . in the management and
operation of Angat Dam. The unholiness of the hour, the extent of the opening of the spillways, And the
magnitude of the water released, are all but products of defendants-appellees' headlessness, slovenliness, and
carelessness. The resulting flash flood and inundation of even areas (sic) one (1) kilometer away from the
Angat River bank would have been avoided had defendants-appellees prepared the Angat Dam by
maintaining in the first place, a water elevation which would allow room for the expected torrential rains. 8

This conclusion, in turn, is anchored on its findings of fact, to wit:

As early as October 21, 1978, defendants-appellees knew of the impending onslaught of and imminent
danger posed by typhoon "Kading". For as alleged by defendants-appellees themselves, the coming of said
super typhoon was bannered by Bulletin Today, a newspaper of national circulation, on October 25, 1978, as
"Super Howler to hit R.P." The next day, October 26, 1978, said typhoon once again merited a headline in
said newspaper as "Kading's Big Blow expected this afternoon" (Appellee's Brief, p. 6). Apart from the
newspapers, defendants-appellees learned of typhoon "Kading' through radio announcements (Civil Case No.
SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-9).

Defendants-appellees doubly knew that the Angat Dam can safely hold a normal maximum headwater
elevation of 217 meters (Appellee's brief, p. 12; Civil Case No. SM-951, Exhibit "I-6"; Civil Case No. SM-
953, Exhibit "J-6"; Civil Case No. SM-1247, Exhibit "G-6").

Yet, despite such knowledge, defendants-appellees maintained a reservoir water elevation even beyond its
maximum and safe level, thereby giving no sufficient allowance for the reservoir to contain the rain water
that will inevitably be brought by the coming typhoon.

On October 24, 1978, before typhoon "Kading" entered the Philippine area of responsibility, water elevation
ranged from 217.61 to 217.53, with very little opening of the spillways, ranging from 1/2 to 1 meter. On
October 25, 1978, when typhoon "Kading" entered the Philippine area of responsibility, and public storm
signal number one was hoisted over Bulacan at 10:45 a.m., later raised to number two at 4:45 p.m., and then
to number three at 10:45 p.m., water elevation ranged from 217.47 to 217.57, with very little opening of the
spillways, ranging from 1/2 to 1 meter. On October 26, 1978, when public storm signal number three
remained hoisted over Bulacan, the water elevation still remained at its maximum level of 217.00 to 218.00
with very little opening of the spillways ranging from 1/2 to 2 meters, until at or about midnight, the
spillways were suddenly opened at 5 meters, then increasing swiftly to 8, 10, 12, 12.5, 13, 13.5, 14, 14.5 in
the early morning hours of October 27, 1978, releasing water at the rate of 4,500 cubic meters per second,
more or less. On October 27, 1978, water elevation remained at a range of 218.30 to 217.05 (Civil Case No.
 SM-950, Exhibits "D" and series, "L", "M", "N", and "O" and Exhibits "3" and "4"; Civil Case No. SM-951,
Exhibits "H" and "H-1"; Civil Case No. SM-953, Exhibits "I" and "I-1"; Civil Case No. SM 1247, Exhibits
"F" and "F-1").

xxx xxx xxx

From the mass of evidence extant in the record, We are convinced, and so hold that the flash flood on
October 27, 1978, was caused not by rain waters (sic), but by stored waters (sic) suddenly and simultaneously
released from the Angat Dam by defendants-appellees, particularly from midnight of October 26, 1978 up to
the morning hours of October 27,
1978. 9

The appellate court rejected the petitioners' defense that they had sent "early warning written notices" to the towns of Norzagaray,
Angat, Bustos, Plaridel, Baliwag and Calumpit dated 24 October 1978 which read:

TO ALL CONCERN (sic):

Please be informed that at present our reservoir (dam) is full and that we have been releasing water
intermittently for the past several days.

With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume of water, if it pass
(sic) over our place.

In view of this kindly advise people residing along Angat River to keep alert and stay in safe places.

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because:

Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by defendants-appellees driver,
Leonardo Nepomuceno (Civil Case No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-11 and
TSN, Leonardo Nepomuceno, March 7, 1985, pp. 10-12).

Said notice is ineffectual, insufficient and inadequate for purposes of the opening of the spillway gates at
midnight of October 26, 1978 and on October 27, 1978. It did not prepare or warn the persons so served, for
the volume of water to be released, which turned out to be of such magnitude, that residents near or along the
Angat River, even those one (1) kilometer away, should have been advised to evacuate. Said notice,
addressed "TO ALL CONCERN (sic)," was delivered to a policeman (Civil Case No. SM-950, pp. 10-12 and
Exhibit "2-A") for the municipality of Norzagaray. Said notice was not thus addressed and delivered to the
proper and responsible officials who could have disseminated the warning to the residents directly affected.
As for the municipality of Sta. Maria, where plaintiffs-appellants in Civil Case No. SM-1246 reside, said
notice does not appear to have been served. 11

Relying on Juan F. Nakpil & Sons vs. Court of Appeals, public respondent rejected the petitioners' plea that the incident in
12

question was caused by force majeure and that they are, therefore, not liable to the private respondents for any kind of damage —
such damage being in the nature of damnum absque injuria.

The motion for reconsideration filed by the petitioners, as well as the motion to modify judgment filed by the public
respondents, were denied by the public respondent in its Resolution of 27 December 1991.
13 14

Petitioners thus filed the instant petition on 21 February 1992.

After the Comment to the petition was filed by the private respondents and the Reply thereto was filed by the petitioners, We
gave due course to the petition on 17 June 1992 and directed the parties to submit their respective Memoranda, which they
15

subsequently complied with.

The petitioners raised the following errors allegedly committed by the respondent Court :

I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL & SONS V. COURT OF
APPEALS AND HOLDING THAT PETITIONERS WERE GUILTY OF NEGLIGENCE.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN NOTICES OF WARNING
ISSUED BY PETITIONERS WERE INSUFFICIENT.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE SUFFERED BY PRIVATE
RESPONDENTS WAS NOT DAMNUM ABSQUE INJURIA.

IV. THE COURT OF APPEALS ERRED IN NOT AWARDING THE COUNTERCLAIM OF

PETITIONERS FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 16
These same errors were raised by herein petitioners in G.R. No. 96410, entitled National Power Corporation, et al., vs. Court of
Appeals, et al., which this Court decided on 3 July 1992. The said case involved the very same incident subject of the instant
17

petition. In no uncertain terms, We declared therein that the proximate cause of the loss and damage sustained by the plaintiffs
therein — who were similarly situated as the private respondents herein — was the negligence of the petitioners, and that the 24
October 1978 "early warning notice" supposedly sent to the affected municipalities, the same notice involved in the case at bar,
was insufficient. We thus cannot now rule otherwise not only because such a decision binds this Court with respect to the cause
of the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978 which resulted in the loss of lives and the
destruction to property in both cases, but also because of the fact that on the basis of its meticulous analysis and evaluation of the
evidence adduced by the parties in the cases subject of CA-G.R. CV Nos. 27290-93, public respondent found as conclusively
established that indeed, the petitioners were guilty of "patent gross and evident lack of foresight, imprudence and negligence in
the management and operation of Angat Dam," and that "the extent of the opening of the spillways, and the magnitude of the
water released, are all but products of defendants-appellees' headlessness, slovenliness, and carelessness." Its findings and
18

conclusions are biding upon Us, there being no showing of the existence of any of the exceptions to the general rule that findings
of fact of the Court of Appeals are conclusive upon this Court. Elsewise stated, the challenged decision can stand on its own
19

merits independently of Our decision in G.R. No. 96410. In any event, We reiterate here in Our pronouncement in the latter case
that Juan F. Nakpil & Sons vs. Court of Appeals is still good law as far as the concurrent liability of an obligor in the case
20

of force majeure is concerned. In the Nakpil case, We held:

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due
to an "act of God," the following must concur: (a) the cause of the breach of the obligation must be
independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event
must be such as to render it impossible for the debtor to fulfill his obligation in a moral manner; and (d) the
debtor must be free from any participation in, or aggravation of the injury to the creditor. (Vasquez v. Court
of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA
527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud,
negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in
Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned
exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into
the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the
result of the participation of man, whether it be from active intervention or neglect, or failure to act, the
whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God.
(1 Corpus Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss,
such person is not exempt from liability by showing that the immediate cause of the damage was the act of
God. To be exempt from liability for loss because of an act of God, he must be free from any previous
negligence or misconduct by which that loss or damage may have been occasioned. (Fish & Elective Co. v.
Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34
Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). 21

Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to escape liability for the loss or damage
sustained by private respondents since they, the petitioners, were guilty of negligence. The event then was not occasioned
exclusively by an act of God or force majeure; a human factor — negligence or imprudence — had intervened. The effect then of
the force majeure in question may be deemed to have, even if only partly, resulted from the participation of man. Thus, the whole
occurrence was thereby humanized, as it were, and removed from the laws applicable to acts of God.

WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the Consolidated Decision of the Court of
Appeals in CA-G.R. CV Nos. 27290-93 is AFFIRMED, with costs against the petitioners.

SO ORDERED.

G.R. No. 185798 January 13, 2014

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC., Petitioners,
vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.

DECISION

PEREZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules .of Civil Procedure assailing the
Decision of the Court of Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the Office of the President in O.P.
1

Case No. 06-F-216.

As culled from the records, the facts are as follow:

Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-petitioner Fil-Estate
Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and Maria Victoria Ronquillo purchased from
petitioners an 82-square meter condominium unit at Central Park Place Tower in Mandaluyong City for a pre-selling contract
price of FIVE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY (₱5,174,000.00). On 29 August 1997,
respondents executed and signed a Reservation Application Agreement wherein they deposited ₱200,000.00 as reservation fee.
As agreed upon, respondents paid the full downpayment of ₱1,552,200.00 and had been paying the ₱63,363.33 monthly
amortizations until September 1998.

Upon learning that construction works had stopped, respondents likewise stopped paying their monthly amortization. Claiming to
have paid a total of ₱2,198,949.96 to petitioners, respondents through two (2) successive letters, demanded a full refund of their
payment with interest. When their demands went unheeded, respondents were constrained to file a Complaint for Refund and
Damages before the Housing and Land Use Regulatory Board (HLURB). Respondents prayed for reimbursement/refund of
₱2,198,949.96 representing the total amortization payments, ₱200,000.00 as and by way of moral damages, attorney’s fees and
other litigation expenses.

On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their Answer within the
reglementary period despite service of summons. 2

Petitioners filed a motion to lift order of default and attached their position paper attributing the delay in construction to the 1997
Asian financial crisis. Petitioners denied committing fraud or misrepresentation which could entitle respondents to an award of
moral damages.

On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment ordering petitioners to jointly and
severally pay respondents the following amount:

a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND NINE HUNDRED FORTY
NINE PESOS & 96/100 (₱2,198,949.96) with interest thereon at twelve percent (12%) per annum to be computed from
the time of the complainants’ demand for refund on October 08, 1998 until fully paid,

b) ONE HUNDRED THOUSAND PESOS (₱100,000.00) as moral damages,

c) FIFTY THOUSAND PESOS (₱50,000.00) as attorney’s fees,

d) The costs of suit, and

e) An administrative fine of TEN THOUSAND PESOS (₱10,000.00) payable to this Office fifteen (15) days upon
receipt of this decision, for violation of Section 20 in relation to Section 38 of PD 957.
3

The Arbiter considered petitioners’ failure to develop the condominium project as a substantial breach of their obligation which
entitles respondents to seek for rescission with payment of damages. The Arbiter also stated that mere economic hardship is not
an excuse for contractual and legal delay.
Petitioners appealed the Arbiter’s Decision through a petition for review pursuant to Rule XII of the 1996 Rules of Procedure of
HLURB. On 17 February 2005, the Board of Commissioners of the HLURB denied the petition and affirmed the Arbiter’s
4

Decision. The HLURB reiterated that the depreciation of the peso as a result of the Asian financial crisis is not a fortuitous event
which will exempt petitioners from the performance of their contractual obligation.

Petitioners filed a motion for reconsideration but it was denied on 8 May 2006. Thereafter, petitioners filed a Notice of Appeal
5

with the Office of the President. On 18 April 2007, petitioners’ appeal was dismissed by the Office of the President for lack of
6

merit. Petitioners moved for a reconsideration but their motion was denied on 26 July 2007.
7

Petitioners sought relief from the Court of Appeals through a petition for review under Rule 43 containing the same arguments
they raised before the HLURB and the Office of the President:

I.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HONORABLE
HOUSING AND LAND USE REGULATORY BOARD AND ORDERING PETITIONERS-APPELLANTS TO REFUND
RESPONDENTS-APPELLEES THE SUM OF ₱2,198,949.96 WITH 12% INTEREST FROM 8 OCTOBER 1998 UNTIL
FULLY PAID, CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST PETITIONERS-
APPELLANTS.

II.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE OFFICE BELOW
ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-APPELLEES THE SUM OF ₱100,000.00 AS
MORAL DAMAGES AND ₱50,000.00 AS ATTORNEY’S FEES CONSIDERING THE ABSENCE OF ANY FACTUAL OR
LEGAL BASIS THEREFOR.

III.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HOUSING AND
LAND USE REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO PAY ₱10,000.00 AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH FINDING. 8

On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit. The appellate court echoed the HLURB
Arbiter’s ruling that "a buyer for a condominium/subdivision unit/lot unit which has not been developed in accordance with the
approved condominium/subdivision plan within the time limit for complying with said developmental requirement may opt for
reimbursement under Section 20 in relation to Section 23 of Presidential Decree (P.D.) 957 x x x." The appellate court supported
9

the HLURB Arbiter’s conclusion, which was affirmed by the HLURB Board of Commission and the Office of the President, that
petitioners’ failure to develop the condominium project is tantamount to a substantial breach which warrants a refund of the total
amount paid, including interest. The appellate court pointed out that petitioners failed to prove that the Asian financial crisis
constitutes a fortuitous event which could excuse them from the performance of their contractual and statutory obligations. The
appellate court also affirmed the award of moral damages in light of petitioners’ unjustified refusal to satisfy respondents’ claim
and the legality of the administrative fine, as provided in Section 20 of Presidential Decree No. 957.

Petitioners sought reconsideration but it was denied in a Resolution dated 11 December 2008 by the Court of Appeals.
10

Aggrieved, petitioners filed the instant petition advancing substantially the same grounds for review:

A.

THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF THE OFFICE OF
THE PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN FAVOR OF THE RESPONDENTS DESPITE
LACK OF CAUSE OF ACTION.

B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE UNDER THE PREMISES, THE
HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE HUGE AMOUNT OF INTEREST OF TWELVE
PERCENT (12%).

C.

THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF THE
OFFICE OF THE PRESIDENT INCLUDING THE PAYMENT OF ₱100,000.00 AS MORAL DAMAGES, ₱50,000.00 AS
ATTORNEY’S FEES AND ₱10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL
BASIS TO SUPPORT SUCH CONCLUSIONS. 11

Petitioners insist that the complaint states no cause of action because they allegedly have not committed any act of
misrepresentation amounting to bad faith which could entitle respondents to a refund. Petitioners claim that there was a mere
delay in the completion of the project and that they only resorted to "suspension and reformatting as a testament to their
commitment to their buyers." Petitioners attribute the delay to the 1997 Asian financial crisis that befell the real estate industry.
Invoking Article 1174 of the New Civil Code, petitioners maintain that they cannot be held liable for a fortuitous event.

Petitioners contest the payment of a huge amount of interest on account of suspension of development on a project. They liken
their situation to a bank which this Court, in Overseas Bank v. Court of Appeals, adjudged as not liable to pay interest on
12

deposits during the period that its operations are ordered suspended by the Monetary Board of the Central Bank.

Lastly, petitioners aver that they should not be ordered to pay moral damages because they never intended to cause delay, and
again blamed the Asian economic crisis as the direct, proximate and only cause of their failure to complete the project. Petitioners
submit that moral damages should not be awarded unless so stipulated except under the instances enumerated in Article 2208 of
the New Civil Code. Lastly, petitioners refuse to pay the administrative fine because the delay in the project was caused not by
their own deceptive intent to defraud their buyers, but due to unforeseen circumstances beyond their control.

Three issues are presented for our resolution: 1) whether or not the Asian financial crisis constitute a fortuitous event which
would justify delay by petitioners in the performance of their contractual obligation; 2) assuming that petitioners are liable,
whether or not 12% interest was correctly imposed on the judgment award, and 3) whether the award of moral damages,
attorney’s fees and administrative fine was proper.

It is apparent that these issues were repeatedly raised by petitioners in all the legal fora. The rulings were consistent that first, the
Asian financial crisis is not a fortuitous event that would excuse petitioners from performing their contractual obligation; second,
as a result of the breach committed by petitioners, respondents are entitled to rescind the contract and to be refunded the amount
of amortizations paid including interest and damages; and third, petitioners are likewise obligated to pay attorney’s fees and the
administrative fine.

This petition did not present any justification for us to deviate from the rulings of the HLURB, the Office of the President and the
Court of Appeals.

Indeed, the non-performance of petitioners’ obligation entitles respondents to rescission under Article 1191 of the New Civil
Code which states:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with payment of damages in either
case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of condominiums, which provides:

Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision or condominium project for
1âwphi1

the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the
owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or
condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may, at
his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest
thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to rescind the contract and demand reimbursement for the
payments they had made to petitioners.

Notably, the issues had already been settled by the Court in the case of Fil-Estate Properties, Inc. v. Spouses Go promulgated on
13

17 August 2007, where the Court stated that the Asian financial crisis is not an instance of caso fortuito. Bearing the same factual
milieu as the instant case, G.R. No. 165164 involves the same company, Fil-Estate, albeit about a different condominium
property. The company likewise reneged on its obligation to respondents therein by failing to develop the condominium project
despite substantial payment of the contract price. Fil-Estate advanced the same argument that the 1997 Asian financial crisis is a
fortuitous event which justifies the delay of the construction project. First off, the Court classified the issue as a question of fact
which may not be raised in a petition for review considering that there was no variance in the factual findings of the HLURB, the
Office of the President and the Court of Appeals. Second, the Court cited the previous rulings of Asian Construction and
Development Corporation v. Philippine Commercial International Bank and Mondragon Leisure and Resorts Corporation v.
14

Court of Appeals holding that the 1997 Asian financial crisis did not constitute a valid justification to renege on obligations. The
15

Court expounded:

Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the control of a business
corporation. It is unfortunate that petitioner apparently met with considerable difficulty e.g. increase cost of materials and labor,
even before the scheduled commencement of its real estate project as early as 1995. However, a real estate enterprise engaged in
the pre-selling of condominium units is concededly a master in projections on commodities and currency movements and
business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, and
fluctuations in currency exchange rates happen everyday, thus, not an instance of caso fortuito. 16

The aforementioned decision becomes a precedent to future cases in which the facts are substantially the same, as in this case.
The principle of stare decisis, which means adherence to judicial precedents, applies.

In said case, the Court ordered the refund of the total amortizations paid by respondents plus 6% legal interest computed from the
date of demand. The Court also awarded attorney’s fees. We follow that ruling in the case before us.

The resulting modification of the award of legal interest is, also, in line with our recent ruling in Nacar v. Gallery
Frames, embodying the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB Circular No.
17

799 which pegged the interest rate at 6% regardless of the source of obligation.

We likewise affirm the award of attorney’s fees because respondents were forced to litigate for 14 years and incur expenses to
protect their rights and interest by reason of the unjustified act on the part of petitioners. The imposition of ₱10,000.00
18

administrative fine is correct pursuant to Section 38 of Presidential Decree No. 957 which reads:

Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding ten thousand pesos for violations
of the provisions of this Decree or of any rule or regulation thereunder. Fines shall be payable to the Authority and enforceable
through writs of execution in accordance with the provisions of the Rules of Court.

Finally, we sustain the award of moral damages. In order that moral damages may be awarded in breach of contract cases, the
defendant must have acted in bad faith, must be found guilty of gross negligence amounting to bad faith, or must have acted in
wanton disregard of contractual obligations. The Arbiter found petitioners to have acted in bad faith when they breached their
19

contract, when they failed to address respondents’ grievances and when they adamantly refused to refund respondents' payment.

In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision and Resolution.

WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with the MODIFICATION that the
legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the time of respondents' demand for refund on
8 October 1998.

SO ORDERED.

G.R. No. 194121, July 11, 2016

TORRES-MADRID BROKERAGE, INC., Petitioner, v. FEB MITSUI MARINE INSURANCE CO., INC. AND BENJAMIN P. MANALASTAS, DOING
BUSINESS UNDER THE NAME OF BMT TRUCKING SERVICES, Respondents.
 DECISION

BRION, J.:

We resolve the petition for review on certiorari challenging the Court of Appeals' (CA) October 14, 2010 decision in CA-G.R. CV No. 91829. 1 chanrobleslaw

The CA affirmed the Regional Trial Court's (RTC) decision in Civil Case No. 01-1596, and found petitioner Torres-Madrid Brokerage, Inc. (TMBI) and respondent
Benjamin P. Manalastas jointly and solidarily liable to respondent FEB Mitsui Marine Insurance Co., Inc. (Mitsui) for damages from the loss of transported cargo.

Antecedents

On October 7, 2000, a shipment of various electronic goods from Thailand and Malaysia arrived at the Port of Manila for Sony Philippines, Inc. (Sony). Previous to
the arrival, Sony had engaged the services of TMBI to facilitate, process, withdraw, and deliver the shipment from the port to its warehouse in Binan, Laguna. 2 chanrobleslaw

TMBI - who did not own any delivery trucks - subcontracted the services of Benjamin Manalastas' company, BMT Trucking Services (BMT), to transport the
shipment from the port to the Binan warehouse. 3 Incidentally, TMBI notified Sony who had no objections to the arrangement. 4 chanrobleslaw

Four BMT trucks picked up the shipment from the port at about 11:00 a.m. of October 7, 2000. However, BMT could not immediately undertake the delivery because
of the truck ban and because the following day was a Sunday. Thus, BMT scheduled the delivery on October 9, 2000.

In the early morning of October 9, 2000, the four trucks left BMT's garage for Laguna. 5 However, only three trucks arrived at Sony's Binan warehouse.

At around 12:00 noon, the truck driven by Rufo Reynaldo Lapesura (NSF-391) was found abandoned along the Diversion Road in Filinvest, Alabang, Muntinlupa
City.6 Both the driver and the shipment were missing.

Later that evening, BMT's Operations Manager Melchor Manalastas informed Victor Torres, TMBI's General Manager, of the development.7 They went to
Muntinlupa together to inspect the truck and to report the matter to the police. 8 chanrobleslaw

Victor Torres also filed a complaint with the National Bureau of Investigation (NBI) against Lapesura for "hijacking." 9 The complaint resulted in a recommendation
by the NBI to the Manila City Prosecutor's Office to prosecute Lapesura for qualified theft. 10 chanrobleslaw

TMBI notified Sony of the loss through a letter dated October 10, 2000, 11 It also sent BMT a letter dated March 29, 2001, demanding payment for the lost shipment.
BMT refused to pay, insisting that the goods were "hijacked."

In the meantime, Sony filed an insurance claim with the Mitsui, the insurer of the goods. After evaluating the merits of the claim, Mitsui paid
Sony PHP7,293,386.23 corresponding to the value of the lost goods. 12 chanrobleslaw

After being subrogated to Sony's rights, Mitsui sent TMBI a demand letter dated August 30, 2001 for payment of the lost goods. TMBI refused to pay Mitsui's claim.
As a result, Mitsui filed a complaint against TMBI on November 6, 2001,

TMBI, in turn, impleaded Benjamin Manalastas, the proprietor of BMT, as a third-party defendant. TMBI alleged that BMT's driver, Lapesura, was responsible for the
theft/hijacking of the lost cargo and claimed BMT's negligence as the proximate cause of the loss. TMBI prayed that in the event it is held liable to Mitsui for the loss,
it should be reimbursed by BMT,

At the trial, it was revealed that BMT and TMBI have been doing business with each other since the early 80's. It also came out that there had been a previous
hijacking incident involving Sony's cargo in 1997, but neither Sony nor its insurer filed a complaint against BMT or TMBI. 13 chanrobleslaw

On August 5, 2008, the RTC found TMBI and Benjamin Manalastas jointly and solidarity liable to pay Mitsui PHP 7,293,386.23 as actual damages, attorney's fees
equivalent to 25% of the amount claimed, and the costs of the suit. 14 The RTC held that TMBI and Manalastas were common carriers and had acted negligently.

Both TMBI and BMT appealed the RTC's verdict.

TMBI denied that it was a common carrier required to exercise extraordinary diligence. It maintains that it exercised the diligence of a good father of a family and
should be absolved of liability because the truck was "hijacked" and this was a fortuitous event.

BMT claimed that it had exercised extraordinary diligence over the lost shipment, and argued as well that the loss resulted from a fortuitous event.

On October 14, 2010, the CA affirmed the RTC's decision but reduced the award of attorney's fees to PHP 200,000.

The CA held: (1) that "hijacking" is not necessarily a fortuitous event because the term refers to the general stealing of cargo during transit; 15 (2) that TMBI is a
common carrier engaged in the business of transporting goods for the general public for a fee; 16 (3) even if the "hijacking" were a fortuitous event, TMBI's failure to
observe extraordinary diligence in overseeing the cargo and adopting security measures rendered it liable for the loss; 17 and (4) even if TMBI had not been negligent
in the handling, transport and the delivery of the shipment, TMBI still breached its contractual obligation to Sony when it failed to deliver the shipment.18 chanrobleslaw

TMBI disagreed with the CA's ruling and filed the present petition on December 3, 2010.

The Arguments

TMBI's Petition

TMBI insists that the hijacking of the truck was a fortuitous event. It contests the CA's finding that neither force nor intimidation was used in the taking of the cargo.
Considering Lapesura was never found, the Court should not discount the possibility that he was a victim rather than a perpetrator.19 chanrobleslaw

TMBI denies being a common carrier because it does not own a single truck to transport its shipment and it does not offer transport services to the public for
compensation.20 It emphasizes that Sony knew TMBI did not have its own vehicles and would subcontract the delivery to a third-party.

Further, TMBI now insists that the service it offered was limited to the processing of paperwork attendant to the entry of Sony's goods. It denies that delivery of the
shipment was a part of its obligation.21
chanrobleslaw
TMBI solely blames BMT as it had full control and custody of the cargo when it was lost.22 BMT, as a common carrier, is presumed negligent and should be
responsible for the loss.

BhtT's Comment

BMT insists that it observed the required standard of care. 23 Like the petitioner, BMT maintains that the hijacking was a fortuitous event - a force majeure - that
exonerates it from liability.24 It points out that Lapesura has never been seen again and his fate remains a mystery. BMT likewise argues that the loss of the cargo
necessarily showed that the taking was with the use of force or intimidation.25 cralawredchanrobleslaw

If there was any attendant negligence, BMT points the finger on TMBI who failed to send a representative to accompany the shipment.26 BMT further blamed TMBI
for the latter's failure to adopt security measures to protect Sony's cargo.27 chanrobleslaw

Mitsui's Comment

Mitsui counters that neither TMBI nor BMT alleged or proved during the trial that the taking of the cargo was accompanied with grave or irresistible threat, violence,
or force.28 Hence, the incident cannot be considered "force majeure" and TMBI remains liable for breach of contract.

Mitsui emphasizes that TMBI's theory - that force or intimidation must have been used because Lapesura was never found - was only raised for the first time before
this Court.29 It also discredits the theory as a mere conjecture for lack of supporting evidence.

Mitsui adopts the CA's reasons to conclude that TMBI is a common carrier. It also points out Victor Torres' admission during the trial that TMBI's brokerage service
includes the eventual delivery of the cargo to the consignee. 30 chanrobleslaw

Mitsui invokes as well the legal presumption of negligence against TMBI, pointing out that TMBI simply entrusted the cargo to BMT without adopting any security
measures despite: (1) a previous hijacking incident, when TMBI lost Sony's cargo; and (2) TMBI's knowledge that the cargo was worth more than 10 million
pesos.31 chanrobleslaw

Mitsui affirms that TMBI breached the contract of carriage through its negligent handling of the cargo, resulting in its loss.

The Court's Ruling

A brokerage may be considered a common

carrier if it also undertakes to deliver the
goods for its customers

Common carriers are persons, corporations, firms or associations engaged in the business of transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public. 32 By the nature of their business and for reasons of public policy, they are bound to observe extraordinary diligence
in the vigilance over the goods and in the safety of their passengers. 33 chanrobleslaw

34
In A.F. Sanchez Brokerage Inc. v. Court of Appeals, we held that a customs broker - whose principal business is the preparation of the correct customs declaration
and the proper shipping documents - is still considered a common carrier if it also undertakes to deliver the goods for its customers. The law does not distinguish
between one whose principal business activity is the carrying of goods and one who undertakes this task only as an ancillary activity.35 This ruling has been reiterated
in Schmitz Transport &Brokerage Corp. v. Transport Venture, Inc.,36 Loadmasters Customs Services, Inc. v. Glodel Brokerage Corporation, 37 and Wesrwind
Shipping Corporation v. UCPB General Insurance Co., Inc.38 chanrobleslaw

Despite TMBI's present denials, we find that the delivery of the goods is an integral, albeit ancillary, part of its brokerage services. TMBI admitted that it was
contracted to facilitate, process, and clear the shipments from the customs authorities, withdraw them from the pier, then transport and deliver them to Sony's
warehouse in Laguna.39 chanrobleslaw

Further, TMBI's General Manager Victor Torres described the nature of its services as follows:
chanRoblesvirtualLawlibrary

ATTY. VIRTUDAZO: Could you please tell the court what is the nature of the business of [TMBI]?

Witness MR. Victor Torres of Torres Madrid: We are engaged in customs brokerage business. We acquire the release documents from the Bureau of Customs
and eventually deliver the cargoes to the consignee's warehouse and we are engaged in that kind of business, sir. 40

That TMBI does not own trucks and has to subcontract the delivery of its clients' goods, is immaterial. As long as an entity holds itself to the public for the transport
of goods as a business, it is considered a common carrier regardless of whether it owns the vehicle used or has to actually hire one.41 chanrobleslaw

Lastly, TMBI's customs brokerage services - including the transport/delivery of the cargo - are available to anyone willing to pay its fees. Given these circumstances,
we find it undeniable that TMBI is a common carrier.

