PAGE 6 CASES
Plaintiff did make false representations and this can
CHARLES F. WOODHOUSE, plaintiff-appellant, vs.
FORTUNATO F. HALILI, defendant-appellant.
G.R. No. L-4811 July 31, 1953
Subject: BusOrg 1 (PAT)
Doctrine: Fraud
FACTS
On November 29, 1947, plaintiff Woodhouse entered into a
written agreement with defendant Halili stating among
others that: 1) that they shall organize a partnership for the
bottling and distribution of Mission soft drinks, plaintiff to
act as industrial partner or manager, and the defendant as a
capitalist, furnishing the capital necessary therefore; 2) that
plaintiff was to secure the Mission Soft Drinks franchise for
and in behalf of the proposed partnership and 3) that the
plaintiff was to receive 30 per cent of the net profits of the
business.
Prior to entering into this agreement, plaintiff had informed
the Mission Dry Corporation of Los Angeles, California,
that he had interested a prominent financier (defendant
herein) in the business, who was willing to invest half a
million dollars in the bottling and distribution of the said
beverages, and requested, in order that he may close the
deal with him, that the right to bottle and distribute be
granted him for a limited time under the condition that it
will finally be transferred to the corporation. Pursuant to
this request, plaintiff was given “a thirty days’ option on
exclusive bottling and distribution rights for the
Philippines”. The contract was finally signed by plaintiff on
December 3, 1947.
When the bottling plant was already in operation, plaintiff
demanded of defendant that the partnership papers be
executed. Defendant Halili gave excuses and would not
execute said agreement, thus the complaint by the plaintiff.
Plaintiff prays for the : 1.execution of the contract of
partnership; 2) accounting of profits and 3)share thereof of
30 percent with 4) damages in the amount of P200,000. The
Defendant on the other hand claims that: 1) the defendant’s
consent to the agreement, was secured by the representation
of plaintiff that he was the owner, or was about to become
owner of an exclusive bottling franchise, which
representation was false, and that plaintiff did not secure
the franchise but was given to defendant himself 2) that
defendant did not fail to carry out his undertakings, but that
it was plaintiff who failed and 3)that plaintiff agreed to
contribute to the exclusive franchise to the partnership, but
plaintiff failed to do so with a 4) counterclaim for P200,00
as damages.
The CFI ruling: 1) accounting of profits and to pay plaintiff
15 % of the profits and that the 2) execution of contract
cannot be enforced upon parties. Lastly, the 3) fraud wasn’t
proved
ISSUES
1. WON plaintiff falsely represented that he had an
exclusive franchise to bottle Mission beverages
2. WON false representation, if it existed, annuls the
agreement to form the partnership
HELD
1. Yes.
be seen through his letters to Mission Dry Corporation
asking for the latter to grant him temporary franchise so
that he could settle the agreement with defendant. The trial
court reasoned, and the plaintiff on this appeal argues, that
plaintiff only undertook in the agreement “to secure the
Mission Dry franchise for and in behalf of the proposed
partnership.” The existence of this provision in the final
agreement does not militate against plaintiff having
represented that he had the exclusive franchise; it rather
strengthens belief that he did actually make the
representation. The defendant believed, or was made to
believe, that plaintiff was the grantee of an exclusive
franchise. Thus it is that it was also agreed upon that the
franchise was to be transferred to the name of the
partnership, and that, upon its dissolution or termination,
the same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in
California he learned that plaintiff did not have the
exclusive franchise, was to reduce, as he himself testified,
plaintiff’s participation in the net profits to one half of that
agreed upon. He could not have had such a feeling had not
plaintiff actually made him believe that he(plaintiff) was
the exclusive grantee of the franchise.
2. No. In consequence, article 1270 of the Spanish Civil
Code distinguishes two kinds of (civil) fraud, the causal
fraud, which may be ground for the annulment of a
contract, and the incidental deceit, which only renders the
party who employs it liable for damages only. The Supreme
Court has held that in order that fraud may vitiate consent,
it must be the causal (dolo causante), not merely the
incidental (dolo incidente) inducement to the making of the
contract.
The record abounds with circumstances indicative of the
fact that the principal consideration, the main cause that
induced defendant to enter into the partnership agreement
with plaintiff, was the ability of plaintiff to get the
exclusive franchise to bottle and distribute for the
defendant or for the partnership. The original draft prepared
by defendant’s counsel was to the effect that plaintiff
obligated himself to secure a franchise for the defendant.
But if plaintiff was guilty of a false representation, this was
not the causal consideration, or the principal inducement,
that led plaintiff to enter into the partnership agreement. On
the other hand, this supposed ownership of an exclusive
franchise was actually the consideration or price plaintiff
gave in exchange for the share of 30 per cent granted him
in the net profits of the partnership business. Defendant
agreed to give plaintiff 30 per cent share in the net profits
because he was transferring his exclusive franchise to the
partnership.
Having arrived at the conclusion that the contract cannot be
declared null and void, may the agreement be carried out or
executed? The SC finds no merit in the claim of plaintiff
that the partnership was already a fait accompli from the
time of the operation of the plant, as it is evident from the
very language of the agreement that the parties intended
that the execution of the agreement to form a partnership
was to be carried out at a later date. , The defendant may
not be compelled against his will to carry out the agreement
nor execute the partnership papers. The law recognizes the
individual’s freedom or liberty to do an act he has promised
to do, or not to do it, as he pleases. EQUATORIAL V. MAYFAIR- Sale of Land

Dispostive Postion: With modification above indicated, the While execution of a public instrument of sale is
judgment appealed from is hereby affirmed.
recognized by law as equivalent to the delivery of the

thing sold, such constructive or symbolic delivery is

OCCENA VS. JABSON, COURT OF APPEALS AND
TROPICAL HOMES, INC merely presumptive. It is nullified by the failure of the
73 SCRA 637
NO. L-44349, OCTOBER 29, 1976 vendee to take actual possession of the land sold.

FACTS: Private respondent Tropical Homes, Inc had

a subdivision contract with petitioners who are the
owners of the land subject of subdivision development
FACTS:
by private respondent. The contract stipulated that the
petitioners’ fixed and sole share and participation is
the land which is equivalent to forty percent of all cash Carmelo & Bauermann, Inc. owned a land, together
receipts from the sale of the subdivision lots. When
the development costs increased to such level not with two 2-storey buildings at Claro M. Recto Avenue,
anticipated during the signing of the contract and
which threatened the financial viability of the project Manila, and covered by TCT No. 18529.
as assessed by the private respondent, respondent
filed at the lower court a complaint for the modification
of the terms and conditions of the contract by fixing
the proper shares that should pertain to the parties On June 1, 1967, Carmelo entered into a Contract of
therein out of the gross proceeds from the sales of the
Lease with Mayfair Theater Inc. fpr 20 years. The
subdivision lots. Petitioners moved for the dismissal of
the complaint for lack of cause of action. The lower lease covered a portion of the second floor and
court denied the motion for dismissal which was
upheld by the CA based on the civil code provision mezzanine of a two-storey building with about 1,610
that “when the service has become so difficult as to
be manifestly beyond the contemplation of the parties, square meters of floor area, which respondent used
the obligor may also be released therefrom, in whole
as Maxim Theater.
or in part”. Insisting that the worldwide increase in
prices cited by private respondent does not constitute
a sufficient cause of action for the modification of the
terms and conditions of the contract, petitioners filed
the instant petition. Two years later, on March 31, 1969, Mayfair entered

into a second Lease with Carmelo for another portion

ISSUE: Whether or not private respondent may
demand modification of the terms of the contract on of the latter’s property this time, a part of the second
the ground that the prestation has manifestly come
beyond the contemplation of the parties. floor of the two-storey building, and two store spaces

RULING: If the prayer of the private respondent is to on the ground floor. In that space, Mayfair put up
be released from its contractual obligations on another movie house known as Miramar Theater. The
account of the fact that the prestation has become
beyond the contemplation of the parties, then private Contract of Lease was likewise for a period of 20
respondent can rely on said provision of the civil code.
But the prayer of the private respondent was for the years.
modification of their valid contract. The above-cited
civil code provision does not grant the court the power
to remake, modify, or revise the contract or to fix the
division of the shares between the parties as Both leases contained a clause giving Mayfair a right
contractually stipulated with the force of law between
the parties. Therefore, private respondent’s complaint of first refusal to purchase the subject properties.
for modification of its contract with petitioner must be Sadly, on July 30, 1978 - within the 20-year-lease
dismissed. The decision of respondent court is
reversed. term -- the subject properties were sold by Carmelo to
Equatorial Realty Development, Inc. for eleven million

smackers, without their first being offered to Mayfair. The court went on to assert that rent is a civil fruit that

belonged to the owner of the property producing it by

right of accession. Hence, the rentals that fell due

As a result of the sale of the subject properties to
from the time of the perfection of the sale to petitioner
Equatorial, Mayfair filed a Complaint before the
until its rescission by final judgment should belong to
Regional Trial Court of Manila for the recission of the
the owner of the property during that period. We
Deed of Absolute Sale between Carmelo and
remember from SALES that in a contract of sale, “one
Equatorial, specific performance, and damages. RTC
of the contracting parties obligates himself to transfer
decided for Carmelo and Equatorial. Tsk tsk.
ownership of and to deliver a determinate thing and
CA reversed and ruled for Mayfair. The SC denied a
the other to pay therefor a price certain in money or its
petition questioning the CA decision. What happened
equivalent.” Ownership of the thing sold is a real right,
is that the contract did get rescinded, Equatorial got
which the buyer acquires only upon delivery of the
its money back and asserted that Mayfair have the
thing to him “in any of the ways specified in articles
right to purchase the lots for 11 million bucks.
1497 to 1501, or in any other manner signifying an
Decision became final and executory, so Mayfair
agreement that the possession is transferred from the
deposited with the clerk the 11M (less 847grand
vendor to the vendee.” This right is transferred, not by
withholding) payment for the properties (Carmelo
contract alone, but by tradition or delivery. There is
somehow disappeared). Meanwhile, on Sept 18,
delivery if and when the thing sold “is placed in the
1997, barely five months after Mayfair submitted its
control and possession of the vendee.” While
Motion for Execution, Equatorial demanded from
execution of a public instrument of sale is recognized
Mayfair backrentals and reasonable compensation for
by law as equivalent to the delivery of the thing sold,
the Mayfair’s continued use of the subject premises
such constructive or symbolic delivery is merely
after its lease contracts expired. Remember that
presumptive. It is nullified by the failure of the vendee
Mayfair was still occupying the premises during all this
to take actual possession of the land sold. For
hullabaloo.
property to be delivered, we need two things. Delivery
ISSUE:
of property or title, and transfer of control or custody

Whether or not Equatorial was the owner of the to the buyer. Possession was never acquired by the

subject property and could thus enjoy the fruits and petitioner. It therefore had no rights to rent.

rentals.