Consequently, TMBI should be held responsible for the loss, destruction, or deterioration of the goods it transports unless it results from:
chanRoblesvirtualLawlibrary

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act of omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority. 42 chanroblesvirtuallawlibrary

For all other cases - such as theft or robbery - a common carrier is presumed to have been at fault or to have acted negligently, unless it can prove that it
observed extraordinary diligence.43 chanrobleslaw

Simply put, the theft or the robbery of the goods is not considered a fortuitous event or a force majeure. Nevertheless, a common carrier may absolve itself of liability
for a resulting loss: (1) if it proves that it exercised extraordinary diligence in transporting and safekeeping the goods;44 or (2) if it stipulated with the shipper/owner of
the goods to limit its liability for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence. 45
chanrobleslaw

However, a stipulation diminishing or dispensing with the common carrier's liability for acts committed by thieves or robbers who do not act with grave or irresistible
threat, violence, or force is void under Article 1745 of the Civil Code for being contrary to public policy. 46Jurisprudence, too, has expanded Article 1734's five
exemptions. De Guzman v. Court of Appeals47 interpreted Article 1745 to mean that a robbery attended by "grave or irresistible threat, violence or force" is a
fortuitous event that absolves the common carrier from liability.

In the present case, the shipper, Sony, engaged the services of TMBI, a common carrier, to facilitate the release of its shipment and deliver the goods to its warehouse.
In turn, TMBI subcontracted a portion of its obligation - the delivery of the cargo - to another common carrier, BMT.

Despite the subcontract, TMBI remained responsible for the cargo. Under Article 1736, a common carrier's extraordinary responsibility over the shipper's goods lasts
from the time these goods are unconditionally placed in the possession of, and received by, the carrier for transportation, until they are delivered, actually or
constructively, by the carrier to the consignee. 48 chanrobleslaw

That the cargo disappeared during transit while under the custody of BMT - TMBI's subcontractor - did not diminish nor terminate TMBFs responsibility over the
cargo. Article 1735 of the Civil Code presumes that it was at fault.

Instead of showing that it had acted with extraordinary diligence, TMBI simply argued that it was not a common carrier bound to observe extraordinary diligence. Its
failure to successfully establish this premise carries with it the presumption of fault or negligence, thus rendering it liable to Sony/Mitsui for breach of contract.

Specifically, TMBI's current theory - that the hijacking was attended by force or intimidation - is untenable.

First, TMBI alleged in its Third Party Complaint against BMT that Lapesura was responsible for hijacking the shipment. 49 Further, Victor Torres filed a criminal
complaint against Lapesura with the NBI.50 These actions constitute direct and binding admissions that Lapesura stole the cargo. Justice and fair play dictate that
TMBI should not be allowed to change its legal theory on appeal.

Second, neither TMBI nor BMT succeeded in substantiating this theory through evidence. Thus, the theory remained an unsupported allegation no better than
speculations and conjectures. The CA therefore correctly disregarded the defense of force majeure.

TMBI and BMT are not solidarity liable

to Mitsui

We disagree with the lower courts" ruling that TMBI and BMT are solidarity liable to Mitsui for the loss as joint tortfeasors. The ruling was based on Article 2194 of
the Civil Code:
chanRoblesvirtualLawlibrary

Art. 2194. The responsibility of two or more persons who are liable for quasi-delict is solidary.

Notably, TMBI's liability to Mitsui does not stem from a quasi-delict (culpa aquiliana) but from its breach of contract (culpa contractual). The tie that binds TMBI
with Mitsui is contractual, albeit one that passed on to Mitsui as a result of TMBI's contract of carriage with Sony to which Mitsui had been subrogated as an insurer
who had paid Sony's insurance claim. The legal reality that results from this contractual tie precludes the application of quasi-delict based Article 2194.

A third party may recover from a

common carrier for quasi-delict
but must prove actual n egligence

We likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the loss of the cargo. While it is undisputed that the cargo was lost under the
actual custody of BMT (whose employee is the primary suspect in the hijacking or robbery of the shipment), no direct contractual relationship existed between
Sony/Mitsui and BMT. If at all, Sony/Mitsui's cause of action against BMT could only arise from quasi-delict, as a third party suffering damage from the action of
another due to the latter's fault or negligence, pursuant to Article 2176 of the Civil Code. 51 chanrobleslaw

We have repeatedly distinguished between an action for breach of contract {culpa contractual) and an action for quasi-delict (culpa aquiliana).

In culpa contractual, the plaintiff only needs to establish the existence of the contract and the obligor's failure to perform his obligation. It is not necessary for the
plaintiff to prove or even allege that the obligor's non- compliance was due to fault or negligence because Article 1735 already presumes that the common carrier is
negligent. The common carrier can only free itself from liability by proving that it observed extraordinary diligence. It cannot discharge this liability by shifting the
blame on its agents or servants.52chanrobleslaw

On the other hand, the plaintiff in culpa aquiliana must clearly establish the defendant's fault or negligence because this is the very basis of the action. 53 Moreover, if
the injury to the plaintiff resulted from the act or omission of the defendant's employee or servant, the defendant may absolve himself by proving that he observed the
diligence of a good father of a family to prevent the damage, 54 chanrobleslaw

In the present case, Mitsui's action is solely premised on TMBl's breach of contract. Mitsui did not even sue BMT, much less prove any negligence on its part. If BMT
has entered the picture at all, it 'is because TMBI sued it for reimbursement for the liability that TMBI might incur from its contract of carriage with Sony/Mitsui.
Accordingly, there is no basis to directly hold BMT liable to Mitsui for quasi-delict.

BMT is liable to TMBI for breach

of their contract of carriage

We do not hereby say that TMBI must absorb the loss. By subcontracting the cargo delivery to BMT, TMBI entered into its own contract of carriage with a fellow
common carrier.

The cargo was lost after its transfer to BMT's custody based on its contract of carriage with TMBI. Following Article 1735, BMT is presumed to be at fault. Since
BMT failed to prove that it observed extraordinary diligence in the performance of its obligation to TMBI, it is liable to TMBI for breach of their contract of carriage.

In these lights, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract of carriage. In turn, TMBI is entitled to reimbursement from BMT due to the
latter's own breach of its contract of carriage with TMBI. The proverbial buck stops with BMT who may either: (a) absorb the loss, or (b) proceed after its missing
driver, the suspected culprit, pursuant to Article 2181,55 chanrobleslaw

WHEREFORE, the Court hereby ORDERS petitioner Torres- Madrid Brokerage, Inc. to pay the respondent FEB Mitsui Marine Insurance Co., Inc. the following:
chanRoblesvirtualLawlibrary

a. Actual damages in the amount of PHP 7,293,386.23 plus legal interest from the time the complaint was filed until it is fully paid;

b. Attorney's fees in the amount of PHP 200,000.00; and cralawlawlibrary

c. Costs of suit.

Respondent Benjamin P. Manalastas is in turn ORDERED to REIMBURSE Torres-Madrid Brokerage, Inc. of the above-mentioned amounts.

SO ORDERED

SECOND DIVISION

G.R. No. 209969, September 27, 2017

JOSE SANICO AND VICENTE CASTRO, Petitioners, v. WERHERLINA P. COLIPANO, Respondent.

DECISION

CAGUIOA, J.:

Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by petitioners Jose Sanico (Sanico) and Vicente Castro (Castro),
assailing the Decision2 dated September 30, 2013 of the Court of Appeals (CA) in CA-G.R. CEB-CV No. 01889. The CA affirmed with modification the
Decision3 dated October 27, 2006 of the Regional Trial Court, Branch 25, Danao City (RTC) which found Sanico and Castro liable for breach of' contract of carriage
and awarded actual and compensatory damages for loss of income in favor of respondent Werherlina P. Colipano (Colipano). The CA reduced the compensatory
damages that the RTC awarded.

Antecedents

Colipano filed a complaint on January 7, 1997 for breach of contract of carriage and damages against Sanico and Castro.4 In her complaint, Colipano claimed that at
4:00 P.M. more or less of December 25, 1993, Christmas Day, she and her daughter were; paying passengers in the jeepney operated by Sanico, which was driven by
Castro.5 Colipano claimed she was made to sit on an empty beer case at the edge of the rear entrance/exit of the jeepney with her sleeping child on her lap. 6 And, at an
uphill incline in the road to Natimao-an, Carmen, Cebu, the jeepney slid backwards because it did not have the power to reach the top.7 Colipano pushed both her feet
against the step board to prevent herself and her child from being thrown out of the exit, but because the step board was wet, her left foot slipped and got crushed
between the step board and a coconut tree which the jeepney bumped, causing the jeepney to stop its backward movement. 8 Colipano's leg was badly injured and was
eventually amputated.9 Colipano prayed for actual damages, loss of income, moral damages, exemplary damages, and attorney's fees. 10

In their answer, Sanico and Castro admitted that Colipano's leg was crushed and amputated but claimed that it! was Colipano's fault that her leg was crushed.11 They
admitted that the jeepney slid backwards because the jeepney lost power. 12 The conductor then instructed everyone not to panic but Colipano tried to disembark and
her foot got caught in between the step board and the coconut tree. 13 Sanico claimed that he paid for all the hospital and medical expenses of Colipano, 14 and that
Colipano eventually freely and voluntarily executed an Affidavit of Desistance and Release of Claim. 15

After trial, the RTC found that Sanico and Castro breached the contract of carriage between them and Colipano but only awarded actual and compensatory damages in
favor of Colipano. The dispositive portion of the RTC Decision states:
WHEREFORE, premises considered, this Court finds the defendants LIABLE for breach of contract of carriage and are solidarily liable to pay plaintiff:

1. Actual damages in the amount of P2,098.80; and

2. Compensatory damages for loss of income in the amount of P360,000.00.

No costs.

SO ORDERED.16
Only Sanico and Castro appealed to the CA, which affirmed with modification the RTC Decision. The dispositive portion of the CA Decision states:
IN LIGHT OF ALL THE FOREGOING, the instant appeal is PARTIALLY GRANTED. The Decision dated October 27, 2006 of the Regional Trial Court, Branch
25, Danao City, in Civil Case No. DNA-418, is AFFIRMED with MODIFICATION in that the award for compensatory damages for loss of income in paragraph 2 of
the dispositive portion of the RTC's decision, is reduced to P200,000.00.

SO ORDERED.17
Without moving for the reconsideration of the CA Decision, Sanico and Castro filed this petition before the Court assailing the CA Decision.
Issues

a. Whether the CA erred in finding that Sanico and Castro breached the contract of carriage with Colipano;

b. Whether the Affidavit of Desistance and Release of Claim is binding on Colipano; and

c. Whether the CA erred in the amount of damages awarded.

 The Court's Ruling

The Court partly grants the petition.

Only Sanico breached the contract of carriage.

Here, it is beyond dispute that Colipano was injured while she was a passenger in the jeepney owned and operated by Sanico that was being driven by Castro.
Both the CA and RTC found Sanico and Castro jointly and severally liable. This, however, is erroneous because only Sanico was the party to the contract of
carriage with Colipano.

Since the cause of action is based on a breach of a contract of carriage, the liability of Sanico is direct as the contract is between him and Colipano. Castro, being
merely the driver of Sanico's jeepney, cannot be made liable as he is not a party to the contract of carriage.

In Soberano v. Manila Railroad Co.,18 the Court ruled that a complaint for breach of a contract of carriage is dismissible as against the employee who was driving
the bus because the parties to the contract of carriage are only the passenger, the bus owner, and the operator, viz.:
The complaint against Caccam was therefore properly dismissed. He was not a party to the contract; he was a mere employee of the BAL. The parties to that
contract are Juana Soberano, the passenger, and the MRR and its subsidiary, the BAL, the bus owner and operator, respectively; and consequent to the inability
of the defendant companies to carry Juana Soberano and her baggage arid personal effects securely and safely to her destination as imposed by law (art. 1733, in
relation to arts. 1736 and 1755, N.C.C.), their liability to her becomes direct and immediate.19
Since Castro was not a party to the contract of carriage, Colipano had no cause of action against him and the pomplaint against him should be dismissed.
Although he was driving the jeepney, he was a mere employee of Sanico, who was the operator and owner of the jeepney. The obligation to carry Colipano safely
to her destination was with Sanico. In fact, the elements of a contract of carriage existeid between Colipano and Sanico: consent, as shown when Castro, as
employee of Sanico, accepted Colipano as a passenger when he allowed Colipano to board the jeepney, and as to Colipano, when she boarded the jeepney; cause
or consideration, when Colipano, for her part, paid her fare; and, object, the transportation of Colipano from the place of departure to the place of destination.20

Having established that the contract of carriage was only between Sanico and Colipano and that therefore Colipano had no cause of action against Castro, the
Court next determines whether Sanico breached his obligations to Colipano under the contract.

Sanico is liable as operator and owner of a common carrier.

Specific to a contract of carriage, ithe Civil Code requires common carriers to observe extraordinary diligence in safely transporting their passengers. Article 1733
of the Civil Code states:
ART. 1733. Common carriers, fijpm the nature of their business and for reasons of public policy, are bbund to observe extraordinary diligence in the vigilance
over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case.

Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734, 1735 and 1745, Nos. 5, 6, and 7, while the extraordinary
diligence for the safety of the passengers is further set forth in Articles 1755 and 1756.
This extraordinary diligence, following Article 1755 of the Civil Code, means that common carriers have the obligation to carry passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious persons, with due regard for all the circumstances.

In case of death of or injury to their passengers, Article 1756 of the Civil Code provides that common carriers are presumed to have been at fault or negligent, and
this presumption can be overcome only by proof of the extraordinary diligence exercised to ensure the safety of the passengers.21

Being an operator and owner of a common carrier, Sanico was required to observe extraordinary diligence in safely transporting Colipano. When Colipano's leg
was injured while she was a passenger in Sanico's jeepney, the presumption of fault or negligence on Sanico's part arose and he had the burden to prove that he
exercised the extraordinary diligence required of him. He failed to do this.

In Calalas v. Court of Appeals,22 the Court found that allowing the respondent in that case to be seated in an extension seat, which was a wooden stool at the rear
of the jeepney, "placed [the respondent] in a peril greater than that to which the other passengers were exposed."23The Court further ruled that the petitioner
in Calalas was not only "unable to overcome the presumption of negligence imposed on him for the injury sustained by [the respondent], but also, the evidence
shows he was actually negligent in transporting passengers."24

Calalas squarely applies here. Sanico failed to rebut the presumption of fault or negligence under the Civil Code. More than this, the evidence indubitably
established Sanico's negligence when Castro made Colipano sit on an empty beer case at the edge of the rear entrance/exit of the jeepney with her sleeping child
on her lap, which put her and her child in greater peril than the other passengers. As the CA correctly held:
For the driver, Vicente Castro, to allow a seat extension made of an empty case of beer clearly indicates lack of prudence. Permitting Werherlina to occupy an
improvised seat in the rear portion of the jeepney, with a child on her lap to boot, exposed her and her child in a peril greater than that to which the other
passengers were exposed. The use of an improvised seat extension is undeniable, in view of the testimony of plaintiffs witness, which is consistent with
Werherlina's testimonial assertion. Werherlina and her witness's testimony were accorded belief by the RTC. Factual findings of the trial court are entitled to
great weight on appeal and should not be disturbed except for strong and valid reasons, because the trial court ip in a better position to examine the demeanor of
the witnesses while testifying.25
The CA also correctly held that the!defense of engine failure, instead of exonerating Sanico, only aggravated his already precarious position.26 The engine failure
"hinted lack of regular check and maintenance to ensure that the engine is at its best, considering that the jeepney regularly passes through a mountainous
area."27 This failure to ensure that the jeepney can safely transport passengers through its route which required navigation through a mountainous area is proof
of fault on Sanico's part. In the face of such evidence, there is no question as to Sanico's fault or negligence.

Further, common carriers may also be liable for damages when they contravene the tenor of their obligations. Article 1170 of the Civil Code states:
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.
In Magat v. Medialdea,28 the Court ruled: "The phrase 'in any manner contravene the tenor' of the obligation includes any illicit act or omission which impairs
the strict and faithful fulfillment of the obligation and every kind of defective performance." 29 There is no question here that making Colipano sit on the empty
beer case was a clear showing of how Sanico contravened the tenor of his obligation to safely transport Colipano from the place of departure to the place of
destination as far as human care and foresight can provide, using the utmost diligence of very cautious persons, and with due regard for all the circumstances.

Sanico's attempt to evade liability by arguing that he exercised extraordinary diligence when he hired; Castro, who was allegedly an experienced and time-tested
driver, whom he had even accompanied on a test-drive and in whom he was personally convinced of the driving skills, 30are not enough to exonerate him from
liability - because the liability of common carriers does not cease upon p!roof that they exercised all the diligence of a good father of a family irii the selection.
and supervision of their employees. This is the express mandate of Article 1759 of the Civil Code:
ART. 1759. Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former's employees, although such
employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers.
This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of
their employees.
The only defenses available to common carriers are (1) proof that they observed extraordinary diligence as prescribed in Article 1756, 31 and (2) following Article
1174 of the Civil Code, proof that the injury or death was brought about by an event which "could not be foreseen, or which, though foreseen, were inevitable,"
or a fortuitous event.

The Court finds that neither of these defenses obtain. Thus, Sanico is liable for damages to Colipano because of the injury that Colipano suffered as a passenger
of Sanico's jeepney.

The Affidavit of Desistance and Release of Claim is void.

Sanico cannot be exonerated from liability under the Affidavit of Desistance and Release of Claim 32and his payment of the hospital and medical bills of Colipano
amounting to P44,900.00.33

The RTC ruled that "the Affidavit of Desistance and Release of Claim is not binding on plaintiff [Colipano] in the absence of proof that the contents thereof were
sufficiently translated and explained to her."34 The CA affirmed the findings of the RTC and ruled that the document was not binding on Colipano, as follows:
Finally, We sustain the RTC's finding that the affidavit of desistance and release of claim, offered by defendants-appellants, are not binding on Werherlina,
quoting with approval its reflection on the matter, saying:
xxx this Court finds that the Affidavit of Desistance and Release of Claim is not binding on plaintiff in the absence of proof that the contents thereof were
sufficiently explained to her. It is clear from the plaintiffs circumstances that she is not able to understand English, more so stipulations stated in the said
Affidavit and Release. It is understandable that in her pressing need, the plaintiff may have been easily convinced to sign the document with the promise that she
will be compensated for her injuries.35
The Court finds no reason to depart from these findings of the CA and the RTC.

For there to be a valid waiver, the following requisites are essential:

(1) that the person making the waiver possesses the right, (2) that he has the capacity and power to dispose of the right, (3) that the waiver must be clear and
unequivocal although it may be made expressly or impliedly, and (4) that the waiver is not contrary to law, public policy, public order, morals, good customs or
prejudicial to a third person with a right recognized by law. 36
While the first two requirements can be said to exist in this case, the third and fourth requirements are, however, lacking.

For the waiver to be clear and unequivocal, the person waiving the right should understand what she is waiving and the effect of such waiver. Both the CA and
RTC made the factual deitermination that Colipano was not able to understand English and that there was no proof that the documents and their contents and
effects were explained to her. These findings of the RTC, affirmed by the CA, are entitled to great weight and respect. 37 As this Court held in Philippine National
Railways Corp. v. Vizcara38:
It is a well-established rule that factual fill dings by the CA are conclusive on the parties and are not reviewable byj this Court. They are entitled to great weight
and respect, even finality, especially when, as in this case, the CA affirmed the factual findings arrived at by the trial court.39
Although there are exceptions to this rule, 40 the exceptions are absent here.

Colipano could not have clearly and unequivocally waived her right to claim damages when she had no understanding of the right she was waiving and the extent
of that right. Worse, she was made to sign a document written in a language she did not understand.

The fourth requirement for a valid waiver is also lacking as the waiver, based on the attendant facts, can only be construed as contrary to public policy. The
doctrine in Gatchalian v. Delim,41which the CA correctly cited,42 is applicable here:
Finally, because what is involved here is the liability of a common carrier for injuries sustained by passengers in respect of whose safety a common carrier must
exercise extraordinary diligence, we must construe any such purported waiver most strictly against the common carrier. For a waiver to be valid and effective, it
must not be contrary to law, morals, public policy or good customs. To uphold a supposed waiver of any right to claim damages by an injured passenger, under
circumstances like those exhibited in this case, would be to dilute and weaken the standard of extraordinary diligence exacted by the law from common carriers
and hence to render that standard unenforceable. We believe such a purported waiver is offensive to public policy. 43
"[P]ublic policy refers to the aims of the state to promote the social and general well-being of the inhabitants."44 The Civil Code requires extraordinary diligence
from common carriers because the nature of their business requires the public to put their safety and lives in the hands of these common carriers. The State
imposes this extraordinary diligence to promote the well-being of the public who avail themselves of the services of common carriers. Thus, in instances of injury
or death, a waiver of the right to claim damages is strictly construed against the common carrier so as not to dilute or weaken the public policy behind the
required standard of extraordinary diligence.

It was for this reason that in Gatchalian, the waiver was considered offensive to public policy because it was shown that the passenger was still in the hospital and
was dizzy when she signed the document. It was also shown that when she saw the other passengers signing the document, she signed it without reading it. .

Similar to Gatchalian, Colipano testified that she did not understand the document she signed. 45 She also did not understand the nature and extent of her waiver
as the content of the document was not explained to her. 46 The waiver is therefore void because it is contrary to public policy. 47

The Court reiterates that waivers executed under similar circumstances are indeed contrary to public policy and are void.48 To uphold waivers taken from injured
passengers who have no knowledge of their entitlement under the law and the extent of liability of common carriers would indeed dilute the extraordinary
diligence required from common carriers, and contravene a public policy reflected in the Civil Code.

Amount of compensatory damages granted is incorrect.

On the amount of damages, the RiTC awarded P2,098.80 as actual damages and P360,000.00 as compensatoiy damages for loss of income, as follows:
[T]his Court can only award actual damages in the amount that is duly supported by receipts, that is, P2,098.80 mid not P7,277.80 as prayed for by plaintiff as
there is no basis for the amount prayed for. However, considering that plaintiff has suffered the loss of one leg which has caused her to be limited in her
movement thus resulting in loss of livelihood, she is entitled to compensatory damages for lost income at the rate of P12,000.00/year for thirty years in the amount
of P360,000.00.49
The CA, on the other hand, modified the award of the RTC by reducing the compensatory damages from P360,000.00 to P200,000.00, thus:
By virtue of their negligence, defendants-appellants are liable to pay Werheiiina compensatory damages for loss of earning capacity. In arriving at the proper
amount, the Supremip Court has consistently used the following formula:
Net Earning Capacity
=
Life Expectancy x [Gross Annual Income - Living Expenses (50% of gross annual income)]

where life expectancy

 =
2/3 (80 - the age of the deceased).
Based on the stated formula, the damages due to Werherlina for loss of earning capacity is:
Net Earning Capacity
=
[2/3 x (80-30)] x (P12,000.00 x (50%)

=
(2/3 x 50) x P6,000.00

=
33.33 x P6,000.00

=
P200,000.00
The award of the sum of P200,000.00 as compensatory damages for loss of earning capacity is in order, notwithstanding the objections of defendants-appellants
with respect to lack of evidence on Werherlina's age and annual income. 50
Sanico argues that Colipano failed to present documentary evidence to support her age and her income, so that her testimony is self-serving and that there was no
basis for the award of compensatory damages in her favor. 51 Sanico is gravely mistaken.

The Court has held in Heirs of Pedro Clemeña y Zurbano v. Heirs of Irene B. Bien52 that testimonial evidence cannot be objected to on the ground of being self-
serving, thus:
"Self-serving evidence" is not to be taken literally to mean any evidence that serves its proponent's interest. The term, if used with any legal sense, refers only to
acts or declarations made by a party in his own interest at some place and time out of court, and it does not include testimony that he gives as a witness in court.
Evidence of this sort is excluded on the same ground as any hearsay evidence, that is, lack of opportunity for cross-examination by the adverse party and on the
consideration that its admission would open the door to fraud and fabrication. In contrast, a party's testimony in court is sworn and subject to cross-examination
by the other party, and therefore, not susceptible to an objection on the ground that it is self-serving.53
Colipano was subjected to cross-examination and both the RTC and CA believed her testimony on her age and annual income. In fact, as these are questions of
facts, these findings of the RTC and CA are likewise binding on the Court. 54

Further, although as a general rule, documentary evidence is required to prove loss of earning capacity, Colipano's testimony on her annual earnings of
P12,000.00 is an allowed exception. There are two exceptions to the general rule and Colipano's testimonial evidence falls under the second exception, viz.:
By way of exception, damages for loss of earning capacity may be awarded despite the absence of documentary evidence when (1) the deceased is self-employed
earning less than the minimum wage under current labor laws, and judicial notice may be taken of the fact that in the deceased's line of work no documentary
evidence is available; or (2) the deceased is employed as a daily wage worker earning less than the minimum wage under current labor laws. 55
The CA applied the correct formula for computing the loss of Colipano's earning capacity:
Net earning capacity = Life expectancy x [Gross Annual Income - Living Expenses (50% of gross annual income)], where life expectancy = 2/3 (80-the age of the
deceased).56
However, the CA erred when it used Colipano's age at the time she testified as basis for computing the loss of earning capacity.57 The loss of earning capacity
commenced when Colipano's leg was crushed on December 25, 1993. Given that Colipano was 30 years old when she testified on October 14, 1997, she was
roughly 27 years old on December 25, 1993 when the injury was sustained. Following the foregoing formula, the net earning capacity of Colipano is
P212,000.00.58

Sanico is liable to pay interest.

Interest is a form of actual or compensatory damages as it belongs to Chapter 2 59 of Title XVIII on Damages of the Civil Code. Under Article 2210 of the Civil
Code, "[i]nterest may, in the discretion of the court, be allowed upon damages awarded for breach of contract." Here, given the gravity of the breach of the
contract of carriage causing the serious injury to the leg of Colipano that resulted in its amputation, the Court deems it just and equitable to award interest from
the date of the RTC decision. Since the award of damages was given by the RTC in its Decision dated October 27, 2006, the interest on the amount awarded shall
be deemed to run beginning October 27, 2006.

As to the rate of interest, in Eastern Shipping Lines, Inc. v. Court of Appeals,60 the Court ruled that "[w]hen 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."61 Further,
upon finality of the judgment awarding a sum of money, the rate of interest shall be 12% per annum from such finality until satisfaction because the interim
period is considered a forbearance of credit.62 Subsequently, in Nacar v. Gallery Frames,63 the rate of legal interest for loans or forbearance of any money, goods
or credits and the rate allowed in judgments was lowered from 12% to 6%. Thus, the applicable rate of interest to the award of damages to Colipano is 6%.

WHEREFORE, premises considered, the petition for review is hereby PARTLY GRANTED. As to petitioner Vicente Castro, the Decision of the Court of Appeals
dated September 30, 2013 is REVERSED and SET ASIDE and the complaint against him is dismissed for lack of cause of action. As to petitioner Jose Sanico, the
Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATIONS, Petitioner Jose Sanico is liable and ordered to pay respondent Werherlina
Colipano the following amounts:Actual damages in the amount of P2,098.80;

Compensatory damages for loss of income in the amount of P212,000.00;

Interest on the total amount of the damages awarded in 1 and 2 at the rate of 6% per annum reckoned from October 27, 2006 until finality of this Decision. The
total amount of the foregoing shall, in turn, earn interest at the rate of 6% per annum from finality of this Decision until full payment thereof.

SO ORDERED.

G.R. No. L-29155 May 13, 1970

UNIVERSAL FOOD CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents.
Wigberto E. Tañada for petitioner.

Teofilo Mendoza for respondents.

CASTRO, J.:

Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13, 1968 in
CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation,
defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the appealed decision is hereby reversed;
the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to plaintiff
Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit A, and to pay him his monthly
salary of P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus attorney's fees in the
amount of P500.00, with costs against defendant." 1

On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of Manila,
against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed
the court to adjudge the defendant as without any right to the use of the Mafran trademark and formula, and order the latter to
restore to them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December 1,
1960, as well as damages in the sum of P40,000, and to pay the costs of suit. 1

On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the allegations
contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had complied with all the terms
and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff
Magdalo V. Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its chief
chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped from questioning 1) the contents and due
execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted by its board of
directors at the special meeting held on October 14, 1960, to suspend operations to avoid further losses due to increase in the
prices of raw materials, since the same plaintiff was present when that resolution was adopted and even took part in the
consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the said resolution, 4)
the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the
further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The
defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary or
corrective damages.

On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages and attorney's
fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court
rendered the judgment now the subject of the present recourse.

The Court of Appeals arrived at the following "uncontroverted" findings of fact:

That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the
manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce;
that the manufacture of this product was used in commercial scale in 1942, and in the same year plaintiff
registered his trademark in his name as owner and inventor with the Bureau of Patents; that due to lack of
sufficient capital to finance the expansion of the business, in 1960, said plaintiff secured the financial
assistance of Tirso T. Reyes who, after a series of negotiations, formed with others defendant Universal Food
Corporation eventually leading to the execution on May 11, 1960 of the aforequoted "Bill of Assignment"
(Exhibit A or 1).

Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was appointed
Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was appointed auditor
and superintendent with a salary of P250.00 a month. Since the start of the operation of defendant
corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory,
never allowed anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of
defendant, to enter the laboratory in order to keep the formula secret to himself. However, said plaintiff
expressed a willingness to give the formula to defendant provided that the same should be placed or kept
inside a safe to be opened only when he is already incapacitated to perform his duties as Chief Chemist, but
 defendant never acquired a safe for that purpose. On July 26, 1960, President and General Manager Tirso T.
Reyes wrote plaintiff requesting him to permit one or two members of his family to observe the preparation
of the 'Mafran Sauce' (Exhibit C), but said request was denied by plaintiff. In spite of such denial, Tirso T.
Reyes did not compel or force plaintiff to accede to said request. Thereafter, however, due to the alleged
scarcity and high prices of raw materials, on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman
of defendant issued a Memorandum (Exhibit B), duly approved by the President and General Manager Tirso
T. Reyes that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of
plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation should resume
its operation. Some five (5) days later, that is, on December 3, 1960, President and General Manager Tirso T.
Reyes, issued a memorandom to Victoriano Francisco ordering him to report to the factory and produce
"Mafran Sauce" at the rate of not less than 100 cases a day so as to cope with the orders of the corporation's
various distributors and dealers, and with instructions to take only the necessary daily employees without
employing permanent employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued
by the same President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco, to
recall all daily employees who are connected in the production of Mafran Sauce and also some additional
daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another
memorandum was issued by the President and General Manager instructing Ricardo Francisco, as Chief
Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops in full
swing starting January 2, 1961 with further instructions to hire daily laborers in order to cope with the full
blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the
amount of P300.00 a month only until his services were terminated on November 30, 1960. On January 9 and
16, 1961, defendant, acting thru its President and General Manager, authorized Porfirio Zarraga and Paula de
Bacula to look for a buyer of the corporation including its trademarks, formula and assets at a price of not
less than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without plaintiff Magdalo
V. Francisco, Sr. being recalled back to work, the latter filed the present action on February 14, 1961. About
a month afterwards, in a letter dated March 20, 1961, defendant, thru its President and General Manager,
requested said plaintiff to report for duty (Exhibit 3), but the latter declined the request because the present
action was already filed in court (Exhibit J).