HELD:NO. Nor right of ownership was transferred

from Carmelo to Equatorial since there was failure to
deliver the property to the buyer. Compound this with
the fact that the sale was even rescinded.
G.R. No. L-2724 August 24, 1950
JOSE DE LEON, CECILIO DE LEON, in their
individual capacity, and JOSE DE LEON and
CECILIO DE LEON , as administrators of the
intestate estate of Felix de Leon, petitioner,
vs.
ASUNCION SORIANO, respondent.
Lorenzo Sumulong and Jose Santos for petitioners.
Vicente J. Francisco for respondent.
TUASON, J.:
This is an appeal by certiorari from a decision of the
Court of Appeals affirming a judgment of the Court of
First Instance of Bulacan.
Jose de Leon, Cecilio de Leon and Albina de Leon,
petitioners herein and defendants in the court below,
were natural children of Felix de Leon, deceased,
while Asuncion Soriano, respondent herein and
plaintiff below, is his widow. In the administration and
settlement of the decedent's estate then pending in
the Court of First Instance, the said widow, on the one
hand, and the natural children, on the other, reached
on March 23, 1943 an agreement, approved by the
probate court, whereby the natural children obligated
themselves, among other things, as follows:
2. At the end of each of agricultural year, by
which shall understood for the purposes of
this agreement the month of March of every
year, the following amounts of palay shall be
given to the party of the FIRST PART
(Asuncion Soriano) by the parties of the
SECOND PART (De Leons): in the month of
March of the current year 1943; one
thousand two hundred (1,200) cavanes of
palay (macan); in the month of March 1944,
one thousand four hundred (1,400) cavanes
of palay (macan); in the month March of
1945, one thousand five hundred (1,500)
cavanes of palay (macan); and in the month
of March 1946 and every succeeding year
thereafter, one thousand six hundred (1,600)
cavanes of palay (macan). Delivery of the
palay shall be made in the warehouse
required by the government, or if there be
none such, at the warehouse to be selected
by the party of the FIRST PART, in San
Miguel, Bulacan, free from the cost of
hauling, transportation, and from any all
taxes or charges.
It is expressly stipulated that this annual
payment of palay shall cease upon the death
of the party of the FIRST PART and shall not
be transmissible to her heirs or to any other
person, but during her lifetime this obligation
for the annual payment of the palay
hereinabove mentioned shall constitute a
first lien upon all the rice lands of the estate
of Dr. Felix de Leon in San Miguel, Bulacan.
The defendants made deliveries to the plaintiff of
1,200 cavanes of palay in 1934, 700 in 1944, 200 in
1945, and another 200 in 1946, a total of 2,300
cavanes which was 3,400 cavanes short of the 5,700
cavanes which should have been delivered up to and
including 1946. It was to recover this shortage or its
value that this action was commenced.
For answer, the defendants averred that their failure
to pay the exact quantities of palay promised for 1944,
1945 and 1946 was due to "the Huk troubles in
Central Luzon which rendered impossible full
compliance with the terms of the agreement;" and it
was contended that "inasmuch as the obligations of
the defendants to deliver the full amount of the palay
is depending upon the produce as this is in the nature
of an annuity, . . . the obligations of the defendants
have been fully fulfilled by delivering in good faith all
that could be possible under the circumstances."
The court gave judgment for the plaintiff for 3,400
cavanes of palay or its equivalent in cash, which was
found to be 24,900, and legal interest. As above
stated, that judgment was affirmed by the appellate
court.
Article 1182 of the Civil Code which was in force at
the time agreement in question was entered into,
provide that "Any obligation which consists in the
delivery of a determinate thing shall be extinguished if
such thing should be lost or destroyed without fault on
the part of the debtor and before he is in default.
Inversely, the obligation is not extinguished if the thing
that perishes is indeterminate.
Manresa explains the distinction between determinate
and generic thing in his comment on article 1096 of
the Civil Code of Spain, saying that the first is a
concrete, particularized object, indicated by its own
individuality, while a generic thing is one of whose
determination is confined to that of its nature, to the
genus (genero) to which it pertains, such as a horse,
a chair. These definitions are in accord with the
popular meaning of the terms defined.
Except as to quality and quantity, the first of which is
itself generic, the contract sets no bounds or limits to
the palay to be paid, nor was there even any
stipulation that the cereal was to be the produce of
any particular land. Any palay of the quality stipulated
regardless of origin on however acquired (lawfully)
would be obligatory on the part of the obligee to
receive and would discharge the obligation. It seems
therefore plain that the alleged failure of crops through
alleged fortuitous cause did not excuse performance.
As Escriche, in his Diccionario Razonado de
Legislacion y Jurisprudencia, puts it, speaking of the
effects of the loss of a thing:
 Extingue la obligacion del deudor cuando la
cosa debida es un cuerpo cierto y
determinado; pero si fuese generica o no
estuviese determinada sino en cuanto a la
especie, como por ejemplo, unaonza de oro,
50 panegas de trigo o 3 toneladas de vino,
siempre se perderia, para el deudor, el cual,
por consiguiente, no se libraria de la deuda,
ya que se supone que el genero por su
naturaleza nunca parece, "nun quan
genusperit", ya porque aunque se diga que
parece no puede parecer, sino para su
dueño, que es el deudor "res domino suo
perit". (Libro 18 y su glosa La Titulo 11,
Partida 5.a)
And he gives this example:
Si prestais, pues, a Pedro una onza de oro
que luego le roban, tendra que pagartela,
porque su obligacion no consistia en haberte
de dar aquella misma onza, sino
generalmente una onza.
In the case of Yu Tek & Co., vs. Gonzales (29 Phil.,
384), it appeared that the plaintiff advanced P3,000 to
defendant in payment of 600 piculs of sugar. The
contract in writing did not specify that the sugar was to
come from the crop on defendant's land which was
destroyed. It was held that the sugar to be sold not
having been segregated, the sale was not perfected
and the loss of the crop, even though through force
majeure did not extinguish defendant's obligation to
deliver the sugar.
In the more recent decision of this Court, in the case
of Reyes vs. Caltex (Phil.) Inc. (47 Off. Gaz., 1193; 84
Phil., 654), a question similar to that at bar arose.
There, we ruled that the inability of the lessee of a
commercial property to pay the stipulated rent
because of war and because the premises had been
occupied by Japanese forces did not affect the
lessee's liability to fulfill its commitments. Shifting to
American authorities, we cited Pollard vs. Shaefer (1
Dall. [Pa.], 210), where the Court said that, "since by
the lease, the lessee was to have the advantage of
casual profits of the leased premises, he should run
the hazard of casual losses during the term and not
lay the whole burden of them upon the lessor." This
court went on to say:
The general rule on performance of contracts
is graphically set forth in American treatises,
which is also the rule, in our opinion,
obtaining under the Civil Code.
Where a person by a contract charges
himself with an obligation possible to be
performed, he must perform it, unless its
performance is rendered impossible by the
act of God, by the law, or by the other party,
it being the rule that in case the party desires
to be excused from performance in the event
of contingencies arising, it is his duty to
provide therefor in his contract. Hence,
performance is not excused by subsequent"
inability to perform, by unforseen difficulties,
by unusual or unexpected expenses, by
danger, by inevitable accident, by the
breaking of machinery, by strikes, by
sickness, by failure of a party to avail himself
of the benefits to be had under the contract,
by weather conditions, by financial
stringency, or by stagnation of business.
Neither is performance excused by the fact
that the contract turns out to be hard and
improvident, unprofitable or impracticable, ill
advised, or even foolish, or less profitable, or
unexpectedly burdensome. (17 C. J. S. 946 -
948).
In the absence of a statute to the contrary,
conditions arising from a state of war in
which the country is engaged, will not
ordinarily constitute an excuse for non-
performance of contract; and impossibility of
performance arising from the acts of the
legislature and the executive branch of
government in war time does not, without
more, constitute an excuse for non-
performance. (17 C.J.S., 953, 954.)
A few words are in order to straighten out the
apparent confusion (of ideas) that exists
regarding the influence of fortuitous events in
contracts; when they excuse performance
and when not.
In considering the effect of impossibility of
performance on the rights of the parties, it is
necessary to keep in mind the distinction
between: (1) Natural impossibility preventing
performance from the nature of the
things and (2) impossibility in fact, in the
absence of inherent impossibility in the
nature of the thing stipulated to be
performed. (17 C.J.S., 951.) In the words of
one Court impossibility must consist in the
nature of thing to be done and not in the
inability of the party to do it. (City of
Montpelier vs. National Surety Co., 122 A.,
484; 97 Vt., Ill; 33 A.L.R., 489.) As others
have put it, to bring the case within the rule
of impossibility, it must appear that the thing
to be done cannot by any means be
accomplished, for if it is only improbable or
out of the power of the obligor, it is not in law
deemed impossible. (17 C.J.S., 442). The
first class of impossibility goes to the
consideration and renders the contract void.
The second, which is the class of
 impossibility that we have to do here, does
not. (17 C.J.S., 951, 952.)
For illustration, where the entire product of a
manufacturer was taken by the government
under orders pursuant to a commandeering
statute during the World War, it was held that
such action excused non-performance of a
contract to supply civilian trade. (40 S. Ct., 5;
U.S., 493; 64 Law. ed., 1031.) Another
example: where a party obligates himself to
deliver certain (determinate) things and the
things perish through war or in a shipwreck
performance is excused, the destruction
operating as a rescission or dissolution of the
covenant. But if the promisor is unable to
deliver the goods promised and his inability
arises, not from their destruction but from,
say, his inability to raise money to buy them
due to sickness, typhoons, or the like, his
liability is not discharged. In the first case the
doing of the thing which the obligor finds
impossible is the foundation of the
undertaking. (C.J.S., 951, note.) In the
second, the impossibility partakes of the
nature of the risk which the promisor took
within the limits of his undertaking of being
able to perform. (C.J.S., supra, 946, note). It
is a contingency which he could have taken
due precaution to guard against in the
contract.
Summoning the above principles to our aid,
and by way of hypothesis the defendant-
appellee here would be relieved from the
obligation to pay rent if the subject matter of
the lease, were this possible had
disappeared, for the personal occupation of
the premises is the foundation of the
contract, the consideration that induced it
(lessee) to enter into the agreement. But a
mere trespass with which the landlord had
nothing to do is a casual disturbance not
going to the essence of the undertaking. It is
a collateral incident which might have been
provided for by a proper stipulation.
271 Phil. 726
NORKIS VS CA
GRINO-AQUINO, J.:
Subject of this petition for review is the decision of the
Court of Appeals (Seventeenth Division) in CA-G.R.
No. 09149, affirming with modification the judgment
of the Regional Trial Court, Sixth (6th) Judicial
Region, Branch LVI, Himamaylan, Negros Occidental,
in Civil Case No. 1272, which was private respondent
Alberto Nepales' action for specific performance of a
contract of sale with damages against petitioner
Norkis Distributors, Inc.
The facts borne out by the record are as follows:
Petitioner Norkis Distributors, Inc. (Norkis for
brevity), is the distributor of Yamaha motorcycles in
Negros Occidental with office in Bacolod City with
Avelino Labajo as its Branch Manager. On September
20, 1979, private respondent Alberto Nepales bought
from the Norkis-Bacolod branch a brand new Yamaha
Wonderbike motorcycle Model YL2DX with Engine
No. L2-329401K. Frame No. NL2-0329401, Color
Maroon, then displayed in Norkis showroom. The
price of P7,500.00 was payable by means of a Letter
of Guaranty from the Development Bank of the
Philippines (DBP), Kabankalan Branch, which Norkis'
Branch Manager Labajo agreed to accept. Hence,
credit was extended to Nepales for the price of the
motorcycle payable by DBP upon release of his
motorcycle loan. As security for the loan, Nepales
would execute a chattel mortgage on the motorcycle in
favor of DBP Branch Manager Labajo issued Norkis
Sales Invoice No. 0120 (Exh. 1) showing that the
contract of sale of the motorcycle had been
perfected. Nepales signed the sales invoice to signify
his conformity with the terms of the sale. In the
meantime, however, the motorcycle remained in
Norkis' possession.
On November 6, 1979, the motorcycle was registered
in the Land Transportation Commission in the name
of Alberto Nepales. A registration certificate (Exh. 2)
in his name was issued by the Land Transportation
Commission on November 6, 1979 (Exh. 2-b). The
registration fees were paid by him, evidenced by an
official receipt, Exhibit 3.
On January 22, 1980, the motorcycle was delivered to
a certain Julian Nepales who was allegedly the agent
of Alberto Nepales but the latter denies it (p. 15, t.s.n.,
August 2, 1984). The record shows that Alberto and
Julian Nepales presented the unit to DBP's Appraiser-
Investigator Ernesto Arriesta at the DBP offices in
Kabankalan, Negros Occidental Branch (p. 12,
Rollo). The motorcycle met an accident on February
3, 1980 at Binalbagan, Negros Occidental. An
investigation, conducted by the DBP revealed that the
unit was being driven by a certain Zacarias Payba at
the time of the accident (p. 33, Rollo). The unit was a
total wreck (p. 36, t.s.n., August 2, 1984; p. 13, Rollo),
was returned and stored inside Norkis' warehouse.
On March 20, 1980, DBP released the proceeds of
private respondent's motorcycle loan to Norkis in the
total sum of P7,500. As the price of the motorcycle
later increased to P7,828 in March, 1980. Nepales
paid the difference of P328 (p. 13, Rollo) and
demanded the delivery of the motorcycle. When
Norkis could not deliver, he filed an action for specific
performance with damages against Norkis in the
Regional Trial Court of Himamaylan, Negros
Occidental, Sixth (6th) Judicial Region, Branch LVI,
where it was docketed as Civil Case No. 1272. He
alleged that Norkis failed to deliver the motorcycle
which he purchased, thereby causing him damages.
Norkis answered that the motorcycle had already been
delivered to private respondent before the accident,
hence, the risk of loss or damage had to be borne by
him as owner of the unit.
After trial on the merits, the lower court rendered a
decision dated August 27, 1985 ruling in favor of
private respondent (p. 28, Rollo) thus:
"WHEREFORE, judgment is rendered in favor of the
plaintiff and against the defendants. The defendants
are ordered to pay solidarily to the plaintiff the
present value of the motorcycle which was totally
destroyed, plus interest equivalent to what the
Kabankalan Sub-Branch of the Development Bank of
the Philippines will have to charge the plaintiff, on his
account, plus P50.00 per day from February 3, 1980
until full payment of the said present value of the
motorcycle plus P1,000.00 as exemplary damages,
and costs of the litigation. In lieu of paying the
present value of the motorcycle, the defendants can
deliver to the plaintiff a brand-new motorcycle of the
same brand, kind, and quality as the one which was
totally destroyed in their possession last February 3,
1980." (pp. 28-29. Rollo.)
On appeal, the Court of Appeals affirmed the appealed
judgment on August 21, 1989, but deleted the award
or damages "in the amount of Fifty (P50.00) Pesos a
day from February 3, 1980 until payment of the
present value of the damaged vehicle" (p. 35,
Rollo). The Court of Appeals denied Norkis motion
for reconsideration. Hence, this Petition for Review.
The principal issue in this case is who should bear the
loss of the motorcycle. The answer to this question
would depend on whether there had already been a
transfer of ownership of the motorcycle to private
respondent at the time it was destroyed.
Norkis' theory' is that:
"x x x. After the contract of sale has been perfected
(Art. 1475) and even before delivery, that is even
before the ownership is transferred to the vendee, the
risk of loss is shifted from the vendor to the
vendee. Under Art. 1262, the obligation of the vendor
to deliver a determinate thing becomes extinguished if
the thing is lost by fortuitous event (Art. 1174), that is,
without the fault or fraud of the vendor and before he
has incurred in delay (Art. 1165, par. 3). If the thing
sold is generic the loss or destruction does not
extinguish the obligation (Art. 1263). A thing is
determinate when it is particularly designated or
physically segregated from all others of the same class
(Art. 1460). Thus, the vendor becomes released from
his obligation to deliver the determinate thing sold
while the vendee's obligation to pay the price
subsists. If the vendee had paid the price in advance
the vendor may retain the same. The legal effect,
therefore, is that the vendee assumes the risk of loss
by fortuitous event (Art. 1262) after the perfection of
the contract to the time of delivery." (Civil Code of the
Philippines, Ambrosio Padilla, Vol. 5, 1987 Ed., p. 87.)
Norkis concedes that there was no "actual" delivery of
the vehicle. However, it insists that there was
constructive delivery of the unit upon: (1) the
issuance of the Sales Invoice No. 0120 (Exh. 1) in the
name of the private respondent and the affixing of his
signature thereon: (2) the registration of the vehicle
on November 6, 1979 with the Land Transportation
Commission in private respondent's name (Exh.
2): and (3) the issuance of official receipt (Exh. 3) for
payment of registration fees (p. 33, Rollo).
That argument is not well taken. As pointed out by
the private respondent, the issuance of a sales invoice
does not prove transfer of ownership of the thing sold
to the buyer. An invoice is nothing more than a
detailed statement of the nature, quantity and cost of
the thing sold and has been considered not bill of sale
(Am. Jur. 2nd Ed., Vol. 67, p. 378).
In all forms of delivery, it is necessary that the act of
delivery, whether constructive or actual, be coupled
with the intention of delivering the thing. The act
without the intention, is insufficient (De Leon
Comments and Cases on Sale, 1978 Ed., citing
Manresa, p. 94).
When the motorcycle was registered by Norkis in the
name of private respondent. Norkis did not intend yet
to transfer the title or ownership to Nepales, but only
to facilitate the execution of a chattel mortgage in
favor of the DBP for the release of the buyer's
motorcycle loan. The Letter of Guarantee (Exh. 5)
issued by the DBP, reveals that the execution in its
favor of a chattel mortgage over the purchased vehicle
is a pre-requisite for the approval of the buyer's
loan. If Norkis would not accede to that arrangement,
DBP would not approve private respondent's loan
application and, consequently, there would be no sale.
In other words, the critical factor in the different
modes of effecting delivery, which gives legal effect to
the act, is the actual intention of the vendor to deliver,
and its acceptance by the vendee. Without that
intention, there is no tradition (Abuan vs. Garcia, 14
SCRA 759).
In the case of Addison vs. Felix and Tioco (38 Phil.
404, 408), this Court held:
"The Code imposes upon the vendor the obligation
to deliver the thing sold. The thing is considered to be
delivered when it is 'placed in the hands and
possession of the vendee.' (Civil Code, Art. 1462). It is
true that the same article declares that the execution
of a public instrument is equivalent to the delivery of
the thing which is the object of the contract, but, in
order that this symbolic delivery may produce the
effect of tradition, it is necessary that the vendor shall
have had such control over the thing sold that, at the
moment of the sale, its material delivery could have
been made. It is not enough to confer upon the
purchaser the ownership and the right of
possession. The thing sold must be placed in
his control. When there is no impediment whatever
to prevent the thing sold passing into the tenancy of
the purchaser by the sole will of the vendor, symbolic
delivery through the execution of a public instrument
is sufficient. But if, notwithstanding the execution of
the instrument, the purchaser cannot have the
enjoyment and material tenancy of the thing and
make use of it himself or through another in his name,
because such tenancy and enjoyment are opposed by
the interposition of another will, then fiction yields to
reality the - delivery has not been effected."
(Underlining supplied.)
The Court of Appeals correctly ruled that the purpose
of the execution of the sales invoice dated September
20, 1979 (Exh. B) and the registration of the vehicle in
the name of plaintiff-appellee (private respondent)
with the Land Registration Commission (Exhibit C)
was not to transfer to Nepales the ownership and
dominion over the motorcycle, but only to comply
with the requirements of the Development Bank of the
Philippines for processing private respondent's
motorcycle loan. On March 20, 1980, before private
respondent's loan was released and before he even
paid Norkis, the motorcycle had already figured in an
accident while driven by one Zacarias Payba. Payba
was not shown by Norkis to be a representative or
relative of private respondent. The latter's supposed
relative, who allegedly took possession of the vehicle
from Norkis did not explain how Payba got hold of the
vehicle on February 3, 1980. Norkis' claim that Julian
Nepales was acting as Alberto's agents when he
allegedly took delivery of the motorcycle (p. 20,
Appellants' Brief), is controverted by the
latter. Alberto denied having authorized Julian
Nepales to get the motorcycle from Norkis
Distributors or to enter into any transaction with
Norkis relative to said motorcycle, (p. 5, t.s.n.,
February 6, 1985). These circumstances more than
amply rebut the disputable presumption of delivery
upon which Norkis anchors its defense to Nepales'
action (pp. 33-34, Rollo).
Article 1496 of the Civil Code which provides that in
the absence of an express assumption of risk by the
buyer, the things sold remain at seller's risk until the
ownership thereof is transferred to the buyer," is
applicable to this case, for there was neither an actual
nor constructive delivery of the thing sold, hence, the
risk of loss should be borne by the seller, Norkis,
which was still the owner and possessor of the
motorcycle when it was wrecked. This is in
accordance with the well-known doctrine of res perit
domino.
WHEREFORE, finding no reversible error in the
decision of the Court of Appeals in CA-G.R. No.
09149, we deny the petition for review and hereby
affirm the appealed decision, with costs against the
petitioner.
SO ORDERED.
ALFRED HAHN v. CA, GR No. 113074, 1997-01-22
Facts:
Petitioner Alfred Hahn is a Filipino citizen doing
business under the name and style "Hahn-Manila."
On the other hand, private respondent Bayerische
Motoren Werke Aktiengesellschaft (BMW) is a
nonresident foreign corporation existing under the
laws of the former
Federal Republic of Germany, with principal office at
Munich, Germany.
petitioner executed in favor of private respondent a
"Deed of Assignment with Special Power of
Attorney,"... the ASSIGNOR is the present owner and
holder of the BMW trademark and device in the
Philippines which ASSIGNOR uses and has been
using on the products manufactured by ASSIGNEE,
and for which ASSIGNOR is the authorized exclusive
Dealer of the ASSIGNEE in the
Philippines
That the ASSIGNOR and the ASSIGNEE shall
continue business relations as has been usual in the
past without a formal contract
But on February 16, 1993, in a meeting with a BMW
representative and the president of Columbia Motors
Corporation (CMC), Jose Alvarez, petitioner was
informed... that BMW was arranging to grant the
exclusive dealership of BMW cars and products to
CMC, which had expressed interest in acquiring the
same
Nonetheless, BMW expressed willingness to continue
business relations with the petitioner on the basis of a
"standard BMW importer" contract, otherwise, it said,
if this was not acceptable to petitioner, BMW would
have no alternative but to terminate petitioner's...
exclusive dealership
Petitioner protested, claiming that the termination of
his exclusive dealership would be a breach of the
Deed of Assignment.[3] Hahn insisted that as long as
the assignment of its trademark and device subsisted,
he remained BMW's exclusive dealer in the
Philippines because the assignment was made in
consideration of the exclusive dealership.
BMW withdrew on March 26, 1993 its offer of a
"standard importer contract" and terminated the
exclusive dealer relationship effective June 30, 1993
BMW moved to dismiss the case, contending that the
trial court did not acquire jurisdiction over it through
the service of summons on the Department of Trade
and Industry, because it (BMW) was a foreign
corporation and it was not doing business in the
Philippines.
Petitioner Alfred Hahn opposed the motion. He
argued that BMW was doing business in the
Philippines through him as its agent
Court of Appeals enjoined the trial court from hearing
petitioner's complaint. On December 20, 1993, it
rendered judgment finding the trial court guilty of
grave abuse of discretion in deferring resolution of the
motion to dismiss.
Issues:
in finding that private respondent BMW is not doing
business in the Philippines and, for... this reason,
dismissing petitioner's case.
whether petitioner Alfred Hahn is the agent or
distributor in the Philippines of private respondent
BMW.
Ruling:
What acts are considered "doing business in the
Philippines" are enumerated in §3(d) of the Foreign
Investments Act of 1991 (R.A. No. 7042)... d) the
phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called
"liaison" offices or branches, appointing
representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the
country... for a period or periods totalling one hundred
eighty (180) days or more; participating in the
management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of
commercial dealings or... arrangements and
contemplate to that extent the performance of acts or
works, or the exercise of some of the functions
normally incident to, and in progressive prosecution
of, commercial gain or of the purpose and object of
the business organization: Provided, however, That
the... phrase "doing business" shall not be deemed to
include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered
to do business, and/or the exercise of rights as such
investor; nor having, a nominee director or officer to
represent its... interests in such corporation; nor
appointing a representative or distributor domiciled in
the Philippines which transacts business in its own
name and for its own account.
Thus, the phrase includes "appointing representatives
or distributors in the Philippines" but not when the
representative or distributor "transacts business in its
name and for its own account."... there is nothing to
support the appellate court's finding that Hahn
solicited orders alone and for his own account and
without "interference from, let alone direction of,
BMW." (p. 13) To the contrary, Hahn... claimed he
took orders for BMW cars and transmitted them to
BMW. Upon receipt of the orders, BMW fixed the
down payment and pricing charges, notified Hahn of
the scheduled production month for the orders, and
reconfirmed the orders by signing and returning to
Hahn the acceptance... sheets. Payment was made
by the buyer directly to BMW. Title to cars purchased
passed directly to the buyer and Hahn never paid for
the purchase price of BMW cars sold in the
Philippines.
Contrary to the appellate court's conclusion, this
arrangement shows an agency. An agent receives a
commission upon the successful conclusion of a sale.
On the other hand, a broker earns his pay merely by
bringing the buyer and the seller together, even if no
sale is eventually... made.
The fact that Hahn invested his own money to put up
these service centers and showrooms does not
necessarily prove that he is not an agent of BMW.
It is not true then that the question whether BMW is
doing business could have been resolved simply by
considering the parties' pleadings. There are genuine
issues of facts which can only be determined on the
basis of evidence duly presented. BMW cannot short
circuit the process... on the plea that to compel it to go
to trial would be to deny its right not to submit to the
jurisdiction of the trial court which precisely it denies.
It is the Court of Appeals which, by ruling that BMW is
not doing business on the basis merely of uncertain
allegations in the pleadings, disposed of the whole
case with finality and thereby deprived petitioner of his
right to be heard on his cause of action. Nor... was
there justification for nullifying the writ of preliminary
injunction issued by the trial court. Although the
injunction was issued ex parte, the fact is that BMW
was subsequently heard on its defense by filing a
motion to dismiss.
PAGE 8 CASES
GUANIO VS MAKATI SHANGRILA HRI
A week before their wedding reception, the hotel
scheduled a food tasting. Eventually, the parties
agreed to a package where the final price was
P1,150.00 per person.
According to the complainants, when the actual
reception took place, ” the respondent’s
representatives did not show up despite their
assurance that they would; their guests complained of
the delay in the service of the dinner; certain items
listed in the published menu were unavailable; the
hotel’s waiters were rude and unapologetic when
confronted about the delay; and despite Alvarez’s
promise that there would be no charge for the
extension of the reception beyond 12:00 midnight,
they were billed and paid P8,000 per hour for the
three-hour extension of the event up to 4:00 A.M. the
next day. They further claim that they brought wine
and liquor in accordance with their open bar
arrangement, but these were not served to the guests
who were forced to pay for their drinks. They sent a
letter-complaint to hotel and received an apologetic
reply from the hotel’s Executive Assistant Manager in
charge of Food and Beverage.
They nevertheless filed a complaint for breach of
contract and damages before the Regional Trial Court
(RTC) of Makati City.
Answering, the hotel said that complainants requested
a combination of king prawns and salmon, hence, the
price was increased to P1,200.00 per person, but
discounted at P1,150.00; that contrary to their claim,
the hotel representatives were present during the
event, albeit they were not permanently stationed
thereat as there were three other hotel functions; that
while there was a delay in the service of the meals,
the same was occasioned by the sudden increase of
guests to 470 from the guaranteed expected minimum
number of guests of 350 to a maximum of 380, as
stated in the Banquet Event Order (BEO);2 and the
Banquet Service Director in fact relayed the delay in
the service of the meals to complainant’s father.
The RTC, relying heavily on the letter of the hotel’s
Executive Assistant ruled in favour of the
complainants and awarded damages in their favour.
The Court of Appeals reversed the decision, noting
that the proximate cause of the complainant’s injury
was the unexpected increase in the number of their
guests.
Issue: WON Makati Shangri-La Hotel may be held
liable for damages.
Held: The Supreme Court reversed the Court of
Appeals decision, noting that in this case, the
obligation was based on a contract, hence, the
concept of proximate cause has no application.In
absolving the hotel from damages, the Supreme Court
noted that: “The appellate court, and even the trial
court, observed that petitioners were remiss in their
obligation to inform respondent of the change in the
expected number of guests. The observation is
reflected in the records of the case. Petitioners’ failure
to discharge such obligation thus excused, as the
above-quoted paragraph 4.5 of the parties’ contract
provide, respondent from liability for “any damage or
inconvenience” occasioned thereby” Nevertheless, on
grounds of equity, the High Court awarded
P50,000.00 in favour of the complainants and justified
it by saying:“The exculpatory clause notwithstanding,
the Court notes that respondent could have managed
the “situation” better, it being held in high esteem in
the hotel and service industry. Given respondent’s
vast experience, it is safe to presume that this is not
its first encounter with booked events exceeding the
guaranteed cover. It is not audacious to expect that
certain measures have been placed in case this
predicament crops up. That regardless of these
measures, respondent still received complaints as in
the present case, does not amuse.Respondent
admitted that three hotel functions coincided with
petitioners’ reception. To the Court, the delay in
service might have been avoided or minimized if
respondent exercised prescience in scheduling
events. No less than quality service should be
delivered especially in events which possibility of
repetition is close to nil. Petitioners are not expected
to get married twice in their lifetimes.”What applies in
the present case is Article 1170 of the Civil Code
which reads:
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.
RCPI v. Verchez, et al. enlightens: 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 or of the attendance of fortuitous event to
excuse him from his ensuing liability.
RADIO COMMUNICATIONS OF THE
PHILIPPINES, INC.v. ALFONSO VERCHEZ, et al.
481 SCRA 384 (2006)
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.
Respondent Grace Verchez-Infante (Grace) hired the
services of Radio Communications of the Philippines, Inc.
(RCPI) to send a telegram to her sister respondent Zenaida
Verchez-Catibog (Zenaida), asking her to send money for
their mother Editha Verchez (Editha) who at that time was
confined in a hospital in Sorsogon. But it took 25 days
before such message was conveyed to Zenaida.When
Editha died, her husband, respondent Alfonso Verchez
(Alfonso), along with his daughters Grace and Zenaida and
their respective spouses, filed an action for damages against
RCPI before the Regional Trial Court (RTC) of Sorsogon.
They alleged that the delay in the delivery of the message
contributed to the early death of Editha. RCPI argues that
there is no privity of contract between other respondents
except with Grace, also the delay in the delivery is caused
by force majeure, maintaining further that they exercised
due diligence in choosing their employees; hence they must
be released from any liability. The RTC rendered
judgement against RCPI. RCPI appealed to the Court of
Appeals (CA). The CA affirmed the decision of the RTC.
ISSUE:
Whether or not the award of moral damages is proper
despite the fact that there was no direct connection between
the injury and the alleged negligent acts
HELD:
RCPI‘s stand fails. It bears noting that its liability is
anchored on culpa contractual or breach of contract with
regard to Grace, and on tort with regard to her co-plaintiffs-
herein-co-respondents. Article 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.
In the case at bar, RCPI bound itself to deliver the telegram
within the shortest possible time. It took 25 days, however,
for RCPI to deliver it. RCPI invokes force majeure,
specifically, the alleged radio noise and interferences which
adversely affected the transmission and/or reception of the
telegraphic message. Additionally, its messenger claimed
he could not locate the address of Zenaida and it was only
on the third attempt that he was able to deliver the
telegram.
For the defense of force majeure to prosper, it is necessary
that one has committed no negligence or misconduct 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.
Assuming arguendo that fortuitous circumstances prevented
RCPI from delivering the telegram at the soonest possible
time, it should have at least informed Grace of the non-
transmission and the non-delivery s that she could have
taken steps to remedy the situation. But it did not. There
lies the fault or negligence.
And for quasi-delict, RCPI is liable to Grace‘s co-
respondents following Article 2176 of the Civil Code
which provides that whoever by act or omission causes
damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed
by the provisions of this Chapter.RCPI‘s liability as an
employer could of course be avoided if it could prove that it
observed the diligence of a good father of a family to
prevent damage provided in Article 2180 of the Civil Code.
RCPI failed, however, to prove that it observed all the
diligence of a good father of a family to prevent damage.
General Milling Corp. vs Spouses Ramos (2011)
FACTS:General Milling Corp. entered into a Growers
Contract with Sps. Librado and Remedios Ramos for the
supply of broiler chickens to the spouses. The Growers
Contract was accompanied by a Deed of Real Estate
Mortgage owned by the spouse. Sps. Ramos however were
not able to settle their account with GMC. Upon
notification to the former, GMC instituted for Extrajudicial
Foreclosure of Mortgage. Sps. Ramos filed for the
annulment of the extrajudicial foreclosure sale and
contended that it was null and void, since there was no
compliance with the requirements of posting and
publication of notices. RTC and CA sustained that GMC’s
action against Sps .Ramos was premature, as they were not
in default at the time the action was filed.
ISSUE:Whether the Spouses Ramos were actually in
default of their obligation to GMC.
HELD:There are three requisites necessary for a finding of
default.
1. the obligation is demandable and liquidated;
2. the debtor delays performance;
3. the creditor judicially or extrajudicially requires the
debtor’s performance.
Based on the evidence on record, GMC did not make a
demand on Sps. Ramos but merely requested them to go to
GMC’s office to discuss the settlement of their account. In
spite of the lack of demand made on the spouses, GMC
proceeded with the foreclosure proceedings. Neither was
there any provision in the Deed of Real Estate Mortgage
allowing GMC to extrajudicially foreclose the mortgage
without need of demand.
Thus, the Court held that GMC should have first made a
demand on the spouses before proceeding to foreclose the
real estate mortgage. Petition is denied. Ruling of CA is
affirmed.
LORENZO SHIPPING VS. BJ MARTHEL Case Digest
LORENZO SHIPPING VS. BJ MARTHEL
443 SCRA 163
November 19, 2004
FACTS: Petitioner Lorenzo Shipping is engaged in
coastwise shipping and owns the cargo M/V
Dadiangas Express. BJ Marthel is engaged in trading,
marketing an dselling various industrial commodities.
Lorenzo Shipping ordered for the second time cylinder
lines from the respondent stating the term of payment
to be 25% upon delivery, the balance payable in 5 bi-
monthly equal installments, no again stating the date
of the cylinder’s delivery. It was allegedly paid through
post dated checks but the same was dishonored due
to insufficiency of funds. Despite due demands by the
respondent, petitioner falied contending that time was
of the essence in the delivery of the cylinders and that
there was a delay since the respondent committed
said items “ within two months after receipt of fir
order”. RTC held respondents bound to the quotation
with respect to the term of payment, which was
reversed by the Court of appeals ordering appellee to
pay appellant P954,000 plus interest. There was no
delay since there was no demand.
ISSUE: Whether or not respondent incurred delay in
performing its obligation under the contract of sale
RULING: By accepting the cylinders when they were
delivered to the warehouse, petitioner waived the
claimed delay in the delivery of said items. Supreme
Court geld that time was not of the essence. There
having been no failure on the part of the respondent
to perform its obligations, the power to rescind the
contract is unavailing to the petitioner.
Petition is denied. Court of appeals decision is
affirmed.
RADIO COMMUNICATIONS OF THE
PHILIPPINES, INC. (RCPI), petitioner, vs. COURT
OF APPEALS AND LORETO DIONELA, respondents
Facts:Loreto Dionela filed a complaint of damages against
Radio Communiciations of the Philippines, Inc. (RCPI) due
to the telegram sent through its Manila Office to the former,
reading as follows:
176 AS JR 1215PM 9 PAID MANDALUYONG JUL 22-
66 LORETO DIONELA CABANGAN LEGASPI CITY
WIRE ARRIVAL OF CHECK FER
LORETO DIONELA-CABANGAN-WIRE ARRIVAL OF
CHECK-PER
115 PM
SA IYO WALANG PAKINABANG DUMATING KA
DIYAN-WALA-KANG PADALA DITO KAHIT
BULBUL MO
Loreto Dionela alleges that the defamatory words on the
telegram sent to him wounded his feelings, caused him
undue embarrassment and affected adversely his business
because other people have come to know of said
defamatory words. RCPI alleges that the additional words
in Tagalog was a private joke between the sending and
receiving operators, that they were not addressed to or
intended for plaintiff and therefore did not form part of the
telegram, and that the Tagalog words are not defamatory.
The RTC ruled that the additional words are libelous for
any person reading the same would logically think that they
refer to Dionela, thus RCPI was ordered to pay moral
damages in the amount of P40, 000.00. The Court of
Appeals affirmed the decision ruling that the company was
negligent and failed to take precautionary steps to avoid the
occurrence of the humiliating incident, and the fact that a
copy of the telegram is filed among other telegrams and
open to public is sufficient publication; however reducing
the amount awarded to P15, 000.00
Issue:
Whether or not the company should answer directly and
primarily for the civil liability arising from the criminal act
of its employee.
Ruling:
Yes. The cause of action of the private respondent is based
on Arts. 19 and 20 of the New Civil Code, as well as on
respondent’s breach of contract thru the negligence of its
own employees. By adding extraneous and libelous matters
in the message sent to the private respondent, there is a
clear breach of contract; for upon payment of the fixed rate,
the company undertakes to transmit the message accurately.
In contracts, the negligence of the employee (servant) is the
negligence of the employer (master). This is the master and
servant rule. As a corporation, the petitioner can act only
through its employees. Hence the acts of its employees in
receiving and transmitting messages are the acts of the
petitioner. To hold that the petitioner is not liable directly
for the acts of its employees in the pursuit of petitioner’s
business is to deprive the general public availing of the
services of the petitioner of an effective and adequate
remedy.
In most cases, negligence must be proved in order that
plaintiff may recover. However, since negligence may be
hard to substantiate in some cases, we may apply the
doctrine of RES IPSA LOQUITUR (the thing speaks for
itself), by considering the presence of facts or
circumstances surrounding the injury.
The judgment of the CA is affirmed
VIL-REY VS LEXBER
Before us are petitions for review on certiorari under Rule
45 of the Rules of Court seeking to nullify the Court of
Appeals (CA) Decision[1] and Resolution[2] in CA-G.R. CV
No. 90241. The CA Decision found Vil-Rey Planners and
Builders (Vil-Rey) and Stronghold Insurance Company,
Inc. (Stronghold), solidarily liable to Lexber, Inc. (Lexber)
in the amount of P284,084.46 plus attorney's fees of
P50,000. The CA Resolution denied the motions for
reconsideration filed by Vil-Rey and Stronghold.
FACTS
Vil-Rey and Lexber entered into a Construction Contract
dated 17 April 1996[3] (first contract) whereby the former
undertook to work on the compacted backfill of the latter's
56,565-square-meter property in Barangay Bangad,
Cabanatuan City. Based on the first contract, Vil-Rey shall
complete the project in 60 days for a consideration of
P5,100,000. Lexber released to Vil-Rey a mobilization
downpayment of P500,000 secured by Surety Bond G(16)
No. 066915[4] (first surety bond) issued by Stronghold. For
its part, Vil-Rey agreed to indemnify Stronghold for
whatever amount the latter might be adjudged to pay
Lexber under the surety bond.[5]
Vil-Rey and Lexber mutually terminated the first contract
and entered into a Construction Contract dated 1 July
1996[6] (second contract) to cover the remaining works, but
under revised terms and conditions. The contract amount
was P2,988,700.20, and the scope of work was required to
be completed in 60 days.
On 23 December 1996, Vil-Rey and Lexber executed Work
Order No. CAB-96-09[7] (third contract) for the completion
of the remaining works by 15 January 1997. Under the third
contract, a consideration of P1,168,728.37 shall be paid on
the following basis: 50% downpayment to be secured by a
surety bond in the same amount issued by Stronghold upon
approval of the work order and 50% balance upon
completion of the works. Accordingly, Stronghold, issued
Surety Bond G(16) No. 077258[8] (second surety bond) in
the amount of P584,364.19 in favor of Lexber. Vil-Rey
again obligated itself to indemnify Stronghold for whatever
amount the latter might be held to pay under the surety
bond.[9]
In a letter dated 21 January 1997[10] addressed to Lexber,
Vil-Rey requested the extension of the contract period to 31
January 1997. Lexber granted the request for extension.[11]
However, Vil-Rey failed to complete the works by the end
of the extended period, or even after Lexber gave it another
five days to finish the works.[12] Lexber then wrote
Stronghold seeking to collect on the two surety bonds
issued in favor of the former.[13]
When negotiations failed, Lexber filed a Complaint[14] for
sum of money and damages against Vil-Rey and
Stronghold before the Regional Trial Court of Quezon City,
Branch 93 (RTC).
In its Answer (with Counterclaim),[15] Vil-Rey denied that
it was guilty of breach of contract and insisted that it was
Lexber that owed the amount of P1,960,558.40 to the
former. Vil-Rey alleged that under the first contract, it was
able to finish 75.33% of the works, but that Lexber paid an
amount equivalent to only 50% of the contract, thereby
leaving a balance of PI,291,830 in Vil-Rey's favor.
Furthermore, considering that almost 100% of the works
were finished under the third contract, Vil-Rey had
receivables of P668/728.40 representing the contract
amount of P1,168,728.37 less the downpayment of
P500,000. It also prayed for the payment of moral damages
and attorney's fees.
Stronghold filed its Answer[16] alleging that its liability
under the surety bonds was very specific. Under the first
surety bond, it guaranteed only the mobilization down
payment of 10% of the total consideration for the first
contract. The mobilization downpayment was fully
liquidated prior to the mutual termination of the first
contract. Also, no collection could be made on the second
surety bond, because Lexber failed to allege that there were
defects in the materials used and workmanship utilized by
Vil-Rey in undertaking the works. Stronghold put forward
its counterclaim against Lexber for attorney's fees,
litigation expenses, and cross-claim against Vil-Rey for any
and all amounts Stronghold may be ordered to pay under
the surety bonds pursuant to the indemnity agreements.
RULING OF THE RTC
In a Decision dated 12 December 2005,[17] the RTC
adjudged Vil-Rey and Stronghold jointly and severally
liable to Lexber in the amount of P2,988,700.20, with
interest at the rate of 12% per annum as actual and
compensatory damages from the time of the breach until
full satisfaction. The trial court also ordered Vil-Rey and
Stronghold to pay attorney's fees in the amount of P500,000
plus the costs of suit. It upheld the indemnity agreements
and granted Stronghold's cross-claim against Vil-Rey.
The RTC emphasized that parties to a contract are bound
by the stipulations therein. When the contract requires the
accomplishment of tasks at a given time and the obligor
fails to deliver, there is breach of contract that entitles the
obligee to damages. In this case, when Vil-Rey failed to
finish the works on time, it became liable to Lexber for
damages brought about by the breach. The trial court found
no merit in the claim of Vil-Rey that there was
underpayment and brushed aside the latter's counterclaim.
As regards Stronghold, the trial court found that the
wording of the surety bonds did not embody the parties'
true intent, which was to ensure the faithful performance by
Vil-Rey of its obligations. Considering its failure in this
regard, Stronghold should pay the total amount of the two
surety bonds to Lexber.
In an Order dated 22 October 2007,[18] the RTC decreed a
partial reconsideration and ordered Vil-Rey and Stronghold
to pay Lexber in solidum in the amount of PI,084,364.19.
This represented the true total amount of the two surety
bonds, with 12% interest per annum as actual and
compensatory damages from the time of the breach until
full satisfaction. Furthermore, attorney's fees were reduced
to P200,000.
Vil-Rey and Stronghold filed an appeal before the CA.
RULING OF THE CA
In the assailed Decision dated 16 April 2009,[19] the CA
modified the RTC Order and further lowered the liability of
Vil-Rey and Stronghold to P284,084.46 with interest at the
rate of 6% per annum from 11 February 1997 until the
finality of the Decision. Thereafter, the amount shall earn
12% interest per annum until full satisfaction. The appellate
court also reduced attorney's fees to P50,000.
The CA ruled that, considering the mutual termination of
the first and second contracts, no liability could be assessed
against Vil-Rey. Whatever claims Lexber had against Vil-
Rey had been deemed waived with the execution of the
third contract. Consequently, Stronghold could not be made
to pay under the first surety bond, which covered only the
mobilization downpayment under the first contract.
Nevertheless, there was a clear breach of the third contract,
and Vil-Rey should be held liable for the natural and
probable consequences of the breach as duly proven. In this
case, Lexber was able to prove that it sustained damages in
the amount of P284,084.46, which was the amount it paid
another contractor tasked to complete the works left
unfinished by Vil-Rey. That amount was charged against
the second surety bond, which guaranteed not only the
workmanship and the quality of the materials used in the
project, but also the obligations of Vil-Rey.
The CA modified the interest imposed considering that the
obligation breached was not a loan or forbearance of
money. Like the RTC, it denied the counterclaims of Vil-
Rey and Stronghold against Lexber, but upheld
Stronghold's cross-claim against Vil-Rey.
Vil-Rey's motion for reconsideration and Stronghold's
motion for partial reconsideration were denied by the CA in
the challenged Resolution dated 1 September 2009.[20]
Issues
Dissatisfied, Vil-Rey and Stronghold filed the instant
petitions before us raising the following issues for our
resolution:
1. Whether Vil-Rey is liable for breach of contract
2. Whether Stronghold's liability under the second
surety bond was extinguished by the extension of
the third contract
3. Whether Lexber is entitled to attorney's fees
Our Ruling
I.
Vil-Rey is liable for breach of contract.
In resisting the ruling of the CA that Vil-Rey was guilty of
breach of contract, the latter alleges that the appellate
court's findings are based on a misapprehension of facts.[21]
Vil-Rey argues that the consideration for the third contract
was P1,168,728.37, of which it was paid only P500,000.
Considering that there remained a balance of P668,728.37,
the amount was more than enough to offset that incurred by
Lexber in order to finish the works.
The argument misses the point.
Breach of contract is the failure of a party, without legal
reason, to comply with the terms of a contract or perform
any promise that forms either a part or the whole of it.[22]
The failure of Vil-Rey to complete the works under the
third contract was never an issue in this case. In fact, that
failure was readily admitted by Moises Villarta, its
managing partner,[23] in his testimony before the trial court:
What happened after you accomplished 95% under
Q.
the [third contract]?
The only remaining there would be the compaction
A.
and fill density test.
Could you please tell us why you did not finish the
Q. compaction and density test under the [third]
contract.
A. Because I lacked funds. 1 was not paid anymore.[24]
To clarify, aside from this testimony, no proof was
presented to show that Vil-Rey was able to accomplish
95% of the works under the third contract. Nevertheless,
even if we were to assume that this claim is true, it still falls
short of the obligation to finish 100% of the works.
In the third contract, Vil-Rey and Lexber agreed on the
following terms of payment:
50% downpayment upon approval of this work order
against a surety bond from Stronghold Insurance
Corporation
50% balance upon completion of work
The work will be completed on or before 15 January 1997 x
x x.[25]

It is clear that the next payment for Vil-Rey would have
fallen due upon completion of the works. Thus, it cannot
put up the defense that its failure to comply with its
obligation was because it was not paid.
Under the above provisions, the parties clearly took on
reciprocal obligations. These are obligations that arise from
the same cause, such that the obligation of one is dependent
upon that of the other.[26]
The reciprocal obligation in this case was Lexber's payment
of the 50% balance upon Vil-Rey's completion of the works
on or before 15 January 1997. However, despite the grant
of extension until 31 January 1997, and even after the lapse
of another five-day grace period, Vil-Rey failed to finish
the works under the third contract.
The law provides that the obligation of a person who fails
to fulfill it shall be executed at that person's cost.[27] The
CA was correct in ruling that Vil-Rey should be held liable
for the amount paid by Lexber to another contractor to
complete the works. Furthermore, Article 2201 of the Civil
Code provides:
Article 2201. In contracts and quasi-contracts, the damages
for which the obligor who acted in good faith is liable shall
be those that are the natural and probable consequences of
the breach of the obligation, and which the parties have
foreseen or could have reasonably foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the
obligation.
In the absence of a clear showing of bad faith on the part of
Vil-Rey, it shall be liable for damages only with regard to
those that are the natural and probable consequences of its
breach. In this case, the failure of Vil-Rey to finish the
works compelled Lexber to secure the services of another
contractor, to which the latter paid a total of P284,084.46.
Considering that this amount was not a loan or forbearance
of money, We impose interest at the rate of 6% per
annum[28] from 17 February 1997[29] until the finality of this
Decision. Thereafter, it shall earn interest at the rate of 6%
per annum until satisfaction.[30]
We shall not close this discussion without passing upon
another reciprocal obligation assumed by the parties under
the third contract. As agreed, Vil-Rey shall acquire a surety
bond from Stronghold equivalent to 50% of the contract
price of P1,168,728.37 upon Lexber's downpayment of the
same amount. Accordingly, on 24 December 1996, Vil-Rey
secured the second surety bond in the amount of
P584,364.19. On the same day, Lexber made a
downpayment of only P500,000.[31]
Article 1169 of the Civil Code provides that in reciprocal
obligations, delay by one of the parties begins from the
moment the other fulfills the obligation. In this case,
Lexber is guilty of delay with regard to the amount of
P84,364.19, which should be paid. Also, the delay shall
make it liable to Vil-Rey for damages,[32] which We impose
in the form of interest at the rate of 6% per annum[33] from
24 December 1996 until the finality of this Decision.
Thereafter, it shall earn interest at the rate of 6% per annum
until satisfaction.[34]
The parties shall be allowed to compensate the amounts due
them to the extent of their respective obligations.
II.
THE EXTENSION OF THE THIRD CONTRACT
DID NOT EXTINGUISH STRONGHOLD'S
LIABILITY
UNDER THE SECOND SURETY BOND.
Stronghold claims that the extension of time for the
completion of the works under the third contract from 15
January 1997 to 31 January 1997 was made without its
consent as surety.[35] It is argued that an extension of
payment given by the creditor to the debtor without notice
to or consent of the surety extinguishes the surety's
obligation, unless a continuing guarantee was executed by
the surety. Stronghold insists that the CA erred in
construing the second surety bond as a continuing
guarantee despite clear stipulations to the contrary.[36]
Furthermore, considering that the second surety bond
guaranteed only the materials and the workmanship that
would be utilized by Vil-Rey, the absence of any complaint
from Lexber in this respect discharged Stronghold.[37]
The following were the conditions and the obligations
assumed by Stronghold under the second surety bond:
TO GUARANTEE [VIL-REY'S] OBLIGATIONS AND
TO ANSWER FOR ANY DEFECTS IN THE
MATERIALS USED AND WORKMANSHIP UTILIZED
IN THE LAND FILLING OF LEXBER HOMES
CABANATUAN (REMAINING WORKS).
AND THAT THE LIABILITY OF THIS BOND SHALL
NOT EXCEED THE SUM OF PESOS, FIVE HUNDRED
EIGHTY FOUR THOUSAND THREE HUNDRED
SIXTY FOUR & 19/100 ONLY, (P584,364.19),
PHILIPPINE CURRENCY.[38]
The second surety bond clearly guaranteed the full and
faithful performance of the "obligations" of Vil-Rey under
the third contract, and it was not secured just to answer for
"defects in the materials used and workmanship utilized."
As a performance bond, the second surety bond guaranteed
that Vil-Rey would perform the contract, and provided that
if the latter defaults and fails to complete the contract,
Stronghold itself shall complete the contract or pay
damages up to the limit of the bond.[39]
A surety bond is an accessory contract dependent for its
existence upon the principal obligation it guarantees.[40]
Being so associated with the third contract as a necessary
condition or component thereof, the second surety bond
cannot be separated or severed from its principal.
Considering that the third contract provided that the works
shall be completed on or before 15 January 1997, the
second surety bond was deemed to have guaranteed the
completion of the works on the same date.
It is true that a surety is discharged from its obligation
when there is a material alteration of the principal contract,
such as a change that imposes a new obligation on the
obligor; or takes away some obligation already imposed; or
changes the legal effect, and not merely the form, of the
original contract.[42] Nevertheless, no release from the
obligation shall take place when the change in the contract
does not have the effect of making the obligation more
onerous to the surety.[43]
In this case, the extension of the third contract for 15 days
and the grant of an additional five-day grace period did not
make Stronghold's obligation more onerous. On the
contrary, the extensions were aimed at the completion of
the works, which would have been for the benefit of
Stronghold. This perspective comes from the provision of
the second surety bond that "if [Vil-Rey] shall in all
respects duly and fully observe and perform all xxx the
aforesaid covenants, conditions and agreements to the true
intent and meaning thereof, then this obligation shall be
null and void, otherwise to remain in full force and
effect."[44] The completion of the works would have
discharged Stronghold from its liability.
We find no merit in the contention of Stronghold that the
extensions extinguished its obligation as a surety.[45] We
note that it also realized the importance of the completion
of the works as far as it was concerned, as shown in its
letter to Vil-Rey dated 25 March 1997:
Enclosed is a copy of the letter dated February 18, 1997 we
received on February 20, 1997 from Lexber, Inc., posting
formal claim against our bonds at caption due to your
failure to complete your contracted project within the
stipulated period.
Please take appropriate action to make good your
commitment and contractual obligations to the Obligee
within five (5) days from receipt hereof and advise us on
any development you have with them on the matter for our
guidance.[46]
Even as late as 25 March 1997, Stronghold still sought the
completion of the works to the point of giving Vil-Rey a
period of five days to fulfill its commitments. Clearly, it
cannot now claim that it was prejudiced by the extensions
given by Lexber, when it was prepared to give an extension
of its own just so Vil-Rey could finish the works.
Stronghold contends that the extension of time for the
completion of the third contract without its knowledge
discharged it from its obligation under the second surety
bond. What further militates against this contention is the
fact that it was raised for the first time in the Motion for
Partial Reconsideration[47] of the CA Decision dated 16
April 2009. Prior to the filing of that motion by Stronghold,
its consistent argument before the RTC and even before the
CA was that the second surety bond guaranteed only the
materials and the workmanship utilized by Vil-Rey; and
that the absence of any complaint from Lexber in this
regard discharged Stronghold.
We have ruled that issues, grounds, points of law, or
theories not brought to the attention of the trial courts
cannot be passed upon by reviewing courts.[48] Thus, when
a party deliberately adopts a certain theory, which becomes
the basis for the manner on which the case is tried and
decided, the party will not be permitted to change that
theory on appeal; otherwise, it would be unfair to the
adverse party.[49]
At any rate, as surety, Stronghold has the right to be
indemnified for whatever it may be ordered to pay Lexber.
This right is provided in the law and not merely based on
the indemnity agreement Stronghold executed with Vil-
Rey.
In Escaño v. Ortigas, Jr.,[50] we explained the right to full
reimbursement by a surety for whatever it pays the creditor:
[E]ven as the surety is solidarity bound with the principal
debtor to the creditor, the surety who does pay the creditor
has the right to recover the full amount paid, and not just
any proportional share, from the principal debtor or
debtors. Such right to full reimbursement falls within the
other rights, actions and benefits which pertain to the surety
by reason of the subsidiary obligation assumed by the
surety.
What is the source of this right to full reimbursement by the
surety? We find the right under Article 2066 of the Civil
Code, which assures that "[t]he guarantor who pays for a
debtor must be indemnified by the latter," such indemnity
comprising of, among others, "the total amount of the
debt." Further, Article 2067 of the Civil Code likewise
establishes that "ft]he guarantor who pays is subrogated by
virtue thereof to all the rights which the creditor had against
the debtor."
Articles 2066 and 2067 explicitly pertain to guarantors, and
one might argue that the provisions should not extend to
sureties, especially in light of the qualifier in Article 2047
that the provisions on joint and several obligations should
apply to sureties. We reject that argument, and instead
adopt Dr. Tolentino's observation that "[t]he reference in
the second paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary or
several obligations, however, does not mean that suretyship
is withdrawn from the applicable provisions governing
guaranty." For if that were not the implication, there would
be no material difference between the surety as defined
under Article 2047 and the joint and several debtors, for
both classes of obligors would be governed by exactly the
same rules and limitations.
Accordingly, the rights to indemnification and subrogation
as established and granted to the guarantor by Articles 2066
and 2067 extend as well to sureties as defined under Article
2047. x x x[51]