1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article 1191 of the
new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and
able to comply with his own obligation and the other is not; that under article 1169 of the same Code, in reciprocal obligations,
neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him; that in this case the trial court found that the respondents not only have failed to show that the petitioner has been
guilty of default in performing its contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff
Magdalo V. Francisco who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant
the formula for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record
is replete with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V.
Francisco to no avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that the private
respondents are entitled to rescind the Bill of Assignment.

The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V. Francisco, Sr.
ceded and transferred to the petitioner corporation the formula for Mafran sauce. 2

The Bill of Assignment sets forth the following terms and conditions:

THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the
MAFRAN trade-mark and the formula for MAFRAN SAUCE;

THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit which
the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its production
of MAFRAN SAUCE and other food products and from other business which the Party of the Second Part
may engage in as defined in its Articles of Incorporation, and which its Board of Directors shall determine
and declare, said Party of the First Part hereby assign, transfer, and convey all its property rights and interest
over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part;

THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the Party of
the Second Part obligates itself to pay unto the Party of the First Part as founder and as owner of the
MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after
the proper accounting and inventories has been undertaken by the Party of the Second Part and after a
 competent auditor designated by the Board of Directors shall have duly examined and audited its books of
accounts and shall have certified as to the correctness of its Financial Statement;

THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of the
Party of the First Part and to increase its production, shall endeavor or undertake such research, study,
experiments and testing, to invent or cause to invent additional formula or formulas, the property rights and
interest thereon shall likewise be assigned, transferred, and conveyed unto the Party of the Second Part in
consideration of the foregoing premises, covenants and stipulations:

THAT in the operation and management of the Party of the First Part, the Party of the First Part shall be
entitled to the following Participation:

(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief Chemist of
the Party of the Second Part, which appointments are permanent in character and Mr. VICTORIANO V.
FRANCISCO shall be appointed Auditor thereof and in the event that the Treasurer or any officer who may
have the custody of the funds, assets and other properties of the Party of the Second Part comes from the
Party of the First Part, then the Auditor shall not be appointed from the latter; furthermore should the Auditor
be appointed from the Party representing the majority shares of the Party of the Second Part, then the
Treasurer shall be appointed from the Party of the First Part;

(b) THAT in case of death or other disabilities they should become incapacitated to discharge the duties of
their respective position, then, their shares or assigns and who may have necessary qualifications shall be
preferred to succeed them;

(c) That the Party of the First Part shall always be entitled to at least two (2) membership in the Board of
Directors of the Party of the Second Part;

(d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the Second Part,
the Chief Chemist shall have and shall exercise absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safekeeping of the Chemicals and other mixtures used in the
preparation of said products;

THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the PARTY OF
THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark
and mafran formula, except when a dissolution of the Party of the Second Part, voluntary or otherwise,
eventually arises, in which case then the property rights and interests over said trademark and formula shall
automatically revert the Party of the First Part.

Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent patentee,
Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last part of
the second paragraph recites that the respondent patentee "assign, transfer and convey all its property rights and interest over
said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states that
such "assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask,
demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula."

However, a perceptive analysis of the entire instrument and the language employed therein would lead one to the conclusion that
3

what was actually ceded and transferred was only the use of the Mafran sauce formula. This was the precise intention of the
parties, as we shall presently show.
4

Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER CENTUM of
the net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food
products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for
the use of a patented invention.

'Royalty,' when used in connection with a license under a patent, means the compensation paid by the
licensee to the licensor for the use of the licensor's patented invention." (Hazeltine Corporation vs. Zenith
Radio Corporation, 100 F. 2d 10, 16.) 5
Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is provided in
paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ... permanent in character," and that in
case of his "death or other disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to
succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and shall
exercise absolute control and supervision over the laboratory assistants and personnel and over the purchase and safekeeping of
the chemicals and other mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment
clearly show that the intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran
sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6

Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take place, "the
property rights and interests over said trademark and formula shall automatically revert to the respondent patentee. This must be
so, because there could be no reversion of the trademark and formula in this case, if, as contended by the petitioner, the
respondent patentee assigned, ceded and transferred the trademark and formula — and not merely the right to use it — for then
such assignment passes the property in such patent right to the petitioner corporation to which it is ceded, which, on the
corporation becoming insolvent, will become part of the property in the hands of the receiver thereof. 7

Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of the Bill of
Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted without equivocation in
paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be contradicted." The last part of paragraph 3
8

of the complaint and paragraph 3 of the answer are reproduced below for ready reference:

3. — ... and due to these privileges, the plaintiff in return assigned to said corporation his interest and rights
over the said trademark and formula so that the defendant corporation could use the formula in the
preparation and manufacture of the mafran sauce, and the trade name for the marketing of said project, as
appearing in said contract ....

3. — Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint.

Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the respondent
patentee.

Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to effect "the
least transmission of right," and is there a better example of least transmission of rights than allowing or permitting only the use,
9

without transfer of ownership, of the formula for Mafran sauce.

The foregoing reasons support the conclusion of the Court of Appeals that what was actually ceded and transferred by the
10

respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the use of the formula. Properly
speaking, the Bill of Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is the
observation of the lower court that the respondent patentee "had been remiss in the compliance of his contractual obligation to
cede and transfer to the defendant the formula for Mafran sauce."

2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed from his
position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of
Assignment which in part provides that his appointment is "permanent in character."

The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the petitioner,
marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being dismissed from his position
as chief chemist of the corporation. The fact, continues the petitioner, is that at a special meeting of the board of directors of the
corporation held on October 14, 1960, when the board decided to suspend operations of the factory for two to four months and to
retain only a skeletal force to avoid further losses, the two private respondents were present, and the respondent patentee was
even designated as the acting superintendent, and assigned the mission of explaining to the personnel of the factory why the
corporation was stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates
that the salary of the respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that
he could draw his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly entirely
disregarded by the respondent Court of Appeals, which concluded that since the petitioner resumed partial production of Mafran
sauce without notifying the said respondent formally, the latter had been dismissed as chief chemist, without considering that the
petitioner had to resume partial operations only to fill its pending orders, and that the respondents were duly notified of that
decision, that is, that exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V.
Francisco. Besides, the records will show that the respondent patentee had knowledge of the resumption of production by the
corporation, but in spite of such knowledge he did not report for work.

The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the product he claimed
he so dearly loved, certainly he would not have waited for a formal notification but would have immediately reported for work,
considering that he was then and still is a member of the corporation's board of directors, and insofar as the petitioner is
concerned, he is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been
entrusted the performance of the duties of chief chemist, while the respondent Victoriano V. Francisco is his brother, the
respondent patentee could not feign ignorance of the resumption of operations.

The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December 29, 1960, the
records will show that the petitioner was set to resume full capacity production only sometime in March or April, 1961, and the
respondent patentee cannot deny that in the very same month when the petitioner was set to resume full production, he received a
copy of the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it
is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this was the situation on
February 1, 1961, thirteen days before the filing of the present action for rescission. The designation of Ricardo Francisco as the
chief chemist carried no weight because the president and general manager of the corporation had no power to make the
designation without the consent of the corporation's board of directors. The fact of the matter is that although the respondent
Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that Ricardo
Francisco was merely the acting chemist as he was the one assisting his father.

In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the secretary-treasurer
of the corporation issued a memorandum (exh. B), duly approved by its president and general manager, directing that only
Ricardo Francisco be retained in the factory and that the salary of respondent patentee, as chief chemist, be stopped for the time
being until the corporation resumed operations. This measure was taken allegedly because of the scarcity and high prices of raw
materials. Five days later, however, or on December 3, the president and general manager issued a memorandum (exh. B-1)
ordering the respondent Victoria V. Francisco to report to the factory and to produce Mafran sauce at the rate of no less than 100
cases a day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take only the
necessary daily employees without employing permanent ones. Then on December 6, the same president and general manager
issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily
employees connected with the production of Mafran sauce and to hire additional daily employees for the production of Porky
Pops. Twenty-three days afterwards, or on December 29, the same president and general manager issued still another
memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to
produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the further instruction to hire daily laborers in
order to cope with the full blast production. And finally, at the hearing held on October 24, 1961, the same president and general
manager admitted that "I consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is
the separation pay."

The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint for rescission
of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate officers, 11 schemed and
maneuvered to ease out, separate and dismiss the said respondent from the service as permanent chief chemist, in flagrant
violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the action for
rescission, the petitioner corporation, thru its president and general manager, requested the respondent patentee to report for duty
(exh. 3), is of no consequence. As the Court of Appeals correctly observed, such request was a "recall to placate said plaintiff."

3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready reference the
following articles of the new Civil Code governing rescission of contracts:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter
should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 of the Mortgage Law.
 ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.

ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused.

At the moment, we shall concern ourselves with the first two paragraphs of article 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party
may choose between fulfillment and rescission of the obligation, with payment of damages in either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The petitioner
corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the respondent
patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause.

Upon the factual milieu, is rescission of the Bill of Assignment proper?

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial
and fundamental breach as would defeat the very object of the parties in making the agreement. The question of whether a
12

breach of a contract is substantial depends upon the attendant circumstances. The petitioner contends that rescission of the Bill
13

of Assignment should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for the same. However, in this case the dismissal
of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and
substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the
legal principle that the option — to demand performance or ask for rescission of a contract — belongs to the injured party, the14

fact remains that the respondents-appellees had no alternative but to file the present action for rescission and damages. It is to be
emphasized that the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the
basic commitment of the petitioner corporation to appoint him as its Second Vice-President and Chief Chemist on a permanent
basis; that in the manufacture of Mafran sauce and other food products he would have "absolute control and supervision over the
laboratory assistants and personnel and in the purchase and safeguarding of said products;" and that only by all these measures
could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and,
in the process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of Assignment,
namely, the transfer to the corporation of only the use of the formula; the appointment of the respondent patentee as Second Vice-
President and chief chemist on a permanent status; the obligation of the said respondent patentee to continue research on the
patent to improve the quality of the products of the corporation; the need of absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said
product — all these provisions of the Bill of Assignment are so interdependent that violation of one would result in virtual
nullification of the rest.

4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is entitled to
payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran trademark and formula,
arguing that under articles 1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal
contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both remedies as it held
that the respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary
aforesaid; that this is a gross error of law, when it is considered that such holding would make the petitioner liable to pay
respondent patentee's salary from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make
payment until it returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is
that the said respondent patentee refused to go back to work, notwithstanding the call for him to return — which negates his right
to be paid his back salaries for services which he had not rendered; and that if the said respondent is entitled to be paid any back
salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had
already formally called him back to work.

The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular provisions in
their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the petitioner, subject to
defined limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner
corporation to employ the respondent patentee as the Second Vice-President and Chief Chemist on a permanent status, at a
monthly salary of P300, unless "death or other disabilities supervened. Under these circumstances, the petitioner corporation
could not escape liability to pay the private respondent patentee his agreed monthly salary, as long as the use, as well as the right
to use, the formula for Mafran sauce remained with the corporation.
5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the respondents the
trademark and formula for Mafran sauce, when both the decision of the appellate court and that of the lower court state that the
corporation is not aware nor is in possession of the formula for Mafran sauce, and the respondent patentee admittedly never gave
the same to the corporation. According to the petitioner these findings would render it impossible to carry out the order to return
the formula to the respondent patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code
provides that rescission creates the obligation to return the things which were the object of the contract. But that as it may, it is a
logical inference from the appellate court's decision that what was meant to be returned to the respondent patentee is not the
formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission specifically and
particularly pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and
formula."

ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is modified to
read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the
defendant corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran
sauce trademark and formula, subject-matter of the Bill of Assignment, and to this end the defendant corporation and all its
assigns and successors are hereby permanently enjoined, effective immediately, from using in any manner the said Mafran sauce
trademark and formula. The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from
December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the
date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with costs
against the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the petitioner corporation.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur.

Teehankee J., took no part

G.R. No. L-47774 March 14, 1941

MAGDALENA ESTATE, INC., petitioner-appellant,

vs.
LOUIS J. MYRICK, respondent-appellee.

Felipe Ysmael and Eusebio C. Encarnacion for petitioner.

Andres C. Aguilar for respondent.

LAUREL, J.:

On January 2, 1928, the Magdalena Estate, Inc., sold to Louis J. Myrick lots Nos. 28 and 29 of Block 1, Parcel 9 of the San Juan
Subdivision, San Juan Rizal, their contract of sale No. SJ-639 (Exhibits B and 1) providing that the price of P7,953 shall be
payable in 120 equal monthly installments of P96.39 each on the second day of every month beginning the date of execution of
the agreement. Simultaneously, the vendee executed and delivered to the vendor a promissory note (Exhibits C and 2) for the
whole purchase price, wherein it was stipulated that "si cualquier pago o pagos de este pagare quedasen en mora por mas de dos
meses, entonces todos el saldo no pagado del mismo con cualesquiera intereses que hubiese devengado, vercera y sera exigible
inmediatamente y devengara intereses al mismo tipo de 9 por ciento al año hasta su completo pago, y en tal caso me comprometo,
ademas, a pagar al tenedor de este pagare el 10 por ciento de la cantidad en concepto de honorarios de abogado."

In pursuance of said agreement, the vendee made several monthly payments amounting to P2,596.08, the last being on October 4,
1930, although the first installment due and unpaid was that of May 2, 1930. By reason of this default, the vendor, through its
president, K.H. Hemady, on December 14, 1932, notified the vendee that, in view of his inability to comply with the terms of
their contract, said agreement had been cancelled as of that date, thereby relieving him of any further obligation thereunder, and
that all amounts paid by him had been forfeited in favor of the vendor, who assumes the absolute right over the lots in question.
To this communication, the vendee did not reply, and it appears likewise that the vendor thereafter did not require him to make
any further disbursements on account of the purchase price.

On July 22, 1936, Louis J. Myrick, respondent herein, commenced the present action in the Court of First Instance of Albay,
praying for an entry of judgment against the Magdalena Estate, Inc. for the sum of P2,596.08 with legal interest thereon from the
filing of the complaint until its payment, and for costs of the suit. Said defendant, the herein petitioner, on September 7, 1936,
filed his answer consisting in a general denial and a cross-complaint and counterclaim, alleging that contract SJ-639 was still in
full force and effect and that, therefore, the plaintiff should be condemned to pay the balance plus interest and attorneys' fees.
After due trial, the Court of First Instance of Albay, on January 31, 1939, rendered its decision ordering the defendant to pay the
plaintiff the sum of P2,596.08 with legal interest from December 14, 1932 until paid and costs, and dismissing defendant's
counterclaim. From this judgment, the Magdalena Estate, Inc. appealed to the Court of Appeals, where the cause was docketed as
CA-G.R. No. 5037, and which, on August 23, 1940, confirmed the decision of the lower court, with the only modification that
the payment of interest was to be computed from the date of the filing of the complaint instead of from the date of the
cancellation of the contract. A motion for reconsideration was presented, which was denied on September 6, 1940. Hence, the
present petition for a writ of certiorari.

Petitioner-appellant assigns several errors which we proceed to discuss in the course of this opinion.

Petitioner holds that contract SJ-639 has not been rendered inefficacious by its letter to the respondent, dated December 14, 1932,
and submits the following propositions: (1) That the intention of the author of a written instrument shall always prevail over the
literal sense of its wording; (2) that a bilateral contract may be resolved or cancelled only by the prior mutual agreement of the
parties, which is approved by the judgment of the proper court; and (3) that the letter of December 14, 1932 was not assented to
by the respondent, and therefore, cannot be deemed to have produced a cancellation, even if it ever was intended. Petitioner
contends that the letter in dispute is a mere notification and, to this end, introduced in evidence the disposition of Mr. K.H.
Hemady, president of the Magdalena Estate, Inc. wherein he stated that the word "cancelled" in the letter of December 14, 1932,
"es un error de mi interpretacion sin ninguna intencion de cancelar," and the testimony of Sebastian San Andres, one of its
employees, that the lots were never offered for sale after the mailing of the letter aforementioned. Upon the other hand, the Court
of Appeals, in its decision of August 23, 1940, makes the finding that "notwithstanding the deposition of K.H. Hemady, president
of the defendant corporation, to the effect that the contract was not cancelled nor was his intention to do so when he wrote the
letter of December 14, 1932, marked Exhibit 6 and D (pp. 6-7, deposition Exhibit 1-a), faith and credit cannot be given to such
testimony in view of the clear terms of the letter which evince his unequivocal intent to resolve the contract. His testimony is an
afterthought. The intent to resolve the contract is expressed unmistakably not only in the letter of December 14, 1932, already
referred to (Exhibit 6 and D), but is reiterated in the letters which the president of the defendant corporation states that plaintiff
lost his rights for the land for being behind more than two years, and of April 10, 1035 (Exhibit G), where defendant's president
makes the following statements: "Confirming the verbal arrangement had between you and our Mr. K.H. Hemady regarding the
account of Mr. Louis J. Myrick under contract No. SJ-639, already cancelled."

This conclusion of fact of the Court of Appeals is final and should not be disturbed. (Guico vs. Mayuga and Heirs of Mayuga, 63
Phil., 328; Mamuyac vs. Abena, XXXVIII Off. Gaz. 84.) Where the terms of a writing are clear, positive and unambiguous, the
intention of the parties should be gleaned from the language therein employed, which is conclusive in the absence of mistake (13
C.J. 524; City of Manila vs. Rizal Park Co., 52 Phil. 515). The proposition that the intention of the writer, once ascertained, shall
prevail over the literal sense of the words employed is not absolute and should be deemed secondary to and limited by the
primary rule that, when the text of the instrument is explicit and leaves no doubt as to its intention, the court may not read into it
any other which would contradict its plain import. Besides, we have met with some circumstances of record which demonstrate
the unequivocal determination of the petitioner to cancel their contract. They are: (1) the act of the petitioner in immediately
taking possession of the lots in question and offering to resell them to Judge M.V. del Rosario, as demonstrated by his letter
marked Exhibit G, shortly after December 14, 1932; (2) his failure to demand from the respondent the balance of the account
after the mailing of the disputed letter; and (3) the letters of January 10, 1933 (Exhibit F-2) and April 10, 1935 (Exhibit G)
reiterate, in clear terms, the intention to cancel first announced by petitioner since December 14, 1932.

It is next argued that contract SJ-639, being a bilateral agreement, in the absence of a stipulation permitting its cancellation, may
not be resolved by the mere act of the petitioner. The fact that the contracting parties herein did not provide for resolution is now
of no moment, for the reason that the obligations arising from the contract of sale being reciprocal, such obligations are governed
by article 1124 of the Civil Code which declares that the power to resolve, in the event that one of the obligors should not
perform his part, is implied. (Mateos vs. Lopez, 6 Phil., 206; Cortez vs. Bibaño & Beramo, 41 Phil. 298; Cui. vs. Sun Chan, 41
Phil., 523; Po Pauco vs. Siguenza, 49 Phil., 404.) Upon the other hand, where, as in this case, the petitioner cancelled the
contract, advised the respondent that he has been relieved of his obligations thereunder, and led said respondent to believe it so
and act upon such belief, the petitioner may not be allowed, in the language of section 333 of the Code of Civil Procedure (now
section 68 (a) of Rule 123 of the New Rules of Court), in any litigation the course of litigation or in dealings in nais, be permitted
to repudiate his representations, or occupy inconsistent positions, or, in the letter of the Scotch law, to "approbate and reprobate."
(Bigelow on Estoppel, page 673; Toppan v. Cleveland, Co. & C.R. Co., Fed. Cas. 14,099.)

The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event of failure of the vendee to
continue in the payment of the stipulated monthly installments, to retain the amounts paid to him on account of the purchase
price. The claim, therefore, of the petitioner that it has the right to forfeit said sums in its favor is untenable. Under article 1124 of
the Civil Code, however, he may choose between demanding the fulfillment of the contract or its resolution. These remedies are
alternative and not cumulative, and the petitioner in this case, having to cancel the contract, cannot avail himself of the other
remedy of exacting performance. (Osorio & Tirona vs. Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua
Jamco, 14 Phil., 602.) As a consequence of the resolution, the parties should be restored, as far as practicable, to their original
situation (Po Pauco vs. Siguenza, supra) which can be approximated only by ordering, as we do now, the return of the things
which were the object of the contract, with their fruits and of the price, with its interest (article 1295, Civil Code), computed from
the date of the institution of the action. (Verceluz vs. Edaño, 46 Phil. 801.)

The writ prayed for is hereby denied, with costs against the petitioner. So ordered.

Imperial, Diaz, Moran, and Horrilleno, JJ., concur.

G.R. No. L-28602 September 29, 1970

UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON CITY,
et al., respondents.

Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel Perfecto V. Fernandez for
petitioner.

Norberto J. Quisumbing for private respondents.

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

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to be annulled
in this petition for certiorari and prohibition, filed by herein petitioner University of the Philippines (or UP) against the above-
named respondent judge and the Associated Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25
February 1966, enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the Lubayat
areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged UP in contempt of court, and
directed Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or conducting logging operations on the
concession; and the third order, dated 12 December 1967, denied reconsideration of the order of contempt.

As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the three (3)
questioned orders was issued by this Court, per its resolution on 9 February 1968.

The petition alleged the following:

That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP, an institution
of higher learning, to be operated and developed for the purpose of raising additional income for its support, pursuant to Act
3608;

That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was granted
exclusive authority, for a period starting from the date of the agreement to 31 December 1965, extendible for a further period of
five (5) years by mutual agreement, to cut, collect and remove timber from the Land Grant, in consideration of payment to UP of
royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an
unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had received notice that UP
would rescind or terminate the logging agreement, ALUMCO executed an instrument, entitled "Acknowledgment of Debt and
Proposed Manner of Payments," dated 9 December 1964, which was approved by the president of UP, and which stipulated the
following:

3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to liquidate the
foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance outstanding after the said
payments have been applied shall be paid by the DEBTOR in full no later than June 30, 1965;

xxx xxx xxx

 5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this document,
the DEBTOR agrees without reservation that the CREDITOR shall have the right and the power to consider
the Logging Agreement dated December 2, 1960 as rescinded without the necessity of any judicial suit, and
the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos (P50,000.00) by way of and for
liquidated damages;

ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December 1964 to 15
July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had previously acknowledged.

That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date, considered as rescinded and of no
further legal effect the logging agreement that they had entered in 1960; and on 7 September 1965, UP filed a complaint against
ALUMCO, which was docketed as Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection
or payment of the herein before stated sums of money and alleging the facts hereinbefore specified, together with other
allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary attachment and preliminary injunction
restraining ALUMCO from continuing its logging operations in the Land Grant.

That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another concessionaire take over the
logging operation, by advertising an invitation to bid; that bidding was conducted, and the concession was awarded to Sta. Clara
Lumber Company, Inc.; the logging contract was signed on 16 February 1966.

That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary injunction but were
denied by the court;

That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the bidding; on 27
November 1965, it filed a second petition for preliminary injunction; and, on 25 February 1966, respondent judge issued the first
of the questioned orders, enjoining UP from awarding logging rights over the concession to any other party.

That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber Company, Inc., and
said company had started logging operations.

That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967, declared
petitioner UP in contempt of court and, in the same order, directed Sta. Clara Lumber Company, Inc., to refrain from exercising
logging rights or conducting logging operations in the concession.

The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967.

Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act 3608 and,
therefore, conclusively known, respondent ALUMCO did not deny the foregoing allegations in the petition. In its answer,
respondent corrected itself by stating that the period of the logging agreement is five (5) years - not seven (7) years, as it had
alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the court
below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not turning over management of
ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to pursue the manner of payments, as
stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" because the logs that it had cut turned out to be
rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm, and which
contract was referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral
rescission of the logging contract, without a court order, was invalid; that petitioner's supervisor refused to allow respondent to
cut new logs unless the logs previously cut during the management of Cesar Guy be first sold; that respondent was permitted to
cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15 July 1965; that it had made
several offers to petitioner for respondent to resume logging operations but respondent received no reply.

The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may disregard the same
before any judicial pronouncement to that effect. Respondent ALUMCO contended, and the lower court, in issuing the injunction
order of 25 February 1966, apparently sustained it (although the order expresses no specific findings in this regard), that it is only
after a final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard ALUMCO's rights
under the contract and treat the agreement as breached and of no force or effect.

We find that position untenable.

In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner of
Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging
Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit." As to such special stipulation, and in
connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31
October 1964, 12 SCRA 276:

there is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of
the contract would cause cancellation thereof, even without court intervention. In other words, it is not
always necessary for the injured party to resort to court for rescission of the contract.

Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account of infractions by
the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review
by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and
bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted,
the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that
the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil Code, Article 2203).

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial
action is necessary for the resolution of a reciprocal obligation, since in every case where the extrajudicial resolution is contested
1

only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is
in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to
judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render
nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page
140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court
such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit,
instead of the rescinder.

In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of
Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil; Code is
practically a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic contracts may be made
extrajudicially unless successfully impugned in court.

El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para el caso de
que uno de los obligados no cumpliese lo que le incumbe, facultad que, segun jurisprudencia de este
Tribunal, surge immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una
declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897).

Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una "facultad" atribuida a la
parte perjudicada por el incumplimiento del contrato, la cual tiene derecho do opcion entre exigir el
cumplimientoo la resolucion de lo convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella,
por declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion hecha por una de las
partes se impugna por la otra, queda aquella sometida el examen y sancion de los Tribunale, que habran de
declarar, en definitiva, bien hecha la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain,
16 November 1956; Jurisp. Aranzadi, 3, 447).

La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las partes de su
respectiva prestacion, puedetener lugar con eficacia" 1. o Por la declaracion de voluntad de la otra hecha
extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada, cuando no opta por el
cumplimientocon la indemnizacion de danos y perjuicios realmente causados, siempre quese acredite, ademas, una actitud o
 conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo
o irreformable lo impida, segun el art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y
16 Nov. 1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem,
fides non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).

In the light of the foregoing principles, and considering that the complaint of petitioner University made out a prima facie case of
breach of contract and defaults in payment by respondent ALUMCO, to the extent that the court below issued a writ of
preliminary injunction stopping ALUMCO's logging operations, and repeatedly denied its motions to lift the injunction; that it is
not denied that the respondent company had profited from its operations previous to the agreement of 5 December 1964
("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second amended answer, such as
the misconduct of its former manager Cesar Guy, and the rotten condition of the logs in private respondent's pond, which said
respondent was in a better position to know when it executed the acknowledgment of indebtedness, do not constitute on their face
sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by respondent ALUMCO is
susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in enjoining petitioner's measures to
protect its interest without first receiving evidence on the issues tendered by the parties, and in subsequently refusing to dissolve
the injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available or adequate. Such
injunction, therefore, must be set aside.

For the reason that the order finding the petitioner UP in contempt of court has open appealed to the Court of Appeals, and the
case is pending therein, this Court abstains from making any pronouncement thereon.

WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25 February 1966, granting
the Associated Lumber Company's petition for injunction, is hereby set aside. Let the records be remanded for further
proceedings conformably to this opinion.

G.R. No. L-29360 January 30, 1982

JOSE C. ZULUETA, petitioner,

vs.
HON. HERMINIO MARIANO, in his capacity as Presiding Judge of Branch X of the Court of First Instance of Rizal;
and LAMBERTO AVELLANA, respondents.

MELENCIO-HERRERA, J.:

In this action for mandamus and Prohibition, petitioner seeks to compel respondent Judge to assume appellate, not original
jurisdiction over an Ejectment case appealed from the Municipal Court of Pasig (CC No. 1190 entitled Jose C. Zulueta vs.
Lamberto Avellana), and to issue a Writ of Execution in said case.

The antecedental facts follow:

Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated within the Antonio Subdivision, Pasig,
Rizal.

On November 6, 1964, petitioner Zulueta and private respondent Lamberto Avellana, a movie director, entered into a "Contract
to Sell" the aforementioned property for P75,000.00 payable in twenty years with respondent buyer assuming to pay a down
payment of P5,000.00 and a monthly installment of P630.00 payable in advance before the 5th day of the corresponding month,
starting with December, 1964.

It was further stipulated:

12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated, BUYER automatically
and irrevocably authorizes OWNER to recover extra-judicially, physical possession of the land, building and
other improvements which are the subject of this contract, and to take possession also extra-judicially
whatever personal properties may be found within the aforesaid premises from the date of said failure to
answer for whatever unfulfilled monetary obligations BUYER may have with OWNER; and this contract
shall be considered as without force and effect also from said date; all payments made by the BUYER to
 OWNER shall be deemed as rental payments without prejudice to OWNER's right to collect from BUYER
whatever other monthly installments and other money obligations which may have been paid until BUYER
vacates the aforesaid premises; upon his failure to comply with any of the herein conditions BUYER forfeits
all money claims against OWNER and shall pay a monthly rental equivalent to his monthly installment under
Condition 1 of this Contract from the date of the said failure to the date of recovery of physical possession by
OWNER of the land, building and other improvements which are the subject of this Contract; BUYER shall
not remove his personal properties without the previous written consent of OWNER, who, should he take
possession of such properties following the aforesaid failure of BUYER, shall return the same to BUYER
only after the latter shall have fulfilled all money claims against him by OWNER; in all cases herein, demand
is waived;

Respondent Avellana occupied the property from December, 1964, but title remained with petitioner Zulueta.

Upon the allegation that respondent Avellana had failed to comply with the monthly amortizations stipulated in the contract,
despite demands to pay and to vacate the premises, and that thereby the contract was converted into one of lease, petitioner, on
June 22, 1966, commenced an Ejectment suit against respondent before the Municipal Court of Pasig (CC No. 1190), praying
that judgment be rendered ordering respondent 1) to vacate the premises; 2) to pay petitioner the sum of P11,751.30 representing
respondent's balance owing as of May, 1966; 3) to pay petitioner the sum of P 630.00 every month after May, 1966, and costs.

Respondent controverted by contending that the Municipal Court had no jurisdiction over the nature of the action as it involved
the interpretation and/or rescission of the contract; that prior to the execution of the contract to sell, petitioner was already
indebted to him in the sum of P31,269.00 representing the cost of two movies respondent made for petitioner and used by the
latter in his political campaign in 1964 when petitioner ran for Congressman, as well as the cost of one 16 millimeter projector
petitioner borrowed from respondent and which had never been returned, which amounts, according to their understanding,
would be applied as down payment for the property and to whatever obligations respondent had with petitioner. The latter
strongly denied such an understanding. Respondent's total counterclaim against petitioner was in the amount of P42,629.99
representing petitioner's pleaded indebtedness to private respondent, claim for moral damages, and attorney's fees.

The counterclaim was dismissed by the Municipal Court for being in an amount beyond its jurisdiction. However, as a special
defense, private respondent sought to offset the sum of P31,269.00 against his obligations to petitioner.

Deciding the case on May 10, 1967, the Municipal Court found that respondent Avellana had failed to comply with his financial
obligations under the contract and ordered him to vacate the premises and deliver possession thereof to petitioner; to pay
petitioner the sum of P21,093.88 representing arrearages as of April, 1967, and P630.00 as monthly rental from and after May,
1967 until delivery of possession of that premises to petitioner. That conclusion was premised on title finding that breach of any
of the conditions by private respondent converted the agreement into a lease contractual and upon the following considerations:

The question involved herein is that of possession, that who of the contending parties has the better right to
possession of the properly in question. The issue in this case being that of possession, the claim of defendant
against plaintiff or P 31,269.00 indebtedness, has no place as a defense here. It should be the subject- matter
of a separate action against, plaintiff Jose C. Zulueta. As it is, said indebtedness is only a claim still debatable
and controversial and not a final judgment. 'It is our considered opinion that to admit and to allow such a
defense would be tantamount to prejuding the claim on its merits prematurely in favor of defendant. This
court can not do without violating some rules of law. This is not the proper court and this is not the proper
case in which to ventilate the claim.

Respondent Avellana appealed to the Court of First Instance of Rizal presided by respondent Judge. Thereat, petitioner
summoned for execution alleging private respondent's failure to deposit in accordance the monthly rentals, which the latter
denied. Respondent Judge held resolution thereof in abeyance.

On February 19, 1968, respondent Avellana filed a Motion to Dismiss Appeal alleging that, inasmuch as the defense set up in his
Answer was that he had not breached his contract with petitioner, the case necessarily involved the interpretation and/or
rescission of the contract and, therefore, beyond the jurisdiction of the Municipal Court. Petitioner opposed claiming that the
Complaint had set out a clear case of unlawful detainer considering that judicial action for the rescission of the contract was
unnecessary due to the automatic rescission clause therein and the fact that petitioner had cancelled said contract so that
respondent's right to remain in the premises had ceased.

On March 21, 1968, respondent Judge dismissed the case on the ground of lack of jurisdiction of the Municipal Court,
explaining:
 The decision of the lower court declared said Contract to Sell to have been converted into a contract of lease.
It is the contention of the defendant that the lower court had no jurisdiction to entertain the case as the same
involves the interpretation of contract as to whether or not the same has been converted to lease contract.
Although the contract to sell object of this case states that the same may be converted into a lease contract
upon the failure of the defendant to pay the amortization of the property in question, there is no showing that
before filing this case in the lower court, the plaintiff has exercised or has pursued his right pursuant to the
contract which should be the basis of the action in the lower court.

Petitioner's Motion for Reconsideration was denied by respondent Judge as follows:

The plaintiff having filed a motion for reconsideration of this Court's Order dismissing the appeal, the Court,
while standing pat on its Order dismissing this case for lack of jurisdiction of the lower court over the subject
matter, hereby takes cognizance of the case and will try the case as if it has been filed originally in this Court.

WHEREFORE, let this case be set for pre-trial on July 12, 1968 at 8:30 a.m. with notice to an parties.

Petitioner then availed of the instant recourse.

Was the action before the Municipal Court of Pasig essentially for detainer and, therefore, within its exclusive original
jurisdiction, or one for rescission or annulment of a contract, which should be litigated before a Court of First Instance?

Upon a review of the attendant circumstances, we uphold the ruling of respondent Judge that the Municipal Court of Pasig was
bereft of jurisdiction to take cognizance of the case filed before it. In his Complaint, petitioner had alleged violation by
respondent Avellana of the stipulations of their agreement to sell and thus unilaterally considered the contract rescinded.
Respondent Avellana denied any breach on his part and argued that the principal issue was one of interpretation and/or rescission
of the contract as well as of set-off. Under those circumstances, proof of violation is a condition precedent to resolution or
rescission. It is only when the violation has been established that the contract can be declared resolved or rescinded. Upon such
rescission, in turn, hinges a pronouncement that possession of the realty has become unlawful. Thus, the basic issue is not
possession but one of rescission or annulment of a contract. which is beyond the jurisdiction of the Municipal Court to hear and
determine.

A violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle
the other party to resolved or rescind it. An allegation of such violation in a detainer suit may be proved by
competent evidence. And if proved a justice of the peace court might make a finding to that effect, but it
certainly cannot declare and hold that the contract is resolved or rescinded. It is beyond its power so to do.
And as the illegality of the possession of realty by a party to a contract to sell is premised upon the resolution
of the contract, it follows that an allegation and proof of such violation, a condition precedent to such
resolution or rescission, to render unlawful the possession of the land or building erected thereon by the party
who has violated the contract, cannot be taken cognizance of by a justice of the peace court. ... 1

True, the contract between the parties provided for extrajudicial rescission. This has legal effect, however, where the
other party does not oppose it. 2 Where it is objected to, a judicial determination of the issue is still necessary.

A stipulation entitling one party to take possession of the land and building if the other party violates the
contract does not ex proprio vigore confer upon the former the right to take possession thereof if objected to
without judicial intervention and' determination. 3

But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the case and correctly
dismissed the appeal, he erred in assuming original jurisdiction, in the face of the objection interposed by petitioner.
Section 11, Rule 40, leaves no room for doubt on this point:

Section 11. Lack of jurisdiction —A case tried by an inferior court without jurisdiction over the subject
matter shall be dismiss on appeal by the Court of First Instance. But instead of dismissing the case, the Court
of First Instance may try the case on the merits, if the parties therein file their pleadings and go to trial
without any objection to such jurisdiction.

There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal.
 If an inferior court tries a case without jurisdiction over the subject-matter on appeal, the only authority of the
CFI is to declare the inferior court to have acted without jurisdiction and dismiss the case, unless the parties
agree to the exercise by the CFI of its original jurisdiction to try the case on the merits. 4

The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment of the Municipal Court of Pasig
must perforce be denied.

WHEREFORE, the Writ of mandamus is denied, but the Writ of Prohibition is granted and respondent Court hereby permanently
enjoined from taking cognizance of Civil Case No. 10595 in the exercise of its original jurisdiction. No costs.

SO ORDERED.

G.R. No. L-56076 September 21, 1983

PALAY, INC. and ALBERT ONSTOTT, petitioner,

vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and NAZARIO
DUMPIT respondents.

Santos, Calcetas-Santos & Geronimo Law Office for petitioner.

Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.:

The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing
petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of
P13,722.50 with 12% interest per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in
Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution
of May 2, 1980, are being assailed in this petition.

On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private respondent, Nazario
Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with
an area of 1,165 square meters, - covered by TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with
9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully paid.
Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment
after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all
installments paid.

Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was made on
December 5, 1967 for installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts
with interest, and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. He followed this up with
another letter dated June 20, 1973 reiterating the same request. Replying petitioners informed respondent that his Contract to Sell
had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.

Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority
(NHA) for reconveyance with an altenative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA,
finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his
capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of
P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of
said Resolution was denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459),
respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by
petitioners was denied for lack of merit. Thus, the present petition wherein the following issues are raised:

Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with
by stipulation in a contract to sell.

II

Whether petitioners may be held liable for the refund of the installment payments made by respondent
Nazario M. Dumpit.

III

Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar.

IV

Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the
decision of respondent NHA holding petitioners solidarily liable for the refund of the installment payments
made by respondent Nazario M. Dumpit thereby denying substantial justice to the petitioners, particularly
petitioner Onstott

We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned Resolutions and of the
Writ of Execution that had been issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon
petitioners' motion, reconsidered the dismissal and gave due course to the petition on March 15, 1982.

On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon
respondent in view of paragraph 6 thereof which provides-

6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein agreed
upon, the BUYER shall be granted a month of grace within which to make the payment of the t in arrears
together with the one corresponding to the said month of grace. -It shall be understood, however, that should
the month of grace herein granted to the BUYER expire, without the payment & corresponding to both
months having been satisfied, an interest of ten (10%) per cent per annum shall be charged on the amounts
the BUYER should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse to
begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall not have paid
all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER
shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence
thereof, the SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this
contract had never been entered into. In case of such cancellation of this Contract, all the amounts which may
have been paid by the BUYER in accordance with the agreement, together with all the improvements made
on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises
and for liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this agreement
: and the BUYER hereby renounces his right to demand or reclaim the return of the same and further
obligates peacefully to vacate the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence, that judicial action for the rescission of a contract is not necessary
2

where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even
in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed
in University of the Philippines vs. Walfrido de los Angeles the act of a party in treating a contract as cancelled should be made
3

known to the other. We quote the pertinent excerpt:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in
account of infractions by the other contracting party must be made known to the other and is always
provisional being ever subject to scrutiny and review by the proper court. If the other party denies that
 rescission is justified it is free to resort to judicial action in its own behalf, and bring the matter to
court.Then, should the court, after due hearing, decide that the resolution of the contract was not warranted,
the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and
the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of
the corresponding court that will conclusively and finally settle whether the action taken was or was not
correct in law. But the law definitely does not require that the contracting party who believes itself injured
must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise,
the party injured by the other's breach will have to passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article 2203).

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent
declaring that judicial action is necessary for the resolution of a reciprocal obligation (Ocejo Perez & Co., vs.
International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820)
since in every case where the extrajudicial resolution is contested only the final award of the court of
competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that
judicial action win be necessary, as without it, the extrajudicial resolution will remain contestable and subject
to judicial invalidation unless attack thereon should become barred by acquiescense, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract
may render nugatory the general rule requiring judicial action (v. Footnote, Padilla Civil Law, Civil Code
Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the
other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation
being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder (Emphasis
supplied).

Of similar import is the ruling in Nera vs. Vacante , reading:

4

A stipulation entitling one party to take possession of the land and building if the other party violates the
contract does not ex propio vigore confer upon the former the right to take possession thereof if objected to
without judicial intervention and determination.

This was reiterated in Zulueta vs. Mariano where we held that extrajudicial rescission has legal effect where the other party does
5

not oppose it. Where it is objected to, a judicial determination of the issue is still necessary.
6

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the
debtor impugns the declaration, it shall be subject to judicial determination. 7

In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to
determine whether resolution of the contract by petitioners was warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice
of resolution, as held in the U.P. vs. Angeles case, supra

Petitioner relies on Torralba vs. De los Angeles where it was held that "there was no contract to rescind in court because from
8

the moment the petitioner defaulted in the timely payment of the installments, the contract between the parties was deemed ipso
facto rescinded." However, it should be noted that even in that case notice in writing was made to the vendee of the cancellation
and annulment of the contract although the contract entitled the seller to immediate repossessing of the land upon default by the
buyer.

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act
to Provide Protection to Buyers of Real Estate on Installment Payments." which took effect on September 14, 1972, when it
specifically provided:
 Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer
of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full
payment of the cash surrender value to the buyer. (Emphasis supplied).

The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious
because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to
stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has
been fully accorded. Moreover, it is a matter of public policy to protect buyers of real estate on installment payments against
9

onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on
installment payments.

Regarding the second issue on refund of the installment payments made by private respondent. Article 1385
of the Civil Code provides:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.

Neither sham rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be
replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no
evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest
at the legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if petitioners were
10

to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was made jointly and
severally liable with petitioner corporation for refund to private respondent of the total amount the latter had paid to petitioner
company. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons
composing it as wen as from that of any other legal entity to which it may be related. As a general rule, a corporation may not
11

be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice
versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice ; 12

or for purposes that could not have been intended by the law that created it ; or to defeat public convenience, justify wrong,
13

protect fraud, or defend crime. ; or to perpetuate fraud or confuse legitimate issues ; or to circumvent the law or perpetuate
14 15

deception ; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.
16 17

We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of its contract
with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person.

In this case, petitioner Onstott was made liable because he was then the President of the corporation and he a to be the controlling
stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He
cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a
single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate
personality. In this respect then, a modification of the Resolution under review is called for.
18

WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby modified. Petitioner Palay,
Inc. is directed to refund to respondent Nazario M. Dumpit the amount of P13,722.50, with interest at twelve (12%) percent per
annum from November 8, 1974, the date of the filing of the Complaint. The temporary Restraining Order heretofore issued is
hereby lifted.

No costs.

SO ORDERED.

G.R. No. L-42283 March 18, 1985

BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.:

This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the
contract to sell as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor
of the plaintiffs-appellees, to pay P500.00 attorney's fees and costs.

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

On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees
Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of
P3,920.00 plus 7% interest per annum.

The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance
in monthly installments of P 41.20 until fully paid, the installments being due and payable on the 19th day of each month. The
plaintiffs-appellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38.
On numerous occasions, the defendants-appellants accepted and received delayed installment payments from the plaintiffs-
appellees.

On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due
accounts.

On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet
subsequent payments. The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the
defendants-appellants.

The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District, Branch X to
compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia that after computing all
subsequent payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including
interests, realty taxes and incidental expenses for the registration and transfer of the land.

The defendants-appellants alleged in their answer that the complaint states no cause of action and that the plaintiffs-appellees
violated paragraph six (6) of the contract to sell when they failed and refused to pay and/or offer to pay the monthly installments
corresponding to the month of August, 1966 for more than five (5) months, thereby constraining the defendants-appellants to
cancel the said contract.

The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the decision reads:

WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in favor of the
plaintiffs and against the defendants declaring that the contract subject matter of the instant case was NOT
VALIDLY cancelled by the defendants. Consequently, the defendants are ordered to execute a final Deed of
Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees. Costs against the
defendants.

A motion for reconsideration filed by the defendants-appellants was denied.

As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves pure questions of law.

The defendants-appellants assigned the following alleged errors of the lower court:
 First Assignment of Error

THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (ANNEX "A" OF
COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED.

Second Assignment of Error

EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN LEGALLY
AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO
EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF.

Third Assignment of Error

THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE SUM OF
P500.00 AS ATTORNEY'S FEES.

The main issue to be resolved is whether or not the contract to sell has been automatically and validly cancelled by the
defendants-appellants.

The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of the contract which
provides:

xxx xxx xxx

SIXTH.—In case the party of the SECOND PART fails to satisfy any monthly installments, or any other
payments herein agreed upon, he is granted a month of grace within which to make the retarded payment,
together with the one corresponding to the said month of grace; it is understood, however, that should the
month of grace herein granted to the party of the SECOND PART expired; without the payments
corresponding to both months having been satisfied, an interest of 10% per annum will be charged on the
amounts he should have paid; it is understood further, that should a period of 90 days elapse, to begin from
the expiration of the month of grace herein mentioned, and the party of SECOND PART has not paid all the
amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART
has the right to declare this contract cancelled and of no effect, and as consequence thereof, the party of the
FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons, as if this
contract had never been entered into. In case of such cancellation of the contract, all the amounts paid in
accordance with this agreement together with all the improvements made on the premises, shall be considered
as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages
suffered by failure of the party of the SECOND PART to fulfill his part of the agreement; and the party of the
SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges
himself to peacefully vacate the premises and deliver the same to the party of the FIRST PART. (Emphasis
supplied by appellant)

xxx xxx xxx

The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966 installment despite demands for more
than four (4) months. The defendants-appellants point to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955)
where this Court upheld the right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision
or stipulation similar to paragraph 6 of the contract in this case. The defendants-appellants also argue that even in the absence of
the aforequoted provision, they had the right to cancel the contract to sell under Article 1191 of the Civil Code of the Philippines.

The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that paragraph 6 of the
contract to sell is contrary to law insofar as it provides that in case of specified breaches of its terms, the sellers have the right to
declare the contract cancelled and of no effect, because it granted the sellers an absolute and automatic right of rescission.

Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:
 The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.

xxx xxx xxx

Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the failure of the other to
perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits the parties from entering into an
agreement that violation of the terms of the contract would cause its cancellation even without court intervention (Froilan v. Pan
Oriental Shipping, Co., et al., 12 SCRA 276)—

Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where
the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions'
(Lopez v. Commissioner of Customs, 37 SCRA 327, and cases cited therein)

Resort to judicial action for rescission is obviously not contemplated . . . The validity of the stipulation can
not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has
been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA 504).

The rule that it is not always necessary for the injured party to resort to court for rescission of the contract when the contract itself
provides that it may be rescinded for violation of its terms and conditions, was qualified by this Court in University of the
Philippines v. De los Angeles, (35 SCRA 102) where we explained that:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on
account of infractions by the other contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that
rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated many consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of
the corresponding court that will conclusively and finally settle whether the action taken was or was not
correct in law. ... .

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent
declaring that judicial action is necessary for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v.
International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820)
since in every case where the extrajudicial resolution is contested only the final award of the court of
competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that
judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject
to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.

The right to rescind the contract for non-performance of one of its stipulations, therefore, is not absolute. In Universal Food
Corp. v. Court of Appeals (33 SCRA 1) the Court stated that—

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for
such substantial and fundamental breach as would defeat the very object of the parties in making the
agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach
of a contract is substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-
23707 & L-23720, Jan. 17, 1968). ... .

The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell which provides:
 SECOND.—That in consideration of the agreement of sale of the above described property, the party of the
SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND
NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency, plus interest at the rate of 7% per
annum, as follows:

(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is signed; and

(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of each month, from
this date until the total payment of the price above stipulated, including interest.

because they failed to pay the August installment, despite demand, for more than four (4) months.

The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the
initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9)
years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal
obligation was only P 3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate amount
of P 4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs- appellees. (See
J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that:

If the obligation has been substantially performed in good faith, the obligor may recover as though there had
been a strict and complete fulfillment, less damages suffered by the obligee.

also militates against the unilateral act of the defendants-appellants in cancelling the contract.

We agree with the observation of the lower court to the effect that:

Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this
subdivision is likewise purposely done to afford those landless, low income group people of realizing their
dream of a little parcel of land which they can really call their own.

The defendants-appellants cannot rely on paragraph 9 of the contract which provides:

NINTH.-That whatever consideration of the party of the FIRST PART may concede to the party of the
SECOND PART, as not exacting a strict compliance with the conditions of paragraph 6 of this contract, as
well as any other condonation that the party of the FIRST PART may give to the party of the SECOND
PART with regards to the obligations of the latter, should not be interpreted as a renunciation on the part of
the party of the FIRST PART of any right granted it by this contract, in case of default or non-compliance by
the party of the SECOND PART.

The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of paragraph 6 not merely
once, but for as many times as he wishes.

The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when the defendants-
appellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments,
though the plaintiffs-appellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the
defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. In De Guzman v.
Guieb (48 SCRA 68), we held that:

xxx xxx xxx

But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor, Teodoro de
Guzman, even took steps to cancel the option or to eject the appellees from the home-lot in question. On the
contrary, it is admitted that the delayed payments were received without protest or qualification. ... Under
these circumstances, We cannot but agree with the lower court that at the time appellees exercised their
option, appellants had already forfeited their right to invoke the above-quoted provision regarding the
 nullifying effect of the non-payment of six months rentals by appellees by their having accepted without
qualification on July 21, 1964 the full payment by appellees of all their arrearages.

The defendants-appellants contend in the second assignment of error that the ledger of payments show a balance of P671,67 due
from the plaintiffs-appellees. They submit that while it is true that the total monthly installments paid by the plaintiffs-appellees
may have exceeded P3,920.00, a substantial portion of the said payments were applied to the interests since the contract
specifically provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on paragraph 2 of the
contract which provides:

SECOND.—That in consideration of the agreement of sale of the above described property, the party of the
SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND
NINE HUNDRED TWENTY ONLY (P 3,920.00), Philippine Currency, plus interest at the rate of 7% per
annum ... . (Emphasis supplied)

The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid the defendants-appellants
a total sum of P4,533.38, the defendants-appellants must now be compelled to execute the final deed of sale pursuant to
paragraph 12 of the contract which provides:

TWELFTH.—That once the payment of the sum of P3,920.00, the total price of the sale is completed, the
party to the FIRST PART will execute in favor of the party of the SECOND PART, the necessary deed or
deeds to transfer to the latter the title of the parcel of land sold, free from all hens and encumbrances other
than those expressly provided in this contract; it is understood, however, that au the expenses which may be
incurred in the said transfer of title shall be paid by the party of the SECOND PART, as above stated.

Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the contract herein is a contract
of adhesion.

We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of
adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon which
they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no
opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis.
In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:

xxx xxx xxx

... (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties thereto. . . .
there are certain contracts almost all the provisions of which have been drafted only by one party, usually a
corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the
signing of his signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots
on the installment plan fall into this category. (Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p.
80.) (Emphasis supplied)

While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of
P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the
buyer upon payment of the P3,920.00 price sale.

The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with the observation
of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party who drafted the same,
especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now
sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers."

Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an
aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the
cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendants-appellants
must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents
as provided in paragraph 12 of the contract. The attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the
modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTY-
SEVEN CENTAVOS (P671.67) without any interests. Costs against the defendants-appellants.

SO ORDERED.

G.R. No. L-22590 March 20, 1987

SOLOMON BOYSAW and ALFREDO M. YULO, JR., plaintiffs-appellants,

vs.
INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR., and MANUEL NIETO, JR., defendants-appellees.

Felipe Torres and Associates for plaintiffs-appellants.

V.E. Del Rosario & Associates for defendant-appellee M. Nieto, Jr.

A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee Interphil Promotions, Inc.

RESOLUTION

FERNAN, J.:

This is an appeal interposed by Solomon Boysaw and Alfredo Yulo, Jr., from the decision dated July 25, 1963 and other rulings
and orders of the then Court of First Instance [CFI] of Rizal, Quezon City, Branch V in Civil Case No. Q-5063, entitled
"Solomon Boysaw and Alfredo M. Yulo, Jr., Plaintiffs versus Interphil Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto, Jr.,
Defendants," which, among others, ordered them to jointly and severally pay defendant-appellee Manuel Nieto, Jr., the total sum
of P25,000.00, broken down into P20,000.00 as moral damages and P5,000.00 as attorney's fees; the defendants-appellees
Interphil Promotions, Inc. and Lope Sarreal, Sr., P250,000.00 as unrealized profits, P33,369.72 as actual damages and P5,000.00
as attorney's fees; and defendant-appellee Lope Sarreal, Sr., the additional amount of P20,000.00 as moral damages aside from
costs.

The antecedent facts of the case are as follows:

On May 1, 1961, Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil Promotions, Inc. represented by
Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing contest for the junior lightweight championship of the
world.

It was stipulated that the bout would be held at the Rizal Memorial Stadium in Manila on September 30, 1961 or not later than
thirty [30] days thereafter should a postponement be mutually agreed upon, and that Boysaw would not, prior to the date of the
boxing contest, engage in any other such contest without the written consent of Interphil Promotions, Inc.

On May 3, 1961, a supplemental agreement on certain details not covered by the principal contract was entered into by Ketchum
and Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde to a similar agreement, that is, to engage Boysaw in a title fight
at the Rizal Memorial Stadium on September 30, 1961.

On June 19, 1961, Boysaw fought and defeated Louis Avila in a ten-round non-title bout held in Las Vegas, Nevada, U.S.A. [pp.
26-27, t.s.n., session of March 14, 1963].

On July 2, 1961, Ketchum on his own behalf and on behalf of his associate Frank Ruskay, assigned to J. Amado Araneta the
managerial rights over Solomon Boysaw.

Presumably in preparation for his engagement with Interphil, Solomon Boysaw arrived in the Philippines on July 31, 1961.
On September 1, 1961, J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the managerial rights over Boysaw that he earlier
acquired from Ketchum and Ruskay. The next day, September 2, 1961, Boysaw wrote Lope Sarreal, Sr. informing him of his
arrival and presence in the Philippines.

On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him of his acquisition of the managerial rights over Boysaw
and indicating his and Boysaw's readiness to comply with the boxing contract of May 1, 1961. On the same date, on behalf of
Interphil Sarreal wrote a letter to the Games and Amusement Board [GAB] expressing concern over reports that there had been a
switch of managers in the case of Boysaw, of which he had not been formally notified, and requesting that Boysaw be called to
an inquiry to clarify the situation.

The GAB called a series of conferences of the parties concerned culminating in the issuance of its decision to schedule the
Elorde-Boysaw fight for November 4, 1961. The USA National Boxing Association which has supervisory control of all world
title fights approved the date set by the GAB

Yulo, Jr. refused to accept the change in the fight date, maintaining his refusal even after Sarreal on September 26, 1961, offered
to advance the fight date to October 28, 1961 which was within the 30-day period of allowable postponements provided in the
principal boxing contract of May 1, 1961.

Early in October 1961, Yulo, Jr. exchanged communications with one Mamerto Besa, a local boxing promoter, for a possible
promotion of the projected Elorde-Boysaw title bout. In one of such communications dated October 6, 1961, Yulo informed Besa
that he was willing to approve the fight date of November 4,1961 provided the same was promoted by Besa.

While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961 boxing contract never
materialized.

As a result of the foregoing occurrences, on October 12, 1961, Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel
Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages allegedly occasioned by the refusal of Interphil and Sarreal,
aided and abetted by Nieto, Jr., then GAB Chairman, to honor their commitments under the boxing contract of May 1,1961.

On the first scheduled date of trial, plaintiff moved to disqualify Solicitor Jorge Coquia of the Solicitor General's Office and Atty.
Romeo Edu of the GAB Legal Department from appearing for defendant Nieto, Jr. on the ground that the latter had been sued in
his personal capacity and, therefore, was not entitled to be represented by government counsel. The motion was denied insofar as
Solicitor General Coquia was concerned, but was granted as regards the disqualification of Atty. Edu.

The case dragged into 1963 when sometime in the early part of said year, plaintiff Boysaw left the country without informing the
court and, as alleged, his counsel. He was still abroad when, on May 13, 1963, he was scheduled to take the witness stand. Thus,
the lower court reset the trial for June 20, 1963. Since Boysaw was still abroad on the later date, another postponement was
granted by the lower court for July 23, 1963 upon assurance of Boysaw's counsel that should Boysaw fail to appear on said date,
plaintiff's case would be deemed submitted on the evidence thus far presented.

On or about July 16, 1963, plaintiffs represented by a new counsel, filed an urgent motion for postponement of the July 23, 1963
trial, pleading anew Boysaw's inability to return to the country on time. The motion was denied; so was the motion for
reconsideration filed by plaintiffs on July 22, 1963.

The trial proceeded as scheduled on July 23, 1963 with plaintiff's case being deemed submitted after the plaintiffs declined to
submit documentary evidence when they had no other witnesses to present. When defendant's counsel was about to present their
case, plaintiff's counsel after asking the court's permission, took no further part in the proceedings.

After the lower court rendered its judgment dismissing the plaintiffs' complaint, the plaintiffs moved for a new trial. The motion
was denied, hence, this appeal taken directly to this Court by reason of the amount involved.

From the errors assigned by the plaintiffs, as having been committed by the lower court, the following principal issues can be
deduced:

1. Whether or not there was a violation of the fight contract of May 1, 1961; and if there was, who was guilty
of such violation.
 2. Whether or not there was legal ground for the postponement of the fight date from September 1, 1961, as
stipulated in the May 1, 1961 boxing contract, to November 4,1961,

3. Whether or not the lower court erred in the refusing a postponement of the July 23, 1963 trial.

4. Whether or not the lower court erred in denying the appellant's motion for a new trial.

5. Whether or not the lower court, on the basis of the evidence adduced, erred in awarding the appellees
damages of the character and amount stated in the decision.

On the issue pertaining to the violation of the May 1, 1961 fight contract, the evidence established that the contract was violated
by appellant Boysaw himself when, without the approval or consent of Interphil, he fought Louis Avila on June 19, 1961 in Las
Vegas Nevada. Appellant Yulo admitted this fact during the trial. [pp. 26-27, t.s.n., March 14, 1963].

While the contract imposed no penalty for such violation, this does not grant any of the parties the unbridled liberty to breach it
with impunity. Our law on contracts recognizes the principle that actionable injury inheres in every contractual breach. Thus:

Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in
any manner contravene the terms thereof, are liable for damages. [Art. 1170, Civil Code].

Also:

The power to rescind obligations is implied, in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him. [Part 1, Art. 1191, Civil Code].

There is no doubt that the contract in question gave rise to reciprocal obligations. "Reciprocal obligations are those which arise
from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent
upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1

The power to rescind is given to the injured party. "Where the plaintiff is the party who did not perform the undertaking which he
was bound by the terms of the agreement to perform 4 he is not entitled to insist upon the performance of the contract by the
defendant, or recover damages by reason of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581, Emphasis supplied].

Another violation of the contract in question was the assignment and transfer, first to J. Amado Araneta, and subsequently, to
appellant Yulo, Jr., of the managerial rights over Boysaw without the knowledge or consent of Interphil.

The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the original contract which, to
be valid, should have been consented to by Interphil.

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.[Art. 1293,
Civil Code, emphasis supplied].

That appellant Yulo, Jr., through a letter, advised Interphil on September 5, 1961 of his acquisition of the managerial rights over
Boysaw cannot change the fact that such acquisition, and the prior acquisition of such rights by Araneta were done without the
consent of Interphil. There is no showing that Interphil, upon receipt of Yulo's letter, acceded to the "substitution" by Yulo of the
original principal obligor, who is Ketchum. The logical presumption can only be that, with Interphil's letter to the GAB
expressing concern over reported managerial changes and requesting for clarification on the matter, the appellees were not
reliably informed of the changes of managers. Not being reliably informed, appellees cannot be deemed to have consented to
such changes.

Under the law when a contract is unlawfully novated by an applicable and unilateral substitution of the obligor by another, the
aggrieved creditor is not bound to deal with the substitute.
 The consent of the creditor to the change of debtors, whether in expromision or delegacion is an,
indispensable requirement . . . Substitution of one debtor for another may delay or prevent the fulfillment of
the obligation by reason of the inability or insolvency of the new debtor, hence, the creditor should agree to
accept the substitution in order that it may be binding on him.