III.
Lexber is entitled to reduced attorney's fees.
Section 9.3 of the first contract provides that in the event
Lexber has to institute judicial proceedings in order to
enforce any term or condition therein, Vil-Rey shall pay
attorney's fees equivalent to not less than 25% of the total
amount adjudged.[52] This provision was adopted in the
second contract[53] and even in the third contract, which
provides that all conditions in the second contract shall
remain in force.[54]
Attorney's fees as provided for in the contracts are in the
nature of liquidated damages agreed upon by the parties.
These fees are to be paid in case of breach of the
contractual stipulations necessitating a party to seek judicial
intervention to protect its rights.[55] Normally, the obligor is
bound to pay the stipulated indemnity without the necessity
of proof of the existence or the measure of damages caused
by the breach.[56]
In this case, the failure of Vil-Rey to fulfill its obligation to
finish the works under the third contract compelled Lexber
to seek judicial intervention. Pursuant to a contractual
stipulation therefor, the payment of attorney's fees to
Lexber shall be the obligation of Vil-Rey and Stronghold.
However, considering the circumstances surrounding this
case, We reduce the award to 10% of P284,084.46, which
was the amount Lexber paid to another contractor for the
completion of the works. Liquidated damages may be
equitably reduced by the courts.[57] Since the failure of Vil-
Rey to fulfill its obligations was apparently caused by
financial difficulties, and Lexber was also guilty of delay
with regard to the latter's reciprocal obligation to make a
downpayment of 50% of the amount of the third contract
upon Vil-Rey's acquisition of a surety bond in the same
amount, the courts' power may be properly exercised in this
case.
WHEREFORE, the Court of Appeals Decision dated 16
April 2009 and Resolution dated 1 September 2009 in CA-
G.R. CV No. 90241 are hereby MODIFIED as follows:
1. Vil-Rey Planners and Builders and Stronghold
Insurance Company, Inc., are hereby ORDERED
to jointly and severally pay the following
amounts to Lexber, Inc.:
a. P284,084.46, with interest at the rate of
6% per annum from 17 February 1997
until full payment
b. 10% of F284,084.46 as attorney's fees
2. Vil-Rey Planners and Builders is hereby
ORDERED to indemnify Stronghold Insurance
Company, Inc., for whatever amount the latter
shall pay Lexber, Inc.
3. Lexber, Inc. is hereby ORDERED to pay Vil-
Rey Planners and Builders the amount of
P84,364.19, with interest at the rate of 6% per
annum from 24 December 1996 until full
payment.
Vil-Rey Planners and Builders and Lexber, Inc., shall be
allowed to compensate the amounts due them to the extent
of their respective obligations.
SO ORDERED.
LALICON VS NHA
Facts:This case is about (a) the right of the National
Housing Authority to seek annulment of sales made by
housing beneficiaries of lands they bought from it within
the prohibited period and (b) the distinction between
actions for rescission instituted underArticle 1191 of the
Civil Code and those instituted under Article 1381 of the
same code. On 1980 National Housing Authority (NHA)
executed a Deed of Sale with Mortgage over a Quezon City
lot... in favor of the... the Alfaros. In due time,... the
Quezon City Registry of Deeds issued Transfer Certificate
of Title... in the name of the Alfaros. The deed of sale
provided, among others, that the Alfaros could sell the land
within five years from the date of its release from mortgage
without NHA's prior written consent. The mortgage and the
restriction on sale were annotated on the Alfaros' title
About nine years later... on 1990... while the mortgage on
the land subsisted, the Alfaros sold the same to their son,...
Victor Alfaro, who had taken in a common-law wife,
Cecilia... ith whom he had two daughters, petitioners
Vicelet and Vicelen Lalicon (the Lalicons) Cecilia... had a
house built on the property and paid for the
amortizations. After full payment of the loan... the NHA
released the mortgage. Six days later... ictor transferred
ownership of the land to his illegitimate... daughters. four
and a half years after the release of the mortgage Victor
registered... the... sale of the land in his favor, resulting in
the cancellation of his parents' title. register of deeds issued
TCT... in Victor's name. Victor mortgaged the land to Chua
Subsequently Victor sold the property to Ch... u... a,...
resulting in the cancellation of his TCT... and the issuance
of TCT NHA instituted a case before the Quezon City
Regional Trial Court... for the annulment... of the NHA's
1980 sale of the land to the Alfaros... the latter's 1990 sale
of the land to their son Victor, and the subsequent sale of
the same to Chua,... RTC rendered a decision in the case
ruled that, although the Alfaros clearly violated the five-
year prohibition, the NHA could no longer rescind its sale
to them since its right to do so had already prescribed The
NHA and the Lalicons, who intervened, filed their
respective appeals to the Court of Appeals (CA). A
reversed the RTC decision and found the NHA entitled to
rescission. The CA declared TCT... in the name... of the
Alfaros and all subsequent titles... a... nd deeds of sale null
and void.
Issues:
Whether or not the CA erred in holding that the Alfaros
violated their contract with the NHA;
Whether or not the NHA's right to rescind has prescribed;
Whether or not the subsequent buyers of the land acted in
good faith and their rights, therefore, cannot be affected by
the rescission.
Ruling:
The contract between the NHA and the Alfaros forbade the
latter from selling the land within five years from the date
of the release of the mortgage in their favor. But the
Alfaros sold the property to Victor on 1990 before the
NHA could release the mortgage in their favor on 1991
Clearly, the Alfaros violated the five-year restriction, thus
entitling the NHA to rescind the contract. The five-year
restriction against resale, counted from the release of the
property from the NHA mortgage, measures out the desired
hold that the government felt it needed to ensure that its
objective of providing cheap housing for the homeless... is
not defeated by wily entrepreneurs.
the resale without the NHA's consent is a substantial
breach. The essence of the government's socialized housing
program is to preserve the beneficiary's ownerships for a
reasonable length of time, here at least within five years
from the time he acquired it free from any encumbrance.
Malicons claim that under Article 1389 of the Civil Code
the "action to claim rescission must be commenced within
four years" from the time of the commission of the cause
for it. But an action for rescission can proceed from either
Article 1191 or Article 1381. It has been held that Article
1191 speaks of rescission in reciprocal obligations
Resolution... applies only to reciprocal obligations such that
a breach on the part of one party constitutes an implied
resolutory condition which entitles the other party to
rescission. Resolution grants the injured party the option to
pursue, as principal actions, either a rescission... or specific
performance of the obligation, with payment of damages in
either case.
Here, the NHA sought annulment of the Alfaros' sale to
Victor because they violated the five-year restriction
against such sale provided in their contract. Thus, the CA
correctly ruled that such violation comes under Article
1191 where the applicable prescriptive period is... that
provided in Article 1144 which is 10 years from the time
the right of action accrues. The NHA's right of action
accrued on 1992 when it learned of the Alfaros' forbidd...
en sale of the property to Victor. Since the NHA filed its
action for annulment of sale on 1998, it did so well within
the 10-year prescriptive period.
Third. The Court also agrees with the CA that the Lalicons
and Chua were not buyers in good faith
Since the five-year prohibition against alienation without
the NHA's written consent was annotated on the property's
title, the Lalicons very well knew that the
Alfaros' sale of the property to their father, Victor, even
before the release of the mortgage violated that prohibition.
As regards Chua,... Victor had no right to mortgage the
property to her... group considering that the Alfaros could
not yet sell the same to him without the NHA's consent.
Consequently, although Victor later sold the property to
Chua after the five-year restriction had lapsed, Chua cannot
claim lack of awareness of the illegality of Victor's...
acquisition of the property from the Alfaros. Lastly, since
mutual restitution is required in cases involving rescission
under Article 1191... the NHA must return the full amount
of the amortizations it received for the property, plus the
value of the improvements introduced on the same, with
6%... interest per annum from the time of the finality of this
judgment.
ST. JOSEPH'S COLLEGE v. JAYSON MIRANDA,
GR No. 182353, 2010-06-29
Facts:
On November 17, 1994, at around 1:30 in the
afternoon inside St. Joseph College's [SJC's]
premises, the class to which [respondent Jayson Val
Miranda] belonged was conducting a science
experiment about fusion of sulphur powder and iron
fillings under the tutelage of[petitioner] Rosalinda
Tabugo, she being the subject teacher and employee
of [petitioner] SJC. The adviser of [Jayson's] class is x
x x Estefania Abdan.Tabugo left her class while it was
doing the experiment without having adequately
secured it from any untoward incident or occurrence.
In the middle of the experiment, [Jayson], who was
the assistant leader of one of the class groups,
checked the result of the experiment by... looking into
the test tube with magnifying glass. The test tube was
being held by one of his group mates who moved it
close and towards the eye of [Jayson]. At that
instance, the compound in the test tube spurted out
and several particles of which hit [Jayson's] eye and
the... different parts of the bodies of some of his group
mates. As a result thereof, [Jayson's] eyes were
chemically burned, particularly his left eye, for which
he had to undergo surgery and had to spend for his
medication.
Issues:
I. THE COURT OF APPEALS GRIEVOUSLY ERRED
IN NOT FINDING THAT THE PROXIMATE CAUSE
OF JAYSON'S INJURY WAS HIS OWN ACT OF
LOOKING AT THE HEATED TEST TUBE BEFORE
THE COMPOUND HAD COOLED IN COMPLETE
DISREGARD OF INSTRUCTIONS GIVEN PRIOR TO
THE EXPERIMENT.
II. THE COURT OF APPEALS FAILED TO
APPRECIATE THAT, IN LIGHT OF THE RULING IN
THE CASE OF ST. MARY'S COLLEGE V. WILLIAM
CARPITANOS, x x x JAYSON'S CONTRIBUTORY
NEGLIGENCE OF PEEKING INTO THE TEST TUBE
WAS IN FACT THE PROXIMATE CAUSE OF HIS
INJURY FOR WHICH THE
PETITIONERS SHOULD NOT BE HELD LIABLE.
III. THE COURT OF APPEALS GRIEVOUSLY
ERRED IN AFFIRMING THE AWARD OF ACTUAL
DAMAGES DESPITE THE ABSENCE OF PROOF
TO SUPPORT THE SAME.
IV. THE LOWER COURT GRIEVOUSLY ERRED IN
AWARDING MORAL DAMAGES TO [JAYSON].
V. THE COURT OF APPEALS GRIEVOUSLY
ERRED IN AFFIRMING THE AWARD OF
ATTORNEY'S FEES TO [JAYSON].
VI. THE LOWER COURT GRIEVOUSLY ERRED IN
DENYING THE PETITIONERS' COUNTERCLAIM.
Ruling:
Petitioners invoke our ruling in St. Mary's Academy
v.Carpitanos[9] which absolved St. Mary's Academy
from liability for the untimely death of its student
during a school sanctioned activity, declaring that "the
negligence of petitioner St. Mary's Academy was only
a remote cause of the accident."We are not
convinced. In this case, [petitioners] failed to show
that the negligence of [Jayson] was the proximate
cause of the latter's injury. We find that the immediate
cause of the accident was not the negligence of
[Jayson] when he curiously looked into the test tube
when the... chemicals suddenly exploded which
caused his injury, but the sudden and unexpected
explosion of the chemicals independent of any
intervening cause. [Petitioners] could have prevented
the mishap if they exercised a higher degree of care,
caution and foresight. The court a... quo correctly
ruled that: "All of the [petitioners] are equally at fault
and are liable for negligence because all of them are
responsible for exercising the required reasonable
care, prudence, caution and foresight to prevent or
avoid injuries to the students. The individual
[petitioners]... are persons charged with the teaching
and vigilance over their students as well as the
supervision and ensuring of their well-being. Based on
the facts presented before this Court, these
[petitioners] were remiss in their responsibilities and
lacking in the degree of vigilance... expected of them.
[Petitioner] subject teacher Rosalinda Tabugo was
inside the classroom when the class undertook the
science experiment although [Jayson] insisted that
said [petitioner] left the classroom. No evidence,
however, was presented to establish that [petitioner]
Tabugo was inside the classroom for the whole
duration of the experiment. It was unnatural in the
ordinary course of events that [Jayson] was brought to
the school clinic for immediate treatment not by
[petitioner] subject teacher Rosalinda Tabugo but by
somebody else. The Court... is inclined to believe that
[petitioner] subject teacher Tabugo was not inside the
classroom at the time the accident happened. The
Court is also perplexed why none of the other
students (who were eyewitnesses to the incident)
testified in Court to corroborate the story of the
[petitioners]. The Court, however, understands that
these other students cannot testify for [Jayson]
because [Jayson] is no longer enrolled in said school
and testifying for [Jayson] would incur the ire of school
authorities. Estefania Abdan is equally at fault as the
subject... adviser or teacher in charge because she
exercised control and supervision over [petitioner]
Tabugo and the students themselves. It was her
obligation to insure that nothing would go wrong and
that the science experiment would be conducted
safely and without any harm or injury... to the
students. [Petitioner] Sr. Josephini Ambatali is
likewise culpable under the doctrine of command
responsibility because the other individual [petitioners]
were under her direct control and supervision. The
negligent acts of the other individual [petitioners] were
done... within the scope of their assigned tasks.
Petitioners' negligence and failure to exercise the
requisite degree of care and caution is demonstrated
by the following:
1. Petitioner school did not take affirmative
steps to avert damage and injury to its
students although it had full information on
the nature of dangerous science experiments
conducted by the students during class;
2. Petitioner school did not install safety
measures to protect the students who
conduct experiments in class;
3. Petitioner school did not provide protective
gears and devices, specifically goggles, to
shield students from expected risks and
dangers; and
4. Petitioner Tabugo was not inside the
classroom the whole time her class
conducted the experiment, specifically, when
the accident involving Jayson occurred. In
any event, the size of the class--fifty (50)
 students-- conducting the experiment is
difficult to monitor.
WHEREFORE, the petition is DENIED. The Decision
of the Court of Appeals in CA-G.R. CV No. 68367 is
AFFIRMED. Costs against petitioners.
SO ORDERED.
MAKATI SHANGRI-LA vs. HARPER
G.R. No. 189998. August 29, 2012
PONENTE: Bersamin
DOCTRINE:
Negligence – Article 2176 0f the New Civil Code
provides “Whoever by act or omission causes
damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict
and is governed by the provisions of this Chapter.”
The hotel business is imbued with public interest.
Hotelkeepers are bound to provide not only lodging
for their guests but also security to their persons and
belongings to their guest. The twin duty constitutes
the essence of the business (Arts 2000-2001 New
Civil Code).
Hotel owner is liable for civil damages to surviving
heirs of hotel guest whom strangers murder inside his
hotel room.
FACTS:
Christian Harper was a Norweigian who came to
Manila on a business trip. He stayed at Makati
Shangri-la Hotel, but he was murdered in his hotel
room [Specifically Room 1428. His ghost can be
found there]. It was found that the muderer, a
caucasian male, was able to trespass into the hotel
room of the victim and was then able to murder and
rob the victim. The heirs of the victim blame the
hotel's gross negligence in providing the most basic
security system of its guests. The RTC held in favor of
the heirs and ordered Shangri-la to pay damages. CA
affirmed.
ISSUE: WON Shangri-la Hotel is liable for damages.
HELD:
Yes. Shangri-la is liable due to its own negligence.
The testimony revealed that the management practice
of the hotel prior to the death of the victim was to
deploy only one security or roving guard for every
three or four floors of the hotel, which is inadequate
because the hotel is L-shaped that rendered hallways
not visible end to end. That there was a
recommendation to increase security to one guard per
floor but this was not followed. This ommission is
critical. The hotel business is imbued with public
interest. Hotelkeepers are bound to provide not only
lodging for their guests but also security to their
persons and belongings to their guest. The twin duty
constitutes the essence of the business.
Therefore, the hotel has a greater degree of care and
responsibility for its guests , otherwise the
hotelkeepers would just stand idly by while strangers
have unrestricted access to all hotel rooms on the
pretense of being visitors of the guests which is
absurd.
Note: The decision of the CA was reproduced in the
decision to which the SC concurred. The CA
discussed the test of negligence as:
“The test of negligence is objective. WE measure the
act or ommission of the tortfeasor with a perspective
as that of an ordinary reasonable person who is
similarly situated. The test, as applied to the extant
case, is whether or not [Shangri-la Hotel], under the
attendant circumstances, used that reasonable care
and caution which an ordinary person would have
used in the same situation.”
PAGE 9 CASES
FRANCISCOCHAVEZ vs.
RAUL M. GONZALES, in his capacity as the
Secretary of the Department of Justice; and NTC
G.R. No. 168338, February 15, 2008
FACTS: Sometime before 6 June 2005, the radio
station dzMM aired the Garci Tapes where the parties
to the conversation discussed “rigging” the results of
the 2004 elections to favor President Arroyo. On 6
June 2005, Presidential spokesperson Bunye held a
press conference in Malacañang Palace, where he
played before the presidential press corps two
compact disc recordings of conversations between a
woman and a man. Bunye identified the woman in
both recordings as President Arroyo but claimed that
the contents of the second compact disc had been
“spliced” to make it appear that President Arroyo was
talking to Garcillano.
However, on 9 June 2005, Bunye backtracked and
stated that the woman’s voice in the compact discs
was not President Arroyo’s after all.3 Meanwhile,
other individuals went public, claiming possession of
the genuine copy of the Garci Tapes. Respondent
Gonzalez ordered the NBI to investigate media
organizations which aired the Garci Tapes for
possible violation of Republic Act No. 4200 or the
Anti-Wiretapping Law.
On 11 June 2005, the NTC issued a press release
warning radio and television stations that airing the
Garci Tapes is a ” cause for the suspension,
revocation and/or cancellation of the licenses or
authorizations” issued to them. On 14 June 2005,
NTC officers met with officers of the broadcasters
group KBP, to dispel fears of censorship. The NTC
and KBP issued a joint press statement expressing
commitment to press freedom
On 21 June 2005, petitioner Francisco I. Chavez
(petitioner), as citizen, filed this petition to nullify the
“acts, issuances, and orders” of the NTC and
respondent Gonzalez (respondents) on the following
grounds: (1) respondents’ conduct violated freedom of
expression and the right of the people to information
on matters of public concern under Section 7, Article
III of the Constitution, and (2) the NTC acted ultra
vires when it warned radio and television stations
against airing the Garci Tapes.
ISSUE: The principal issue for resolution is whether
the NTC warning embodied in the press release of 11
June 2005 constitutes an impermissible prior restraint
on freedom of expression.
1. Standing to File Petition
Petitioner has standing to file this petition. When the
issue involves freedom of expression, as in the
present case, any citizen has the right to bring suit to
question the constitutionality of a government action
in violation of freedom of expression, whether or not
the government action is directed at such citizen.
Freedom of expression, being fundamental to the
preservation of a free, open and democratic society, is
of transcendental importance that must be defended
by every patriotic citizen at the earliest opportunity.
2. Overview of Freedom of Expression, Prior Restraint
and Subsequent PunishmentFreedom of expression
is the foundation of a free, open and democratic
society. Freedom of expression is an indispensable
condition8 to the exercise of almost all other civil and
political rights. Freedom of expression allows citizens
to expose and check abuses of public officials.
Freedom of expression allows citizens to make
informed choices of candidates for public office.
Section 4, Article III of the Constitution prohibits the
enactment of any law curtailing freedom of
expression:
No law shall be passed abridging the freedom of
speech, of expression, or the press, or the right of the
people peaceably to assemble and petition the
government for redress of grievances.
Thus, the rule is that expression is not subject to any
prior restraint or censorship because the Constitution
commands that freedom of expression shall not be
abridged. Over time, however, courts have carved out
narrow and well defined exceptions to this rule out of
necessity.The exceptions, when expression may be
subject to prior restraint, apply in this jurisdiction to
only four categories of expression,
namely:pornography,
false or misleading advertisement,
advocacy of imminent lawless action, and
danger to national security.
All other expression is not subject to prior restraint.
Expression not subject to prior restraint is protected
expression or high-value expression. Any content-
based prior restraint on protected expression is
unconstitutional without exception. A protected
expression means what it says – it is absolutely
protected from censorship. Thus, there can be no
prior restraint on public debates on the amendment or
repeal of existing laws, on the ratification of treaties,
on the imposition of new tax measures, or on
proposed amendments to the Constitution.
If the prior restraint is not aimed at the message or
idea of the expression, it is content-neutral even if it
burdens expression. A content-neutral restraint is a
restraint which regulates the time, place or manner of
the expression in public places without any restraint
on the content of the expression. Courts will subject
content-neutral restraints to intermediate scrutiny. An
example of a content-neutral restraint is a permit
specifying the date, time and route of a rally passing
through busy public streets. A content-neutral prior
restraint on protected expression which does not
touch on the content of the expression enjoys the
presumption of validity and is thus enforceable subject
to appeal to the courts.
Expression that may be subject to prior restraint is
unprotected expression or low-value expression. By
definition, prior restraint on unprotected expression is
content-based since the restraint is imposed because
of the content itself. In this jurisdiction, there are
currently only four categories of unprotected
expression that may be subject to prior restraint. This
Court recognized false or misleading advertisement
as unprotected expression only in October 2007. Only
unprotected expression may be subject to prior
restraint. However, any such prior restraint on
unprotected expression must hurdle a high barrier.
First, such prior restraint is presumed unconstitutional.
Second, the government bears a heavy burden of
proving the constitutionality of the prior restraint. Prior
restraint is a more severe restriction on freedom of
expression than subsequent punishment. Although
subsequent punishment also deters expression, still
the ideas are disseminated to the public. Prior
restraint prevents even the dissemination of ideas to
the public. While there can be no prior restraint on
protected expression, such expression may be
subject to subsequent punishment,27 either civilly or
criminally. Similarly, if the unprotected expression
does not warrant prior restraint, the same expression
may still be subject to subsequent punishment, civilly
or criminally. Libel falls under this class of unprotected
expression.
However, if the expression cannot be subject to the
lesser restriction of subsequent punishment, logically
it cannot also be subject to the more severe restriction
of prior restraint. Thus, since profane language or
“hate speech” against a religious minority is not
subject to subsequent punishment in this jurisdiction,
such expression cannot be subject to prior restraint.If
the unprotected expression warrants prior restraint,
necessarily the same expression is subject to
subsequent punishment. There must be a law
punishing criminally the unprotected expression
before prior restraint on such expression can be
justified. The prevailing test in this jurisdiction to
determine the constitutionality of government action
imposing prior restraint on three categories of
unprotected expression – pornography,31 advocacy
of imminent lawless action, and danger to national
security – is the clear and present danger test.32 The
expression restrained must present a clear and
present danger of bringing about a substantive evil
that the State has a right and duty to prevent, and
such danger must be grave and imminent. Prior
restraint on unprotected expression takes many forms
– it may be a law, administrative regulation, or
impermissible pressures like threats of revoking
licenses or withholding of benefits.34 The
impermissible pressures need not be embodied in a
government agency regulation, but may emanate from
policies, advisories or conduct of officials of
government agencies.
3. Government Action in the Present Case
The government action in the present case is a
warning by the NTC that the airing or broadcasting of
the Garci Tapes by radio and television stations is a
“cause for the suspension, revocation and/or
cancellation of the licenses or authorizations” issued
to radio and television stations. The NTC warning,
embodied in a press release, relies on two grounds.
First, the airing of the Garci Tapes “is a continuing
violation of the Anti-Wiretapping Law and the
conditions of the Provisional Authority and/or
Certificate of Authority issued to radio and TV
stations.” Second, the Garci Tapes have not been
authenticated, and subsequent investigation may
establish that the tapes contain false information or
willful misrepresentation. The NTC does not claim that
the public airing of the Garci Tapes constitutes
unprotected expression that may be subject to prior
restraint. The NTC does not specify what substantive
evil the State seeks to prevent in imposing prior
restraint on the airing of the Garci Tapes. The NTC
does not claim that the public airing of the Garci
Tapes constitutes a clear and present danger of a
substantive evil, of grave and imminent character, that
the State has a right and duty to prevent. The NTC did
not conduct any hearing in reaching its conclusion
that the airing of the Garci Tapes constitutes a
continuing violation of the Anti-Wiretapping Law.
There is also the issue of whether a wireless cellular
phone conversation is covered by the Anti-
Wiretapping Law. Clearly, the NTC has no factual or
legal basis in claiming that the airing of the Garci
Tapes constitutes a violation of the Anti-Wiretapping
Law. The radio and television stations were not even
given an opportunity to be heard by the NTC. The
NTC did not observe basic due process as mandated
in Ang Tibay v. Court of Industrial Relations. The NTC
concedes that the Garci Tapes have not been
authenticated as accurate or truthful. The NTC also
concedes that only “after a prosecution or appropriate
investigation” can it be established that the Garci
Tapes constitute “false information and/or willful
misrepresentation.” Clearly, the NTC admits that it
does not even know if the Garci Tapes contain false
information or willful misrepresentation.
4. Nature of Prior Restraint in the Present Case
The NTC action restraining the airing of the Garci
Tapes is a content-based prior restraint because it is
directed at the message of the Garci Tapes. The
NTC’s claim that the Garci Tapes might contain “false
information and/or willful misrepresentation,” and thus
should not be publicly aired, is an admission that the
restraint is content-based.
5. Nature of Expression in the Present Case
The public airing of the Garci Tapes is a protected
expression because it does not fall under any of the
four existing categories of unprotected expression
recognized in this jurisdiction. The airing of the Garci
Tapes is essentially a political expression because it
exposes that a presidential candidate had allegedly
improper conversations with a COMELEC
Commissioner right after the close of voting in the last
presidential elections. Obviously, the content of the
Garci Tapes affects gravely the sanctity of the ballot.
Public discussion on the sanctity of the ballot is
indisputably a protected expression that cannot be
subject to prior restraint. In any event, public
discussion on all political issues should always remain
uninhibited, robust and wide open. The rule, which
recognizes no exception, is that there can be no
content-based prior restraint on protected expression.
On this ground alone, the NTC press release is
unconstitutional. Of course, if the courts determine
that the subject matter of a wiretapping, illegal or not,
endangers the security of the State, the public airing
of the tape becomes unprotected expression that may
be subject to prior restraint. However, there is no
claim here by respondents that the subject matter of
the Garci Tapes involves national security and
publicly airing the tapes would endanger the security
of the State. The airing of the Garci Tapes does not
violate the right to privacy because the content of the
Garci Tapes is a matter of important public concern.
The Constitution guarantees the people’s right to
information on matters of public concern. The remedy
of any person aggrieved by the public airing of the
Garci Tapes is to file a complaint for violation of the
Anti-Wiretapping Law after the commission of the
crime. Subsequent punishment, absent a lawful
defense, is the remedy available in case of violation of
the Anti-Wiretapping Law. While there can be no prior
restraint on protected expression, there can be
subsequent punishment for protected expression
under libel, tort or other laws. In the present case, the
NTC action seeks prior restraint on the airing of the
Garci Tapes, not punishment of personnel of radio
and television stations for actual violation of the Anti-
Wiretapping Law.
6. Only the Courts May Impose Content-Based Prior
Restraint
The NTC has no power to impose content-based prior
restraint on expression. The charter of the NTC does
not vest NTC with any content-based censorship
power over radio and television stations. In the
present case, the airing of the Garci Tapes is a
protected expression that can never be subject to
prior restraint. However, even assuming for the sake
of argument that the airing of the Garci Tapes
constitutes unprotected expression, only the courts
have the power to adjudicate on the factual and legal
issue of whether the airing of the Garci Tapes
presents a clear and present danger of bringing about
a substantive evil that the State has a right and duty
to prevent, so as to justify the prior restraint. Any
order imposing prior restraint on unprotected
expression requires prior adjudication by the courts on
whether the prior restraint is constitutional. This is a
necessary consequence from the presumption of
invalidity of any prior restraint on unprotected
expression.
7. Government Failed to Overcome Presumption of
Invalidity
Respondents did not invoke any compelling State
interest to impose prior restraint on the public airing of
the Garci Tapes. The respondents claim that they
merely “fairly warned” radio and television stations to
observe the Anti-Wiretapping Law and pertinent NTC
circulars on program standards. Respondents have
not explained how and why the observance by radio
and television stations of the Anti-Wiretapping Law
and pertinent NTC circulars constitutes a compelling
State interest justifying prior restraint on the public
airing of the Garci Tapes. Violation of the Anti-
Wiretapping Law, like the violation of any criminal
statute, can always be subject to criminal prosecution
after the violation is committed. Respondents have
not explained how the violation of the Anti-
Wiretapping Law, or of the pertinent NTC circulars,
can incite imminent lawless behavior or endanger the
security of the State.
8. The NTC Warning is a Classic Form of Prior
Restraint
The NTC press release threatening to suspend or
cancel the airwave permits of radio and television
stations constitutes impermissible pressure amounting
to prior restraint on protected expression. Whether the
threat is made in an order, regulation, advisory or
press release, the chilling effect is the same: the
threat freezes radio and television stations into
deafening silence. Radio and television stations that
have invested substantial sums in capital equipment
and market development suddenly face suspension or
cancellation of their permits. The NTC threat is thus
real and potent.
9.Conclusion In sum, the NTC press release
constitutes an unconstitutional prior restraint on
protected expression. There can be no content-based
prior restraint on protected expression. This rule has
no exception.
JACINTO TANGUILIG doing business under the
name and style J.M.T. ENGINEERING
AND GENERAL
MERCHANDISING, petitioner, vs. COURT
OF APPEALS and VICENTE HERCE
JR., respondents.
DECISION
This case involves the proper interpretation of the
contract entered into between the parties.Sometime in
April 1987 petitioner Jacinto M. Tanguilig doing
business under the name and style J. M.
T. Engineering and General Merchandising proposed
to respondent Vicente Herce Jr. to construct a
windmill system for him. After some negotiations they
agreed on the construction of the windmill for a
consideration of P60,000.00 with a one-year guaranty
from the date of completion and acceptance by
respondent Herce Jr. of the project. Pursuant to the
agreement respondent paid petitioner a down
payment of P30,000.00 and an installment payment
of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure
of respondent to pay the balance, petitioner filed a
complaint to collect the amount. In his Answer before
the trial court respondent denied the claim saying that
he had already paid this amount to the San Pedro
General Merchandising Inc. (SPGMI) which
constructed the deep well to which the windmill
system was to be connected. According to
respondent, since the deep well formed part of the
system the payment he tendered to SPGMI should be
credited to his account by petitioner. Moreover,
assuming that he owed petitioner a balance
of P15,000.00, this should be offset by the defects in
the windmill system which caused the structure to
collapse after a strong wind hit their place.[1]
Petitioner denied that the construction of a deep
well was included in the agreement to build the
windmill system, for the contract price of P60,000.00
was solely for the windmill assembly and its
installation, exclusive of other incidental materials
needed for the project. He also disowned any
obligation to repair or reconstruct the system and
insisted that he delivered it in good and working
condition to respondent who accepted the same
without protest. Besides, its collapse was attributable
to a typhoon, a force majeure, which relieved him of
any liability.
In finding for plaintiff, the trial court held that the
construction of the
deep well was not part of the windmill project as evide
nced clearly by the letter proposals submitted by
petitioner to respondent.[2] It noted that "[i]f the
intention of the parties is to include the construction of
the deep well in the project, the same should be
stated in the proposals. In the absence of such an
agreement, it could be safely concluded that the
construction of the deep well is not a part of the
project undertaken by the plaintiff."[3] With respect to
the repair of the windmill, the trial court found that
"there is no clear and convincing proof that the
windmill system fell down due to the defect of the
construction."[4]
The Court of Appeals reversed the trial court. It
ruled that the construction of the deep well was
included in the agreement of the parties because the
term "deep well" was mentioned in both proposals. It
also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which
installed the deep well, that petitioner Tanguilig told
him that the cost of constructing the deep well would
be deducted from the contract price
of P60,000.00. Upon these premises the appellate
court concluded that respondent's payment
of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively
extinguishing his contractual obligation. However, it
rejected petitioner's claim of force majeure and
ordered the latter to reconstruct the windmill in
accordance with the stipulated one-year guaranty.
His motion for reconsideration having been
denied by the Court of Appeals, petitioner now seeks
relief from this Court. He raises two issues: firstly,
whether the agreement to construct the windmill
system included the installation of a deep well
and, secondly, whether petitioner is under obligation
to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue
but sustain it on the second.
The preponderance of evidence supports the
finding of the trial court that the installation of a deep
well was not included in the proposals of petitioner to
construct a windmill system for respondent.There
were in fact two (2) proposals: one dated 19 May
1987 which pegged the contract price at P87,000.00
(Exh. "1"). This was rejected by respondent. The other
was submitted three days later, i.e., on 22 May 1987
which contained more specifications but proposed a
lower contract price of P60,000.00 (Exh. "A"). The
latter proposal was accepted by respondent and the
construction immediately followed. The pertinent
portions of the first letter-proposal (Exh. "1") are
reproduced hereunder -
In connection with your Windmill System and
Installation, we would like to quote to you as follows:
One (1) Set - Windmill suitable for 2 inches diameter
deepwell, 2 HP, capacity, 14 feet in diameter, with 20
pieces blade, Tower 40 feet high, including
mechanism which is not advisable to operate during
extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides
as follows:
In connection with your Windmill system Supply of
Labor Materials and Installation, operated water
pump, we would like to quote to you as follows -
One (1) set - Windmill assembly for 2 inches or 3
inches deep-well pump, 6 Stroke, 14 feet diameter, 1-
lot blade materials, 40 feet Tower complete with
standard appurtenances up to Cylinder pump,
shafting U.S. adjustable International Metal.
One (1) lot - Angle bar, G. I. pipe, Reducer Coupling,
Elbow Gate valve, cross Tee coupling. One (1) lot -
Float valve. One (1) lot - Concreting materials
foundation. F. O. B. Laguna Contract
Price P60,000.00
Notably, nowhere in either proposal is the installation
of a deep well mentioned, even remotely. Neither is
there an itemization or description of the materials to
be used in constructing the deep well.There is
absolutely no mention in the two (2) documents that a
deep well pump is a component of the proposed
windmill system. The contract prices fixed in both
proposals cover only the features specifically
described therein and no other. While the
words "deep well" and "deep well pump" are
mentioned in both, these do not indicate that a deep
well is part of the windmill system. They merely
describe the type of deep well pump for which the
proposed windmill would be suitable. As correctly
pointed out by petitioner, the words "deep
well" preceded by the prepositions "for" and "suitable
for"were meant only to convey the idea that the
proposed windmill would be appropriate for a deep
well pump with a diameter of 2 to 3 inches. For if the
real intent of petitioner was to include a deep well in
the agreement to construct a windmill, he would have
used instead the conjunctions "and" or "with." Since
the terms of the instruments are clear and leave no
doubt as to their meaning they should not be
disturbed. Moreover, it is a cardinal rule in the
interpretation of contracts that the intention of the
parties shall be accorded primordial
consideration[5] and, in case of doubt, their
contemporaneous and subsequent acts shall be
principally considered.[6] An examination of such
contemporaneous and subsequent acts of respondent
as well as the attendant circumstances does not
persuade us to uphold him. Respondent insists that
petitioner verbally agreed that the contract price
of P60,000.00 covered the installation of a deep well
pump. He contends that since petitioner did not have
the capacity to install the pump the latter agreed to
have a third party do the work the cost of which was
to be deducted from the contract price. To prove his
point, he presented Guillermo Pili of SPGMI who
declared that petitioner Tanguilig approached him with
a letter from respondent Herce Jr. asking him to build
a deep well pump as "part of the price/contract which
Engineer (Herce) had with Mr. Tanguilig." [7] We are
disinclined to accept the version of respondent. The
claim of Pili that Herce Jr. wrote him a letter is
unsubstantiated. The alleged letter was never
presented in court by private respondent for reasons
known only to him. But granting that this written
communication existed, it could not
have simply contained a request for Pili to install a
deep well; it would have also mentioned the party who
would pay for the undertaking. It strains credulity that
respondent would keep silent on this matter and leave
it all to petitioner Tanguilig to verbally convey to
Pili that the deep well was part of the windmill
construction and that its payment would come from
the contract price of P60,000.00.
We find it also unusual that Pili would readily
consent to build a deep well the payment for which
would come supposedly from the windmill contract
price on the mere representation of petitioner, whom
he had never met before, without a written
commitment at least from the former. For if indeed the
deep well were part of the windmill project, the
contract for its installation would have been strictly a
matter between petitioner and Pili himself with the
former assuming the obligation to pay the price. That
it was respondent Herce Jr. himself who paid for the
deep well by handing over to Pili the amount
of P15,000.00 clearly indicates that the contract for
the deep well was not part of the windmill project but a
separate agreement between respondent and
Pili. Besides, if the price of P60,000.00 included the
deep well, the obligation of respondent was to pay the
entire amount to petitioner without prejudice to any
action that Guillermo Pili or SPGMI may take, if any,
against the latter. Significantly, when asked why he
tendered payment directly to Pili and not to petitioner,
respondent explained, rather lamely, that he did it
"because he has (sic) the money, so (he) just paid the
money in his possession."[8] Can respondent claim
that Pili accepted his payment on behalf of
petitioner? No. While the law is clear that "payment
shall be made to the person in
whose favor the obligation has beenconstituted, or
his successor
interest, or any person authorized to receive it,".[9] It
does not appear from the record that Pili and/or
SPGMI was so authorized.Respondent cannot claim
the benefit of the law concerning "payments made by
a third person."[10] The Civil Code provisions do not
apply in the instant case because no creditor-debtor
relationship between petitioner and Guillermo Pili
and/or SPGMI has been established regarding the
construction of the deep well. Specifically, witness Pili
did not testify that he entered into a contract with
petitioner for the construction of respondent's deep
well. If SPGMI was really commissioned by petitioner
to construct the deep well, an agreement particularly
to this effect should have been entered into.
The contemporaneous and subsequent acts of
the parties concerned effectively belie respondent's
assertions. These circumstances only show that the
construction of the well by SPGMI was for the sole
account of respondent and that petitioner merely
supervised the installation of the well because the
windmill was to be connected to it. There is no legal
nor factual basis by which this Court can impose upon
petitioner an obligation he did not expressly assume
nor ratify.
The second issue is not a novel one. In a long
line of cases[11] this Court has consistently held that in
order for a party to claim exemption from liability by
reason of fortuitous event under Art. 1174 of the Civil
Code the event should be the sole
and proximate cause of the loss or destruction of the
object of the contract. In Nakpil vs. Court of
Appeals,[12] four (4) requisites 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 unforeseeable 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. Petitioner
failed to show that the collapse of the windmill was
due solely to a fortuitous event. Interestingly, the
evidence does not disclose that there was actually a
typhoon on the day the windmill collapsed. Petitioner
merely stated that there was a "strong wind." But a
strong wind in this case cannot be fortuitous -
unforeseeable nor unavoidable. On the contrary, a
strong wind should be present in places where
windmills are constructed, otherwise the windmills
will not turn. The appellate court correctly observed
that "given the newly-constructed windmill system, the
same would not have collapsed had there been no
inherent defect in it which could only be attributable to
the appellee."[13] It emphasized that
respondent had in his favor the presumption that
"things have happened according to the ordinary
course of nature and the ordinary habits of
life."[14] This presumption has not been rebutted by
petitioner. Finally, petitioner's argument that private
respondent was already in default in the payment of
his outstanding balance of P15,000.00 and hence
should bear his own loss, is untenable. 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.[15] When
the windmill failed to function properly it became
incumbent upon petitioner to institute the proper
repairs in accordance with the guaranty stated in the
contract. Thus, respondent cannot be said to have
incurred in delay; instead, it is petitioner who should
bear the expenses for the reconstruction of the
windmill. Article 1167 of the Civil Code is explicit on
this point that if a person obliged to do something fails
to do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision
is MODIFIED. Respondent VICENTE HERCE JR. is
directed to pay petitioner JACINTO M. TANGUILIG
the balance of P15,000.00 with interest at the legal
rate from the date of the filing of the complaint. In
return, petitioner is ordered to "reconstruct subject
defective windmill system, in accordance with the
one-year guaranty"[16]and to complete the same within
three (3) months from the finality of this decision.
SO ORDERED.
OLIVERIO LAPERAL and FILIPINAS GOLF &
COUNTRY CLUB INC., Petitioners, v. SOLID
HOMES, INC., Respondent.
SOUTHRIDGE VILLAGE HOMEOWNERS
ASSOCIATION, intervenor.
D E C I S I O N Before us is this Petition for
Review on certriorari under Rule 45 of the Rules
of Court to nullify and set aside the following
issuances of the Court of Appeals in CA-G.R. CV
No. 37853, to wit:
1. Decision dated September 18,
1996,1 affirming with modification an earlier
decision of the Regional Trial Court at Laguna, Br.
XXV, in an action for reformation of document
thereat commenced by herein respondent Solid
Homes, Inc. against the petitioners; and cralawl ibra ry
2. Resolution dated September 23,
1997,2 denying the parties' respective motions
for reconsideration.
As found by the Court of Appeals in the decision
under review, the material facts may be briefly
stated, as follows:
On June 6, 1981, Filipinas Golf Sales and
Development Corporation (FGSDC), predecessor-
in-interest of petitioner Filipinas Golf and
Country Club, Inc. (FGCCI), represented by its
then President, the other petitioner
herein, Oliverio Laperal, entered into
a Development and Management
Agreement3(Agreement, for short) with herein
respondent Solid Homes, Inc., a registered
subdivision developer, involving several parcels of
land owned by Laperal and FGSDC with an
aggregate area of approximately 42 hectares and
located at Bo. San Antonio, San Pedro, Laguna.
Under the terms and conditions of the
aforementioned Agreement and
the Supplement4 thereto dated January 19, 1982,
respondent Solid Homes, Inc., undertook to
convert at its own expense the land subject of the
agreement into a first-class residential
subdivision, in consideration of which respondent
will get 45% of the lot titles of the saleable area
in the entire project.
On different dates, or more specifically on June 8,
1983, June 22, 1983 and July 29, 1983, Victorio
V. Soliven, President and General Manager of
respondent Solid Homes, Inc., wrote Oliverio
Laperal, President of FGSDC, requesting Laperal
to furnish Solid Homes, Inc., with the owner's
duplicate copies of the Torrens titles covering the
subject land in order to facilitate the processing of
respondent's application with the Human
Settlements Regulatory Commission (HSRC) for a
license to sell subdivision lots, as required under
Presidential Decree No. 957.
Despite repeated requests, however, Laperal did
not comply.
On October 7, 1983, the
aforementioned Agreement was cancelled by the
parties, and, in lieu thereof, two (2) contracts
identically denominated Revised Development and
Management Agreement5 (Revised
Agreements, for short) were entered into by
respondent with the two (2) successors-in-
interest of FGSDC, to wit: (1) one, with petitioner
Oliverio Laperal as owner of the 181,075-square
meter area of the subject land; and (2) another,
with petitioner FGCCI as owner of the 399,075-
square meter area thereof. Unlike the original
agreement, both Revised Agreements omitted the
obligation of herein petitioners Laperal and FGCCI
to make available to respondent Solid Homes,
Inc. the owner's duplicate copies of the titles
covering the subject parcels of land. And, because
there were still other matters which were
inadvertently omitted in the said Revised
Agreements, the parties executed
an Addendum6 thereto dated November 11,
1983. In addition to the provision on the
automatic rescission of the Revised Agreements in
case of breach of the terms and conditions
thereof under paragraph 10 of the same, the
parties further agreed in the Addendum that upon
a showing that respondent deliberately
abandoned or discontinued work in the subject
project, all improvements of whatever nature and
kind it may have introduced in the property and
existing as of the date of the violation shall be
forfeited in favor of the petitioners without any
obligation on their part to pay respondent
therefor. Likewise, the parties agreed in the
same Addendumto a forfeiture of all advances
made and remittances of proceeds from
reservations and sales upon occurrence of the
aforesaid default or violation of any of the terms
and conditions of the Revised Agreements and
the Addendum. Under
the Addendum, abandonment is deemed to have
occurred upon failure or absence of any work for
development for any ten (10) days. It appears,
however, that even as the Revised
Agreements already provided for the non-
surrender of the owner's duplicate copies of the
titles, respondent persisted in its request for the
delivery thereof, explaining that said owner's
duplicate copies were necessary for: (1) the
issuance by the HSRC of the license to
sell; (2) the segregation of the golf course portion
from the rest of the subdivision area; (3)the
segregation of the individual titles for portions
which are supposed to be made available for PAG-
IBIG take-outs; and (4) the preparation of the
technical description of nine (9) blocks already
approved by the Bureau of Lands.Then, in a letter
dated December 7, 1983 addressed to herein
petitioners, respondent, through its Executive
Vice-President and Treasurer, Purita R. Soliven,
explained that it was unable to meet the
November 30, 1983 deadline for the payment
of P1 Million as provided for in the Revised
Agreementsbecause there was delay in the
processing of its license to sell, which, in turn, is
due to petitioners' continued refusal to deliver the
owner's duplicate copies of the titles, contrary to
what was allegedly agreed upon by the parties.
Respondent reiterated in the same letter that in
the absence of such license from HSRC, it would
not be able to comply with the rest of its
undertakings within the allotted periods since the
projected collection of amounts from sales and
reservations of the subdivision lots did not
materialize. Nonetheless, in order to demonstrate
that it was not reneging on its commitments
under the Revised Agreements despite its
difficulties to generate more funds, respondent
proposed that it be allowed to assign to
petitioners P1Million out of its receivables
worth P1,209,000.00 from loan proceeds due in
its favor under the PAG-IBIG housing program,
which it expected to receive for some of the
completed housing units. In separate letters both
dated December 9, 1983, however, petitioners
rejected respondent's proposal and instead
insisted on the payment of P1Million to each of
them. It was only at this point, as alleged in
respondent's reply letter dated December 13,
1983, that respondent supposedly realized that
instead of providing for the payment of
only P500,000.00 in each contract, or a total
of P1Million for both Revised Agreements, the
total amount of P1Million was erroneously carried
over in each of the Revised Agreements, with the
consequence that under said two (2) Revised
Agreements, it was bound to pay a total
of P2Million to the petitioners. Meanwhile, in
subsequent letters dated January 6, 1984,
January 17, 1984 and February 6, 1984,
respondent continued to press petitioners for the
delivery of the owner's duplicate copies of their
titles covering the subject parcel of land.
Then, on March 9, 1984, petitioners served on
respondent notices of rescission of the Revised
Agreements with a demand to vacate the subject
properties and yield possession thereof to them.
In the same letter, petitioners made it clear that
they are enforcing the rescission clause of
the Revised Agreements on account of
respondents' failure to: (1) pay them P1Million
each on November 30, 1983; (2) complete the
development of Phase I-A of the project not later
than February 15, 1984; and (3)obtain from the
HSRC the license to sell subdivision lots.
In its response-letter dated March 14, 1984,
respondent, through counsel, objected to the
announced rescission, arguing that the proximate
cause of its inability to meet its contractual
obligations was petitioners' own failure and
refusal to deliver their owner's duplicate copies of
the titles for processing by the HSRC, PAG-IBIG,
accredited banks, and other government
agencies, adding that on account of petitioners'
failure to do so, it was not issued the necessary
license to sell, thus resulting in the slowdown in
the development works in the project due to its
inability to generate additional funds and to the
slackening of its sales campaign.
Such was the state of things when, on April 2,
1984, in the Regional Trial Court (RTC) at
Biñan, Laguna respondent Solid Homes, Inc.
instituted the complaint in this case praying for
the reformation of the Revised Agreements and
the Addendum on the ground that these contracts
failed to express the true intent of the parties. In
the same complaint, respondent prayed for the
issuance of a temporary restraining order (TRO)
and a writ of preliminary injunction to prevent
petitioners from exercising their rights as owners
of the subject properties. Docketed with the same
court as Civil Case No. B-2069, the complaint was
raffled to Branch XXV thereof.
On the very day that the complaint was filed, the
trial court issued a TRO to prevent petitioners
from implementing the unilateral rescission of
the Revised Agreements and the Addendum.
Later, in an order dated May 23, 1984,7 the same
court granted respondent's application for a writ
of preliminary injunction upon its posting of a
bond in the amount of P1Million.
On April 18, 1985,8 the Southridge Village
Homeowner's Association filed a complaint-in-
intervention praying that the rights and
preferential status of its members who have been
occupying some of the completed units in the
subdivision project be respected by whoever
between the principal litigants may later be
adjudged as the prevailing party.
Both the petitioners and respondent filed their
respective answers to the aforesaid complaint-in-
intervention, commonly alleging intervenor's lack
of capacity to sue. Petitioners added in their
answer that it should be respondent which must
be made solely liable to the intervenor for
whatever claims its members may be entitled to.
For its part, respondent prayed for the
cancellation, in whole or in part, of its contracts
with the members of the intervenor Association to
the extent compatible with prevailing economic
conditions.
Upon petitioners' motion, the trial court issued an
order on May 20, 1985 lifting the writ of
preliminary injunction over the entire property
except as to Phase I-A thereof, and reducing
respondent's injunction bond from P1Million to
only P200,000.00.
Petitioners then filed a motion for reconsideration.
Finding merit in the motion, the trial court, in its
order of August 15, 1985,9 as clarified in its order
of September 27, 1985,10 completely lifted the
writ of preliminary injunction so as to include the
area covered by Phase I-A, and cancelled the
bond of P200,000.00 earlier posted by
respondent.
To these orders, both parties filed their respective
motions for reconsideration. In its subsequent
order dated November 8, 1985,11 the trial court
modified its August 15, 1985 order by maintaining
the complete lifting of the writ of preliminary
injunction but ordering the restoration of
respondent's P1Million bond or its substitution
with another if the same had already been
cancelled, to answer for whatever damages that
may be proven by the petitioners during the trial
of the case.
The above-mentioned orders, namely, orders
dated May 20, 1985, August 15, 1985, September
27, 1985 and November 8, 1985 involving the
dissolution of the writ of preliminary injunction
over the entire property and the maintenance of
the P1Million bond against respondent, became
the subject of a Petition for Certiorari filed by
respondent before the Court of Appeals docketed
therein as CA-G.R. SP No. 47885.
In a decision dated October 9, 1987, the Court of
Appeals dismissed the petition.
Therefrom, respondent went to this Court in G.R,
No. 80290 but later abandoned the same,
prompting this Court, in its Resolution dated
February 22, 1988, to consider the Court of
Appeals' dismissal of respondent's petition final
and executory.
Meanwhile, upon respondent's application, a
notice of lis pendens was annotated on the
Torrens titles covering the properties in litigation.
Said notice, however, was lifted by the trial court
in its orders of April 12, 1988 and May 21, 1991.
Eventually, after due proceedings in the main
case, the trial court, in a decision dated
December 19, 1991,12 rendered judgment
dismissing respondent's complaint for
reformation. We quote the dispositive portion of
the same decision:
IN THE LIGHT OF THE FOREGOING, judgment is
hereby rendered in favor of the defendants and
against the plaintiff dismissing the complaint with
costs:
On defendants' recovery upon the bond posted by
the plaintiff to answer to whatever damages that
the party enjoined may suffer by reason of the
injunction, resolution as to the propriety of its
award is hereby held in abeyance until after
proper application by the defendants and hearing
thereon, as reserved by the defendants in their
memorandum.
As regards the Intervenors, the defendants are
directed to respect and acknowledge their
preferential rights over said Intervenors' occupied
houses and lots.
SO ORDERED.
Therefrom, respondent went to the Court of
Appeals via ordinary appeal in CA-G.R. CV No.
37853.
As stated at the threshold hereof, the Court of
Appeals, in a decision dated September 18,
1996,13affirmed with modification the appealed
decision of the trial court, thus:
WHEREFORE, IN VIEW OF ALL THE
FOREGOING, the decision appealed from
is AFFIRMED with the modification that
[petitioners] are ordered to reimburse
[respondent], jointly and severally, the amount of
Five Million Two Hundred Thousand Eight Hundred
Thirty Three Pesos and Twenty Seven Centavos
(P5,200,833.27) representing the actual cost of
the development and the completed
improvements on the project. In all other
respects, the judgment of the trial court
is AFFIRMED.
SO ORDERED.
Both parties separately moved for
reconsideration, but their respective motions were
denied by the appellate court in its resolution of
September 23, 1997.14
And, as they did not agree with the judgment,
petitioners are now appealing to this Court for
relief via the present recourse, it being their
submission that the Court of Appeals erred -
I.
xxx IN HOLDING THAT PETITIONERS'
TERMINATION OF THE REVISED AGREEMENT AND
ADDENDUM, BECAUSE OF THE CONTRACTUAL
BREACH COMMITTED BY RESPONDENT SOLID
HOMES, CARRIED WITH IT THE EFFECT
PROVIDED UNDER ARTICLE 1385 OF THE NEW
CIVIL CODE.
II.
xxx IN VOIDING THE FORFEITURE CLAUSES OF
THE ADDENDUM, AND IN ORDERING THE
REFUND OF THE SUM OF P5,200,833.27 TO
RESPONDENT SOLID HOMES.
III.
xxx IN HOLDING, IN EFFECT, THAT PETITIONERS
ARE NOT ENTITLED TO DAMAGES.
The Court finds merit in the petition.
While this Court does not agree with petitioners
that the right to rescind under Article 1191 of the
Civil Code does not carry with it the
corresponding obligation for restitution, we do not
subscribe to the Court of Appeals' conclusion
that: (1) "the forfeiture/penalty clause under
paragraphs Nos. 2 and 3 of the 'Addendum to the
Revised Development and Management
Agreements' is, under the factual milieu of this
case, unreasonable and unconscionable and,
therefore, void for being contrary to morals and
good customs"15; and (2) petitioners must
reimburse respondent the actual cost of
development and completed improvements on the
project in the total amount of P5,200,833.27.16
It is petitioners' thesis that inasmuch as the
rescission of the Revised Agreements and
its Addendum was made pursuant to Article 1191
of the Civil Code, the provision of Article 138517 of
the same Code, which requires mutual restitution
- should not apply because Article 1385 applies
only if the rescission is made under the instances
enumerated in Article 138118 of the Code.
We do not agree.
Mutual restitution is required in cases involving
rescission under Article 1191. In Velarde v. Court
of Appeals,19 this Court, in no uncertain terms,
squarely ruled on this matter:
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 P800,000 and the
corresponding mortgage payments in the
amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners
should be returned by private respondents, lest
the latter unjustly enrich themselves at the
expense of the former.
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 (citing Co
v. Court of Appeals, 312 SCRA 528, August 17,
1999; and Vitug, Compendium of Civil Law and
Jurisprudence, 1993 revised ed., p. 556). 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 (citing Ocampo
v. Court of Appeals, 233 SCRA 551, June 30,
1994).
Article 1191 of the Civil Code provides:
Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of the period.
This is understood without prejudice to the rights
of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law. (1124)
Despite the fact that Article 1124 of the old Civil
Code from whence Article 1191 was taken, used
the term "resolution", the amendment thereto
(presently, Article 1191) explicitly and clearly
used the term "rescission". Unless Article 1191 is
subsequently amended to revert back to the term
"resolution", this Court has no alternative but to
apply the law, as it is written.
Again, since 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.
In Palay, Inc. v. Clave,20 this Court applied Article
1385 in a case involving "resolution" under Article
1191, thus:
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 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."
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 to be allowed to
retain private respondent's payments and at the
same time appropriate the proceeds of the second
sale to another.
Applying the clear language of the law and the
consistent jurisprudence on the matter, therefore,
the Court rules that rescission under Article 1191
in the present case, carries with it the
corresponding obligation of restitution.
This notwithstanding, the Court does not agree
with the Court of Appeals that, as a consequence
of the obligation of mutual restitution in this case,
petitioners should return the amount
of P5,200,833.27 to respondent.
Article 1191 states that "the injured party may
choose between fulfillment and rescission of the
obligation, with the payment of damages in
either case." In other words, while petitioners
are indeed obliged to return the said amount to
respondent under Article 1385, assuming said
figure is correct, respondent is at the same time
liable to petitioners in the same amount as
liquidated damages by virtue of the
forfeiture/penalty clause as freely stipulated upon
by the parties in the Addendum, paragraphs 1
and 221 of which respectively read:
WHEREAS, included as part of said agreement are
the following:
1. Further to the stipulations on paragraph 10,
upon default of performances, violations and/or
non-compliance with the terms and conditions
herein agreed upon by the DEVELOPER wherein it
appears that the DEVELOPER deliberately
abandoned or discontinued the work on the
project, said party shall lose any entitlement, if
any, to any refund and/or advances it may have
incurred in connection with or relative to previous
development works in the subdivision; likewise,
all improvements of whatever nature and kind
introduced by the DEVELOPER on the property,
existing as of the date of default or violation, shall
automatically belong to the OWNER without
obligation on his part to pay for the costs thereof.
2. Similarly with the same condition of default or
violation obtaining, as stated in paragraph 10 of
said agreement, all advances made and
remittances of proceeds from reservations and
sales given by the DEVELOPER to the OWNER as
provided for in this agreement shall be deemed
absolutely forfeited in favor of the OWNER,
resulting to waiver of DEVELOPER's rights, if any,
with respect to said amount(s).
If this Court recognized the right of the parties to
stipulate on an extrajudicial rescission22 under
Article 1191, there is no reason why this Court
will not allow the parties to stipulate on the
matter of damages in case of such rescission
under Book IV, Title VIII, Chapter 3, Section 2 of
the Civil Code governing liquidated damages.23
For sure, we find no factual and legal justification
to sustain the appellate court's conclusion that
the agreed forfeiture/penalty clause is
unreasonable and unconscionable unless
respondent had sufficiently shown that it had
completely accounted for the proceeds of the sale
of subdivision lots it made during the effectivity of
the agreement. It must be stressed that the lots
sold by respondent were owned by petitioners
Laperal and FGCCI. How then could there be
unjust enrichment in favor of petitioners in such a
case?chanroblesv irtualawl ibra ry
Furthermore, a substantial part of the funds spent
by respondent in the construction works which by
the Court of Appeals required to be reimbursed by
petitioners admittedly came from the proceeds of
the sale of the real property still owned by
petitioners. This may be gleaned from the fact
that one of the main reasons respondent raised in
its complaint for reformation before the trial court
was that it was unable to proceed with the
construction works due to lack of funds on
account of the slackening of its sales campaign
resulting from the alleged refusal, which is after
all justified, of the petitioners to surrender their
titles to respondent.
Finally, even assuming that the foregoing
forfeiture/penalty clause in the "Addendum"
would result in considerable losses on the part of
respondent, it is not for this Court to release said
party from its obligation. Our pronouncement
in Esguerra v. Court of Appeals24 is apt and
pertinent:
xxx. It is a long established doctrine that the law
does not relieve a party from the effects of an
unwise, foolish, or disastrous contract, entered
into with all the required formalities and with full
awareness of what he was doing. Courts have no
power to relieve parties from obligations
voluntarily assumed, simply because their
contracts turned out to be disastrous deals or
unwise investments." xxx. crvll
WHEREFORE, the petition is hereby GRANTED.
Accordingly, the assailed decision and resolution
of the Court of appeals are REVERSED and SET
ASIDE and the decision dated December 19, 1991
of the Regional Trial Court in Civil Case No. B-
2069 REINSTATED.
No pronouncement as to costs.SO ORDERED.
GOTESCO VS SPS FAJARDO
Assailed in this Petition for Review on Certiorari under
Rule 45 of the Rules of Court is the July 22, 2011
Decision[1] and February 29, 2012 Resolution[2] of the
Court of Appeals (CA) in CA-G.R. SP No. 112981,
which affirmed with modification the August 27, 2009
Decision[3] of the Office of the President (OP).
The Facts
On January 24, 1995, respondent-spouses Eugenio
and Angelina Fajardo (Sps. Fajardo) entered into a
Contract to Sell[4] (contract) with petitioner-corporation
Gotesco Properties, Inc. (GPI) for the purchase of a
100-square meter lot identified as Lot No. 13, Block
No. 6, Phase No. IV of Evergreen Executive Village, a
subdivision project owned and developed by GPI
located at Deparo Road, Novaliches, Caloocan
City. The subject lot is a portion of a bigger lot
covered by Transfer Certificate of Title (TCT) No.
244220[5] (mother title).
Under the contract, Sps. Fajardo undertook to pay the
purchase price of P126,000.00 within a 10-year
period, including interest at the rate of nine percent
(9%) per annum. GPI, on the other hand, agreed to
execute a final deed of sale (deed) in favor of Sps.
Fajardo upon full payment of the stipulated
consideration. However, despite its full payment of
the purchase price on January 17, 2000[6] and
subsequent demands,[7] GPI failed to execute the
deed and to deliver the title and physical possession
of the subject lot. Thus, on May 3, 2006, Sps. Fajardo
filed before the Housing and Land Use Regulatory
Board-Expanded National Capital Region Field Office
(HLURB-ENCRFO) a complaint[8] for specific
performance or rescission of contract with damages
against GPI and the members of its Board of Directors
namely, Jose C. Go, Evelyn Go, Lourdes G. Ortiga,
George Go, and Vicente Go (individual petitioners),
docketed as HLURB Case No. REM-050306-13319.
Sps. Fajardo averred that GPI violated Section 20[9] of
Presidential Decree No. 957[10] (PD 957) due to its
failure to construct and provide water facilities,
improvements, infrastructures and other forms of
development including water supply and lighting
facilities for the subdivision project. They also alleged
that GPI failed to provide boundary marks for each lot
and that the mother title including the subject lot had
no technical description and was even levied upon by
the Bangko Sentral ng Pilipinas (BSP) without their
knowledge. They thus prayed that GPI be ordered to
execute the deed, to deliver the corresponding
certificate of title and the physical possession of the
subject lot within a reasonable period, and to develop
Evergreen Executive Village; or in the alternative, to
cancel and/or rescind the contract and refund the total
payments made plus legal interest starting January
2000.
For their part, petitioners maintained that at the time
of the execution of the contract, Sps. Fajardo were
actually aware that GPI's certificate of title had no
technical description inscribed on it. Nonetheless, the
title to the subject lot was free from any liens or
encumbrances.[11] Petitioners claimed that the failure
to deliver the title to Sps. Fajardo was beyond their
control[12] because while GPI's petition for inscription
of technical description (LRC Case No. 4211) was
favorably granted[13] by the Regional Trial Court of
Caloocan City, Branch 131 (RTC-Caloocan), the
same was reversed[14] by the CA; this caused the
delay in the subdivision of the property into individual
lots with individual titles. Given the foregoing
incidents, petitioners thus argued that Article 1191 of
the Civil Code (Code) the provision on which Sps.
Fajardo anchor their right of rescission remained
inapplicable since they were actually willing to comply
with their obligation but were only prevented from
doing so due to circumstances beyond their
control. Separately, petitioners pointed out that BSP's
adverse claim/levy which was annotated long after the
execution of the contract had already been settled.
The Ruling of the HLURB-ENCRFO
On February 9, 2007, the HLURB-ENCRFO issued a
Decision[15] in favor of Sps. Fajardo, holding that GPI's
obligation to execute the corresponding deed and to
deliver the transfer certificate of title and possession
of the subject lot arose and thus became due and
demandable at the time Sps. Fajardo had fully paid
the purchase price for the subject lot. Consequently,
GPI's failure to meet the said obligation constituted a
substantial breach of the contract which perforce
warranted its rescission. In this regard, Sps. Fajardo
were given the option to recover the money they paid
to GPI in the amount of P168,728.83, plus legal
interest reckoned from date of extra-judicial demand
in September 2002 until fully paid. Petitioners were
likewise held jointly and solidarily liable for the
payment of moral and exemplary damages, attorney's
fees and the costs of suit.
The Ruling of the HLURB Board of
Commissioners
On appeal, the HLURB Board of Commissioners
affirmed the above ruling in its August 3, 2007
Decision,[16] finding that the failure to execute the
deed and to deliver the title to Sps. Fajardo amounted
to a violation of Section 25 of PD 957 which therefore,
warranted the refund of payments in favor of Sps.
Fajardo.
The Ruling of the OP
On further appeal, the OP affirmed the HLURB rulings
in its August 27, 2009 Decision.[17] In so doing, it
emphasized the mandatory tenor of Section 25 of PD
957 which requires the delivery of title to the buyer
upon full payment and found that GPI unjustifiably
failed to comply with the same.
The Ruling of the CA
On petition for review, the CA affirmed the above
rulings with modification, fixing the amount to be
refunded to Sps. Fajardo at the prevailing market
value of the property[18] pursuant to the ruling in Solid
Homes v. Tan (Solid Homes).[19]
The Petition
Petitioners insist that Sps. Fajardo have no right to
rescind the contract considering that GPI's inability to
comply therewith was due to reasons beyond its
control and thus, should not be held liable to refund
the payments they had received. Further, since the
individual petitioners never participated in the acts
complained of nor found to have acted in bad faith,
they should not be held liable to pay damages and
attorney's fees.
The Court's Ruling
The petition is partly meritorious.
A. Sps. Fajardo's right to rescind
It is settled that in a contract to sell, the seller's
obligation to deliver the corresponding certificates of
title is simultaneous and reciprocal to the buyer's full
payment of the purchase price.[20] In this relation,
Section 25 of PD 957, which regulates the subject
transaction, imposes on the subdivision owner or
developer the obligation to cause the transfer of the
corresponding certificate of title to the buyer upon full
payment, to wit:

Sec. 25. Issuance of Title. The owner or developer
shall deliver the title of the lot or unit to the buyer
upon full payment of the lot or unit. No fee, except
those required for the registration of the deed of sale
in the Registry of Deeds, shall be collected for the
issuance of such title. In the event a mortgage over
the lot or unit is outstanding at the time of the
issuance of the title to the buyer, the owner or
developer shall redeem the mortgage or the
corresponding portion thereof within six months from
such issuance in order that the title over any fully paid
lot or unit may be secured and delivered to the buyer
in accordance herewith. (Emphasis supplied.)
In the present case, Sps. Fajardo claim that GPI
breached the contract due to its failure to execute the
deed of sale and to deliver the title and possession
over the subject lot, notwithstanding the full payment
of the purchase price made by Sps. Fajardo on
January 17, 2000[21]as well as the latter's demand for
GPI to comply with the aforementioned obligations per
the letter[22] dated September 16, 2002. For its part,
petitioners proffer that GPI could not have committed
any breach of contract considering that its purported
non-compliance was largely impelled by
circumstances beyond its control i.e., the legal
proceedings concerning the subdivision of the
property into individual lots. Hence, absent any
substantial breach, Sps. Fajardo had no right to
rescind the contract.
The Court does not find merit in petitioners'
contention.
A perusal of the records shows that GPI acquired the
subject property on March 10, 1992 through a Deed of
Partition and Exchange[23]executed between it and
Andres Pacheco (Andres), the former registered
owner of the property. GPI was issued TCT No.
244220 on March 16, 1992 but the same did not bear
any technical description.[24] However, no plausible
explanation was advanced by the petitioners as to
why the petition for inscription (docketed as LRC
Case No. 4211) dated January 6, 2000,[25] was filed
only after almost eight (8) years from the acquisition
of the subject property.
Neither did petitioners sufficiently explain why GPI
took no positive action to cause the immediate filing of
a new petition for inscription within a reasonable time
from notice of the July 15, 2003 CA Decision which
dismissed GPI's earlier petition based on technical
defects, this notwithstanding Sps. Fajardo's full
payment of the purchase price and prior demand for
delivery of title. GPI filed the petition before the RTC-
Caloocan, Branch 122 (docketed as LRC Case No. C-
5026) only on November 23, 2006,[26] following receipt
of the letter[27]dated February 10, 2006 and the filing
of the complaint on May 3, 2006, alternatively seeking
refund of payments. While the court a quo decided the
latter petition for inscription in its favor,[28] there is no
showing that the same had attained finality or that the
approved technical description had in fact been
annotated on TCT No. 244220, or even that the
subdivision plan had already been approved.
Moreover, despite petitioners' allegation[29] that the
claim of BSP had been settled, there appears to be no
cancellation of the annotations[30] in GPI's
favor. Clearly, the long delay in the performance of
GPI's obligation from date of demand on September
16, 2002 was unreasonable and unjustified. It cannot
therefore be denied that GPI substantially breached
its contract to sell with Sps. Fajardo which thereby
accords the latter the right to rescind the same
pursuant to Article 1191 of the Code, viz:
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.
B. Effects of rescission
At this juncture, it is noteworthy to point out that
rescission does not merely terminate the contract and
release the parties from further obligations to each
other, but abrogates the contract from its inception
and restores the parties to their original positions as if
no contract has been made.[31] Consequently, mutual
restitution, which entails the return of the benefits that
each party may have received as a result of the
contract, is thus required.[32] To be sure, it has been
settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to
cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving
rescission under Article 1191. This means bringing
the parties back to their original status prior to the
inception of the contract. Article 1385 of the Civil
Code provides, thus:
ART. 1385. Rescission creates the obligation to
return the things which were the object of the
contract, together with their fruits, and the price
with its interest; consequently, it can be carried
out only when he who demands rescission can
return whatever he may be obligated to restore.
Neither shall rescission take place when the things
which are the object of the contract are legally in the
possession of third persons who did not act in bad
faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
This Court has consistently ruled that this
provision applies to rescission under Article 1191:
[S]ince Article 1385 of the Civil Code expressly and
clearly states that "rescission creates the obligation to
return the things which were the object of the contract,
together with their fruits, and the price with its
interest," the Court finds no justification to sustain
petitioners' position that said Article 1385 does not
apply to rescission under Article 1191. x x
x[33] (Emphasis supplied; citations omitted.)
In this light, it cannot be denied that only GPI
benefited from the contract, having received full
payment of the contract price plus interests as early
as January 17, 2000, while Sps. Fajardo remained
prejudiced by the persisting non-delivery of the
subject lot despite full payment. As a necessary
consequence, considering the propriety of the
rescission as earlier discussed, Sps. Fajardo must be
able to recover the price of the property pegged at its
prevailing market value consistent with the Court's
pronouncement in Solid Homes,[34] viz:
Indeed, there would be unjust enrichment if
respondents Solid Homes, Inc. & Purita Soliven are
made to pay only the purchase price plus interest. It is
definite that the value of the subject property already
escalated after almost two decades from the time the
petitioner paid for it. Equity and justice dictate that
the injured party should be paid the market value
of the lot, otherwise, respondents Solid Homes,
Inc. & Purita Soliven would enrich themselves at
the expense of herein lot owners when they sell
the same lot at the present market value. Surely,
such a situation should not be countenanced for to do
so would be contrary to reason and therefore,
unconscionable. Over time, courts have recognized
with almost pedantic adherence that what is
inconvenient or contrary to reason is not allowed in
law. (Emphasis supplied.)
On this score, it is apt to mention that it is the intent of
PD 957 to protect the buyer against unscrupulous
developers, operators and/or sellers who reneged on
their obligations.[35] Thus, in order to achieve this
purpose, equity and justice dictate that the injured
party should be afforded full recompense and as
such, be allowed to recover the prevailing market
value of the undelivered lot which had been fully paid
for.
C. Moral and exemplary damages, attorney's fees
and costs of suit
Furthermore, the Court finds that there is proper legal
basis to accord moral and exemplary damages and
attorney's fees, including costs of suit. Verily, GPI's
unjustified failure to comply with its obligations as
above-discussed caused Sps. Fajardo serious
anxiety, mental anguish and sleepless nights, thereby
justifying the award of moral damages. In the same
vein, the payment of exemplary damages remains in
order so as to prevent similarly minded subdivision
developers to commit the same transgression. And
finally, considering that Sps. Fajardo were constrained
to engage the services of counsel to file this suit, the
award of attorney's fees must be likewise sustained.
D. Liability of individual petitioners
However, the Court finds no basis to hold individual
petitioners solidarily liable with petitioner GPI for the
payment of damages in favor of Sps. Fajardo since it
was not shown that they acted maliciously or dealt
with the latter in bad faith. Settled is the rule that in
the absence of malice and bad faith, as in this case,
officers of the corporation cannot be made personally
liable for liabilities of the corporation which, by legal
fiction, has a personality separate and distinct from its
officers, stockholders, and members.[36]
WHEREFORE, the assailed July 22, 2011 Decision
and February 29, 2012 Resolution of the Court of
Appeals in CA-G.R. SP No. 112981 are
hereby AFFIRMED WITH MODIFICATION, absolving
individual petitioners Jose C. Go, Evelyn Go, Lourdes
G. Ortiga, George Go, and Vicente Go from personal
liability towards respondent-spouses Eugenio and
Angelina Fajardo.
SOORDERED.
PAGE 11 CASES
KT CONSTRUCTION SUPPLY, INC.,
REPRESENTED BY WILLIAM GO,
PETITIONER, VS. PHILIPPINE SAVINGS
BANK, RESPONDENT.
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to reverse
and set aside the April 22, 2016 Decision[1] and
November 23, 2016 Resolution[2] of the Court of
Appeals (CA) in CA-G.R. CV No. 103037, which
affirmed with modification the June 11, 2014
Decision[3] of the Regional Trial Court, Branch 133,
Makati City (RTC).
On October 12, 2006, petitioner KT Construction
Supply, Inc. (KT Construction) obtained a loan from
respondent Philippine Savings Bank (PSBank) in the
amount of P2.5 million. The said loan was evidenced
by a Promissory Note[4] executed on the same date.
The said note was signed by William K. Go (Go) and
Nancy Go-Tan (Go-Tan) as Vice-President/General
Manager and Secretary/Treasurer of KT Construction,
respectively. In addition, both Go and Go-Tan signed
the note in their personal capacities.
The promissory note stipulated that the loan was
payable within a period of sixty (60) months from
November 12, 2006 to October 12, 2011. In addition,
the said note provided for the payment of attorney's
fees in case of litigation.
On January 3, 2011, PSBank sent a demand letter to
KT Construction asking the latter to pay its
outstanding obligation in the amount of P725,438.81,
excluding interest, penalties, legal fees, and other
charges. For its failure to pay despite demand,
PSBank filed a complaint for sum of money against
KT Construction.
The RTC Ruling
In its June 11, 2014 Decision, the RTC ruled in favor of
PSBank. It opined that the promissory note expressly
declared that the entire obligation shall immediately
become due and payable upon default in payment of
any installment. The trial court, nevertheless, reduced
the interest rate and stipulated interest fees for being
unconscionable. Thus, it declared KT Construction,
Go and Go-Tan solidary liable and it ordered them to
pay PSBank the loan in the amount of P725,438.81
subject to twelve percent (12%) interest per
annum and P50,000.00 as attorney's fees.
The fallo reads:
WHEREFORE, judgment is hereby rendered in favor
of the plaintiff Philippine Savings Bank and against
the defendant KT Construction Supply, Inc.,
represented by William Go and Nancy Go Tan,
ordering the defendant to pay the plaintiff, jointly and
severally, the following:
The amount of Seven Hundred Twenty Five
Thousand Four Hundred Thirty Eight Pesos and
1) 81/100 (Php725,438.81) plus twelve percent (12%)
interest per annum from January 13, 2011 until
fully paid.
2) Php50,000.00 as and for attorney's fees.
SO ORDERED.[5]
Aggrieved, KT Construction appealed before the CA.
The CA Ruling
In its April 22, 2016 Decision, the CA affirmed the
RTC decision. It explained that due to the acceleration
clause, the loan became due and demandable upon KT
Construction's failure to pay an installment. In
addition, the CA disagreed that the promissory note
was a contract of adhesion because KT Construction
was not in any way compelled to accept the terms of
the promissory note.
The CA held that the trial court rightfully awarded
attorney's fees as the same was stipulated in the
promissory note. It stated that the award of attorney's
fees was in the nature of a penal clause, which was
valid and binding between the parties. Likewise, the
CA agreed that Go and Go-Tan were solidarity liable
with KT Construction for the judgment amount
because, when they signed the promissory note in
their personal capacities, they became co-makers
thereof. It added that the parties themselves
stipulated in the promissory note that their liability
was solidary. The CA disposed the case in this wise:
WHEREFORE, in view of the foregoing premises, the
instant appeal is DENIED. The Decision of Branch 133
of the Regional Trial Court, Makati City, National
Capital Judicial Region dated June 11, 2014 in Civil
Case No. 11-060, is hereby AFFIRMED with the
MODIFICATION that KT Construction, represented
by William K. Go and Nancy Go-Tan, is ordered to pay
PS Bank the amount equivalent to 6% per annum of
the total of the monetary awards from the finality of
this Decision until full payment thereof, as legal
interest. In addition, the Clerk of Court of Branch 133
of the Regional Trial Court in Makati City, or his duly
authorized deputy is DIRECTED to assess and collect
the additional docket fees from Philippine Savings
Bank as fees in lien in accordance with Section 2, Rule
141 of the Rules of Court.
SO ORDERED.[6]
KT Construction moved for reconsideration, but its
motion was denied by the CA in its November 23,
2016 resolution.
Hence, this appeal instituted by KT Construction
raising the following errors:
ISSUES
I
THE COURT OF APPEALS GRAVELY AND
PALPABLY ERRED, AS DID THE LOWER
COURT, IN HOLDING WILLIAM GO AND
NANCY GO TAN JOINTLY AND SEVERALLY
LIABLE WITH THE PETITIONER TO THE
RESPONDENT BANK;
II
THE COURT OF APPEALS ERRED, AS DID
THE LOWER COURT, IN NOT FINDING THAT
THE COMPLAINT IN THIS CASE WAS
PREMATURELY FILED;
III
THE COURT OF APPEALS ERRED, AS DID
THE LOWER COURT, IN FAILING TO
DECLARE THE PROMISSORY NOTE IN
QUESTION AS NULL AND VOID FOR BEING A
CONTRACT OF ADHESION; AND
IV
THE COURT OF APPEALS ERRED, AS DID
THE LOWER COURT, IN AWARDING
ATTORNEY'S FEES IN FAVOR OF THE
RESPONDENT BANK.[7]
KT Construction insists that Go and Go-Tan could not
be held solidarity liable for the judgment award
because they were neither impleaded nor served with
summons. Moreover, they did not voluntarily appear
before the court. Thus, the courts never acquired
jurisdiction over their persons.
KT Construction further asserts that the complaint
was premature because it was not alleged that it had
defaulted in paying any of the installments due and
that it had received a demand letter from PSBank. It
reiterates that the promissory note was null and void
for being a contract of adhesion. KT Construction also
argues that the award of attorney's fees was improper
because it was contrary to the policy that no premium
should be placed on the right to litigate.
In its Comment,[8] dated March 3, 2017, PSBank
countered that Go and Go-Tan were solidarity liable
with KT Construction because they signed the
promissory note in favor of PSBank as officers of the
corporation and in their personal capacities. It
averred that the obligation was already due and
demandable in view of the acceleration clause in the
promissory note. Further, PSBank pointed out that
the promissory note was consensual as the parties
voluntarily signed the same. Finally, it claimed that
attorney's fees were rightfully awarded because the
same formed part of the terms and conditions of the
loan agreement.
The Court's Ruling
The petition is partly meritorious.
It has long been settled that an acceleration clause is
valid and produces legal effects.[9] In the case at
bench, the promissory note explicitly stated that
default in any of the installments shall make the entire
obligation due and demandable even without notice or
demand. Thus, KT Construction was erroneous in
saying that PSBank's complaint was premature on the
ground that the loan was due only on October 12,
2011. KT Construction's entire loan obligation became
due and demandable when it failed to pay an
installment pursuant to the acceleration clause.
Moreover, KT Construction could not evade
responsibility by claiming that it had not received any
demand letter for the payment of the loan. PSBank
had sent a demand letter,[10] dated February 3, 2011,
asking KT Construction to pay the remaining
obligation within five (5) days from receipt of the
letter. More importantly, even granting that KT
Construction did not receive the demand letter, the
loan still became due and demandable because the
parties expressly waived the necessity of demand.[11]
Further, KT Construction is mistaken that it could not
be held liable for the entire loan obligation because
PSBank failed to prove how many installments it had
failed to pay. In Bognot v. RRI Lending
Corporation,[12] the Court explained that once the
indebtedness had been established, the burden is on
the debtor to prove payment, to wit:
Jurisprudence tells us that one who pleads payment
has the burden of proving it; the burden rests on the
defendant to prove payment, rather than on the
plaintiff to prove non-payment. Indeed, once the
existence of an indebtedness is duly established by
evidence, the burden of showing with legal certainty
that the obligation has been discharged by payment
rests on the debtor.[13]
In the case at bench, KT Construction admitted that it
obtained a loan with PSBank. It, nevertheless, averred
that it had been regularly paying the loan. Thus, KT
Construction could have easily provided deposit slips
and other documentary evidence to prove the fact of
payment. It, however, merely alleged that it religiously
paid its obligation without presenting any evidence to
substantiate the said obligation.
In a further attempt to absolve itself from the loan
obligation, KT Construction argued that the
promissory note was null and void because it was a
contract of adhesion. It may be true that KT
Construction had no hand in its preparation. Still, it
has been ruled in a plethora of cases that a contract of
adhesion is not invalid per se.[14] Contracts of
adhesion, where one party imposes a ready-made
form of contract on the other, are not entirely
prohibited. The one who adheres to the contract is, in
reality, free to reject it entirely; if he adheres, he gives
his consent.[15]
KT Construction also claimed that attorney's fees
should not be awarded for lack of legal basis. The
promissory note, however, categorically provided for
the payment of attorney's fees in case of default. The
said stipulation constituted a penal clause to which
the parties were bound, it being part of the contract
between the parties.[16] KT Construction was mistaken
in relying on Article 2208 of the Civil Code because
the same applies only when there is no stipulation as
to the payment of attorney's fees in case of default.
Only parties to the case may be bound by the court's
decision
The courts a quo, however, erred in holding Go and
Go-Tan solidarity liable for the judgment award in
PSBank's favor. In Guy v. Gacott,[17] the Court ruled
that a judgment binds only those who were made
parties in the case, to wit:
In relation to the rules of civil procedure, it is
elementary that a judgment of a court is conclusive
and binding only upon the parties and their
successors-in-interest after the commencement of the
action in court. A decision rendered on a complaint in
a civil action or proceeding does not bind or prejudice
a person not impleaded therein, for no person shall be
adversely affected by the outcome of a civil action or
proceeding in which he is not a party. The principle
that a person cannot be prejudiced by a ruling
rendered in an action or proceeding in which he has
not been made a party conforms to the constitutional
guarantee of due process of law.
In short, jurisdiction over the person of the parties
must be acquired so that the decision of the court
would be binding upon them. It is a fundamental rule
that jurisdiction over a defendant is acquired in a civil
case either through service of summons or voluntary
appearance in court and submission to its
authority.[18]
In the case at bench, Go and Go-Tan were neither
impleaded in the civil case nor served with summons.
They merely acted as representatives of KT
Construction, which was impleaded as the defendant
in the complaint. It is for this reason that only KT
Construction filed an answer to the complaint. Thus,
it is clear that the trial court never acquired
jurisdiction over Go and Go-Tan.
Consequently, it was improper for the trial court to
declare in its dispositive portion that Go and Go-Tan
were jointly and severally liable with KT Construction
for the judgment award. It is noteworthy that their
liability as co-makers was never discussed in the body
of the decision and that their solidary liability was a
mere conclusion in the dispositive portion.
WHEREFORE, the April 22, 2016 Decision and
November 23, 2016 Resolution of the Court of
Appeals in CA-G.R. CV No. 103037, are AFFIRMED
with MODIFICATION, in that, only petitioner KT
Construction Supply, Inc. is bound by the judgment
award.
SO ORDERED.
SPS IBANEZ VS HARPER
Sometime in October 1996, spouses Amado and
Esther Ibañez (spouses Ibañez) borrowed from
Francisco E. Muñoz, Sr. (Francisco), Consuelo
Estrada (Consuelo) and Ma. Consuelo E. Muñoz (Ma.
Consuelo) the amount of P1,300,000, payable in three
months, with interest at the rate of 3% a month.[7]
On October 14, 1996, the spouses Ibañez issued a
Promissory Note[8] binding themselves jointly and
severally to pay Ma. Consuelo and Consuelo the loan
amount with interest, to wit:
FOR VALUE RECEIVED, I jointly and severally,
promise to pay to MA. CONSUELO E. MUÑOZ &
CONSUELO C. ESTRADA, at their office at x x x, the
principal sum of ONE MILLION THREE HUNDRED
THOUSAND ONLY (P1,300,000.00), Philippine
Currency, with interest thereon at the rate of three
percent (3%) per month, subject to one (1%) percent
penalty if not paid on monthly due date. Interest not
paid when due shall be added to and become part of
the principal and shall likewise bear interest at the
same rate compounded monthly. Payable within a
period of three (3) months from the date hereof,
beginning Nov. 14, 1996 and every month thereafter,
until the whole sum of principal and interest shall have
been fully paid.
Upon default of three (3) monthly installments when
due, all the other installments shall become due and
payable. Interest not paid when due shall be added to,
and become part of the principal and shall likewise
bear interest at the same rate, compounded
monthly.[9]
As security, on October 17, 1996, the spouses Ibañez
executed a Deed of Real Estate Mortgage[10] in favor
of Ma. Consuelo and Consuelo over a parcel of land
and its improvements covered by Transfer of
Certificate Title (TCT) No. 202978. The mortgage
contained the same terms as the promissory note. It
further stipulated that Ma. Consuelo and Consuelo
shall have the right to immediately foreclose the
mortgage upon the happening of the following events:
(1) filing by the mortgagor of any petition for
insolvency or suspension of payment; and/or (2)
failure of the mortgagor to perform or comply with any
covenant, agreement, term or condition of the
mortgage.[11]
On September 23, 1997, alleging that the conditions
of the mortgage have been violated since November
17, 1996 and that all check payments were
dishonored by the drawee, Ma. Consuelo and
Consuelo applied for foreclosure of the real estate
mortgage.[12]
On December 8, 1997, the spouses Ibañez filed in the
RTC of Manila a Complaint[13] for injunction and
damages with prayers for writ of preliminary injunction
and temporary restraining order against Francisco,
Ma. Consuelo, Consuelo, the Clerk of Court and Ex-
Officio Sheriff, Sheriff-in-Charge and Register of
Deeds of the City of Manila. Docketed as Civil Case
No. 97-86454, the Complaint alleged that there is no
reason to proceed with the foreclosure because the
real estate mortgage was novated.[14] They prayed
that the public auction of the property be enjoined and
that Francisco, Ma. Consuelo and Consuelo be held
liable for actual and compensatory, moral and
exemplary damages, as well as attorney's fees and
costs of suit.[15]
On December 12, 1997, the spouses Ibañez filed an
Amended Complaint.[16] They alleged that the public
auction was conducted, with Francisco, Ma. Consuelo
and Consuelo as the highest bidders[17] and prayed
that the Ex-Officio Sheriff and the Sheriff-in-Charge be
enjoined from executing the certificate of sale in favor
of Francisco, Ma. Consuelo and Consuelo. In the
event the certificate of sale is already issued, they
alternatively prayed for that the Register of Deeds of
Manila be enjoined from registering the certificate of
sale.[18]
On December 16, 1997, the RTC issued a status quo
order.[19]
On June 11, 2002, the parties filed a Joint Motion for
Approval of Amended Compromise Agreement.[20]
The Amended Compromise Agreement,[21] signed by
the spouses Ibañez and Francisco, for himself and on
behalf of Ma. Consuelo and Consuelo, reads:
AMENDED COMPROMISE AGREEMENT
PARTIES PLAINTIFFS and DEFENDANTS, assisted
by their respective counsels, unto this Honorable
Court, most respectfully submit this AMENDED
COMPROMISE AGREEMENT, to wit:
I- STIPULATIONS OF THE PARTIES:
1.1. On October 16, 1996, plaintiffs obtained a loan
from the defendants, in the principal amount of
P1,300,000.00, with interest thereon, payable within
three (3) months therefrom;
1.2. The loan has been secured by a Real Estate
Mortgage, constituted on a parcel of land, situated in
the District of Singalong, Malate, Manila, containing
an area of 135.70 Square Meters, registered in the
name of Amado O. Iba[ñ]ez, married to Esther R.
Iba[ñ]ez, embraced under Transfer Certificate of
Title No. [202978], of the Registry of Deeds for the
City of Manila;
1.3. Thereafter, the mortgage was extra-judicially
foreclosed by the defendants, for failure to pay the
loan obligation, plus interests due thereon, within the
agreed period;
1.4. The property in question was not redeemed
within the period prescribed by law. Hence, on
December 10, 1997, after Notice, the Office of the
Clerk of Court and Ex-Officio Sheriff of Manila, sold
the same property at public auction where
defendant Francisco E. Munoz, Sr. was the highest
bidder;
1.5. However, the Certificate of Sale, was not issued
in view of the institution by plaintiffs of the present
case.
II- TERMS AND CONDITIONS:
2.1. The plaintiffs shall pay unto the defendants, the
total sum of THREE MILLION PESOS
(P3,000,000.00), Philippine Currency, portion of which
shall be paid through the proceeds of a real estate
loan, being secured from the Government Service[]
Insurance System (GSIS), and the remaining
balance, from such other sources determined by the
plaintiffs, subject to the conformity of the defendants;
2.2. The defendants accept, as initial payment, the
amount of PESOS: TWO MILLION (P2,000,000.00)
Philippine Currency, from the proceeds of the said
real estate loan to be released by the Government
Service[] Insurance System (GSIS), which amount
is hereby unconditionally committed by the plaintiffs to
be paid in full to the defendants, immediately upon
release thereof, or within a period of three (3) months
from date of this agreement;
2.3. The amount to be released by the Government
Service Insurance System (GSIS), representing
proceeds of the above-stated loan shall be assigned
by the plaintiffs, in favor of the defendants, upon
execution of this agreement;
2.4. The remaining balance of the total obligation
stated in paragraph 2.1 above, amounting to One
Million (P1,000,000.00), shall be payable within one
(1) year from date hereof, with interest at the rate
of two (2%) per month, and to be secured by a real
estate mortgage, to be constituted on a prope1iy
registered in the names of the plaintiffs, situated at
Puerto Azul, Brgy. Zapang, Ternate, Cavite,
identified as Lot 1-J of the subdivision plan Psd-04-
133674, portion of Lot 1, (LRC) Psd-88692, L.R.C.
Record No. N-33296, containing an area of Twenty
(20) hectares, more or less;
2.5. In the event, that the above-mentioned GSIS loan
application will not materialize, parties hereby agree
to immediately cause the lifting or recall of the
Status Quo Order issued by this Honorable Court,
on December 16, 1997. Thereafter, the defendants
shall immediately cause the issuance of the
Certificate of Sale over the subject property in their
favor, and the plaintiffs agree not to further delay the
same, with any Court action or otherwise;
2.6. Parties hereby agree to WAIVE such other claims
by one party against the other, relative to or
connected with the instant case;
2.7. In the event of failure of the plaintiffs to comply
with any of the terms and conditions of this
agreement, the defendants shall be entitled to a Writ
of Execution, to implement this agreement of the
parties.
On June 17, 2002, the RTC approved the Amended
Compromise Agreement and adopted it as its
Hatol.[23]
On September 24, 2002, the spouses Ibañez
manifested that: (1) there will be a slight delay in their
compliance due to new loan requirements of the
Government Service Insurance System (GSIS);[24]
and (2) they have executed a Real Estate Mortgage[25]
dated August 10, 2002 in favor of Ma. Consuelo and
Consuelo over a property covered by TCT No. T-
77676, as per the parties' Amended Compromise
Agreement.
On February 28, 2006, Atty. Roberto C. Bermejo
(Atty. Bermejo), representing himself as collaborating
counsel for Francisco, Ma. Consuelo and Consuelo,
filed an Omnibus Motion for Execution and Lifting of
the Status Quo Order of December 16, 1997 and for
the Issuance of Writ of Possession.[26] Atty. Bermejo
alleged that the spouses Ibañez failed to comply with
their obligation under the Amended Compromise
Agreement. Consequently, and following the terms of
the Amended Compromise Agreement, the RTC's
status quo order must be lifted and a certificate of sale
over the subject property be immediately issued.[27]
On March 24, 2006, the RTC granted Atty. Bermejo's
motion. It found that the spouses Ibañez have yet to
pay the amount due, in violation of the terms of the
Amended Compromise Agreement.[28] The Order
dated March 24, 2006 reads:
WHEREFORE, in view of the foregoing, Order is
issued: (1) lifting the status quo order of December
16, 1997; (2) directing the issuance of a writ of
possession directing the private defendant[s] be
placed in possession of the subject property; and (3)
directing the Office of the Sheriff of Manila to issue a
certificate of sale in favor of the private
defendant[s].[29] (Emphasis omitted.)
The spouses Ibañez moved to reconsider[30] this order
on the following grounds: (1) Francisco died in June
2004; (2) Atty. Prospero A. Anave (Atty. Anave),
counsel on record of Francisco, Ma. Consuelo and
Consuelo, failed to inform the court of such fact; thus,
there was no valid substitution of parties; and (3) Atty.
Bermejo had no authority to file the omnibus motion
as it is without knowledge, approval and consent of
Atty. Anave.[31]
On June 15, 2006, the RTC granted the spouses
Ibañez' Motion for Reconsideration.[32] It held that: (1)
Atty. Anave's failure to report Francisco's death to the
court for purposes of substitution rendered the
proceedings thereat null and void; (2) Atty. Anave's
subsequent conformity to Atty. Bermejo's actions did
not cure the initial defect in the filing of the Omnibus
Motion; neither did it mean the withdrawal, dismissal
or substitution of Atty. Anave by Atty. Bermejo; and
(3) a formal entry of appearance with Atty. Anave's
conformity is necessary before Atty. Bermejo can
legally act as collaborating counsel.
On June 29, 2006, the spouses Ibañez filed a Motion
for the Implementation of the Amended Compromise
Agreement.[33] They argued that since there was no
proper substitution of the heirs of Francisco, the
proper parties to substitute him are Ma. Consuelo and
Consuelo. They also argued that the Amended
Compromise Agreement had already been partially
complied with: (1) they have already executed a Deed
of Assignment assigning to Ma. Consuelo and
Consuelo the proceeds of the GSIS loan pursuant to
paragraph 2.3; and (2) on May 19, 2006, they have
already executed the Real Estate Mortgage provided
under paragraph 2.4.[34] They further allege that the
delay in the implementation of the assignment was
due to the assignees' failure to deliver to the GSIS the
owner's copy of TCT No. 202978 (the same lot which
served as security for the Promissory Note executed
by the spouses Ibañez on October 14, 1996) and the
discharge of the corresponding Real Estate Mortgage
executed by the spouses Ibañez on October 17, 1996.
The spouses Ibañez thus prayed that the Amended
Compromise Agreement be considered initially
implemented and that Ma. Consuelo and Consuelo be
ordered to surrender the owner's copy of TCT No.
202978 or to consider the title lost should the same
not be surrendered.[35]
On July 5, 2006, citing irreconcilable differences, Atty.
Anave filed his Notice of Withdrawal of Appearance[36]
as counsel for Francisco, Ma. Consuelo and
Consuelo.
On even date, Atty. Bermejo filed a Notice of Death[37]
of Francisco and named James Harper (James) as
Francisco's legal representative. Atty. Bermejo also
filed his Entry of Appearance[38] as counsel for James,
Ma. Consuelo and Consuelo.
On July 31, 2006, the spouses Ibañez filed a Motion
to Adopt/Consider the Judicial Compromise
Agreement dated June 17, 2002 Designated as
"Hatol" as the Final and Executory Decision.[39] The
motion prayed that since all the stipulations in the
Amended Compromise Agreement have been
complied with to the entire satisfaction of all the
contending parties, the Compromise Agreement
should be considered and adopted as the trial court's
decision on the merits.[40] The motion was signed by
Amado Ibañez with the conformity of Consuelo,
signing for herself and Ma. Consuelo.[41] Atty. Anave
and the Branch Clerk of Court were notified of the
hearing. Only Atty. Anave, Ma. Consuela and
Consuela were, however, furnished copies of the
motion.[42]
In an Order dated August 11, 2006,[43] the RTC
granted the spouses Ibañez' motion, thus:
x x x It appearing that all the stipulations in the
"Hatol", dated June 10, 2002, have been complied
with accordingly to the entire satisfaction of each one
of the contending parties and the terms and
conditions set forth therein were duly performed and
satisfied. As prayed for, the said "Hatol", dated June
10, 2002, is considered, regarded and adopted as this
Court's decision on the merits with finality which was
approved by this Court on June 17, 2002.
SO ORDERED.[44]
On same date, the RTC issued an Order[45] noting
Atty. Anave's withdrawal as counsel and Atty.
Bermejo's entry of appearance.
On August 18, 2006, Ma. Consuela and Consuela
filed a Manifestation[46] disclaiming Atty. Bermejo as
their counsel and naming Atty. Marigold Ana C.
Barcelona (Atty. Barcelona) as their counsel. Attached
to the Manifestation is Atty. Barcelona's Entry of
Appearance.[47]
On August 24, 2006, James, as Francisco's legal
representative, and through Atty. Bermejo, sought
reconsideration[48] of the RTC's August 11, 2006
Order. He argued that the trial court erred in holding
that all the stipulations in the Hatol have been
complied with to the satisfaction of all the parties.
According to James, the spouses Ibañez made it
appear that only Ma. Consuela and Consuela
remained as parties after Francisco's death. Since
James, as Francisco's representative, was excluded
from the Deed of Assignment, the Amended
Compromise Agreement could not have been
completely complied with.
On February 20, 2007, the RTC denied[49] James'
motion for reconsideration of the trial court's August
11, 2006 Order, to wit:
A judicial compromise, once stamped with judicial
approval becomes more than a contract binding upon
the parties and having the sanction of the Court and
entered as its determination of the controversy, it has
the force and effect and (sic) any other judgment. It
has also the effect of res judicata and it is immediately
executory and not appeallable (sic).
In this case, the judicial compromise agreement
entered into by the parties was already approved by
this Court in its HATOL, dated June 17, 2002 and
considered it as its decision on the merits with finality.
Therefore, the same has become immediately final
and executory and could ho longer be reconsidered
and set aside.
Moreover, there is no reason to disturb this Court's
finding that all the stipulations in the HATOL have
already been complied with according to the entire
satisfaction of each one of the contending parties.
James Harper cannot be made a party thereto, there
being no valid substitution of parties made.
WHEREFORE, James Harper, through counsel's
motion for reconsideration is DENIED for lack of
merit.[50] (Emphasis in the original, citations omitted.)
Aggrieved, the heirs of Francisco, identified as Maria
C. Muñoz, Angelina M. Crocker and Maria Elena M.
Webster and represented by James Harper, filed
before the CA a Petition for Certiorari[51] under Rule
65 of the Revised Rules of Court. They assailed the
Orders dated August 11, 2006 and February 20, 2007
of the trial court and clarified that contrary to the
findings of the trial court, they are pushing for the
execution of the Amended Compromise Agreement.
The heirs emphasized that under the terms of the
Compromise Agreement, the obligations of the
spouses Ibañez are as follows: (1) To pay P2,000,000
to be sourced from the proceeds of a GSIS loan and
released three months from the date of the
agreement; and (2) to pay P1,000,000 within one year
from the date of the agreement and secured by a real
estate mortgage on the spouses Ibañez' property in
Puerto Azul. The heirs are of the view that since the
spouses Ibañez have not complied with any of the
foregoing stipulations, the December 16, 1997 status
quo order of the trial court should already be lifted.
They likewise argue that the trial court gravely and
seriously erred when it disregarded Francisco and his
heirs by holding that there was no proper substitution
of parties.[52]
Meanwhile, on April 17, 2007, the spouses Ibañez
filed a Motion for Execution[53] and prayed that Ma.
Consuelo and Consuelo be ordered to surrender to
them the owner's copy of TCT No. 202978. In case of
failure to surrender, they alternately prayed that the
Register of Deeds of Manila be ordered to declare the
owner's copy lost for purposes of subsequent
reconstitution.[54]
On May 18, 2007, James filed his Opposition[55] to the
Motion for Execution and moved to suspend further
proceedings in the trial court due to the pendency of
his petition for certiorari in the CA.