Thus, in a contract where x is the creditor and y is the debtor, if y enters into a contract with z, under which
he transfers to z all his rights under the first contract, together with the obligations thereunder, but such
transfer is not consented to or approved by x, there is no novation. X can still bring his action against y for
performance of their contract or damages in case of breach. [Tolentino, Civil Code of the Philippines, Vol.
IV, p. 3611.

From the evidence, it is clear that the appellees, instead of availing themselves of the options given to them by law of rescission
or refusal to recognize the substitute obligor Yulo, really wanted to postpone the fight date owing to an injury that Elorde
sustained in a recent bout. That the appellees had the justification to renegotiate the original contract, particularly the fight date is
undeniable from the facts aforestated. Under the circumstances, the appellees' desire to postpone the fight date could neither be
unlawful nor unreasonable.

We uphold the appellees' contention that since all the rights on the matter rested with the appellees, and appellants' claims, if any,
to the enforcement of the contract hung entirely upon the former's pleasure and sufferance, the GAB did not act arbitrarily in
acceding to the appellee's request to reset the fight date to November 4, 1961. It must be noted that appellant Yulo had earlier
agreed to abide by the GAB ruling.

In a show of accommodation, the appellees offered to advance the November 4, 1961 fight to October 28, 1961 just to place it
within the 30- day limit of allowable postponements stipulated in the original boxing contract.

The refusal of appellants to accept a postponement without any other reason but the implementation of the terms of the original
boxing contract entirely overlooks the fact that by virtue of the violations they have committed of the terms thereof, they have
forfeited any right to its enforcement.

On the validity of the fight postponement, the violations of the terms of the original contract by appellants vested the appellees
with the right to rescind and repudiate such contract altogether. That they sought to seek an adjustment of one particular covenant
of the contract, is under the circumstances, within the appellee's rights.

While the appellants concede to the GAB's authority to regulate boxing contests, including the setting of dates thereof, [pp. 44-
49, t.s.n., Jan. 17, 1963], it is their contention that only Manuel Nieto, Jr. made the decision for postponement, thereby arrogating
to himself the prerogatives of the whole GAB Board.

The records do not support appellants' contention. Appellant Yulo himself admitted that it was the GAB Board that set the
questioned fight date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it must be stated that one of the strongest presumptions of law is that
official duty has been regularly performed. In this case, the absence of evidence to the contrary, warrants the full application of
said presumption that the decision to set the Elorde-Boysaw fight on November 4, 1961 was a GAB Board decision and not of
Manuel Nieto, Jr. alone.

Anent the lower court's refusal to postpone the July 23, 1963 trial, suffice it to say that the same issue had been raised before Us
by appellants in a petition for certiorari and prohibition docketed as G.R. No. L-21506. The dismissal by the Court of said
petition had laid this issue to rest, and appellants cannot now hope to resurrect the said issue in this appeal.

On the denial of appellant's motion for a new trial, we find that the lower court did not commit any reversible error.

The alleged newly discovered evidence, upon which the motion for new trial was made to rest, consists merely of clearances
which Boysaw secured from the clerk of court prior to his departure for abroad. Such evidence cannot alter the result of the case
even if admitted for they can only prove that Boysaw did not leave the country without notice to the court or his counsel.

The argument of appellants is that if the clearances were admitted to support the motion for a new trial, the lower court would
have allowed the postponement of the trial, it being convinced that Boysaw did not leave without notice to the court or to his
counsel. Boysaw's testimony upon his return would, then, have altered the results of the case.
We find the argument without merit because it confuses the evidence of the clearances and the testimony of Boysaw. We uphold
the lower court's ruling that:

The said documents [clearances] are not evidence to offset the evidence adduced during the hearing of the
defendants. In fact, the clearances are not even material to the issues raised. It is the opinion of the Court that
the 'newly discovered evidence' contemplated in Rule 37 of the Rules of Court, is such kind of evidence
which has reference to the merits of the case, of such a nature and kind, that if it were presented, it would
alter the result of the judgment. As admitted by the counsel in their pleadings, such clearances might have
impelled the Court to grant the postponement prayed for by them had they been presented on time. The
question of the denial of the postponement sought for by counsel for plaintiffs is a moot issue . . . The denial
of the petition for certiorari and prohibition filed by them, had he effect of sustaining such ruling of the court
. . . [pp. 296-297, Record on Appeal].

The testimony of Boysaw cannot be considered newly discovered evidence for as appellees rightly contend, such evidence has
been in existence waiting only to be elicited from him by questioning.

We cite with approval appellee's contention that "the two qualities that ought to concur or dwell on each and every of evidence
that is invoked as a ground for new trial in order to warrant the reopening . . . inhered separately on two unrelated species of
proof" which "creates a legal monstrosity that deserves no recognition."

On the issue pertaining to the award of excessive damages, it must be noted that because the appellants wilfully refused to
participate in the final hearing and refused to present documentary evidence after they no longer had witnesses to present, they,
by their own acts prevented themselves from objecting to or presenting proof contrary to those adduced for the appellees.

On the actual damages awarded to appellees, the appellants contend that a conclusion or finding based upon the uncorroborated
testimony of a lone witness cannot be sufficient. We hold that in civil cases, there is no rule requiring more than one witness or
declaring that the testimony of a single witness will not suffice to establish facts, especially where such testimony has not been
contradicted or rebutted. Thus, we find no reason to disturb the award of P250,000.00 as and for unrealized profits to the
appellees.

On the award of actual damages to Interphil and Sarreal, the records bear sufficient evidence presented by appellees of actual
damages which were neither objected to nor rebutted by appellants, again because they adamantly refused to participate in the
court proceedings.

The award of attorney's fees in the amount of P5,000.00 in favor of defendant-appellee Manuel Nieto, Jr. and another P5,000.00
in favor of defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr., jointly, cannot also be regarded as excessive
considering the extent and nature of defensecounsels' services which involved legal work for sixteen [16] months.

However, in the matter of moral damages, we are inclined to uphold the appellant's contention that the award is not sanctioned by
law and well- settled authorities. Art. 2219 of the Civil Code provides:

Art. 2219. Moral damages may be recovered in the following analogous cases:

1) A criminal offense resulting in physical injuries;

2) Quasi-delict 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 Art. 309.

10) Acts and actions referred to in Arts., 21, 26, 27, 28, 29, 30, 32, 34 and 35.

The award of moral damages in the instant case is not based on any of the cases enumerated in Art. 2219 of the Civil Code. The
action herein brought by plaintiffs-appellants is based on a perceived breach committed by the defendants-appellees of the
contract of May 1, 1961, and cannot, as such, be arbitrarily considered as a case of malicious prosecution.

Moral damages cannot be imposed on a party litigant although such litigant exercises it erroneously because if the action has
been erroneously filed, such litigant may be penalized for costs.

The grant of moral damages is not subject to the whims and caprices of judges or courts. The court's
discretion in granting or refusing it is governed by reason and justice. In order that a person may be made
liable to the payment of moral damages, the law requires that his act be wrongful. The adverse result of an
action does not per se make the act wrongful and subject the actor to the payment of moral damages. The law
could not have meant to impose a penalty on the right to litigate; such right is so precious that moral damages
may not be charged on those who may exercise it erroneously. For these the law taxes costs. [Barreto vs.
Arevalo, et. al. No. L-7748, Aug. 27, 1956, 52 O.G., No. 13, p. 5818.]

WHEREFORE, except for the award of moral damages which is herein deleted, the decision of the lower court is hereby
affirmed.

SO ORDERED.

G.R. No. L-67881

PILIPINAS BANK as Successor-In-Interest Of And/Or In substitution to, The MANUFACTURERS BANK AND
TRUST COMPANY, petitioner-appellant
vs.
INTERMEDIATE APPELLATE COURT (Fourth Civil Cases Division), and JOSE W. DIOKNO and CARMEN I.
DIOKNO, respondents-appellees.

PARAS, J.:

This is an appeal by certiorari from the Decision of the respondent court dated May 31, 1984 in CA-G.R. CV No. 67205 entitled
1

"Jose W. Diokno and Carmen I. Diokno, plaintiffs-appellees, vs. The Manufacturers Bank and Trust Company, defendant-
appellant" which affirmed the decision of the Court of First Instance of Rizal (Pasig Branch XXI) in Civil Case No. 19660, the
2

dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of the plaintiffs and against the defendant, ordering the defendant
Manufacturers Bank & Trust Company:

1. To deliver to the plaintiffs the parcel of land described in Contract to Sell No. VV-18-(a) in the total area of 5,936
square meters and to execute in their favor the necessary deed of absolute sale therefor;

2. To pay the sum of P556,160.00 less the amount due on the contract (i.e., the unpaid installments from December,
1966 until the contract would have been fully paid together with interest thereon up to March 25, 1974) with legal
interest on said balance from April 22, 1974 until the same is fully paid;

3. P50,000.00 by way of moral damages;

 4. P50,000.00 by way of exemplary damages;

5. Ten per cent (10%) of the judgment by way of attorney's fees; and

6. Costs of suit.

SO ORDERED. (Rollo, pp. 14-15)

The following are the undisputed facts of the case:

1. On April 18, 1961, Hacienda Benito, Inc. (petitioner's predecessor-in-interest) as vendor, and private respondents, as vendees
executed Contract to Sell No. VV-18 (a) (Exh. A) over a parcel of land with an area of 5,936 square meters of the Victoria Valley
Subdivision in Antipolo, Rizal, subject to the following terms and conditions, among others, relevant to this petition:

(a) The total contract price for the entire 5,936 square-meter-lot was P47,488.00;

(b) Of the total sum, an amount of Pl2,182.00 was applied thereto so as to reduce the balance on the principal to
P35,306.00;

(c) The aforesaid balance, together with the stipulated interest of 6% per annum, was to be paid over a period of 8-1/2
years starting on May 1, 1961 at a monthly installment of P446.10 until fully paid-although this monthly installment
was later adjusted to the higher amount of P797.86, starting on April 1, 1965;

(d) Upon complete payment by the vendee of the total price of the lot the vendor shall execute a deed of sale in favor of
the vendee;

(e) The contract shall be considered automatically rescinded and cancelled and of no further force and effect upon
failure of the vendee to pay when due, three or more consecutive installments as stipulated therein or to comply with
any of the terms and conditions thereof, in which case the vendor shall have right to resell the said parcel of land to any
person interested, forfeiting payments made by the vendee as liquidated damages.

2. On July 27, 1965, petitioner sent to private respondents a Statement of Account (Exh. F-1) requesting remittance of installment
arrears showing partial payments for the month of April 1965 and May 1965 and complete default for June, July and August,
1965;

3. Likewise, on August 31, 1965, petitioner sent to private respondents another Statement of Account with the additional entries
of interests and the incoming installment for September, 1965;

4. In partial compliance with the aforesaid Statements of Account, private respondents paid on September 3, 1965 the sum of
Pl,397.00 which answers for the installments for the months of June 1965 to August 1965;

5. On March 17, 1967, petitioner sent private respondents a simple demand letter showing a delinquency in their monthly
amortizations for 19 months (Exh. 9);

6. On April 17, 1967, petitioner again sent private respondents a demand letter showing total arrearages of 20 months as of April
1965, but this time advising that unless they up-date their installment payments, petitioner shall be constrained to avail of the
automatic rescission clause (Exh. 10);

7. On May 17, 1967, private respondents made a partial payment of P2,000.00 with the request for an extension of 60 days from
May 17, 1967 within which to up-date their account (Exh. 10-a);

8. On July 17, 1967, private respondents wrote a letter to petitioner asking another extension of sixty (60) days to pay all their
arrearages and update their payments under Contract No. VV-18 (a);

9. On September 18, 1967, private respondents paid P5,000.00 as partial payment and requested an extension of another 30 days
from September 18, 1967 within which to update their account (Exh. 10-c);
10. On October 19, 1967, however, private respondents failed to update their arrearages and did not request for any further
extension of time within which to update their account;

11. After almost three (3) years, or on July 16, 1970, private respondents wrote a letter to petitioner requesting for a Statement of
Account as of date in arrears and interests(Exh. 10-d), to which petitioner made a reply on July 22, 1970 (Exh. 11);

12. On May 19, 1971, petitioner wrote a letter to private respondents, reminding them of their balance which will be due on the
31st instant (Exh. J);

13. More than two (2) years from May 19, 1971 or on July 5, 1973, private respondents wrote a letter to petitioner expressing
their desire to fully settle their obligation, requesting for a complete statement of all the balance due including interests;

14. On March 14, 1974, private respondents wrote a letter reiterating their request in their letter dated July 5, 1973, which has not
been complied with despite several follow-ups (Exh. O);

15. On March 25, 1974, private respondent Carmen I. Diokno went to see the Chairman of petitioner's Board of Directors on the
matter informing him that she had a buyer who was ready to purchase the property,

16. On March 27, 1974, petitioner wrote a letter to private respondents, informing them that the contract to sell had been
rescinded/cancelled by a notarial act, to which letter was annexed a "Demand for Rescission of Contract", notarized on March 25,
1974 (Exh. 12);

17. In view of the foregoing, private respondents filed Complaint for Specific Performance with Damages to compel petitioner to
execute a deed of sale in their favor, and to deliver to them the title of the lot in question.

18. Petitioner filed an Answer with counterclaim for damages in the form of attorney's fees, claiming that Contract to Sell No.
VV-18(a) has been automatically rescinded or cancelled by virtue of private respondents' failure to pay the installments due in the
contract under the automatic rescission clause.

19. After trial, the lower court rendered a decision in private respondents' favor, holding that petitioner could not rescind the
contract to sell, because: (a) petitioner waived the automatic rescission clause by accepting payment on September 1967, and by
sending letters advising private respondents of the balances due, thus, looking forward to receiving payments thereon; (b) in any
event, until May 18, 1977 (when petitioner made arrangements for the acquisition of additional 870 square meters) petitioner
could not have delivered the entire area contracted for, so, neither could private respondents be liable in default, citing Art. 1 189
of the New Civil Code. (Decision, pp. 141-148, Amended Record on Appeal).

Said decision was affirmed on appeal.

Hence, this Petition For Review on Certiorari, raising the main issue of whether or not the Contract to Sell No. VV-18(a) was
rescinded or cancelled, under the automatic rescission clause contained therein.

We find the petition meritless. While it is true that in the leading case of Luzon Brokerage Co., Inc. vs. Maritime Building Co.,
Inc. and Myers Building Co., 43 SCRA 93 the Supreme Court reiterated among other things that a contractual provision allowing
"automatic rescission" (without prior need of judicial rescission, resolution or cancellation) is VALID, the remedy of one who
feels aggrieved being to go to Court for the cancellation of the rescission itself, in case the rescission is found unjustified under
the circumstances, still in the instant case there is a clear WAIVER of the stipulated right of "automatic rescission," as evidenced
by the many extensions granted private respondents by the petitioner. In all these extensions, the petitioner never called attention
to the proviso on "automatic rescission."

WHEREFORE the assailed decision is hereby AFFIRMED but the actual damages are hereby reduced to P250,000.00 (the profit
private respondents could have earned had the land been delivered to them at the time they were ready to pay all their arrearages)
minus whatever private respondents still owe the petitioner (with the stipulated 6% annual interest up to March 25, 1974) as a
result of the contract.

SO ORDERED.

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings
Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No.
52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan,
which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages
with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application
for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his
100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on
the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan
proceeds solely as an additional capital to develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino
and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the
date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00
loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-
deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no
fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised
repeatedly the release of the P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity
problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the
Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments in government
securities] excluding extensions or renewals of already approved loans, provided that such extensions or
renewals shall be subject to review by the Superintendent of Banks, who may impose such limitations as may
be necessary to insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its
solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed
the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an
application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino;
and the sheriff scheduled the auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific
performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the
P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate
mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining
the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M.
Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp.
65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio
M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due
thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision
by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can
neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be
foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they
undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of
the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has
performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and
willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a
real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of
Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April
28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June
14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for
Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over
insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948,
the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with
its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously
contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor
does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190
[1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is
taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for
the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00
balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was
improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest
for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it,
which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not
affect, much less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with
its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are
expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA
151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their
customers, they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of
events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral
being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy
on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral
turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting
proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15.
1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections
not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue
before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino,
under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But
since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot
grant specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the
P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed
to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan.
The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His
failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission
(Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is,
Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he
would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to
perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed
to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the
liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for
damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties
and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00
debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use
of the P17,000.00, it is just that he should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00
debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs.
Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was
no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for
lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration
is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to
pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is
partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172
N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less
than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins.
Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio
M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering
100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as
a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of
this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of
the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment
of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or
creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED,
AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF
P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22,
1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985
UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES
SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND
IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

[G.R. NO. 149338 : July 28, 2008]

UNLAD RESOURCES DEVELOPMENT CORPORATION, UNLAD RURAL

BANK OF NOVELETA, INC., UNLAD COMMODITIES, INC., HELENA Z.
BENITEZ, and CONRADO L. BENITEZ II, Petitioners, v.RENATO P.
DRAGON, TARCISIUS R. RODRIGUEZ, VICENTE D. CASAS, ROMULO M.
VIRATA, FLAVIANO PERDITO, TEOTIMO BENITEZ, ELENA BENITEZ,
and ROLANDO SUAREZ, Respondents.
 DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of
Civil Procedure seeking the reversal of the November 29, 2000 Decision1 and August
2, 2001 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 54226.

The facts, as found by the CA, are as follows:

On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein
petitioner) Unlad Resources, through its Chairman[,] Helena Z. Benitez[,] entered into
a Memorandum of Agreement wherein it is provided that [respondents], as controlling
stockholders of the Rural Bank [of Noveleta] shall allow Unlad Resources to invest
four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the
form of additional equity. On the other hand, [petitioner] Unlad Resources bound
itself to invest the said amount of 4.8 million pesos in the Rural Bank; upon signing, it
was, likewise, agreed that [petitioner] Unlad Resources shall subscribe to a minimum
of four hundred eighty thousand pesos (P480,000.00) (sic) common or preferred non-
voting shares of stock with a total par value of four million eight hundred thousand
pesos (P4,800,000.00) and pay up immediately one million two hundred thousand
pesos (P1,200,000.00) for said subscription; that the [respondents], upon the signing
of the said agreement shall transfer control and management over the Rural Bank to
Unlad Resources. According to the [respondents], immediately after the signing of the
agreement, they complied with their obligation and transferred control of the Rural
Bank to Unlad Resources and its nominees and the Bank was renamed the Unlad
Rural Bank of Noveleta, Inc. However, [respondents] claim that despite repeated
demands, Unlad Resources has failed and refused to comply with their obligation
under the said Memorandum of Agreement when it did not invest four million eight
hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of additional
equity and, likewise, it failed to immediately infuse one million two hundred thousand
pesos (P1,200,000.00) as paid in capital upon signing of the Memorandum of
Agreement.

On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources passed
Resolution No. 84-041 authorizing the President and the General Manager to lease a
mango plantation situated in Naic, Cavite. Pursuant to this Resolution, the Bank as
[lessee] entered into a Contract of Lease with the [petitioner] Helena Z. Benitez as
[lessor]. The management of the mango plantation was undertaken by Unlad
Commodities, Inc., a subsidiary of Unlad Resources[,] under a Management Contract
Agreement. The Management Contract provides that Unlad Commodities, Inc. would
receive eighty percent (80%) of the net profits generated by the operation of the
mango plantation while the Bank's share is twenty percent (20%). It was further
agreed that at the end of the lease period, the Rural Bank shall turn over to the lessor
all permanent improvements introduced by it on the plantation.

xxx

On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the]
Central Bank's approval to retire its [Development Bank of the Philippines] preferred
shares in the amount of P219,000.00 and giving notice for subscription to
proportionate shares. The [respondents] objected on the grounds that there is already a
sinking fund for the retirement of the said DBP-held preferred shares provided for
annually and that it could deprive the Rural Bank of a cheap source of fund. (sic)

[Respondents] alleged compliance with all of their obligations under the

Memorandum of Agreement in that they have transferred control and management
over the Rural bank to the [petitioners] and are ready, willing and able to allow
[petitioners] to subscribe to a minimum of four hundred eighty thousand
(P480,000.00) (sic) common or preferred non-voting shares of stocks with a total par
value of four million eight hundred thousand pesos (P4,800,000.00) in the Rural
Bank. However, [petitioners] have failed and refused to subscribe to the said shares of
stock and to pay the initial amount of one million two hundred thousand pesos
(P1,200,000.00) for said subscription.3

On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of
Makati City, Branch 61 a Complaint4 for rescission of the agreement and the return of
control and management of the Rural Bank from petitioners to respondents, plus
damages. After trial, the RTC rendered a Decision,5 the dispositive portion of which
provides:

WHEREFORE, Premises Considered, judgment is hereby rendered, as follows:

1. The Memorandum of Agreement dated 29 December 1991 (sic) is hereby declared

rescinded and:

(a) Defendant Unlad Resources Development Corporation is hereby ordered to

immediately return control and management over the Rural Bank of Noveleta, Inc. to
Plaintiffs; and
cralawlibrary

(b) Unlad Rural Bank of Noveleta, Inc. is hereby ordered to return to Defendants the
sum of One Million Three Thousand Seventy Pesos (P1,003,070.00)
2. The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby
appointed as Receiver of the Rural Bank;

3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the retired
DBP-held preferred shares available for subscription and the same is hereby ordered
to be placed under a sinking fund;

4. Defendant Unlad Resources Development Corporation is hereby ordered to pay

plaintiffs the following:

(a) actual compensatory damages amounting to Four Million Six Hundred One
Thousand Seven Hundred Sixty - Five and 38/100 Pesos (P4,601,765.38);

(b) moral damages in the amount of Five Hundred Thousand Pesos (P500,000.00);

(c) exemplary and corrective damages in the amount of One Hundred Thousand Pesos
(P100,000.00); and cralawlibrary

(d) attorney's fees in the sum of (P100,000.00), plus cost of suit.

SO ORDERED.6

Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to
Dismiss and, subsequently, a Supplemental Motion to Dismiss, which were both
denied. Later, however, the CA, in a Decision dated November 29, 2000, dismissed
the appeal for lack of merit and affirmed the RTC Decision in all respects. Petitioners'
motion for reconsideration was denied in CA Resolution dated August 2, 2001.

Petitioners are now before this Court alleging that the CA committed a grave and
serious reversible error in issuing the assailed Decision. Petitioners question the
jurisdiction of the trial court, something they have done from the beginning of the
controversy, contending that the issues that respondents raised before the trial court
are intra-corporate in nature and are, therefore, beyond the jurisdiction of the trial
court. They point out that respondents' complaint charged them with mismanagement
and alleged dissipation of the assets of the Rural Bank. Since the complaint challenges
corporate actions and decisions of the Board of Directors and prays for the recovery of
the control and management of the Rural Bank, these matters fall outside the
jurisdiction of the trial court. Thus, they posit that the judgment of the trial court, as
affirmed by the CA, is null and void and may be impugned at any time.

Petitioners further argue that the action instituted by respondents had already
prescribed, because Article 1389 of the Civil Code provides that an action for
rescission must be commenced within four years. They claim that the trial court and
the CA mistakenly applied Article 1144 of the Civil Code which treats of prescription
of actions in general. They submit that Article 1389, which deals specifically with
actions for rescission, is the applicable law.

Moreover, petitioners assert that they have fully complied with their undertaking
under the subject Memorandum of Agreement, but that the undertaking has become a
"legal and factual impossibility" because the authorized capital stock of the Rural
Bank was increased from P1.7 million to only P5 million, and could not accommodate
the subscription by petitioners of P4.8 million worth of shares. Such deficiency,
petitioners contend, is with the knowledge and approval of respondent Renato P.
Dragon and his nominees to the Board of Directors.

Petitioners, without conceding the propriety of the judgment of rescission, also argue
that the subject Memorandum of Agreement could not just be ordered rescinded
without the corresponding order for the restitution of the parties' total contributions
and/or investments in the Rural Bank. Finally, they assail the award for moral and
exemplary damages, as well as the award for attorney's fees, as bereft of factual and
legal bases given that, in the body of the Decision, it was merely stated that
respondents suffered moral damages without any discussion or explanation of, nor any
justification for such award. Likewise, the matter of attorney's fees was not at all
discussed in the body of the Decision. Petitioners claim that pursuant to the prevailing
rule, attorney's fees cannot be recovered in the absence of stipulation.

On the other hand, respondents declare that immediately after the signing of the
Memorandum of Agreement, they complied with their obligation and transferred
control of the Rural Bank to petitioner Unlad Resources and its nominees, but that,
despite repeated demands, petitioners have failed and refused to comply with their
concomitant obligations under the Agreement.

Respondents narrate that shortly after taking over the Rural Bank, petitioners Conrado
L. Benitez II and Jorge C. Cerbo, as President and General Manager, respectively,
entered into a Contract of Lease over the Naic, Cavite mango plantation, and that, as a
consequence of this venture, the bank incurred expenses amounting to P475,371.57,
equivalent to 25.76% of its capital and surplus. The respondents further assert that the
Central Bank found this undertaking not inherently connected with bona fide rural
banking operations, nor does it fall within the allied undertakings permitted under
Section 26 of Central Bank Circular No. 741 and Section 3379 of the Manual of
Regulations of the Central Bank. Thus, respondents contend that this circumstance,
coupled with the fact that petitioners Helena Z. Benitez and Conrado L. Benitez II
were also stockholders and members of the Board of Directors of Unlad Resources,
Unlad Rural Bank, and Unlad Commodities at that time, is adequate proof that the
Rural Bank's management had every intention of diverting, dissipating, and/or
wasting the bank's assets for petitioners' own gain.

They likewise allege that because of the failure of petitioners to comply with their
obligations under the Memorandum of Agreement, respondents, with the exception of
Tarcisius Rodriguez, lodged a complaint with the Securities and Exchange
Commission (SEC), seeking rescission of the Agreement, damages, and the
appointment of a management committee, but the SEC dismissed the complaint for
lack of jurisdiction.

Furthermore, when the Rural Bank informed respondents of the Central Bank's
approval of its plan to retire its DBP-held preferred shares, giving notices for
subscription to proportionate shares, respondents objected on the ground that there
was already a sinking fund for the retirement of said shares provided for annually, and
that the retirement would deprive the petitioner Rural Bank of a cheap source of fund.
It was at that point, respondents claim, that they instituted the aforementioned
Complaint against petitioners before the RTC of Makati.

The respondents also seek the outright dismissal of this Petition for lack of
verification as to petitioners Helena Z. Benitez and Conrado L. Benitez II; lack of
proper verification as to petitioners Unlad Resources Development Corporation,
Unlad Rural Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper
verified statement of material dates; and lack of proper sworn certification of non-
forum shopping.

They support the proposition that Tijam v. Sibonghanoy7 applies, and that petitioners
are indeed estopped from questioning the jurisdiction of the trial court. They also
share the lower court's view that it is Article 1144 of the Civil Code, and not Article
1389, that is applicable to this case. Finally, respondents allege that the failure of
petitioner Unlad Resources to comply with its undertaking under the Agreement, as
uniformly found by the trial court and the CA, may no longer be assailed in the instant
Petition, and that the award of moral and exemplary damages and attorney's fees is
justified.

The Petition is bereft of merit. We uphold the Decision of the CA affirming that of the
RTC.

First, the subject of jurisdiction. The main issue in this case is the rescission of the
Memorandum of Agreement. This is to be distinguished from respondents' allegation
of the alleged mismanagement and dissipation of corporate assets by the petitioners
which is based on the prayer for receivership over the bank. The two issues, albeit
related, are obviously separate, as they pertain to different acts of the parties involved.
The issue of receivership does not arise from the parties' obligations under the
Memorandum of Agreement, but rather from specific acts attributed to petitioners as
members of the Board of Directors of the Bank. Clearly, the rescission of the
Memorandum of Agreement is a cause of action within the jurisdiction of the trial
courts, notwithstanding the fact that the parties involved are all directors of the same
corporation.

Still, the petitioners insist that the trial court had no jurisdiction over the complaint
because the issues involved are intra-corporate in nature.

This argument miserably fails to persuade. The law in force at the time of the filing of
the case was Presidential Decree (P.D.) 902-A, Section 5(b) of which vested the
Securities and Exchange Commission with original and exclusive jurisdiction to hear
and decide cases involving controversies arising out of intra-corporate
relations.8 Interpreting this statutorily conferred jurisdiction on the SEC, this Court
had occasion to state:

Nowhere in said decree do we find even so much as an [intimation] that absolute

jurisdiction and control is vested in the Securities and Exchange Commission in all
matters affecting corporations. To uphold the respondent's arguments would remove
without legal imprimatur from the regular courts all conflicts over matters involving
or affecting corporations, regardless of the nature of the transactions which give rise
to such disputes. The courts would then be divested of jurisdiction not by reason of
the nature of the dispute submitted to them for adjudication, but solely for the reason
that the dispute involves a corporation. This cannot be done.9

It is well to remember that the respondents had actually filed with the SEC a case
against the petitioners which, however, was dismissed for lack of jurisdiction due to
the pendency of the case before the RTC.10The SEC's Order dismissing the
respondents' complaint is instructive:

From the foregoing allegations, it is apparent that the present action involves two
separate causes of action which are interrelated, and the resolution of which hinges on
the very document sought to be rescinded. The assertion that the defendants failed to
comply with their contractual undertaking and the claim for rescission of the contract
by the plaintiffs has, in effect, put in issue the very status of the herein defendants as
stockholders of the Rural Bank. The issue as to whether or not the defendants are
stockholders of the Rural Bank is a pivotal issue to be determined on the basis of the
Memorandum of Agreement. It is a prejudicial question and a logical antecedent to
confer jurisdiction to this Commission.
It is to be noted, however, that determination of the contractual undertaking of the
parties under a contract lies with the Regional Trial Courts and not with this
Commission. x x x11

Be that as it may, this point has been rendered moot by Republic Act (R.A.) No. 8799,
also known as the Securities Regulation Code. This law, which took effect in 2000,
has transferred jurisdiction over such disputes to the RTC. Specifically, R.A. 8799
provides:

Sec. 5. Powers and Functions of the Commission

xxx

5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme
Court in the exercise of its authority may designate the Regional Trial Court branches
that shall exercise jurisdiction over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final
resolution which should be resolved within one (1) year from the enactment of this
Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

Section 5 of P.D. No. 902-A reads, thus:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:

a) Devices and schemes employed by or any acts of the board of directors, business
associates, its officers or partnership, amounting to fraud and misrepresentation which
may be detrimental to the interest of the public and/or of the stockholder, partners,
members of associations or organizations registered with the Commission;

b) Controversies arising out of intra-corporate or partnership relations, between and

among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as such
entity;
c) Controversies in the election or appointment of directors, trustees, officers or
managers of such corporations, partnerships or associations.