On May 31, 2007, the trial court issued its Order[56]
granting the Motion for Execution and denying James'
motion to suspend. According to the trial court, there
was no valid substitution; thus, it did not acquire
jurisdiction over James. On June 26, 2007, the trial
court issued a Writ of Execution.[57]
On September 20, 2007, Sheriff Gavin P. Reyala
(Sheriff Reyala) filed his Return[58] indicating that
Consuelo failed to surrender the owner's copy of TCT
No. 202978 as it was allegedly in James' possession.
Thus, the Registry of Deeds of Manila, in compliance
with the Writ of Execution, issued a new owner's copy
of TCT No. 202978 which Sheriff Reyala delivered to
the spouses Ibañez.
On October 29, 2009, the CA resolved James' petition
for certiorari, the dispositive portion of which states:
WHEREFORE, the instant petition is GRANTED.
Setting aside the assailed Orders dated August 11,
2006 and February 20, 2007, the RTC's March 24,
2006 Order granting the February 28, 2006 Omnibus
Motion for Execution and the Lifting of the RTC's
December 16, 1997 Status Quo Order is hereby
Reinstated.
SO ORDERED.[59] (Emphasis in the original.)
The CA ruled that the Amended Complaint and the
Hatol identified Francisco, Ma. Consuelo and
Consuelo as the creditors and the parties who were
supposed to receive the proceeds of the Amended
Compromise Agreement. Since the Deed of
Assignment was executed only in favor of Ma.
Consuelo and Consuelo, the loan obligation of the
spouses Ibañez to Francisco remained unsettled. The
heirs of Francisco thus retain the right to invoke
paragraph 2.5 of the Compromise Agreement which
provides for the lifting of the trial court's status quo
order.[60] The CA disagreed that there was no valid
substitution of parties and noted from the records that
the RTC was notified of Francisco's death on June 29,
2006. The late filing of the notice of death did not
divest the RTC of jurisdiction to favorably act on the
heirs' motion to lift the status quo order and issue the
writ of execution. Based on Section 16, Rule 3 of the
Revised Rules of Court, it is the counsel, not the heirs
of the deceased, who will be penalized for the failure
to comply with the duty to notify the court of the
client's death.[61]
The CA denied the spouses Ibañez' Urgent Motion for
Reconsideration[62] via its assailed Resolution.
Hence, this petition.The issues presented are:
1. Whether Francisco was a real party in
interest;
2. Whether there was valid substitution of
parties; and
3. Whether all the provisions of the Amended
Compromise Agreement have been
complied with.
II
In their Amended Petition for Review on Certiorari,[63]
the spouses Ibañez claim that neither James nor
Francisco, the person he seeks to substitute, are
parties in interest in Civil Case No. 97-86454. As
such, James has no personality to file the petition for
certiorari in the CA and the issue of whether
Francisco was validly substituted is moot and
academic.[64] Alternatively, the spouses Ibañez argue
that the CA erred in ruling that James has validly
substituted Francisco as the notice of death and
substitution was made beyond the mandatory 30-day
period.[65]
Section 2, Rule 3 of the Revised Rules of Court
provides:
Sec. 2. Parties in interest. – A real party in interest is
the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails
of the suit. Unless otherwise authorized by law or
these Rules, every action must be prosecuted or
defended in the name of the real party in interest.
"Interest," within the meaning of the rule, means
material interest, an interest in issue and to be
affected by the decree, as distinguished from mere
interest in the question involved, or a mere incidental
interest.[66]In their Complaint and Amended
Complaint, the spouses Ibañez impleaded Francisco
as a defendant and described him as the capitalist.
They also alleged that they took a loan from
Francisco, Ma. Consuelo and Consuelo.[67] They also
narrated that a public auction over the mortgaged
property was conducted where Francisco, Ma.
Consuelo and Consuelo emerged as the highest
bidders.[68]
Further, attachments to the Complaint and Amended
Complaint show that Amado Ibañez and Francisco
communicated with each other regarding the payment
of the loan.[69] The Amended Compromise Agreement,
approved by the trial court and which served as the
basis for the Hatol, referred to the spouses Ibañez as
the plaintiffs while the defendants they covenanted to
pay are Francisco, Consuelo and Ma. Consuelo. It
was signed by the spouses Ibañez and Francisco, for
himself and on behalf of Ma. Consuelo and
Consuelo.[70] These facts indicate that Francisco has
a material interest in the case as it is in his interest to
be paid the money he lent the spouses Ibañez. Any
judgment which will be rendered will either benefit or
injure Francisco; thus, he is a real party in interest.
We now resolve whether Francisco's heirs have
validly substituted him as parties in the case.
Section 16, Rule 3 of the Revised Rules of Court
provides:
Sec. 16. Death of party; duly of counsel. – Whenever
a party to a pending action dies, and the claim is not
thereby extinguished, it shall be the duty of his
counsel to inform the court within thirty (30) days after
such death of the fact thereof, and to give the name
and address of his legal representative or
representatives. Failure of counsel to comply with this
duty shall be a ground for disciplinary action.
The heirs of the deceased may be allowed to be
substituted for the deceased, without requiring the
appointment of an executor or administrator and the
court may appoint a guardian ad litem for the minor
heirs.
The court shall forthwith order said legal
representative or representatives to appear and be
substituted within a period of thirty (30) days from
notice.
If no legal representative is named by the counsel for
the deceased party, or if the one so named shall fail to
appear within the specified period, the court may
order the opposing party, within a specified time, to
procure the appointment of an executor or
administrator for the estate of the deceased and the
latter shall immediately appear for and on behalf of
the deceased. The court charges in procuring such
appointment, if defrayed by the opposing party, may
be recovered as costs.
The rationale behind the rule on substitution is to
apprise the heir or the substitute that he is being
brought to the jurisdiction of the court in lieu of the
deceased party by operation of law.[71] It serves to
protect the right of every party to due process. It is to
ensure that the deceased party would continue to be
properly represented in the suit through the duly
appointed legal representative of his estate. Non-
compliance with the rule on substitution would render
the proceedings and the judgment of the trial court
infirm because the court acquires no jurisdiction over
the persons of the legal representatives or of the heirs
on whom the trial and the judgment would be
binding.[72]
Nevertheless, there are instances when formal
substitution may be dispensed with. In Vda. de
Salazar v. Court of Appeals,[73] we ruled that the
defendant's failure to effect a formal substitution of
heirs before the rendition of judgment does not
invalidate the court's judgment where the heirs
themselves appeared before the trial court,
participated in the proceedings, and presented
evidence in defense of the deceased defendant. The
court there found it undeniably evident that the heirs
themselves sought their day in court and exercised
their right to due process.[74]
Similarly, in Berot v. Siapno,[75] we ruled that the
continiued appearance and participation of Rodolfo,
the estate's representative, in the proceedings of the
case dispensed with the formal substitution of the
heirs in place of the deceased.[76]
Here, while there may have been a failure to strictly
observe the provisions of the rules and there was no
formal substitution of heirs, the heirs of Francisco,
represented by James, voluntarily appeared and
actively participated in the case, particularly in the
enforcement of the Hatol. As the records show, they
have filed multiple pleadings and moved several times
to implement the Hatol to protect Francisco's interest.
Following our rulings in Vda. de Salazar and Berot, a
formal substitution of parties is no longer required
under the circumstances.
The trial court therefore committed grave abuse of
discretion when it declared that Harper cannot be
made a party in the case because of the lack of a
valid substitution.[77] Its refusal to recognize
Francisco's heirs deprived them of the opportunity to
exact compliance with whatever rights they may have
under the terms of the Amended Compromise
Agreement.
Anent the third issue, the spouses Ibañez argued that
the CA erred in reversing the August 11, 2006 and
February 20, 2007 Orders of the trial court. They
claim that since the Hatol, rendered by the RTC
based on the Amended Compromise Agreement, is
already final, executory and, in fact, partially
executed,[78] Harper cannot anymore file a petition for
certiorari to assail them.[79]
A compromise agreement is a contract whereby the
parties, make reciprocal concessions to avoid a
litigation or put an end to one already commenced. In
a compromise, the parties adjust their difficulties in
the manner they have agreed upon, disregarding the
possible gain in litigation and keeping in mind that
such gain is balanced by the danger of losing.[80] It
encompasses the objects stated, although it may
include other objects by necessary implication. It is
binding on the contractual parties, being expressly
acknowledged as a juridical agreement between
them, and has the effect and authority of res
judicata.[81]
Here, the spouses Ibañez agreed to pay Francisco,
Ma. Consuela and Consuela the total amount of
P3,000,000, with the initial payment of P2,000,000 to
be sourced from the proceeds of a GSIS loan and
secured by the spouses Ibañez while the remaining
balance of P1,000,000 to be paid one year from the
date of the Amended Compromise Agreement.
As correctly identified by the CA, the Amended
Compromise Agreement clearly refers to the spouses
Ibañez as plaintiffs and Francisco, Consuela and Ma.
Consuela as the defendants they covenanted to pay.
There is nothing in the Hatol, and the Amended
Compromise Agreement it is based on, which shows
a declaration that the obligation created was solidary.