Consequently, whether the cause of action stems from a contractual dispute or one
that involves intra-corporate matters, the RTC already has jurisdiction over this case.
In this light, the question of whether the doctrine of estoppel by laches applies, as
enunciated by this Court in Tijam v. Sibonghanoy, no longer finds relevance.

Second, the issue of prescription. Petitioners further contend that the action for
rescission has prescribed under Article 1398 of the Civil Code, which provides:

Article 1389. The action to claim rescission must be commenced within four years x x
x.

This is an erroneous proposition. Article 1389 specifically refers to rescissible

contracts as, clearly, this provision is under the chapter entitled "Rescissible
Contracts."

In a previous case,12 this Court has held that Article 1389:

applies to rescissible contracts, as enumerated and defined in Articles 1380 and 1381.
We must stress however, that the "rescission" in Article 1381 is not akin to the term
"rescission" in Article 1191 and Article 1592. In Articles 1191 and 1592, the
rescission is a principal action which seeks the resolution or cancellation of the
contract while in Article 1381, the action is a subsidiary one limited to cases of
rescission for lesion as enumerated in said article.

The prescriptive period applicable to rescission under Articles 1191 and 1592, is
found in Article 1144, which provides that the action upon a written contract should
be brought within ten years from the time the right of action accrues.

Article 1381 sets out what are rescissible contracts, to wit:

Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one-fourth of the value of the things which are
the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion
stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;

(4) Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority;

(5) All other contracts specially declared by law to be subject to rescission.

The Memorandum of Agreement subject of this controversy does not fall under the
above enumeration. Accordingly, the prescriptive period that should apply to this case
is that provided for in Article 1144, to wit:

Article 1144. The following actions must be brought within ten years from the time
the right of action accrues:

(1) Upon a written contract;

xxx

Based on the records of this case, the action was commenced on July 3, 1987, while
the Memorandum of Agreement was entered into on December 29, 1981. Article 1144
specifically provides that the 10-year period is counted from "the time the right of
action accrues." The right of action accrues from the moment the breach of right or
duty occurs.13Thus, the original Complaint was filed well within the prescriptive
period.

We now proceed to determine if the trial court, as affirmed by the CA, correctly ruled
for the rescission of the subject Agreement.

Petitioners contend that they have fully complied with their obligation under the
Memorandum of Agreement. They allege that due to respondents' failure to increase
the capital stock of the corporation to an amount that will accommodate their
undertaking, it had become impossible for them to perform their end of the
Agreement.

Again, petitioners' contention is untenable. There is no question that petitioners herein

failed to fulfill their obligation under the Memorandum of Agreement. Even they
admit the same, albeit laying the blame on respondents.

It is true that respondents increased the Rural Bank's authorized capital stock to
only P5 million, which was not enough to accommodate the P4.8 million worth of
stocks that petitioners were to subscribe to and pay for. However, respondents' failure
to fulfill their undertaking in the agreement would have given rise to the scenario
contemplated by Article 1191 of the Civil Code, which reads:

Article 1191. The power to rescind reciprocal obligations is implied in reciprocal

ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

Thus, petitioners should have exacted fulfillment from the respondents or asked for
the rescission of the contract instead of simply not performing their part of the
Agreement. But in the course of things, it was the respondents who availed of the
remedy under Article 1191, opting for the rescission of the Agreement in order to
regain control of the Rural Bank.

Having determined that the rescission of the subject Memorandum of Agreement was
in order, the trial court ordered petitioner Unlad Resources to return to respondents the
management and control of the Rural Bank and for the latter to return the sum
of P1,003,070.00 to petitioners.

Mutual restitution is required in cases involving rescission under Article 1191. This
means bringing the parties back to their original status prior to the inception of the
contract.14 Article 1385 of the Civil Code provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the object of the contract
are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the
loss.
This Court has consistently ruled that this provision applies to rescission under Article
1191:

[S]ince Article 1385 of the Civil Code expressly and clearly states that "rescission
creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest," the Court finds no
justification to sustain petitioners' position that said Article 1385 does not apply to
rescission under Article 1191.15

Rescission has the effect of "unmaking a contract, or its undoing from the beginning,
and not merely its termination."16 Hence, rescission creates the obligation to return the
object of the contract. It can be carried out only when the one who demands rescission
can return whatever he may be obliged to restore. To rescind is to declare a contract
void at its inception and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other, but to
abrogate it from the beginning and restore the parties to their relative positions as if no
contract has been made.17

Accordingly, when a decree for rescission is handed down, it is the duty of the court
to require both parties to surrender that which they have respectively received and to
place each other as far as practicable in his original situation. The rescission has the
effect of abrogating the contract in all parts.18

Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there was
just cause for rescission. With the contract thus rescinded, the parties must be restored
to the status quo ante, that is, before they entered into the Memorandum of
Agreement.

Finally, we must resolve the question of the propriety of the award for damages and
attorney's fees.

The trial court's Decision mentioned that the "evidence is clear and convincing that
Plaintiffs (herein respondents) suffered actual compensatory damages amounting to
Four Million Six Hundred One Thousand Seven Hundred Sixty-Five and 38/100
Pesos (P4,601,765.38) moral damages and attorney's fees."

Though not discussed in the body of the Decision, the records show that the amount
of P4,601,765.38 pertains to actual losses incurred by respondents as a result of
petitioners' non-compliance with their undertaking under the Memorandum of
Agreement. On this point, respondent Dragon presented testimonial and documentary
evidence to prove the actual amount of damages, thus:
Atty. Cruz

Q: Was there any consequence to you Mr. Dragon due to any breach of the agreement
marked as Exhibit A? cralawred

A: Yes sir I could have earned thru the shares of stock that I have, or we have or we
had by this time amounting to several millions pesos (sic). They have only put in the
whole amount that we have agreed upon (sic).

Q: In this connection did you cause computation of these losses that you incured
(sic)?
cralawred

A: Yes sir.

xxx

Q: Will you please kindly go through this computation and explain the same to the
Honorable Court? cralawred

A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three
Hundred Ninety Nine Thousand Two hundred for Nineteen Thousand Nine Hundred
Sixty shares which should have been sold if it were sold to others for P50.00 each for
a total of Nine Hundred Ninety Eight Thousand but sold to them for Three Hundred
Ninety nine (sic) Thousand two (sic) Hundred only and of which only Three Hundred
Twenty Four Thousand Six Hundred was paid to me. Therefore, there was a
difference of Six Hundred Seven Three (sic) Thousand Four Hundred (P673,400.00).
On the basis of the commulative (sic) lost income every year from March 1982 from
the amount of Seven Six Hundred (sic) Seventy Three Thousand four (sic) Hundred
(P673,400.) (sic) there would be a discommulative (sic) lost (sic) of One Million
Ninety Three Thousand Nine Hundred Fifty Two Pesos and forty two (sic) centavos
(P1,093,952.42). Please note that the interest imputed is only at 12% per annum but it
should had (sic) been much higher. In 1984 to 1986 (sic) alone rates went as higher
(sic) as 40% per annum from the so called (sic) Jobo Bills and yet we only computed
the imputed income or lost income at 12% per annum and then there is a 40%
participation on the unrealized earnings due to their failure to put in an stabilized (sic)
earnings. You will note that if they put in 4.8 million Pesos and it would be earning
money, 40% of that will go to us because 40% of the bank would be ours and 60%
would be there (sic). But because they did put in the 4.8 million our 40% did not earn
up to that extent and computed again on the basis of 12% the amount (sic) on the
commulative (sic) basis up to September 1990 is 2 million three hundred fifty two
thousand sixty five pesos and four centavos (sic). (P2,352,065.04). You will note
again that the average return of investment of any Cavite based (sic) Rural Bank has
been no less than 20% or about 30% per annum. And we computed only the earnings
at 12%.

xxx

There were loans granted fraudulently to members of the board and some borrowers
which were not all charged interest for several years and on this basis we computed a
40% shares (sic) on the foregone income interest income (sic) on all these
fraudulently granted loans, without interest being collected and none a project (sic)
among a plantation project (sic), which was funded by the bank but nothing was given
back to the bank for several hundred thousand of pesos (sic). And we arrived an (sic)
estimate of the foregone interest income a total of One Million Two Hundred Five
Thousand Eight Hundred Sixty None Pesos and eighty one (sic) centavos and 40
percent share of this (sic) would be Four Hundred Eighty Two Thousand Three
Hundred Forty Seven Pesos and Ninety Two Centavos. All in all our estimate of the
damages we have suffered is Four Million Six Hundred one (sic) Thousand Seven
Hundred Sixty Five Pesos and thirty eight (sic) centavos (P4,601,765.38).19

More importantly, petitioners never raised in issue before the CA this award of actual
compensatory damages. They did not raise the matter of damages in their Appellants'
Brief, while in their Motion for Reconsideration, they questioned only the award of
moral and exemplary damages, not the award of actual damages. Even in the present
Petition for Review, what petitioners raised was the propriety of the award of moral
and exemplary damages and attorney's fees.

On the grant of moral and exemplary damages and attorney's fees, we note that the
trial court's Decision did not discuss the basis for the award. No mention of these
damages awarded - or their factual basis - is made in the body of the Decision, only in
the dispositive portion. Be that as it may, we have examined the records of the case
and found that the award must be sustained.

It should be remembered that there are two separate causes of action in this case: one
for rescission of the Memorandum of Agreement and the other for receivership based
on alleged mismanagement of the company by the plaintiffs. While the award of
actual compensatory damages was based on the breach of duty under the
Memorandum of Agreement, the award of moral damages appears to be based on
petitioners' mismanagement of the company when they became members of the Board
of Directors of the Rural Bank.

Thus, the trial court said:

Under the Rural Bank's management, a systematic diversion of the bank's assets was
conceived whereby: (a) The Rural Bank's funds would be funneled in the
development and improvements of the Benitez Mango Plantation in the guise of an
investment in said plantation; (b) Of the net profits earned from the plantation's
operations, the Rural Bank's share therein, although it shoulders all of the financial
risks, would be a measly twenty percent (20%) thereof while UCI, without investing a
single centavo, would earn eighty percent (80%) of the said profits. Thus, the bulk of
the profits of the mango plantation was also sought to be diverted to an entity wherein
Helena Z. Benitez and Conrado L. Benitez II are not only principal stockholders but
also the Chairman of the Board of Directors and President, respectively. Moreover,
Defendant Helena Z. Benitez would be entitled to receive, under the lease contract,
rentals in the total amount of Three Hundred Thousand Pesos (P300,000.00) or ten
percent (10%) of gross profits, whichever is higher. (c) Finally, at the end of the lease
period, the Rural Bank was obliged to turn over to the lessor (Helena Z. Benitez) all
permanent improvements introduced by it on the plantation at no cost to Ms. Benitez.

Further, in its report dated March 13, 1985, the [Central Bank] after conducting its
general examination upon the Rural Bank ordered the latter to "explain satisfactorily
why the bank engage (sic) in an undertaking not inherently connected with [bona fide]
rural banking operations nor within the allowed allied undertakings," contrary to the
provisions of Section 3379 of the CB Manual of Regulations and Section 26 of CB
Circular No. 741, otherwise known as the "Circular on Rural Banks[.]"

The aforestated CB report states that "total exposure to this project now amounts
to P475,371.57 or 25.76% of its capital and surplus[.]" Notwithstanding a finding by
the CB of the undertaking's illegality, the defendants nevertheless persisted in
pursuing the Mango Plantation Project and never acceded to the call of [the] CB for it
to desist from further implementing the said project. It was only after another letter
from the CB was received when defendant finally shelved the mango plantation
project.

The result of the aforestated report, as well as the actuations of the Defendants in not
yielding to the order of the CB, adequately establishes not only a violation of CB
Rules (specifically Section 26, Circular 741 and Section 3379 of the CB Manual of
Regulations, but also, that it has caused undue damage both to the Rural bank as well
as its stockholders.

The initial CB report should have sufficiently apprised Defendants of the illegality of
the undertaking. Defendants, therefore have the duty to terminate the Mango
Plantation Project. They, however, [chose] to continue it, apparently to further their
[own] interest in the scheme for their own personal benefit and gain, an act which is
clearly contrary to the fiduciary nature of their relationship with the corporation in
which they are officers. Such persistence proves evident bad faith, or a breach of a
known duty through some motive or ill-will, which resulted in the further dissipation
and wastage of the Rural Bank's assets, unjustly depriving Plaintiffs of their fair share
in the assets of the bank.

All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect that
these contracts were but part of a device employed by Defendants to siphon [off] the
Rural bank for their personal gain.20

Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Though incapable of precise pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendant's wrongful act or
omission.21 Article 2220 of the Civil Code further provides that moral damages may
be recovered in case of a breach of contract where the defendant acted in bad faith.22

To award moral damages, a court must be satisfied with proof of the following
requisites: (1) an injury - whether physical, mental, or psychological - clearly
sustained by the claimant; (2) a culpable act or omission factually established; (3) a
wrongful act or omission of the defendant as the proximate cause of the injury
sustained by the claimant; and (4) the award of damages predicated on any of the
cases stated in Article 2219.23 chanrobles virtual law library

Accordingly, based upon the findings of the trial court, it is clear that respondents are
entitled to moral damages. The acts attributed to the petitioners as directors of the
Rural Bank manifestly prejudiced the respondents causing detriment to their standing
as directors and stockholders of the Rural Bank.

Exemplary damages cannot be recovered as a matter of right.24 While these need not
be proved, respondents must show that they are entitled to moral, temperate or
compensatory damages before the court may consider the question of awarding
exemplary damages.25 We find that respondents are indeed entitled to moral damages;
thus, the award for exemplary damages is in order.

Anent the award for attorney's fees, Article 2208 of the Civil Code states:

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.

Hence, the award of exemplary damages is in itself sufficient justification for the
award of attorney's fees.26

WHEREFORE, the foregoing premises considered, the petition is hereby DENIED.

The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
54226 are AFFIRMED.

SO ORDERED.
G.R. No. 207133, March 09, 2015

SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner, v. JAYNE YU, Respondent.

DECISION

PERALTA, J.:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure which seeks to reverse and set aside the Decision 1 dated January 24,
2013 and Resolution 2 dated April 30, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 121175.

The facts follow.

Respondent Jayne Yu and petitioner Swire Realty Development Corporation entered into a Contract to Sell on July 25, 1995 covering one residential condominium
unit, specifically Unit 3007 of the Palace of Makati, located at P. Burgos corner Caceres Sts., Makati City, with an area of 137.30 square meters for the total contract
price of P7,519,371.80, payable in equal monthly installments until September 24, 1997. Respondent likewise purchased a parking slot in the same condominium
building for P600,000.00.

On September 24, 1997, respondent paid the full purchase price of P7,519,371.80 for the unit while making a down payment of P20,000.00 for the parking lot.
However, notwithstanding full payment of the contract price, petitioner failed to complete and deliver the subject unit on time. This prompted respondent to file a
Complaint for Rescission of Contract with Damages before the Housing and Land Use Regulatory Board (HLURB) Expanded National Capital Region Field Office
(ENCRFO).

On October 19, 2004, the HLURB ENCRFO rendered a Decision 3 dismissing respondent’s complaint. It ruled that rescission is not permitted for slight or casual
breach of the contract but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement. It disposed of the
case as follows:chan Roblesv irtualLawlibrary

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered ordering [petitioner] the following:

1. To finish the subject unit as pointed out in the inspection Report

2. To pay [respondent] the following:

a. the amount of P100,000 as compensatory damages for the minor irreversible defects in her unit [respondent], or, in the
alternative, conduct the necessary repairs on the subject unit to conform to the intended specifications;
b. moral damages of P20,000.00
c. Attorney’s fees of P20,000.00

On the other hand, [respondent] is hereby directed to immediately update her account insofar as the parking slot is concerned, without interest, surcharges or penalties
charged therein.

All other claims and counterclaims are hereby dismissed for lack of merit.

IT IS SO ORDERED. 4 cralawlawlibrary

Respondent then elevated the matter to the HLURB Board of Commissioners.

In a Decision 5 dated March 30, 2006, the HLURB Board of Commissioners reversed and set aside the ruling of the HLURB ENCRFO and ordered the rescission of
the Contract to Sell, ratiocinating: chan Roblesv irtualLawlibrary

We find merit in the appeal. The report on the ocular inspection conducted on the subject condominium project and subject unit shows that the amenities under the
approved plan have not yet been provided as of May 3, 2002, and that the subject unit has not been delivered to [respondent] as of August 28, 2002, which is beyond
the period of development of December 1999 under the license to sell. The delay in the completion of the project as well as of the delay in the delivery of the unit are
breaches of statutory and contractual obligations which entitles [respondent] to rescind the contract, demand a refund and payment of damages.

The delay in the completion of the project in accordance with the license to sell also renders [petitioner] liable for the payment of administrative fine.
Wherefore, the decision of the Office below is set aside and a new decision is rendered as follows:

1. Declaring the contract to sell as rescinded and directing [petitioner] to refund to [respondent] the amount of P7,519,371.80 at 6% per annum from the
time of extrajudicial demand on January 05, 2001: subject to computation and payment of the correct filing fee; Chan RoblesV irtualawlibrary

2. Directing [petitioner] to pay respondent attorney’s fees in the amount of P20,000.00; Chan Robles Virtualawlibrary

3. Directing [petitioner] to pay an administrative fine of P10,000.00 for violation of Section 20, in relation to Section 38 of P.D. 957:

SO ORDERED. 6
cralawlawlibrary
cralawred

Petitioner moved for reconsideration, but the same was denied by the HLURB Board of Commissioners in a Resolution 7 dated June 14, 2007.

Unfazed, petitioner appealed to the Office of the President (OP) on August 7, 2007.

In a Decision 8 dated November 21, 2007, the OP, through then Deputy Executive Secretary Manuel Gaite, dismissed petitioner’s appeal on the ground that it failed to
promptly file its appeal before the OP. It held: chan Rob lesvirtualLawlibrary

Records show that [petitioner] received its copy of the 30 March 2006 HLURB Decision on 17 April 2006 and instead of filing an appeal, it opted first to file a Motion
for Reconsideration on 28 April 2006 or eleven (11) days thereafter. The said motion interrupted the 15-day period to appeal.

On 23 July 2007, [petitioner] received the HLURB Resolution dated 14 June 2007 denying the Motion for Reconsideration.

Based on the ruling in United Overseas Bank Philippines, Inc. v. Ching (486 SCRA 655), the period to appeal decisions of the HLURB Board of Commissioners to
the Office of the President is 15 days from receipt thereof pursuant to Section 15 of P.D. No. 957 and Section 2 of P.D. No. 1344 which are special laws that provide
an exception to Section 1 of Administrative Order No. 18.

Corollary thereto, par. 2, Section 1 of Administrative Order No. 18, Series of 1987 provides that:
The time during which a motion for reconsideration has been pending with the Ministry/Agency concerned shall be deducted from the period of appeal. But where
such a motion for reconsideration has been filed during office hours of the last day of the period herein provided, the appeal must be made within the day following
receipt of the denial of said motion by the appealing party. (Underscoring supplied)

xxxx
Accordingly, the [petitioner] had only four (4) days from receipt on 23 July 2007 of HLURB Resolution dated 14 June 2007, or until 27 July 2007 to file the Notice of
Appeal before this Office. However, [petitioner] filed its appeal only on 7 August 2007 or eleven (11) days late.

Thus, this Office need not delve on the merits of the appeal filed as the records clearly show that the said appeal was filed out of time.

WHEREFORE, premises considered, [petitioner]’s appeal is hereby DISMISSED, and the HLURB Decision dated 30 March 2006 and HLURB Resolution dated 14
June 2007 are hereby AFFIRMED.

SO ORDERED. 9 cralawlawlibrary

Immediately thereafter, petitioner filed a motion for reconsideration against said decision.

In a Resolution 10 dated February 17, 2009, the OP, through then Executive Secretary Eduardo Ermita, granted petitioner’s motion and set aside Deputy Executive
Secretary Gaite’s decision. It held that after a careful and thorough evaluation and study of the records of the case, the OP was more inclined to agree with the earlier
decision of the HLURB ENCRFO as it was more in accord with facts, law and jurisprudence relevant to the case. Thus: chan Roblesv irtualLawlibrary

WHEREFORE, premises considered, the instant Motion for Reconsideration is hereby GRANTED. The Decision and Resolution of the HLURB Third Division
Board of Commissioners, dated March 30, 2006 and June 14, 2007, respectively, are hereby SET ASIDE, and the HLURB ENCRFO Decision dated October 19,
2004 is hereby REINSTATED.

SO ORDERED. 11
cralawlawlibrary
cralawred

Respondent sought reconsideration of said resolution, however, the same was denied by the OP in a Resolution 12 dated August 18, 2011.

Consequently, respondent filed an appeal to the CA.

In a Decision dated January 24, 2013, the CA granted respondent’s appeal and reversed and set aside the Order of the OP. The fallo of its decision reads: chanRo blesvirtualLawlibrary

WHEREFORE, the Petition is hereby GRANTED. The assailed Resolution dated 17 February 2009 and Order dated 18 August 2011 of the Office of the President,
in O.P. Case No. 07-H-283, are hereby REVERSED and SET ASIDE. Accordingly, the Decision dated 30 March 2006 and Resolution dated 14 June 2007 of the
HLURB Board of Commissioners in HLURB Case No. REM-A-050127-0014, are REINSTATED.
13
SO ORDERED.
cralawlawlibrary
cralawlawlibrary cralawred

Petitioner moved for reconsideration, however, the CA denied the same in a Resolution dated April 30, 2013.

Hence, the present petition wherein petitioner raises the following grounds to support its petition: c hanRob lesvirtualLawlibrary

THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE LEGAL PRECEPTS THAT:
 1. TECHNICAL RULES ARE NOT BINDING UPON ADMINISTRATIVE AGENCIES; and

2. RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH COMPLAINED OF IS SUBSTANTIAL AS TO DEFEAT THE OBJECT OF
THE PARTIES IN ENTERING INTO THE AGREEMENT. 14

cralawlawlibrary

In essence, the issues are: (1) whether petitioner’s appeal was timely filed before the OP; and (2) whether rescission of the contract is proper in the instant case.

We shall resolve the issues in seriatim.

First, the period to appeal the decision of the HLURB Board of Commissioners to the Office of the President has long been settled in the case of SGMC Realty
Corporation v. Office of the President, 15 as reiterated in the cases of Maxima Realty Management and Development Corporation v. Parkway Real Estate Development
Corporation 16 and United Overseas Bank Philippines, Inc. v. Ching. 17 cralawred

In the aforementioned cases, we ruled that the period to appeal decisions of the HLURB Board of Commissioners is fifteen (15) days from receipt thereof pursuant to
Section 15 18 of PD No. 957 19 and Section 2 20 of PD No. 1344 21 which are special laws that provide an exception to Section 1 of Administrative Order No. 18. Thus,
in the SGMC Realty Corporation v. Office of the President case, the Court explained: chanRob lesvirtualLawlibrary

As pointed out by public respondent, the aforecited administrative order allows aggrieved party to file its appeal with the Office of the President within thirty (30)
days from receipt of the decision complained of. Nonetheless, such thirty-day period is subject to the qualification that there are no other statutory periods of appeal
applicable. If there are special laws governing particular cases which provide for a shorter or longer reglementary period, the same shall prevail over the thirty-day
period provided for in the administrative order. This is in line with the rule in statutory construction that an administrative rule or regulation, in order to be valid, must
not contradict but conform to the provisions of the enabling law.

We note that indeed there are special laws that mandate a shorter period of fifteen (15) days within which to appeal a case to public respondent. First, Section 15 of
Presidential Decree No. 957 provides that the decisions of the National Housing Authority (NHA) shall become final and executory after the lapse of fifteen (15) days
from the date of receipt of the decision. Second, Section 2 of Presidential Decree No. 1344 states that decisions of the National Housing Authority shall become final
and executory after the lapse of fifteen (15) days from the date of its receipt. The latter decree provides that the decisions of the NHA is appealable only to the Office
of the President. Further, we note that the regulatory functions of NHA relating to housing and land development has been transferred to Human Settlements
Regulatory Commission, now known as HLURB. x x x 22 cralawlawlibrary

Records show that petitioner received a copy of the HLURB Board of Commissioners’ decision on April 17, 2006. Correspondingly, it had fifteen days from April 17,
2006 within which to file its appeal or until May 2, 2006. However, on April 28, 2006, or eleven days after receipt of the HLURB Board of Commissioner’s decision,
it filed a Motion for Reconsideration, instead of an appeal.

Concomitantly, Section 1 of Administrative Order No. 18 23 provides that the time during which a motion for reconsideration has been pending with the ministry or
agency concerned shall be deducted from the period for appeal. Petitioner received the HLURB Board Resolution denying its Motion for Reconsideration on July 23,
2007 and filed its appeal only on August 7, 2007. Consequently therefore, petitioner had only four days from July 23, 2007, or until July 27, 2007, within which to file
its appeal to the OP as the filing of the motion for reconsideration merely suspended the running of the 15-day period. However, records reveal that petitioner only
appealed to the OP on August 7, 2007, or eleven days late. Ergo, the HLURB Board of Commissioners’ decision had become final and executory on account of the
fact that petitioner did not promptly appeal with the OP.

In like manner, we find no cogent reason to exempt petitioner from the effects of its failure to comply with the rules.

In an avuncular case, we have held that while the dismissal of an appeal on purely technical grounds is concededly frowned upon, it bears emphasizing that the
procedural requirements of the rules on appeal are not harmless and trivial technicalities that litigants can just discard and disregard at will. Neither being a natural
right nor a part of due process, the rule is settled that the right to appeal is merely a statutory privilege which may be exercised only in the manner and in accordance
with the provisions of the law. 24 cralawred

Time and again, we have held that rules of procedure exist for a noble purpose, and to disregard such rules, in the guise of liberal construction, would be to defeat such
purpose. Procedural rules are not to be disdained as mere technicalities. They may not be ignored to suit the convenience of a party. 25 The reason for the liberal
application of the rules before quasi-judicial agencies cannot be used to perpetuate injustice and hamper the just resolution of the case. Neither is the rule on liberal
construction a license to disregard the rules of procedure. 26 cralawred

Thus, while there may be exceptions for the relaxation of technical rules principally geared to attain the ends of justice, petitioner’s fatuous belief that it had a fresh
15-day period to elevate an appeal with the OP is not the kind of exceptional circumstance that merits relaxation.

Second, Article 1191 of the Civil Code sanctions the right to rescind the obligation in the event that specific performance becomes impossible, to wit: chan Roblesv irtualLawlibrary

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage
Law. cralawlawlibrary

Basic is the rule that the right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them. The breach contemplated in the said provision is the obligor’s failure to comply with an existing obligation. When the obligor
cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission. 27 cralawred

In the instant case, the CA aptly found that the completion date of the condominium unit was November 1998 pursuant to License No. 97-12-3202 dated November 2,
1997 but was extended to December 1999 as per License to Sell No. 99-05-3401 dated May 8, 1999. However, at the time of the ocular inspection conducted by the
HLURB ENCRFO, the unit was not yet completely finished as the kitchen cabinets and fixtures were not yet installed and the agreed amenities were not yet available.
Said inspection report states: chan Roblesv irtualLawlibrary
 1. The unit of the [respondent] is Unit 3007, which was labeled as P2-07, at the Palace of Makati, located at the corner of P. Burgos Street and Caceres
Street, Poblacion, Makati City. Based on the approved plans, the said unit is at the 26 thFloor.
2. During the time of inspection, the said unit appears to be completed except for the installation of kitchen cabinets and fixtures.

3. Complainant pinpointed to the undersigned the deficiencies as follows:

a. The delivered unit has high density fiber (HDF) floorings instead of narra wood parquet.

b. The [petitioners] have also installed baseboards as borders instead of pink porrino granite boarders.

c. Walls are newly painted by the respondent and the alleged obvious signs of cladding could not be determined.

d. Window opening at the master bedroom conforms to the approved plans. As a result it leaves a 3 inches (sic) gap between the glass window
and partitioning of the master’s bedroom.

e. It was verified and confirmed that a square column replaced the round column, based on the approved plans.

f. At the time of inspection, amenities such as swimming pool and change room are seen at the 31 st floor only. These amenities are reflected on
the 27th floor plan of the approved condominium plans. Health spa for men and women, Shiatsu Massage Room, Two-Level Sky Palace
Restaurant and Hall for games and entertainments, replete with billiard tables, a bar, indoor golf with spectacular deck and karaoke rooms
were not yet provided by the [petitioner].

g. The [master’s] bedroom door bore sign of poor quality of workmanship as seen below.

h. The stairs have been installed in such manner acceptable to the undersigned.

28
i. Bathrooms and powder room have been installed in such manner acceptable to the undersigned.

cralawlawlibrary

From the foregoing, it is evident that the report on the ocular inspection conducted on the subject condominium project and subject unit shows that the amenities under
the approved plan have not yet been provided as of May 3, 2002, and that the subject unit has not been delivered to respondent as of August 28, 2002, which is beyond
the period of development of December 1999 under the license to sell. Incontrovertibly, petitioner had incurred delay in the performance of its obligation amounting
to breach of contract as it failed to finish and deliver the unit to respondent within the stipulated period. The delay in the completion of the project as well as of the
delay in the delivery of the unit are breaches of statutory and contractual obligations which entitle respondent to rescind the contract, demand a refund and payment of
damages.

WHEREFORE, premises considered, the instant petition is DENIED. The Decision dated January 24, 2013 and Resolution dated April 30, 2013 of the Court of
Appeals in CA-G.R. SP No. 121175 are hereby AFFIRMED, with MODIFICATION that moral damages be awarded in the amount of P20,000.00

SO ORDERED. cralawlawlibrary

G.R. No. 196251 July 9, 2014

OLIVAREZ REALTY CORPORATION and DR. PABLO R. OLIVAREZ, Petitioner,

vs.
BENJAMIN CASTILLO, Respondent.

DECISION

LEONEN, J.:

Trial may be dispensed with and a summary judgment rendered if the case can be resolved judiciously by plain resort to the
pleadings, affidavits, depositions, and other papers filed by the parties.

This is a petition for review on certiorari of the Court of Appeals' decision dated July 20, 2010 and resolution dated March 18,
1 2 3

2011 in CAG.R. CV No. 91244.