In any case, solidary obligations cannot be inferred
lightly. They must be positively and clearly
expressed.[82] Articles 1207 and 1208 of the Civil
Code provide:
Art. 1207. The concurrence of two or more
creditors or of two or more debtors in one and the
same obligation docs 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 prestations. There 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 obligations 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 arc creditors or debtors, the
credits or debts being considered distinct from
one another, subject to the Rules of Court
governing the multiplicity of suits. (Emphasis
supplied.)
In this case, given that solidarity could not be inferred
from the agreement, the presumption under the law
applies—the obligation is joint.
As defined in Article 1208, a joint obligation is one
where there is a concurrence of several creditors, or
of several debtors, or of several debtors, or of
several creditors and debtors, by virtue of which
each of the creditors has a right to demand, and
each of the debtors is bound to render
compliance with his proportionate part of the
prestation which constitutes the object of the
obligation.[83] Each debtor answers only for a part of
the whole liability and to each obligee belongs only
a part of the correlative rights[84] as it is only in
solidary obligations that payment made to any one of
the solidary creditors extinguishes the entire
obligation.[85] This means that Francisco, Ma.
Consuelo and Consuelo are each entitled to equal
shares in the P3,000,000 agreed upon in the
Amended Compromise Agreement and that payment
to Consuelo and Ma. Consuelo will not have the effect
of discharging the obligation with respect to
Francisco.
The spouses Ibañez assigned the proceeds of the
GSIS loan and executed a real estate mortgage over
the Puerto Azul property only in Ma. Consuelo and
Consuelo's favour. By doing so, they did not
discharge their obligation in accordance with the
terms of the Amended Compromise Agreement and
left their loan obligation to Francisco unsettled. Thus,
and as correctly held by the CA, it was gravely
erroneous for the trial court to rule that all the
stipulations in the Hatol have been complied with.
Under the circumstances, the obligations to
Francisco, and consequently, his heirs, have clearly
not been complied with.
The trial court deprived the heirs of Francisco of the
opportunity to assert their rights under the Amended
Compromise Agreement not only in its August 11,
2006 and February 20, 2007 Orders finding that the
stipulations in the Amended Compromise Agreement
have been complied with to the satisfaction of all
parties, but also in its June 15, 2006 Order which set
aside the March 24, 2006 Order granting the motion
filed by the counsel for Francisco's heirs.
As earlier discussed, while there might have been a
failure to strictly observe the rule on formal
substitution of heirs, the trial court's refusal to
recognize the heirs of Francisco even after their
voluntary appearance and active participation in the
case constitutes grave abuse of discretion. Thus, in
addition to the August 11, 2006 and February 20,
2007 Orders of the RTC, its June 15, 2006 Order
must also be set aside.
WHEREFORE, the petition is DENIED. The Decision
dated October 29, 2009 and Resolution dated
September 29, 2010 of the CA in CA-G.R. SP No.
98623 which REINSTATED the RTC's March 24,
2006 Order and SET ASIDE the August 11, 2006 and
February 20, 2007 Orders of the RTC, Manila, Branch
40, in Civil Case No. 97-86454 are hereby
AFFIRMED with the MODIFICATION that the June
15, 2006 Order of the RTC is likewise ANNULLED
and SET ASIDE.
SO ORDERED.
GONZALES VS LIM
Before us is a petition for review on
certiorari[1] assailing the Resolutions dated 12 May
2011[2] and 9 March 2012[3] of the Court of Appeals
(CA) in CA-G.R. CV No. 02784.
The Facts
The subject of the litigation involves a parcel of land
known as Lot No. 1595-A containing an area of
27,551 square meters situated in Buanoy, Balamban,
Cebu and covered by Transfer Certificate of Title
(TCT)No.T-57604. On 5 February 2003, respondents
Maria Lim Vda. de Gonzalez, Gaudencia L. Buagas,
Ranulfo Y. Lim, Don L. Calvo, Susan C. Santiago,
Dina C. Aranas, and Rufina C. Ramirez filed with the
Regional Trial Court (RTC) of Toledo City, Cebu,
Branch 29, a Complaint[4] for Recovery of Possession,
Preliminary Mandatory Injunction with a Prayer for a
Temporary Restraining Order with Damages and
Attorney's Fees against petitioner Inocencia Tagalog
(Tagalog). At the time of the complaint, the land was
declared for taxation purposes under Tax Declaration
No. 01-08-05410 with an assessed value of P57,960
and a market value of P264,930.[5]
In the Complaint, respondents stated that they were
the co-owners of the land. They alleged that Tagalog
occupied a portion of the land as lessee and paid rent
on a month to month basis by virtue of a verbal
contract. Tagalog built a house with light materials on
the land and when a strong typhoon hit Cebu,
Tagalog's house was damaged. Thereafter,
respondents alleged that Tagalog discontinued paying
the rent and stopped inhabiting the house.
Sometime before December 2002, respondents
demanded that Tagalog remove the scattered debris
on the land, notified her of their intention to use the
land, and subdivide and develop it for their personal
use. Respondents informed Tagalog to vacate the
premises asserting that the verbal contract of lease
was deemed terminated upon the expiration of the
monthly contract. However, Tagalog refused to vacate
claiming that she was still a lessee.
Sometime in January 2003, respondents alleged that
Tagalog constructed a two-storey residential house
made of cement, large steel bars, hollow blocks, sand
and gravel on the land. Respondents informed the
Office of the Municipal Engineer of Balamban, Cebu
of Tagalog's act of constructing a house on the land
without their consent and without the required building
permit. Respondents alleged that despite the warning
given by the Office of the Municipal Engineer to stop
the construction, Tagalog still continued with the
construction. Respondents then referred the matter to
the Barangay Captain of Buanoy, Balamban, Cebu
but again, as respondents alleged, Tagalog only
ignored the advice given by the Barangay Captain.
In her Answer, Tagalog alleged that the lease contract
was still valid and subsisting and had never been
terminated by the parties. She added that she had not
abandoned her possession over the land and has
continuously paid the rent on a month to month basis.
Tagalog denied having been notified of the
respondents' intention to use and subdivide the land
and further alleged that she sought and was granted
permission to repair her dwelling structure and
undertook the repair without enlarging the area of her
occupation. Tagalog admitted being summoned by
the Office of the Municipal Engineer and Barangay
Captain and she alleged that both offices found that
she had long ceased the repair work. As a defense,
Tagalog prayed for the dismissal of the case on the
ground that the action was for ejectment and unlawful
detainer which was beyond the jurisdiction of the
RTC.
In a Decision[6] dated 5 May 2008, the RTC decided
the case in favor of respondents. The RTC ruled that,
in the complaint, respondents prayed for the recovery
of possession of the leased property as owners. Thus,
the issue of ownership, which was within the original
jurisdiction of the court was primordial and the prayer
for eviction was merely incidental there being no
written contract of lease between the parties. The
dispositive portion of the Decision states:
WHEREFORE, finding the evidence for the plaintiffs
to have preponderantly and greatly leaned in their
favor, judgment is hereby rendered against the
defendant, Inocencia Tagalog as follows:
Ordering her to vacate the premises in question,
deliver the peaceful possession thereof to plaintiffs
(1)who are its rightful owners but wrongfully deprived
of it, and remove whatever structures are built
thereon at her own expense;
Directing her (defendant) to pay plaintiffs the
amount of Fifty Thousand (P50,000.00) Pesos, as
(2)moral damages and the further sum of Twenty
Thousand (P20,000.00) Pesos, as reasonable
attorney's fees; plus
(3)Costs of suit.
SO ORDERED.[7]
Tagalog filed a Motion for Reconsideration which was
denied by the RTC in an Order dated 30 May 2008.
Tagalog then filed an appeal[8]with the Court of
Appeals. In a Resolution[9] dated 12 May 2011, the
CA dismissed the case for failure of Tagalog to file the
required brief within the extended period requested.
The dispositive portion of the Resolution states:
WHEREFORE, in view of appellant's failure to file the
required brief within the extended period requested,
and pursuant to Section 1 (e), Rule 50 of the 1997
Rules of Civil Procedure, the above-entitled case is
hereby DISMISSED.
SO ORDERED.[10]
Tagalog filed a Motion for Reconsideration which was
denied by the appellate court in a Resolution[11] dated
9 March 2012.
Hence, the instant petition.
The Issue
The main issue for our resolution is whether the
Regional Trial Court had jurisdiction over the subject
matter of the action.
The Court's Ruling
The petition is meritorious.
Petitioner contends that the subject of the action is for
unlawful detainer, thus cognizable by a first level court
or the Municipal Trial Court (MTC). Since the case
was filed with the RTC, a second level court, the
RTC's decision should be rendered void for lack of
jurisdiction over the case.
The jurisdiction of a particular court is determined by
the nature of the action pleaded as appearing from
the allegations in the complaint. In order to determine
whether the lower court had jurisdiction, it is
necessary to first ascertain the nature of the complaint
filed before it.
In the present case, the complaint was for recovery of
possession, preliminary mandatory injunction with a
prayer for temporary restraining order with damages
and attorney's fees. Respondents' complaint
contained the following allegations:
x x x x
3. Plaintiffs (respondents) are among the registered
owners and are co- owners of a parcel of land, x x x.
x x x x
6. For quite sometime, defendant (petitioner) has
been occupying a portion of the above-described
parcel of land, as lessee thereof, where her house
was being built with light materials and was paying
rentals over the same by virtue of a verbal contract of
lease on a month to month basis.
7. The said house of the defendant was damaged by
a strong typhoon which hit Cebu and was no longer
inhabited by her and her family for quite sometime.
8. Since the destruction of the defendant's house, the
latter was no longer paying rentals as a
consequen[ce] of her possession of the property
where her house was previously standing, and that
the verbal contract of lease was deemed terminated
upon the expiration of the verbal monthly contract.
9. Due to the termination of the verbal monthly
contract, plaintiffs demanded that defendant remove
the scattered debris and notified defendant that they
are already intending to use the property and
subdivide and develop it for their personal use.
10. However, defendant refused to vacate the
property and continued to possess the same, and
refused to remove the debris scattered thereon
despite demands for her to do so. Instead, defendant
wrongfully claimed that she is still a lessee of the
portion previously occupied by her and that she still
intends to continue her possession.
11. Instead, sometime in the first week of January
2003, defendant brought cement, large steel bars,
hollow blocks, sand and gravel and other construction
materials into the premises in question and started the
construction of a two (2) storey residential house
thereon.
x x x x
14. Plaintiffs are entitled to the relief being demanded
which is for the defendant to vacate the premises in
question and to desist from constructing a residential
house thereon because plaintiffs have a right to
possess the property being the owners thereof and
that defendant's possession of the same is now
unlawful and illegal due to the termination of the
verbal contract of lease on a month to month basis.[12]
Based on the allegations in respondents' complaint, it
is clear that the case involves only the issue of
physical possession or unlawful detainer as defined in
Section 1,[13] Rule 70 of the Rules of Court. In De
Leon v. CA,[14] we held that unlawful detainer is the
withholding by a person from another of the
possession of a land or building to which the latter is
entitled after the expiration or termination of the
former's right to hold possession by virtue of a
contract, express or implied. An ejectment suit is
brought before the MTC to recover not possession de
jure but physical possession only or possession de
facto, where dispossession has lasted for not more
than one year.
The right to recover possession of the land based on
the expiration of the verbal monthly contract of lease
is governed by Article 1687[15]of the Civil Code. Since
the lease is paid monthly under a verbal contract of
lease without a fixed period, the lease period is from
month to month. Respondents demanded that
Tagalog vacate the land sometime before December
2002, after the termination of the monthly verbal lease
contract. They filed the complaint with the RTC in
February 2003. Since the complaint was filed within
one year from the expiration of the right to hold
possession, this case is clearly an unlawful detainer
suit within the jurisdiction of the MTC.
The conclusion would be different if the action is for
the recovery of the right to possess and
dispossession lasted for more than one year which
would justify resort to the remedy of accion
publiciana. Accion publiciana is the plenary action in
an ordinary civil proceeding to determine the better
right of possession of the land independently of the
title and is filed after the expiration of one year from
the accrual of the cause of action or from the unlawful
withholding of possession of the land. In such case,
the RTC has jurisdiction.[16]
However, in this case, the unlawful withholding of
possession of the land before the filing of the
complaint with the RTC lasted only for more or less
three months. Also, neither of the parties brought forth
the issue of ownership which was the reason given by
the RTC for taking cognizance of the action.
Jurisdiction is conferred by law and any judgment,
order or resolution issued without it is void and cannot
be given any effect.[17] This rule applies even if the
issue on jurisdiction was raised for the first time on
appeal or even after final judgment. [18] In this case,
Tagalog raised the issue of jurisdiction in her Answer.
Clearly, the RTC erred in not dismissing the case
before it. Under the Rules of Court, it is the duty of the
court to dismiss an action whenever it appears that
the court has no jurisdiction over the subject matter.[19]
In sum, since respondents' complaint should have
been filed with the MTC, the RTC seriously erred in
proceeding with the case. The proceedings before a
court without jurisdiction, including its decision, are
null and void. It then follows that the appeal brought
before the appellate court, as well as the decisions or
resolutions promulgated in accordance with said
appeal, is without force and effect.
WHEREFORE, we GRANT the petition. We SET
ASIDE the Resolutions dated 12 May 2011 and 9
March 2012 of the Court of Appeals in CA-G.R. CV
No. 02784. We DISMISS Civil Case No. T-1059
without prejudice to the parties seeking relief in the
proper forum.
SO ORDERED.
SPOUSES FERDINAND AGUILAR and
JOSEPHINE AGUILAR v. CITYTRUST FINANCE
CORPORATION
In conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the
event which constitutes the condition.
Petitioner Spouses Josephine and
Ferdinand Aguilar bought a car from World Cars, Inc.
(World Cars) through the latter‘s agent, Joselito
Perez. The spouses issued three checks payable to
Perez who was authorized by World Cars to receive
payment. Spouses Aguilar subsequently executed a
promissory note, chattel mortgage and
other accessory documents the dates of which were
left blank. The same were intended to take effect only
if the checks issued by Spouses Aguilar would be
dishonored. The promissory notes
and chattel mortgage were subsequently assigned by
World Cars to Citytrust. Spouses Aguilar received
letters from Citytrust, advising them of overdue
account and unpaid installments for the months of
August to December 1992 plus accumulated penalty
charges. World Cars‘ Vice President Domondon
informed Spouses Aguilar that the last payment had
not been received. Thus, Spouses Aguilarfiled a
complaint for ―annulment of chattel mortgage plus
damages‖ against Citytrust and World Cars before the
Regional Trial Court (RTC).
The RTC held that the Spouses Aguilar had paid
World Cars the full purchase price of the car and
Citytrust, as the assignee, had no right to collect from
them the amount stated in the
simulated Chattel Mortgage cum Deed of Assignment.
Further, RTC ordered Citytrust and World Cars jointly
and severally for damages in favor of
Spouses Aguilar. On appeal, the Court of Appeals
modified RTC‘s decision. It ruled that the promissory
note and its derivative instruments were not really
intended to produce legal effect. Hence, these present
petitions of the Spouses Aguilar and World Cars.
ISSUE: Whether or not CA erred in ruling that the
promissory note and derivative instruments were null
and void for the same were not really intended to
produce legal effect
HELD: Clearly, Perez was the agent of World Cars
and was duly authorized to acceptpayment for the car.
Josephine‘s testimony that before issuing the checks
in the name of Perez, she verified from
his supervisor and the latter confirmed Perez‘
authority to receive payment remains unrefuted by
World Cars. In fact, World Cars admitted in its Answer
with Counterclaim that ―[w]hat was actually paid [by
the Spouses Aguilar] and received by [it] was
[Josephine‘s] check in the amount of P148,000.00 as
downpayment for the said car.‖ Parenthetically, as
earlier stated, when Josephine spoke to World Cars‘
Vice President Domondon, the latter informed her that
the last payment had not been received. This
information of Domondon does not jibe with the claim
of World Cars that it received only Josephine‘s first
check in the amount of P148,000.00 as downpayment
payable to Perez. Since Spouses Aguilar payment to
Perez is deemed payment to World Cars, the
promissory note, chattel mortgage and
other accessory documents they executed which were
to take effect only in the event the checks would be
dishonored were deemed nullified, all the checks
having been cleared. Since the condition for the
instruments to become effective was fulfilled, the
obligation on the part of the spouses Aguilar to be
bound thereby did not arise and World Cars did not
thus acquire rights thereunder following Art. 1181 of
the Civil Code which provides that in conditional
obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired,
shall depend upon the happening of the event which
constitutes the condition. As no right against the
Spouses Aguilar was acquired by World Cars under
the promissory note and chattel mortgage, it had
nothing to assign to Citytrust. Consequently, Citytrust
cannot enforce the instruments against the
spouses Aguilar, for an assignee cannot acquire
greater rights than those pertaining to the assignor.
At all events, the Spouses Aguilar having fully paid
the car before they became awareof the assignment
of the instruments to Citytrust when they received
notice thereof by Citytrust, they were released of their
obligation thereunder. The Civil Code so provides that
the debtor who, before having knowledge of the
assignment, pays his creditor, shall be released from
the obligation. While Citytrust cannot enforce the
instruments against the Spouses Aguilar, since under
the RFA, specifically paragraph 5(a) thereof, World
Cars guaranteed that as further warranties, [World
Cars] hereby agrees and shall be bound by the
following: a. World Cars guarantees to [Citytrust] its
successors, and assigns, that it has full right and legal
authority to make the assignment or discounting; that
the installment papers so discounted by virtue of this
agreement, are subsisting, valid, enforceable and in
all respects what they purport to be; that the papers
contain the entire agreement between the customers
and [World Cars]; x x x that it has absoluteand good
title to such contracts and the personalties covered
thereby and the right to sell and transfer the same in
favor of [Citytrust].
JEANETTE D. MOLINO, petitioner, vs. SECURITY
DINERS INTERNATIONAL
CORPORATION, respondent.
DECISION
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is
the decision of the Court of Appeals dated September
28, 1998[1] which held petitioner liable as surety for
the outstanding credit card debts of Danilo Alto with
herein respondent corporation.The decision of the
Court of Appeals satisfactorily sums up the facts that
led to the filing of this case: The Security Diners
International Corporation (SDIC) operates a credit
card system under the name of Diners Club through
which it extends credit accommodation to its
cardholders for the purchase of goods and payment of
services from its member establishments to be
reimbursed later on by the cardholder upon proper
billing. There are two types of credit cards issued:
one, the Regular (Local) Card which entitles the
cardholder to purchase goods and pay services from
member establishments in an amount not exceeding
P10,000.00; and two, the Diamond (Edition) Card
which entitles the cardholder to purchase goods and
pay services from member establishments in
unlimited amounts. One of the requirements for the
issuance of either of these cards is that an applicant
should have a surety. On July 24, 1987, Danilo A. Alto
applied for a Regular (Local) Card with SDIC. He got
as his surety his own sister-in-law Jeanette Molino
Alto. Thus, Danilo signed the printed application form
(Exhibit A) and Jeanette signed the Surety
Undertaking (Exhibit A-5). Attached to the Application
Form was an Agreement (Use of Diners Club Card),
paragraph 16 of which reads:
16. SURETY. The cardholder shall furnish an
adequate surety or sureties acceptable to Security
Diners who shall be jointly and severally liable with
the cardholder to pay Security Diners all the
obligations and charges incurred and credit extended
on the basis of the card. In the event the
surety/sureties furnished the cardholder are
discharged the cardholder must furnish a new surety
or sureties acceptable to Security Diners within thirty
(30) days. Otherwise the cardholders privileges shall
be automatically terminated in accordance with
Section 11 hereof.
The Surety Undertaking signed by Jeanette states:
I/WE, the undersigned, bind myself/ourselves jointly
and severally with Mr. Danilo Alto to pay SECURITY
DINERS INTERNATIONAL CORPORATION,
hereinafter referred to as Security Diners all the
obligations and charges including but not limited to
fees, interest, attorneys fees and all other costs
incurred by him/her in connection with the use of the
DINERS CLUB CARD in accordance with the terms
and conditions governing the issuance and use of the
Diners Club Card. Any change or novation in the
agreement or any extension of time granted by
SECURITY DINERS to pay such obligations, charges
and fees, shall not release me/us from this Surety
Undertaking, it being understood that said undertaking
is a continuing one and shall subsist and bind me/us
until all such obligations, charges and fees have been
fully paid and satisfied.It is understood that the
indication of a credit limit to the cardholder shall not
relieve me/us of liability for charges and all other
amounts voluntarily incurred by the cardholder in
excess of the credit limit.On the basis of the
completed and signed Application Form and Surety
Undertaking, the SDIC issued to Danilo Diners Card
No. 36510293216-0006. The latter used this card and
initially paid his obligations to SDIC. On February 8,
1988, Danilo wrote SDIC a letter (Exhibit B)
requesting it to upgrade his Regular (Local) Diners
Club Card to a Diamond (Edition) one. As a
requirement of SDIC, Danilo secured from Jeanette
her approval.The latter obliged and so on March 2,
1988, she signed a Note (Exhibit C) which states:
This certifies that I, Jeanette D. Molino, approve of the
request of Danilo and Gloria Alto with Card No. 3651-
203216-0006 and 3651-203412-5007 to upgrade their
card from regular to diamond edition.Danilos request
was granted and he was issued a Diamond (Edition)
Diners Club Card. He used this card and made
purchases (Exhibits D, D-1 to D-7) from member
establishments. On October 1, 1988 Danilo had
incurred credit charged plus appropriate interest and
service charges in the aggregate amount of
P166,408.31. He defaulted in the payment of this
obligation.SDIC demanded of Danilo and Jeanette to
pay said obligation but they did not pay. So, on
November 9, 1988, SDIC filed an action to collect said
indebtedness against Danilo and Jeanette. This was
docketed in the Regional Trial Court of Makati, Branch
145 as Civil Case No. 88-2381. xxx [2]
Defendant Danilo Alto failed to file an Answer, and
during the pre-trial conference respondent moved to
have the complaint dismissed against him, without
prejudice to a subsequent re-filing. Petitioner was left
as the lone defendant, sued in her capacity as surety
of Danilo.In the Answer with Compulsory
Counterclaim that she filed with the RTC, petitioner
claimed that her liability under the Surety Undertaking
was limited to P10,000.00 and that she did not
expressly and categorically agree to act as surety for
Danilo in an amount higher than P10,000.00. [3] By
way of counterclaim, she asked for moral and
exemplary damages.
On August 19, 1991, the trial court rendered a
decision dismissing the complaint for failure of
respondent to prove its case by a preponderance of
the evidence. It found that while petitioner clearly
bound herself as surety under the terms of Danilo
Altos Regular Diners Club Card, there was no
evidence that after the card had been upgraded to
Diamond (Edition) petitioner consented or agreed to
act as surety for Danilo. Exhibit C or Exhibit 1, inter
alia, which was a note bearing petitioners signature
certifying to her approval of Danilos request to have
his card upgraded should be read simply as a
statement of no objection to his request for upgrading,
and not as an assumption of liability for the debts that
Danilo may later owe through the said card.[4] The trial
court also took note of the testimony of Alfredo
Vicente, an officer of respondent, who opined that the
consent to be bound as surety to an upgraded card
should be categorical[5] and not in a simple no
objection form.The trial court went on further to state
that petitioner was not liable for any amount, not even
for P10,000.00 which is the maximum credit limit for
Regular Diners Club Cards, since at the time of the
upgrading Danilo had no outstanding credit card
debts.[6] This is evident from the fact that Danilos
request for upgrading was approved, since one of the
requirements for the approval of a request for the
upgrading of a credit card from Regular to Diamond is
that the applicant must have paid all his billings for the
last three months prior to his request.Hence, the trial
court disposed of the case with these
pronouncements:WHEREFORE, judgment
rendered dismissing the complaint against defendant
Jeanette D. Molino-Alto for failure of the plaintiff to
prove its case by a clear preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED.[7]
The Court of Appeals found contrary to the lower
court, and declared that the Surety Undertaking
signed by petitioner when Danilo Alto first applied for
a Regular Diners Club Card clearly applied to the
unpaid purchases of Danilo Alto under the Diamond
card. In holding thus, the Court of Appeals referred to
the terms of the said Surety Undertaking, which stated
that any change or novation in the agreement on the
use of the Diners Club card does not release the
surety from his obligations, it being understood that
the undertaking is a continuing one which subsists
until all obligations and charges under the subject
credit card are paid and satisfied. It also cited Pacific
Banking Corporation vs. Intermediate Appellate
Court,[8] a 1991 decision which held the surety liable
to the extent of the credit cardholders indebtedness,
under the clear terms of the Guarantors Undertaking
that the surety signed with the credit card company.
The Court of Appeals further declared that it was
erroneous of the trial court to conclude that petitioner
was completely relieved of liability under Danilo Altos
credit card since the Surety Undertaking she signed
remained valid and enforceable even after the
upgrading of the said card; besides, petitioner herself
admitted that she was liable to the extent of
P10,000.00.
Additionally, the Court of Appeals reduced the
attorneys fees (stipulated in the Agreement for the
Use of Diners Club Card) from 25% to 10% of the
amount due, judging this to be a more reasonable rate
under the circumstances.
The dispositive portion of the decision of the
Court of Appeals reads: WHEREFORE, the appealed
Decision is REVERSED and one is rendered ordering
defendant-appellee Jeanette D. Molino-Alto to pay
plaintiff-appellant Security Diners International, Inc.
the following:
1. The sum of P166,408.31 plus interest of
3% per annum and 2% per month from
November 9, 1988 until the obligation is
fully paid;
2. The amount equivalent to 10% of the
obligation mentioned in the preceding
paragraph as attorneys fees; and
3. Costs.
SO ORDERED.[9]
is
Petitioners motion for reconsideration of the
above decision was denied for lack of merit on
December 1, 1998. Hence, the petition before us,
which assigns the following errors:
I agreement of the parties, or by their acts which
The material findings of the Court of Appeals,
which are contrary to those of the lower court,
are erroneous.
II
The findings of the Court of Appeals are
conflicting and/or without citation of specific
evidence on which they are based.
III
The Court of Appeals erred in disregarding the
applicable legal principle established by this
Honorable Court that, unlike in ordinary solidary
debtors, the surety does not incur liability unless
the principal debtor is held liable.[10]
Petitioner posits that she did not expressly give
her consent to be bound as surety under the
upgraded card. She points out that the note she
signed, marked as Exhibit C, registering her approval
of the request of Danilo Alto to upgrade his card,
renders the Surety Undertaking she signed under the
terms of the previous card without probative value,
immaterial and irrelevant as it covers only the liability
of the surety in the use of the regular credit card by
the principal debtor xxx .[11] She argues further that
because the principal debtor, Danilo Alto, was not
held liable, having been dropped as a defendant, she
could not be said to have incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as
surety under the Diamond card revolves around the
effect of the upgrading by Danilo Alto of his card. Was
the upgrading a novation of the original agreement
governing the use of Danilo Altos first credit card, as
to extinguish that obligation and the Surety
Undertaking which was simply accessory to it?
Novation, as a mode of extinguishing
obligations, may be done in two ways: by explicit
declaration, or by material incompatibility (implied
novation). As we stated in Fortune Motors vs. Court of
Appeals, supra:
xxx The test of incompatibility is whether the two
obligations can stand together, each one having
its independent existence. If they cannot, they
are incompatible and the latter obligation
novates the first. Novation must be established
either by the express terms of the new
agreement or by the acts of the parties clearly
demonstrating the intent to dissolve the old
obligation as a consideration for the emergence
of the new one. The will to novate, whether
totally or partially, must appear by express
are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation
of the original agreement covering the first credit card
issued to Danilo Alto, basically since it was committed
with the intent of cancelling and replacing the said
card.However, the novation did not serve to release
petitioner from her surety obligations because in the
Surety Undertaking she expressly waived discharge in
case of change or novation in the agreement
governing the use of the first credit card.
The nature and extent of petitioners obligations are
set out in clear and unmistakable terms in the Surety
Undertaking. Thus:
1. She bound herself jointly and severally with Danilo
Alto to pay SDIC all obligations and charges in the
use of the Diners Club Card, including fees, interest,
attorneys fees, and costs;
2. She declared that any change or novation in the
Agreement or any extension of time granted by
SECURITY DINERS to pay such obligation,
charges, and fees, shall not release (her) from this
Surety Undertaking;
3. (S)aid undertaking is a continuous one and shall
subsist and bind (her) until all such obligations,
charges and fees have been fully paid and satisfied;
and
4. The indication of a credit limit to the cardholder
shall not relieve (her) of liability for charges and all
other amounts voluntarily incurred by the cardholder
in excess of said credit limit.[12]
We cannot give any additional meaning to the
plain language of the subject undertaking. The extent
of a suretys liability is determined by the language of
the suretyship contract or bond itself.[13] Article 1370
of the Civil Code provides: If the terms of a contract
are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control.
This case is no different from Pacific Banking
Corporation vs. IAC, supra, correctly applied by the
Court of Appeals, which involved a Guarantors
Undertaking (although thus denominated, it was in
substance a contract of surety) signed by the husband
for the credit card application of his wife. Like herein
petitioner, the husband also argued that his liability
should be limited to the credit limit allowed under his
wifes card but the Court declared him liable to the full
extent of his wifes indebtedness. Thus:
We need not look elsewhere to determine the nature
and extent of private respondent Roberto Regala, Jr.s
undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala to pay the
Pacific Banking Corporation upon demand, any and
all indebtedness, obligations, charges or liabilities due
and incurred by said Celia Syjuco Regala with the use
of Pacificard or renewals thereof issued in (her) favor
by Pacific Banking Corporation. xxx
xxxxxxxxxxx
It is likewise not disputed by the parties that the credit
limit granted to Celia Regala was P2,000.00 per
month and that Celia Regala succeeded in using the
card beyond the original period of its effectivity,
October 29, 1979.We do not agree, however, that
Roberto Jr.s liability should be limited to that
extent. Private respondent Roberto Regala, Jr., as
surety of his wife, expressly bound himself up to the
extent of the debtors (Celias) indebtedness likewise
expressly waiving any discharge in case of any
change or novation of the terms and conditions in
connection with the issuance of the Pacificard credit
card. Roberto, in fact, made his commitment as a
surety a continuing one, binding upon himself until all
the liabilities of Celia Regala have been fully paid. All
these were clear under the Guarantors Undertaking
Roberto signed, thus:
x x x. Any changes of or novation in the terms and
conditions in connection with the issuance or use of
said Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any
manner release me/us from the responsibility
hereunder, it being understood that the undertaking is
a continuing one and shall subsist and bind me/us
until all the liabilities of the said Celia Syjuco Regala
have been fully satisified or paid. (italics supplied)
As a last-ditch measure, petitioner asseverates
that, being merely a surety, a pronouncement should
first be made declaring the principal debtor liable
before she herself can be proceeded against. The
argument, which is hinged upon the dropping of
Danilo as defendant in the complaint, is bereft of
merit.
The Surety Undertaking expressly provides that
petitioners liability is solidary. A surety is considered
in law as being the same party as the debtor in
relation to whatever is adjudged touching the
obligation of the latter, and their liabilities are
interwoven as to be inseparable.[14] Although the
contract of a surety is in essence secondary only to a
valid principal obligation, his liability to the creditor is
direct, primary and absolute; he becomes liable for
the debt and duty of another although he possesses
no direct or personal interest over the obligations nor
does he receive any benefit therefrom.[15] There being
no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation
shared solidarily by petitioner, respondent was
certainly within its rights to proceed singly against
petitioner, as surety and solidary debtor, without
prejudice to any action it may later file against Danilo
Alto, until the obligation is fully satisfied. This is so
provided under Article 1216 of the Civil Code:
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 be
subsequently directed against the others, so long as
the debt has not been fully collected.
Petitioner is a graduate of business
administration, and possesses considerable work
experience in several banks. She knew the full import
and consequence of the Surety Undertaking that she
executed. She had the option to withdraw her
suretyship when Danilo upgraded his card to one that
permitted unlimited purchases, but instead she
approved the upgrading. While we commiserate in the
financial predicament she now faces, it is also evident
that the liability she incurred is only the legitimate
consequence of an undertaking that she freely and
intelligently obliged to. Prospective sureties to credit
card applicants would be well-advised to study
carefully the terms of the agreements prepared by the
credit card companies before giving their consent, and
pay heed to stipulations that could lead to onerous
effects, like in the present case where the credit
applied for was limitless. At the same time, it bears
articulating that although courts in appropriate cases
may equitably reduce the award for penalty as
provided under such suretyship agreements if the
same is iniquitous or unconscionable,[16] we are
unable to give relief to petitioner by way of reducing
the amount of the principal liability as surety under the
circumstances of this case.
WHEREFORE, the petition is dismissed for lack
of merit. The decision of the Court of Appeals is
AFFIRMED in all respects.
SO ORDERED.
Catungal vs Rodriguez
Facts:
Agapita T. Catungal (Agapita) owned a parcel of land
(Lot 10963) situated in the Barrio of Talamban, Cebu
City. Agapita, with the consent of her husband Jose,
entered into a Contract to Sell[6] with respondent
Rodriguez which subsequently purportedly “upgraded” successful negotiation of the road right of way; (c) he