The facts as established from the pleadings of the parties are as follows:

Benjamin Castillo was the registered owner of a 346,918-squaremeter parcel of land located in Laurel, Batangas, covered by
Transfer Certificate of Title No. T-19972. The Philippine Tourism Authority allegedly claimed ownership of the sameparcel of
4

land based on Transfer Certificate of Title No. T-18493. On April 5, 2000, Castillo and Olivarez Realty Corporation, represented
5

by Dr. Pablo R. Olivarez, entered into a contract of conditional sale over the property. Under the deed of conditional sale,
6
Castillo agreed to sell his property to Olivarez Realty Corporation for ₱19,080,490.00. Olivarez Realty Corporation agreed toa
down payment of ₱5,000,000.00, to be paid according to the following schedule:

DATE AMOUNT

April 8, 2000 500,000.00

May 8, 2000 500,000.00

May 16, 2000 500,000.00

1,000,000.0
June 8, 2000
0

July 8, 2000 500,000.00

August 8, 2000 500,000.00

September 8, 2000 500,000.00

October 8, 2000 500,000.00

November 8, 2000 500,000.00 7

As to the balance of ₱14,080,490.00, Olivarez Realty Corporation agreed to pay in 30 equal monthly installments every eighth
day of the month beginning in the month that the parties would receive a decision voiding the Philippine Tourism Authority’s
title to the property. Under the deed of conditional sale, Olivarez RealtyCorporation shall file the action against the Philippine
8

Tourism Authority "with the full assistance of [Castillo]." Paragraph C of the deed of conditional sale provides:
9

C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the claim/title
TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and voided; with the full assistance
of [Castillo][.]
10

Should the action against the Philippine Tourism Authority be denied, Castillo agreed to reimburse all the amounts paid by
Olivarez Realty Corporation. Paragraph D of the deed of conditional sale provides:

D. In the event that the Court denie[s] the petition against the Philippine Tourism Authority, all sums received by [Castillo] shall
be reimbursed to [Olivarez Realty Corporation] without interest[.] 11

As to the "legitimate tenants" occupying the property, Olivarez Realty Corporation undertook to pay them "disturbance
compensation," while Castillo undertook to clear the land of the tenants within six months from the signing of the deed of
conditional sale. Should Castillo fail to clear the land within six months, Olivarez Realty Corporation may suspend its monthly
down payment until the tenants vacate the property. Paragraphs E and F of the deed of conditional sale provide: E. That [Olivarez
Realty Corporation] shall pay the disturbance compensation to legitimate agricultural tenants and fishermen occupants which in
no case shall exceed ONE MILLION FIVE HUNDRED THOUSAND (₱1,500,000.00) PESOS. Said amountshall not form part
of the purchase price. In excess of this amount, all claims shall be for the account of [Castillo];

F. That [Castillo] shall clear the land of [the] legitimate tenants within a period of six (6) months upon signing of this Contract,
and in case [Castillo] fails, [Olivarez Realty Corporation] shall have the right to suspend the monthly down payment until such
time that the tenants [move] out of the land[.]12

The parties agreed thatOlivarez Realty Corporation may immediately occupy the property upon signing of the deed of conditional
sale. Should the contract be cancelled, Olivarez RealtyCorporation agreed to return the property’s possession to Castillo and
forfeit all the improvements it may have introduced on the property. Paragraph I of the deed of conditional sale states:

I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and develop the
subject property. In case this Contract is canceled [sic], any improvement introduced by [the corporation] on the property shall be
forfeited in favor of [Castillo][.]
13
On September 2, 2004, Castillo filed a complaint against Olivarez Realty Corporation and Dr. Olivarez with the Regional Trial
14

Court of Tanauan City, Batangas.

Castillo alleged that Dr. Olivarez convinced him into selling his property to Olivarez Realty Corporation on the representation
that the corporation shall be responsible in clearing the property of the tenants and in paying them disturbance compensation. He
further alleged that Dr. Olivarez solely prepared the deed of conditional sale and that he was made to sign the contract with its
terms "not adequately explained [to him] in Tagalog." 15

After the parties had signed the deed of conditional sale, Olivarez Realty Corporation immediately took possession of the
property. However, the corporation only paid 2,500,000.00 ofthe purchase price. Contrary to the agreement, the corporation did
not file any action against the Philippine Tourism Authority to void the latter’s title to the property. The corporation neither
cleared the land of the tenants nor paid them disturbance compensation. Despite demand, Olivarez Realty Corporation refused to
fully pay the purchase price.16

Arguing that Olivarez Realty Corporation committed substantial breach of the contract of conditional sale and that the deed of
conditional sale was a contract of adhesion, Castillo prayed for rescission of contract under Article 1191 of the Civil Code of the
Philippines. He further prayed that Olivarez Realty Corporation and Dr. Olivarez be made solidarily liable for moral damages,
exemplary damages, attorney’s fees, and costs of suit. 17

In their answer, Olivarez Realty Corporation and Dr. Olivarez admitted that the corporation only paid ₱2,500,000.00 ofthe
18

purchase price. In their defense, defendants alleged that Castillo failed to "fully assist" the corporation in filing an action against
19

the Philippine Tourism Authority. Neither did Castillo clear the property of the tenants within six months from the signing of the
deed of conditional sale. Thus, according to defendants, the corporation had "all the legal right to withhold the subsequent
payments to [fully pay] the purchase price." 20

Olivarez Realty Corporation and Dr. Olivarez prayedthat Castillo’s complaint be dismissed. By way of compulsory counterclaim,
they prayed for ₱100,000.00 litigation expenses and ₱50,000.00 attorney’s fees. 21

Castillo replied to the counterclaim, arguing that Olivarez Realty Corporation and Dr. Olivarez had no right to litigation
22

expenses and attorney’s fees. According to Castillo, the deed of conditional sale clearly states that the corporation "assume[d] the
responsibility of taking necessary legal action" against the Philippine Tourism Authority, yet the corporation did not file any
23

case. Also, the corporation did not pay the tenants disturbance compensation. For the corporation’s failure to fully pay the
purchase price, Castillo claimed that hehad "all the right to pray for the rescission of the [contract]," and he "should not be held
24

liable . . . for any alleged damages by way of litigation expenses and attorney’s fees." 25

On January 10, 2005, Castillo filed a request for admission, requesting Dr. Olivarez to admit under oath the genuineness of the
26

deed of conditional sale and Transfer Certificate of Title No. T-19972. He likewise requested Dr. Olivarez to admit the truth of
the following factual allegations:

1. That Dr. Olivarez is the president of Olivarez Realty Corporation;

2. That Dr. Olivarez offered to purchase the parcel of land from Castillo and that he undertook to clear the property of
the tenants and file the court action to void the Philippine Tourism Authority’s title to the property;

3. That Dr. Olivarez caused the preparation of the deed of conditional sale;

4. That Dr. Olivarez signed the deed of conditional sale for and on behalf of Olivarez Realty Corporation;

5. That Dr. Olivarez and the corporation did not file any action against the Philippine Tourism Authority;

6. That Dr. Olivarez and the corporation did not pay the tenants disturbance compensation and failed to clear the
property of the tenants; and

7. That Dr. Olivarez and the corporation only paid ₱2,500,000.00 of the agreed purchase price. 27

On January 25, 2005, Dr. Olivarez and Olivarez Realty Corporation filed their objections to the request for admission, stating
28

that they "reiterate[d] the allegations [and denials] in their [answer]."

29
The trial court conducted pre-trial conference on December 17, 2005.

On March 8, 2006, Castillo filed a motion for summary judgment and/or judgment on the pleadings. He argued that Olivarez
30

Realty Corporation and Dr. Olivarez "substantially admitted the material allegations of [his] complaint," specifically:
31

1. That the corporation failed to fully pay the purchase price for his property; 32

2. That the corporation failed to file an action to void the Philippine Tourism Authority’s title to his property; and 33

3. That the corporation failed to clear the property of the tenants and pay them disturbance compensation. 34

Should judgment on the pleadings beimproper, Castillo argued that summary judgment may still be rendered asthere is no
genuine issue as to any material fact. He cited Philippine National Bank v. Noah’s Ark Sugar Refinery as authority.
35 36

Castillo attached to his motion for summary judgment and/or judgment on the pleadings his affidavit and the affidavit of a
37

Marissa Magsino attesting to the truth of the material allegations of his complaint.
38

Olivarez Realty Corporation and Dr. Olivarez opposed the motion for summary judgment and/or judgment on the pleadings,
39

arguing that the motion was "devoid of merit." They reiterated their claim that the corporation withheld further payments of the
40

purchase price because "there ha[d] been no favorable decision voiding the title of the Philippine Tourism Authority." They 41

added that Castillo sold the property to another person and that the sale was allegedly litigated in Quezon City. 42

Considering that a title adverse to that of Castillo’s existed, Olivarez Realty Corporation and Dr. Olivarez argued that the case
should proceed to trial and Castillo be required to prove that his title to the property is "not spurious or fake and that he had not
sold his property to another person." 43

In reply to the opposition to the motion for summary judgment and/or judgment on the pleadings, Castillo maintained that
44

Olivarez Realty Corporation was responsible for the filing of an action against the Philippine Tourism Authority. Thus, the
corporation could not fault Castillo for not suing the PhilippineTourism Authority. The corporation illegally withheld payments
45

of the purchase price.

As to the claim that the case should proceed to trial because a title adverse to his title existed, Castillo argued that the Philippine
Tourism Authority’s title covered another lot, not his property. 46

During the hearing on August 3, 2006, Olivarez Realty Corporation and Dr. Olivarez prayed that they be given 30 days to file a
supplemental memorandum on Castillo’s motion for summary judgment and/or judgment on the pleadings. 47

The trial court granted the motion. Itgave Castillo 20 days to reply to the memorandum and the corporation and Dr. Olivarez 15
days to respond to Castillo’s reply. 48

In their supplemental memorandum, Olivarez Realty Corporation and Dr. Olivarez argued that there was "an obvious
49

ambiguity" as to which should occur first — the payment of disturbance compensation to the tenants or the clearing of the
50

property of the tenants. This ambiguity, according to defendants, is a genuine issue and "oughtto be threshed out in a full blown
51

trial."
52

Olivarez Realty Corporation and Dr. Olivarez added that Castillo prayed for irreconcilable reliefs of reformation of instrument
and rescission of contract. Thus, Castillo’s complaint should be dismissed.
53

Castillo replied to the memorandum, arguing that there was no genuine issue requiring trial of the case. According to Castillo,
54

"common sense dictates . . . that the legitimate tenants of the [property] shall not vacate the premises without being paid any
disturbance compensation . . ." Thus, the payment of disturbance compensation should occur first before clearing the property of
55

the tenants.

With respect to the other issuesraised in the supplemental memorandum, specifically, that Castillo sold the property to another
person, he argued that these issues should not be entertained for not having been presented during pre-trial. 56
In their comment on the reply memorandum, Olivarez Realty Corporation and Dr. Olivarez reiterated their arguments that
57

certain provisions of the deed of conditional sale were ambiguous and that the complaint prayed for irreconcilable reliefs. 58

As to the additional issues raised in the supplemental memorandum, defendants argued that issues not raised and evidence not
identified and premarked during pre-trial may still be raised and presented during trial for good cause shown. Olivarez Realty
Corporation and Dr. Olivarez prayed that Castillo’s complaint be dismissed for lack of merit. 59

Ruling of the trial court

The trial court found that Olivarez Realty Corporation and Dr. Olivarez’s answer "substantially [admitted the material allegations
of Castillo’s] complaint and [did] not . . . raise any genuine issue [as to any material fact]." 60

Defendants admitted that Castillo owned the parcel of land covered by Transfer Certificate of Title No. T-19972. They likewise
admitted the genuineness of the deed of conditional sale and that the corporation only paid ₱2,500,000.00 of the agreed purchase
price.
61

According to the trial court, the corporation was responsible for suing the Philippine Tourism Authority and for paying the
tenants disturbance compensation. Since defendant corporation neither filed any case nor paid the tenants disturbance
compensation, the trial court ruled that defendant corporation had no right to withhold payments from Castillo. 62

As to the alleged ambiguity of paragraphs E and F of the deed of conditional sale, the trial court ruled that Castillo and his
witness, Marissa Magsino, "clearly established" in their affidavits that the deed of conditional sale was a contract of adhesion.
63

The true agreement between the parties was that the corporation would both clear the land of the tenants and pay them
disturbance compensation.

With these findings, the trial court ruled that Olivarez Realty Corporation breached the contract ofconditional sale. In its 1âwphi1

decision dated April 23, 2007, the trial court ordered the deed of conditional sale rescinded and the ₱2,500,000.00 forfeited in
64

favor of Castillo "as damages under Article 1191 of the Civil Code." 65

The trial court declared Olivarez Realty Corporation and Dr. Olivarez solidarily liable to Castillo for 500,000.00 as moral
damages, ₱50,000.00 as exemplary damages, and ₱50,000.00 as costs of suit. 66

Ruling of the Court of Appeals

Olivarez Realty Corporation and Dr. Olivarez appealed to the Court of Appeals. 67

In its decision dated July 20, 2010, the Court of Appeals affirmed in totothe trial court’s decision. According to the appellate
68

court, the trial court "did not err in its finding that there is no genuine controversy as to the facts involved [in this case]." The 69

trial court, therefore, correctly rendered summary judgment. 70

As to the trial court’s award of damages, the appellatecourt ruled that a court may award damages through summary judgment "if
the parties’ contract categorically [stipulates] the respective obligations of the parties in case of default." As found by the trial
71

court,paragraph I of the deed of conditional sale categorically states that "in case [the deed of conditional sale] is cancelled, any
improvementintroduced by [Olivarez Realty Corporation] on the property shall be forfeited infavor of [Castillo]." Considering
72

that Olivarez Realty Corporation illegally retained possession of the property, Castillo forewent rentto the property and "lost
business opportunities." The ₱2,500,000.00 down payment, according to the appellate court, shouldbe forfeited in favor of
73

Castillo. Moral and exemplary damages and costs ofsuit were properly awarded.

On August 11, 2010, Olivarez RealtyCorporation and Dr. Olivarez filed their motion for reconsideration, arguing that the trial
74

court exceeded its authority in forfeiting the ₱2,500,000.00 down payment and awarding ₱500,000.00 in moral damages to
Castillo. They argued that Castillo only prayed for a total of ₱500,000.00 as actual and moral damages in his
complaint. Appellants prayed that the Court of Appeals "take a second hard look" at the case and reconsider its decision.
75 76

In the resolution dated March 18, 2011, the Court of Appeals denied the motion for reconsideration.
77

Proceedings before this court

Olivarez Realty Corporation and Dr. Olivarez filed their petition for review on certiorari with this court. Petitionersargue that the
78

trial court and the Court of Appeals erred in awarding damages to Castillo. Under Section 3, Rule 35 of the 1997 Rules ofCivil
Procedure, summary judgment may be rendered except as to the amountof damages. Thus, the Court of Appeals "violated the
procedural steps in rendering summary judgment." 79

Petitioners reiterate that there are genuine issues ofmaterial fact to be resolved in this case. Thus, a full-blown trial is required,
and the trial court prematurely decided the case through summary judgment. They cite Torres v. Olivarez Realty Corporation and
Dr. Pablo Olivarez, a case decided by the Ninth Division of the Court of Appeals.
80

In Torres, Rosario Torres was the registeredowner of a parcel of land covered by Transfer Certificate of Title No. T-19971.
Under a deed of conditional sale, she sold her property to OlivarezRealty Corporation for ₱17,345,900.00. When the corporation
failed to fully pay the purchase price, she sued for rescission of contractwith damages. In their answer, the corporation and Dr.
Olivarez argued thatthey discontinued payment because Rosario Torres failed to clear the land of the tenants.

Similar to Castillo, Torres filed a motion for summary judgment, which the trial court granted. On appeal, the Court of Appeals
set aside the trial court’s summary judgment and remanded the case to the trial court for further proceedings. The Court of
81

Appeals ruled that the material allegations of the complaint "were directly disputed by [the corporation and Dr. Olivarez] in their
answer" when they argued that they refused to pay because Torres failed to clear the land of the tenants.
82

With the Court of Appeals’ decision in Torres,Olivarez Realty Corporation and Dr. Olivarez argue that this case should likewise
be remanded to the trial court for further proceedings under the equipoise rule.

Petitioners maintain that Castillo availed himself of the irreconcilable reliefs of reformation of instrument and rescission of
contract. Thus, the trial court should have dismissed the case outright.
83

Petitioners likewise argue that the trial court had no jurisdiction to decide the case as Castillo failed topay the correct docket
fees. Petitioners argue that Castillo should have paid docket fees based on the property’s fair market value since Castillo’s
84

complaint is a real action. 85

In his comment, Castillo maintains that there are no genuine issues as to any material fact inthis case. The trial court, therefore,
86

correctly rendered summary judgment.

As to petitioners’ claim that the trial court had no jurisdiction to decide the case, Castillo argues that he prayed for rescission of
contract in his complaint. This action is incapable of pecuniary estimation, and the Clerk of Court properly computed the docket
fees based on this prayer. Olivarez Realty Corporation and Dr. Olivarez replied, reiterating their arguments in the petition for
87 88

review on certiorari.

The issues for our resolution are the following:

I. Whether the trial court erred in rendering summary judgment;

II. Whether proper docket fees were paid in this case.

The petition lacks merit.

I
The trial court correctly rendered
summary judgment, as there were no

genuine issues of material fact in this case

Trial "is the judicial examination and determination of the issues between the parties to the action." During trial, parties "present
89

their respective evidence of their claims and defenses." Parties to an action have the right "to a plenary trial of the case" to
90 91

ensure that they were given a right to fully present evidence on their respective claims.
There are instances, however, whentrial may be dispensed with. Under Rule 35 of the 1997 Rules of Civil Procedure, a trial court
may dispense with trial and proceed to decide a case if from the pleadings, affidavits, depositions, and other papers on file, there
is no genuine issue as to any material fact. In such a case, the judgment issued is called a summary judgment.

A motion for summary judgment is filed either by the claimant or the defending party. The trial court then hears the motion for
92

summary judgment. If indeed there are no genuine issues of material fact, the trial court shall issue summary judgment. Section 3,
Rule 35 of the 1997 Rules of Civil Procedure provides:

SEC. 3. Motion and proceedings thereon. – The motion shall be served at least ten (10) days beforethe time specified for the
hearing. The adverse party may serve opposing affidavits, depositions, or admission at least three (3) days before the hearing.
After the hearing, the judgment sought shall be rendered forthwith ifthe pleadings, supporting affidavits, depositions, and
admissions on file, showthat, except as to the amount of damages, there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.

An issue of material fact exists if the answer or responsive pleading filed specifically denies the material allegations of fact set
forth in the complaint or pleading. If the issue offact "requires the presentation of evidence, it is a genuine issue of
fact." However, if the issue "could be resolved judiciously by plain resort" to the pleadings, affidavits, depositions, and other
93 94

paperson file, the issue of fact raised is sham, and the trial court may resolve the action through summary judgment.

A summary judgment is usually distinguished from a judgment on the pleadings. Under Rule 34 of the 1997 Rules of Civil
Procedure, trial may likewise be dispensed with and a case decided through judgment on the pleadings if the answer filed fails to
tender an issue or otherwise admits the material allegations of the claimant’s pleading. 95

Judgment on the pleadings is proper when the answer filed fails to tender any issue, or otherwise admitsthe material allegations in
the complaint. On the other hand, in a summary judgment, the answer filed tenders issues as specific denials and affirmative
96

defenses are pleaded, but the issues raised are sham, fictitious, or otherwise not genuine. 97

In this case, Olivarez Realty Corporation admitted that it did not fully pay the purchase price as agreed upon inthe deed of
conditional sale. As to why it withheld payments from Castillo, it set up the following affirmative defenses: First, Castillo did not
filea case to void the Philippine Tourism Authority’s title to the property; second,Castillo did not clear the land of the tenants;
third, Castillo allegedly sold the property to a third person, and the subsequent sale is currently being litigated beforea Quezon
City court.

Considering that Olivarez RealtyCorporation and Dr. Olivarez’s answer tendered an issue, Castillo properly availed himself of a
motion for summary judgment.

However, the issues tendered by Olivarez Realty Corporation and Dr. Olivarez’s answer are not genuine issues of material fact.
These are issues that can be resolved judiciously by plain resort to the pleadings, affidavits, depositions, and other papers on file;
otherwise, these issues are sham, fictitious, or patently unsubstantial.

Petitioner corporation refused to fully pay the purchase price because no court case was filed to void the Philippine Tourism
Authority’s title on the property. However, paragraph C of the deed of conditional sale is clear that petitioner Olivarez Realty
Corporation is responsible for initiating court action against the Philippine Tourism Authority:

C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the claim/title
TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and voided; with the full assistance
of [Castillo].
98

Castillo’s alleged failureto "fully assist" the corporation in filing the case is not a defense. As the trial court said, "how can
99

[Castillo] assist [the corporation] when [the latter] did not file the action [in the first place?]" 100

Neither can Olivarez Realty Corporation argue that it refused to fully pay the purchase price due to the Philippine Tourism
Authority’s adverse claim on the property. The corporation knew of this adverse claim when it entered into a contract of
conditional sale. It even obligated itself under paragraph C of the deed of conditional sale to sue the Philippine Tourism
Authority. This defense, therefore, is sham.

Contrary to petitioners’ claim, there is no "obvious ambiguity" as to which should occur first — the payment of the disturbance
101

compensation or the clearing of the land within six months from the signing of the deed of conditional sale. The obligations must
be performed simultaneously. In this case, the parties should have coordinated to ensure that tenants on the property were paid
disturbance compensation and were made to vacate the property six months after the signingof the deed of conditional sale.

On one hand, pure obligations, or obligations whose performance do not depend upon a future or uncertainevent, or upon a past
event unknown to the parties, are demandable at once. On the other hand, obligations with a resolutory period also take effect at
102

once but terminate upon arrival of the day certain. 103

Olivarez Realty Corporation’s obligation to pay disturbance compensation is a pure obligation. The performance of the obligation
to pay disturbance compensation did not depend on any condition. Moreover, the deed of conditional sale did not give the
corporation a period to perform the obligation. As such, the obligation to pay disturbance compensation was demandable at once.
Olivarez RealtyCorporation should have paid the tenants disturbance compensation upon execution of the deed of conditional
sale.

With respect to Castillo’s obligation to clear the land of the tenants within six months from the signing of the contract, his
obligation was an obligation with a resolutory period. The obligation to clear the land of the tenants took effect at once,
specifically, upon the parties’ signing of the deed of conditional sale. Castillo had until October 2, 2000, six months from April 5,
2000 when the parties signed the deed of conditional sale, to clear the land of the tenants.

Olivarez Realty Corporation, therefore, had no right to withhold payments of the purchase price. As the trial court ruled, Olivarez
Realty Corporation "can only claim non-compliance [of the obligation to clear the land of the tenants in] October 2000." It said: 104

. . . it is clear that defendant [Olivarez Realty Corporation] should have paid the installments on the ₱5 million downpayment up
to October 8, 2000, or a total of ₱4,500,000.00. That is the agreement because the only time that defendant [corporation] can
claim non-compliance of the condition is after October, 2000 and so it has the clear obligation topay up to the October 2000 the
agreed installments. Since it paid only 2,500,000.00, then a violation of the contract has already been committed. . . . 105

The claim that Castillo sold the property to another is fictitious and was made in bad faith to prevent the trial court from
rendering summary judgment. Petitioners did not elaborate on this defense and insisted on revealing the identity of the buyer only
during trial. Even in their petition for review on certiorari, petitioners never disclosed the name of this alleged buyer. Thus, as
106

the trial court ruled, this defense did not tender a genuine issue of fact, with the defense "bereft of details."107

Castillo’s alleged prayer for the irreconcilable reliefs of rescission of contract and reformation of instrument is not a ground to
dismiss his complaint. A plaintiff may allege two or more claims in the complaint alternatively or hypothetically, either in one
cause of action or in separate causes of action per Section 2, Rule 8 of the 1997 Rules of Civil Procedure. It is the filing of two
108

separatecases for each of the causes of action that is prohibited since the subsequently filed case may be dismissed under Section
4, Rule 2 of the 1997 Rules of Civil Procedure on splitting causes of action.
109

As demonstrated, there are no genuineissues of material fact in this case. These are issues that can be resolved judiciously by
plain resort to the pleadings, affidavits, depositions, and other papers on file. As the trial court found, Olivarez Realty
Corporation illegally withheld payments of the purchase price. The trial court did not err in rendering summary judgment.

II
Castillo is entitled to cancel the contract
of conditional sale

Since Olivarez Realty Corporation illegally withheld payments of the purchase price, Castillo is entitled to cancel his contract
with petitioner corporation. However, we properly characterize the parties’ contract as a contract to sell, not a contract of
conditional sale.

In both contracts to sell and contracts of conditional sale, title to the property remains with the seller until the buyer fully pays the
purchase price. Both contracts are subject to the positive suspensive condition of the buyer’s full payment of the purchase
110

price.
111

In a contract of conditional sale, the buyer automatically acquires title to the property upon full payment of the purchase
price. This transfer of title is "by operation of law without any further act having to be performed by the seller." In a contract
112 113

to sell, transfer of title to the prospective buyer is not automatic. "The prospective seller [must] convey title to the property
114

[through] a deed of conditional sale." 115

The distinction is important to determine the applicable laws and remedies in case a party does not fulfill his or her obligations
under the contract. In contracts of conditional sale, our laws on sales under the Civil Code of the Philippines apply. On the other
hand, contracts to sell are not governed by our law on sales but by the Civil Code provisions on conditional obligations.
116

Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not apply to contracts to sell. As
117

this court explained in Ong v. Court of Appeals, failure to fully pay the purchase price in contracts to sell is not the breach of
118

contract under Article 1191. Failure to fully pay the purchase price is "merely an event which prevents the [seller’s] obligation
119

to convey title from acquiring binding force." This is because "there can be no rescission of an obligation that is still
120

nonexistent, the suspensive condition not having [happened]." 121

In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute sale upon Olivarez Realty
Corporation’s full payment of the purchase price. Since Castillo still has to execute a deed of absolute sale to Olivarez
122

RealtyCorporation upon full payment of the purchase price, the transfer of title is notautomatic. The contract in this case is a
contract to sell.

As this case involves a contract tosell, Article 1191 of the Civil Code of the Philippines does not apply. The contract to sell is
instead cancelled, and the parties shall stand as if the obligation to sell never existed.
123

Olivarez Realty Corporation shall return the possession of the property to Castillo. Any improvement that Olivarez Realty
Corporation may have introduced on the property shall be forfeited in favor of Castillo per paragraph I of the deed of conditional
sale:

I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and develop the
subject property. In case this Contract is cancelled, any improvement introduced by [Olivarez Realty Corporation] on the
property shall be forfeited in favor of [Castillo.] 124

As for prospective sellers, thiscourt generally orders the reimbursement of the installments paidfor the property when setting
aside contracts to sell. This is true especially ifthe property’s possession has not been delivered to the prospective buyer prior to
125

the transfer of title.

In this case, however, Castillo delivered the possession of the property to Olivarez Realty Corporation prior to the transfer of
title. We cannot order the reimbursement of the installments paid.

In Gomez v. Court of Appeals, the City of Manila and Luisa Gomez entered into a contract to sell over a parcel of land. The city
126

delivered the property’s possession to Gomez. She fully paid the purchase price for the property but violated the terms of the
contract to sell by renting out the property to other persons. This court set aside the contract to sell for her violation of the terms
of the contract to sell. It ordered the installments paid forfeited in favor of the City of Manila "as reasonable compensation for
[Gomez’s] use of the [property]" for eight years.
127

In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It only paid ₱2,500,000.00 out of
the ₱19,080,490.00 agreed purchase price. Worse, petitioner corporation has been in possession of Castillo’s property for 14
years since May 5, 2000 and has not paid for its use of the property.

Similar to the ruling in Gomez, we order the ₱2,500,000.00 forfeited in favor of Castillo as reasonable compensation for Olivarez
Realty Corporation’s use of the property.

III
Olivarez Realty Corporation is liable for
moral and exemplary damages and
attorney’s fees

We note that the trial court erred in rendering summary judgment on the amount of damages. Under Section 3, Rule 35 of the
1997 Rules of Civil Procedure, summary judgment may be rendered, except as to the amount of damages.

In this case, the trial court erred in forfeiting the ₱2,500,000.00 in favor of Castillo as damages under Article 1191 of the Civil
Code of the Philippines. As discussed, there is nobreach of contract under Article 1191 in this case.
The trial court likewise erred inrendering summary judgment on the amount of moral and exemplary damages and attorney’s
fees.

Nonetheless, we hold that Castillois entitled to moral damages, exemplary damages, and attorney’s fees.

Moral damages may be awarded in case the claimant experienced physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. 128

As for exemplary damages, they are awarded in addition to moral damages by way of example or correction for the public
good. Specifically in contracts, exemplary damages may be awarded if the defendant acted in a wanton, fraudulent,reckless,
129

oppressive, or malevolent manner. 130

Under the deed of conditional sale, Olivarez Realty Corporation may only suspend the monthly down payment in case Castillo
fails to clear the land of the tenants six months from the signing of the instrument. Yet, even before the sixth month arrived,
Olivarez Realty Corporation withheld payments for Castillo’s property. It evenused as a defense the fact that no case was filed
against the PhilippineTourism Authority when, under the deed of conditional sale, Olivarez Realty Corporation was clearly
responsible for initiating action against the Philippine Tourism Authority. These are oppressive and malevolent acts, and we find
Castillo entitled to ₱500,000.00 moral damages and ₱50,000.00 exemplary damages:

Plaintiff Castillo is entitled to moral damages because of the evident bad faith exhibited by defendants in dealing with him
regarding the sale of his lot to defendant [Olivarez Realty Corporation]. He suffered much prejudice due to the failure of
defendants to pay him the balance of purchase price which he expected touse for his needs which caused him wounded feelings,
sorrow, mental anxiety and sleepless nights for which defendants should pay ₱500,000.00 as moral damages more than six (6)
years had elapsed and defendants illegally and unfairly failed and refused to pay their legal obligations to plaintiff, unjustly
taking advantage of a poor uneducated man like plaintiff causing much sorrow and financial difficulties. Moral damages in favor
of plaintiff is clearly justified . . . [Castillo] is also entitled to ₱50,000.00 as exemplary damages to serve as a deterrent to other
parties to a contract to religiously comply with their prestations under the contract. 131

We likewise agree that Castillo is entitled to attorney’s fees in addition to the exemplary damages. Considering that Olivarez
132

Realty Corporation refused to satisfy Castillo’splainly valid, just, and demandable claim, the award of ₱50,000.00 as attorney’s
133

fees is in order. However, we find that Dr. Pablo R.Olivarez is not solidarily liable with Olivarez Realty Corporation for the
amount of damages.

Under Article 1207 of the Civil Code of the Philippines, there is solidary liability only when the obligation states it or when the
law or the nature of the obligation requires solidarity. In case of corporations, they are solely liable for their obligations. The
134 135

directors or trustees and officers are not liable with the corporation even if it is through their acts that the corporation incurred the
obligation. This is because a corporation is separate and distinct from the persons comprising it. 136

As an exception to the rule, directors or trustees and corporate officers may be solidarily liable with the corporation for corporate
obligations if they acted "in bad faith or with gross negligence in directing the corporate affairs." 137

In this case, we find that Castillo failed to prove with preponderant evidence that it was through Dr. Olivarez’s bad faith or gross
negligence that Olivarez Realty Corporation failed to fully pay the purchase price for the property. Dr. Olivarez’s alleged act of
making Castillo sign the deed of conditional sale without explaining to the latter the deed’s terms in Tagalog is not reason to hold
Dr. Olivarez solidarily liable with the corporation. Castillo had a choice not to sign the deed of conditional sale. He could have
asked that the deed of conditional sale be written in Tagalog. Thus, Olivarez Realty Corporation issolely liable for the moral and
exemplary damages and attorney’s fees to Castillo.

IV
The trial court acquired jurisdiction over
Castillo’s action as he paid the correct
docket fees

Olivarez Realty Corporation and Dr. Olivarez claimed that the trial court had no jurisdiction to take cognizance of the case. In the
reply/motion to dismiss the complaint they filed with the Court of Appeals, petitioners argued that Castillo failed to pay the
138

correct amount of docket fees. Stating that this action is a real action, petitioners argued that the docket fee Castillo paid should
have been based on the fair market value of the property. In this case, Castillo only paid 4,297.00, which is insufficient "if the
real nature of the action was admitted and the fair market value of the property was disclosed and made the basis of the amount of
docket fees to be paid to the court." Thus, according to petitioners, the case should be dismissed for lack of jurisdiction.
139

Castillo countered that his action for rescission is an action incapable of pecuniary estimation. Thus, the Clerk of Court of the
Regional Trial Court of Tanauan City did not err in assessing the docket fees based on his prayer.

We rule for Castillo. In De Leon v. Court of Appeals, this court held that an action for rescission of contract of sale of real
140

property is an action incapable of pecuniary estimation. In De Leon, the action involved a real property. Nevertheless, this court
held that "it is the nature of the action as one for rescission of contract which is controlling." Consequently, the docket fees to be
141

paid shall be for actions incapableof pecuniary estimation, regardless if the claimant may eventually recover the real property.
This court said:

. . . the Court in Bautista v.Lim, held that an action for rescission of contract is one which cannot be estimated and therefore the
docket fee for its filing should be the flat amount of ₱200.00 as then fixed in the former Rule 141, §141, §5(10). Said this Court:

We hold that Judge Dalisay did not err in considering Civil Case No. V-144 as basically one for rescission or annulment of
contract which is not susceptible of pecuniary estimation (1 Moran's Comments on the Rules of Court, 1970 Ed, p. 55; Lapitan
vs. Scandia, Inc., L-24668, July 31, 1968, 24 SCRA 479, 781-483).

Consequently, the fee for docketing it is ₱200, an amount already paid by plaintiff, now respondent Matilda Lim. (She should
1â wphi1

pay also the two pesos legal research fund fee, if she has not paid it, as required in Section 4 of Republic Act No. 3870, the
charter of the U.P. Law Center).

Thus, although eventually the result may be the recovery of land, it is the nature of the action as one for rescission of contract
which is controlling. The Court of Appeals correctly applied these cases to the present one. As it said:

We would like to add the observations that since the action of petitioners [private respondents] against private respondents
[petitioners] is solely for annulment or rescission which is not susceptible of pecuniary estimation, the action should not be
confused and equated with the "value of the property" subject of the transaction; that by the very nature of the case, the
allegations, and specific prayer in the complaint, sans any prayer for recovery of money and/or value of the transaction, or for
actual or compensatory damages, the assessment and collection of the legal fees should not be intertwined with the merits of the
case and/or what may be its end result; and that to sustain private respondents' [petitioners'] position on what the respondent court
may decide after all, then the assessment should be deferred and finally assessed only after the court had finally decided the case,
which cannot be done because the rules require that filing fees should be based on what is alleged and prayed for in the face of
the complaint and paid upon the filing of the complaint. 142

Although we discussed that there isno rescission of contract to speak of in contracts of conditional sale, we hold that an action to
cancel a contract to sell, similar to an action for rescission of contract of sale, is an action incapable of pecuniary estimation. Like
any action incapable of pecuniary estimation, an action to cancel a contract to sell "demands an inquiry into other factors" aside 143

from the amount of money to be awarded to the claimant. Specifically in this case, the trial court principally determined whether
Olivarez Realty Corporation failed to pay installments of the property’s purchase price as the parties agreed upon in the deed of
conditional sale. The principal natureof Castillo’s action, therefore, is incapable of pecuniary estimation.

All told, there is no issue that the parties in this case entered into a contract to sell a parcel of land and that Olivarez Realty
Corporation failed to fully pay the installments agreed upon.Consequently, Castillo is entitled to cancel the contract to sell.

WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals’ decision dated July 20, 2010 and in CA-
G.R. CV No. 91244 is AFFIRMEDwith MODIFICATION.

The deed of conditional sale dated April 5, 2000 is declared CANCELLED. Petitioner Olivarez Realty Corporation shall
RETURN to respondent Benjamin Castillo the possession of the property covered by Transfer Certificate of Title No. T-19972
together with all the improvements that petitioner corporation introduced on the property. The amount of ₱2,500,000.00 is
FORFEITED in favor of respondent Benjamin Castillo as reasonable compensation for the use of petitioner Olivarez Realty
Corporation of the property.

Petitioner Olivarez Realty Corporation shall PAY respondent Benjamin Castillo ₱500,000.00 as moral damages, ₱50,000.00 as
exemplary damages, and ₱50,000.00 as attorney's fees with interest at 6% per annum from the time this decision becomes final
and executory until petitioner
corporation fully pays the amount of damages. 144

SO ORDERED.

G.R. No. 176986

NISSAN CAR LEASE PHILS., INC., Petitioner,

vs.
LICA MANAGEMENT, INC. and PROTON PILIPINAS, INC., Respondents.

DECISION

JARDELEZA, J.:

This is a Petition for Review on Certiorari filed by Nissan Car Lease Philippines, Inc. (NCLPI) to assail the Decision and
1 2

Resolution dated September 27, 2006 and March 8, 2007, respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 75985.
3

The CA affirmed with modification the Decision of the Regional Trial Court dated June 7, 2002 and ruled that there was a valid
4

extrajudicial rescission of the lease contract between NCLPI and Lica Management, Inc. (LMI). It also ordered NCLPI to pay its
unpaid rentals and awarded damages in favor of LMI and third-party respondent Proton Pilipinas, Inc. (Proton).

The Facts

LMI is the absolute owner of a property located at 2326 Pasong Tamo Extension, Makati City with a total area of approximately
2,860 square meters. On June 24, 1994, it entered into a contract with NCLPI for the latter to lease the property for a term of ten
5

(10) years (or from July 1, 1994 to June 30, 2004) with a monthly rental of ₱308,000.00 and an annual escalation rate of ten
percent (10%). Sometime in September 1994, NCLPI, with LMI’s consent, allowed its subsidiary Nissan Smartfix Corporation
6

(NSC) to use the leased premises. 7

Subsequently, NCLPI became delinquent in paying the monthly rent, such that its total rental arrearages amounted to
8

₱1,741,520.85. In May 1996, Nissan and Lica verbally agreed to convert the arrearages into a debt to be covered by a promissory
9

note and twelve (12) postdated checks, each amounting to ₱162,541.95 as monthly payments starting June 1996 until May 1997. 10

While NCLPI was able to deliver the postdated checks per its verbal agreement with LMI, it failed to sign the promissory note
and pay the checks for June to October 1996. Thus, in a letter dated October 16, 1996, which was sent on October 18, 1996 by
registered mail, LMI informed NCLPI that it was terminating their Contract of Lease due to arrears in the payment of rentals. It
also demanded that NCLPI (1) pay the amount of ₱2,651,570.39 for unpaid rentals and (2) vacate the premises within five (5)
11

days from receipt of the notice.

12

In the meantime, Proton sent NCLPI an undated request to use the premises as a temporary display center for "Audi" brand cars
for a period of ten (10) days. In the same letter, Proton undertook "not to disturb [NCLPI and LMI’s] lease agreement and ensure
that [NCLPI] will not breach the same [by] lending the premises x x x without any consideration." NCLPI acceded to this
13

request.14

On October 11, 1996, NCLPI entered into a Memorandum of Agreement with Proton whereby the former agreed to allow Proton
"to immediately commence renovation work even prior to the execution of the Contract of Sublease x x x." In consideration,
15

Proton agreed to transmit to NCLPI a check representing three (3) months of rental payments, to be deposited only upon the due
execution of their Contract of Sublease. 16

In a letter dated October 24, 1996, NCLPI, through counsel, replied to LMI’s letter of October 16, 1996 acknowledging the
arrearages incurred by it under their Contract of Lease. Claiming, however, that it has no intention of abandoning the lease and
citing efforts to negotiate a possible sublease of the property, NCLPI requested LMI to defer taking court action on the matter.17

LMI, on November 8, 1996, entered into a Contract of Lease with Proton over the subject premises. 18

On November 12, 1996, LMI filed a Complaint for sum of money with damages seeking to recover from NCLPI the amount of
19

₱2,696,639.97, equivalent to the balance of its unpaid rentals, with interest and penalties, as well as exemplary damages,
attorney’s fees, and costs of litigation.
20
On November 20, 1996, NCLPI demanded Proton to vacate the leased premises. However, Proton replied that it was occupying
21

the property based on a lease contract with LMI. In a letter of even date addressed to LMI, NCLPI asserted that its failure to pay
22

rent does not automatically result in the termination of the Contract of Lease nor does it give LMI the right to terminate the
same. NCLPI also informed LMI that since it was unlawfully ousted from the leased premises and was not deriving any benefit
23

therefrom, it decided to stop payment of the checks issued to pay the rent. 24

In its Answer and Third-Party Complaint against Proton, NCLPI alleged that LMI and Proton "schemed" and "colluded" to
25 26

unlawfully force NCLPI (and its subsidiary NSC) from the premises. Since it has not abandoned its leasehold right, NCLPI
asserts that the lease contract between LMI and Proton is void for lack of a valid cause or consideration. It likewise prayed for
27

the award of: (1) ₱3,000,000.00, an amount it anticipates to lose on account of LMI and Proton’s deprivation of its right to use
and occupy the premises; (2) ₱1,000,000.00 as exemplary damages; and (3) ₱500,000.00 as attorney’s fees, plus ₱2,000.00 for
every court appearance. 28

The trial court admitted the third-party complaint over LMI’s opposition.
29 30

Subsequently, or on April 17, 1998, Proton filed its Answer with Compulsory Counterclaim against NCLPI. According to
31

Proton, the undated letter-request supposedly sent by Proton to NCLPI was actually prepared by the latter so as to keep from LMI
its intention to sublease the premises to Proton until NCLPI is able to secure LMI’s consent. Denying NCLPI’s allegation that its
32

use of the lease premises was made without any consideration, Proton claims that it "actually paid [NCLPI] rental of ₱200,000.00
for the use of subject property for 10 days x x x." 33

Proton further asserted that NCLPI had vacated the premises as early as during the negotiations for the sublease and, in fact,
authorized the former to enter the property and commence renovations. When NCLPI ultimately failed to obtain LMI’s consent
34

to the proposed sublease and its lease contract was terminated, Proton, having already incurred substantial expenses renovating
the premises, was constrained to enter into a Contract of Lease with LMI. Thus, Proton prayed for the dismissal of the Third-
Party Complaint, and asked, by way of counterclaim, that NCLPI be ordered to pay exemplary damages, attorney’s fees, and
costs of litigation. 35

Ruling of the Trial Court

On June 7, 2002, the trial court promulgated its Decision, the decretal portion of which reads:
36

WHEREFORE, in view of the foregoing, judgment is rendered in plaintiff LICA MANAGEMENT INCORPORATED’s favor.
As a consequence of this, defendant NISSAN CAR LEASE PHILIPPINES, INC. is directed to pay plaintiff the following:

1.) [₱]2,696,639.97 representing defendant’s unpaid rentals inclusive of interest and penalties up to 12 November 1996,
plus interest to be charged against said amount at the rate of twelve percent (12%) beginning said date until the amount
is fully paid.

2.) Exemplary damages and attorney’s fees amounting to Two Hundred Thousand Pesos ([₱]200,000.00) and litigation
expenses amounting to Fifty Thousand Pesos ([₱]50,000.00).

The third party complaint filed by defendant is DENIED for lack of merit and in addition to the foregoing and as prayed for,
defendant NISSAN is ordered to pay third party defendant PROTON PILIPINAS INC. the sum of Two Hundred Thousand Pesos
([₱]200,000.00) representing exemplary damages and attorney’s fees due.

SO ORDERED. 37

The trial court found that NCLPI purposely violated the terms of its contract with LMI when it failed to pay the required rentals
and contracted to sublease the premises without the latter’s consent. Under Article 1191 of the Civil Code, LMI was therefore
38

entitled to rescind the contract between the parties and seek payment of the unpaid rentals and damages. In addition, the trial
39

court ruled that LMI’s act of notifying NCLPI of the termination of their lease contract due to non-payment of rentals is expressly
sanctioned under paragraphs 16 and 18 of their contract.
40 41 42

Contrary to NCLPI’s claim that it was "fooled" into allowing Proton to occupy the premises for a limited period after which the
latter unilaterally usurped the premises for itself, the trial court found that it was NCLPI "which misrepresented itself to [Proton]
as being a lessee of good standing, so that it could induce the latter to occupy and renovate the premises when at that time the
negotiations were underway the lease between [LMI] and [NCLPI] had already been terminated." 43
Aggrieved, NCLPI filed a Petition for Review with the CA. In its Appellant’s Brief, it argued that the trial court erred in: (1)
44

holding that there was a valid extrajudicial rescission of its lease contract with LMI; and (2) dismissing NCLPI’s claim for
damages against LMI and Proton while at the same time holding NCLPI liable to them for exemplary damages and attorney’s
fees.
45

Ruling of the Court of Appeals

The CA denied NCLPI’s appeal and affirmed the trial court’s decision with modification. The decretal portion of the CA’s
Decision reads:
46

WHEREFORE, the appealed Decision dated June 7, 2002 of the trial court is affirmed, subject to modification that:

(1) The award of exemplary damages of ₱100,000.00 each in favor of plaintiff-appellee and third-party defendant-
appellee is reduced to ₱50,000.00 each;

(2) The award of attorney’s fees of ₱100,000.00 each in favor of plaintiff-appellee and third-party defendantappellee is
reduced to ₱50,000.00 each;

(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61, exclusive of interest; and,

(4) Plaintiff-appellee is ordered to return the balance of the security deposit amounting to ₱883,253.72 to defendant-
appellant.

The Decision dated June 7, 2002 is affirmed in all other respects.

SO ORDERED. 47

NCLPI sought for a reconsideration of this decision. LMI, on the other hand, filed a motion to clarify whether the amount of
48

₱2,365,569.61 representing unpaid rentals was inclusive of interest. The CA resolved both motions, thus:
49

WHEREFORE, the motion for reconsideration filed by defendant-appellant Nissan Car Lease is denied for lack of merit.

With respect to the motion for clarification filed by plaintiff-appellee Lica Management, Inc., paragraph (3) of the dispositive
portion of the Decision is hereby clarified to read as follows:

(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61, inclusive of interest and penalties up to
November 12, 1996, plus interest to be charged against said amount at the rate of twelve per cent (12%) beginning said date until
the amount is fully paid.

SO ORDERED. 50

Hence, this petition.

The Petition

NCLPI, in its Petition, raises the following questions:

1. May a contract be rescinded extrajudicially despite the absence of a special contractual stipulation therefor?

2. Do the prevailing facts warrant the dismissal of [LMI]’s claims and the award of NCLPI’s claims?

3. How much interest should be paid in the delay of the release of a security deposit in a lease contract?51

The Court’s Ruling

We deny the Petition for lack of merit.

Before going into the substantive merits of the case, however, we shall first resolve the technical issue raised by LMI in its
Comment dated August 22, 2007.
52

According to LMI, NCLPI’s petition must be denied outright on the ground that Luis Manuel T. Banson (Banson), who caused
the preparation of the petition and signed the Verification and Certification against Forum Shopping, was not duly authorized to
do so. His apparent authority was based, not by virtue of any NCLPI Board Resolution, but on a Special Power of Attorney
(SPA) signed only by NCLPI’s Corporate Secretary Robel C. Lomibao. 53

As a rule, a corporation has a separate and distinct personality from its directors and officers and can only exercise its corporate
powers through its board of directors. Following this rule, a verification and certification signed by an individual corporate
officer is defective if done without authority from the corporation’s board of directors. 54

The requirement of verification being a condition affecting only the form of the pleading, this Court has, in a number of cases,
55

held that:

[T]he following officials or employees of the company can sign the verification and certification without need of a board
resolution: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting
General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case.

x x x [T]he determination of the sufficiency of the authority was done on a case to case basis. The rationale applied in the
foregoing cases is to justify the authority of corporate officers or representatives of the corporation to sign x x x, being "in
a position to verify the truthfulness and correctness of the allegations in the

petition." (Emphasis and underscoring supplied)

56

In this case, Banson was President of NCLPI at the time of the filing of the petition. Thus, and applying the foregoing ruling, he
57

can sign the verification and certification against forum shopping in the petition without the need of a board resolution. 58

Having settled the technical issue, we shall now proceed to discuss the substantial issues.

Validity of Extrajudicial Rescission of Lease Contract

It is clear from the records that NCLPI committed substantial breaches of its Contract of Lease with LMI.

Under Paragraph 2, NCLPI bound itself to pay a monthly rental of ₱308,000.00 not later than the first day of every month to
which the rent corresponds. NCLPI, however, defaulted on its contractual obligation to timely and properly pay its rent, the
arrearages of which, as of October 16, 1996, amounted to ₱2,651,570.39. This fact was acknowledged and admitted by NCLPI.
59 60

Aside from non-payment of rentals, it appears that NCLPI also breached its obligations under Paragraphs 4 and 5 of the
61 62

Contract of Lease which prohibit it from subleasing the premises or introducing improvements or alterations thereon without
LMI’s prior written consent. The trial court found:

As revealed from the evidence presented by PROTON however, even before [NCLPI] represented that it would try to negotiate a
possible sub-lease of the premises, it had, without any semblance of authority from [LMI,]already effectively subleased the
subject premises to PROTON and allowed the latter not only to enter the premises but to renovate the same.

[NCLPI]’s assertion that they only allowed PROTON to utilize the premises for ten days as a display center for Audi cars on the
occasion of the historic visit of Chancellor Helmut Kohl of Germany to the Philippines is belied by the evidence offered by
PROTON that by virtue of a Memorandum of Agreement [NCLPI] had already permitted PROTON "to immediately
commence renovation work even prior to the execution of the Contract of Sublease" and had accepted a check from
PROTON representing the rental deposit under the yet to be executed Contract of Sublease. x x x

xxxx
Besides, the court is not inclined to show [NCLPI] any sympathy x x x because it came to court with unclean hands when it
accused [LMI] and PROTON of being guilty parties when they supposedly connived with each other to oust [NCLPI]
from the leased premises when in truth and in fact, [NCLPI]’s lease was already terminated when it pursued negotiations
to sub-lease the premises to PROTON then giving the latter the assurance they would be able to obtain [LMI]’s consent to the
sublease when this was very remote, in light of [NCLPI]’s failure to update its rental payments. (Emphasis and underscoring
63

supplied)

This factual finding was affirmed by the CA:

There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to maintain it in peaceful possession of
the leased premises. It was [NCLPI] who breached the lease contract by defaulting in the payment of lease rentals, entering
into a sublease contract with [Proton] and allowing [Proton] to introduce renovations on the leased premises without the
consent of [LMI]. x x x (Emphasis supplied)
64

Factual findings of the CA are binding and conclusive on the parties and upon this Court and will not be reviewed or disturbed on
appeal. While the rule admits of certain exceptions, NCLPI failed to prove that any of the exceptions applies in this case.
65

The crux of the controversy rather revolves around the validity of LMI’s act of extrajudicially rescinding its Contract of Lease
with NCLPI.

NCLPI maintains that while a lessor has a right to eject a delinquent lessee from its property, such right must be exercised in
accordance with law:

6.15. In this case, [LMI] did not comply with the requirement laid down in Section 2 of Rule 70 of the Rules of Court, in
unceremoniously ejecting [NCLPI] from the property. The said Rule explicitly provides that the lessor shall serve a written notice
of the demand to pay or comply with the conditions of the lease and to vacate or post such notice on the premises if no person is
found thereon, giving the lessee 15 days to comply with the demand. [LMI]’s demand letter dated 16 October 1996 provides
only a period of five days for [NCLPI] to comply with such demand and, thus, defective. (Emphasis and underscoring supplied)
66

NCLPI’s reliance on Section 2, Rule 70 in this case is misplaced.

67

Rule 70 of the Rules of Court sets forth the procedure in relation to the filing of suits for forcible entry and unlawful detainer.
The action filed by LMI against NCLPI, however, is one for the recovery of a sum of money. Clearly, Section 2 of Rule 70 is not
applicable.

In fact, it does not appear that it was even necessary for LMI to eject NCLPI from the leased premises. NCLPI had already
vacated the same as early as October 11, 1996 when it surrendered possession of the premises to Proton, by virtue of their
Memorandum of Agreement, so that the latter can commence renovations. 68

NCLPI also maintains that LMI cannot unilaterally and extrajudicially rescind their Contract of Lease in the absence of an
express provision in their Contract to that effect. According to NCLPI:
69

6.1. The power to rescind is judicial in nature x x x

6.2. Nevertheless, the Supreme Court has allowed extrajudicial rescission if such remedy is specifically provided for in the
contract. A provision granting the nondefaulting party merely a right to rescind would be superfluous because by law, it is
inherent in such contract [see by analogy Villanueva, PHILIPPINE LAW ON SALES, P. 238 (1998)].

xxxx

6.4. [Paragraph 16], however, cannot be construed as an authority for either party to unilaterally and extrajudicially rescind
70

the Lease Contract in case of breach by the other party. All that [Paragraph] 16 affords the aggrieved party is merely the right to
rescind the lease contract, which is the very same right already granted under Article 1191 of the Civil Code. (Emphasis and
71

underscoring in the original)

It is true that NCLPI and LMI’s Contract of Lease does not contain a provision expressly authorizing extrajudicial rescission.
LMI can nevertheless rescind the contract, without prior court approval, pursuant to Art. 1191 of the Civil Code.
Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases where one of the obligors should fail to
comply with what is incumbent upon him. Otherwise stated, an aggrieved party is not prevented from extrajudicially rescinding a
contract to protect its interests, even in the absence of any provision expressly providing for such right. The rationale for this
72

rule was explained in the case of University of the Philippines v. De los Angeles wherein this Court held:
73

[T]he law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a
judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have
to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis and underscoring supplied)

We are aware of this Court’s previous rulings in Tan v. Court of Appeals, Iringan v. Court of Appeals, and EDS Manufacturing,
74 75

Inc. v. Healthcheck International, Inc., for example, wherein we held that extrajudicial rescission of a contract is not possible
76

without an express stipulation to that effect.

77

The seeming "conflict" between this and our previous rulings, however, is more apparent than real.

Whether a contract provides for it or not, the remedy of rescission is always available as a remedy against a defaulting party.
When done without prior judicial imprimatur, however, it may still be subject to a possible court review. In Golden Valley
Exploration, Inc. v. Pinkian Mining Company, we explained:
78

This notwithstanding, jurisprudence still indicates that an extrajudicial rescission based on grounds not specified in the
contract would not preclude a party to treat the same as rescinded. The rescinding party, however, by such course of action,
subjects himself to the risk of being held liable for damages when the extrajudicial rescission is questioned by the opposing party
in court. This was made clear in the case of U.P. v. De los Angeles, wherein the Court held as follows:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to the other and is always provisional, being ever subject
to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to
judicial action in its own behalf, and bring the matter to court.Then, should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly,
without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court
that will conclusively and finally settle whether the action taken was or was not correct in law. x x x (Emphasis and
underscoring in the original)

The only practical effect of a contractual stipulation allowing extrajudicial rescission is "merely to transfer to the defaulter the
initiative of instituting suit, instead of the rescinder."79

In fact, the rule is the same even if the parties’ contract expressly allows extrajudicial rescission. The other party denying the
rescission may still seek judicial intervention to determine whether or not the rescission was proper. 80

Having established that LMI can extrajudicially rescind its contract with NCLPI even absent an express contractual stipulation to
that effect, the question now to be resolved is whether this extrajudicial rescission was proper under the circumstances.

As earlier discussed, NCLPI’s non-payment of rentals and unauthorized sublease of the leased premises were both clearly proven
by the records. We thus confirm LMI’s rescission of its contract with NCLPI on account of the latter’s breach of its obligations.
1avvphi1

Rental Arrearages and Interest

Having upheld LMI’s extrajudicial rescission of its Contract of Lease, we hold that NCLPI is required to pay all rental arrearages
owing to LMI, computed by the CA as follows:

In its appellant’s brief, [NCLPI] admitted that it had rental arrears of ₱1,300,335.60 as of May 1996. Additionally, the statement
1âwphi1

of account submitted by [LMI] showed that from June 1996 to October 1996 the rental arrears of [NCLPI] amounted to
₱1,065,234.01. Hence, the total of said rental arrears not disputed by the parties is ₱2,365,569.61 x x x. (Emphasis and
81

underscoring supplied)

The Contract of Lease shows that the parties did not stipulate an applicable interest rate in case of default in the payment of
rentals. Thus, and following this Court’s ruling in Nacar v. Gallery Frames, the foregoing amount of rental arrearages shall earn
82

interest at the rate of six percent (6%) per annum computed from October 18, 1996, the date of LMI’s extrajudicial
demand, until the date of finality of this judgment. The total amount shall thereafter earn interest at the rate of six percent (6%)
83

per annum from such finality of judgment until its satisfaction.

Security Deposit

NCLPI also argues that, assuming LMI could validly rescind their Contract of Lease, the security deposit must be returned, with
interest at the rate of twelve percent (12%) per annum, the obligation to return being in the nature of a forbearance of money. 84

NCLPI is partly correct.

Paragraph 3 of the Contract of Lease provides that, in case of termination of the lease, the balance of the security deposit must
85

be returned to NCLPI within seven (7) days. Since "there is no question that [LMI] is retaining the security deposit" in the
amount of ₱883,253.72 (after deduction of the expenses for water and telephone services), LMI must return the same to NCLPI,
86

with interest.

Considering, however, that the Contract of Lease does not stipulate an applicable interest rate, again following our ruling
in Nacar, the rate shall be six percent (6%) from the time of judicial or extrajudicial demand. The records of this case show
that the first time NCLPI raised the issue on the security deposit was in its Brief dated March 25, 2003 filed with the CA. Thus,
87

the interest should be computed starting only on said date until the finality of this Decision, after which the total amount shall
earn interest at the rate of six percent (6%) from the finality of this Decision until satisfaction by LMI.
88

Improvements

In its Petition, NCLPI also prayed for the return of "all the equipment installed and the other improvements on the property, or
their value, pursuant to the mandate of mutual restitution."
89

NCLPI errs.

Under Paragraph 5 of the Contract of Lease, NCLPI is entitled only to the return of those improvements introduced by it which
can be removed without causing damage to the leased premises. Considering, however, that the issue of ownership of the
90

improvements within the premises appears to be subject of another case initiated by NCLPI’s subsidiary, NSC, this Court will
91

not rule on the same.

Denial of NCLPI’s claim and award of damages in favor of LMI and Proton proper

Both the trial court and CA found that NCLPI breached the Contract of Lease. In sustaining the denial of NCLPI’s claim for
damages, the CA held:

There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to maintain it in peaceful possession of
the leased premises. It was [NCLPI] who breached the lease contract x x x Moreover, the lease contract between [LMI] and
[Proton] was entered into only on November 8, 1996 x x x after the lease contract between [LMI] and [NCLPI] had been
terminated. As aptly noted by the trial court:

xxxx

In other words, while in its responsive pleading [NCLPI] claims [that] it was fooled into allowing [Proton] to occupy the subject
premises for a limited period, after which the latter, in alleged collusion with [LMI] unilaterally usurped the premises for
itself, the evidence shows that it was [NCLPI] which misrepresented itself to PROTON as being a lessee of good standing,
so that it could induce the latter to occupy and renovate the premises when at that time the negotiations were underway,
the lease between [LMI] and [NCLPI] had already been terminated. (Emphasis and underscoring supplied)
92
Contrary to NCLPl's claims of an unlawful "scheme" devised by LMJ and Proton to force it out of the leased premises, we find
that it was NCLPI who was in bad faith and itself provided the bases for the cancellation of its Contract of Lease with LMI and
its eventual ejectment from the leased premises. Accordingly, we affirm (1) the award of exemplary damages and attorney's fees
in favor of LMI and Proton and (2) the denial of NCLPI's claim for damages. 93

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated September 27, 2006 and the Resolution
dated March 8, 2007 rendered by the CA in CA-G.R. CV No. 75985 are, however, MODIFIED as follows:

(1) NCLP I is ordered to pay LMI and Proton exemplary damages of P50,000.00 and attorney's fees of P50,000.00,
each;

(2) NCLPI is ordered to pay the amount of P2,365,569.61 unpaid rentals, with interest at the rate of six percent ( 6%)
per annum computed from October 18, 1996 until the date of finality of this judgment. The total amount shall thereafter
earn interest at the rate of six percent (6%) per annum from the finality of judgment until its satisfaction;

(3) LMI is ordered to return to NCLPI the balance of the security deposit amounting to P883,253.72, with interest at the
rate of six percent ( 6o/o) starting March 25, 2003 until the finality of this Decision, after which the total amount shall
earn interest at the rate of six percent (6%) from the finality of this Decision until satisfaction by LMI.
94

SO ORDERED.