into a Conditional Deed of Sale.Both the Contract to proved his diligent efforts to negotiate the road right of

Sell and the Conditional Deed of Sale were annotated way; (d) the spouses Catungal were guilty of

on the title. misrepresentation which defeated Rodriguez’s efforts

to acquire the road right of way; and (e) the

The provisions of the Conditional Deed of Sale Catungals’ rescission of the contract had no basis and

pertinent to the present dispute are quoted below: was in bad faith.

During the pendency of the case with the

1.price 25 Million pesos
2. downpayment 500 Thousand Court of Appeals, Agapita Catungal passed away and
3. balance shall be paid after the VENDEE have
successfully negotiated, secured and provided a Road thus, her husband, Jose, filed on February 17, 1999 a
Right of Way . If however said Road Right of Way
could not be negotiated, the VENDEE shall give
motion for Agapita’s substitution by her surviving
notice to the VENDOR for them to reassess and solve
the problem by taking other options and should the
situation ultimately prove futile, he shall take steps to children.[46]
rescind or cancel the herein Conditional Deed of Sale.
He likewise alleged that he actively negotiated for the
road right of way as stipulated in the contract.[9]
The Catungals alleged that the conditional deed of

sale was void ab initio because it violates the

On August 31, 1990 the spouses Catungal
mutuality of contract in view of Article 1308
requested an advance of P5,000,000.00 on the
ncc. Petitioners rely on Article 1308 of the Civil
purchase price for personal reasons. Rodriquez
Code to support their conclusion regarding the
allegedly refused on the ground that the amount was
claimed nullity of the aforementioned provisions.
substantial and was not due under the terms of their
Article 1308 states that “[t]he contract must bind both
agreement. The Catungal’s rescinded the contract.
contracting parties; its validity or compliance cannot

be left to the will of one of them.”

Rodirguez filed a complaint against the Catungal’s for

arbitrarily rescinding the contract. In a Decision dated

Article 1182 of the Civil Code, in turn, provides:
May 30, 1992, the trial court ruled in favor of

Rodriguez, finding that: (a) under the contract it was
complainant (Rodriguez) that had the option to
rescind the sale; (b) Rodriguez’s obligation to pay the
balance of the purchase price arises only upon
Art. 1182. When the fulfillment of the condition
depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon
chance or upon the will of a third person, the
obligation shall take effect in conformity with the
provisions of this Code.
Issue: W/N Conditional Deed of Sale violate the
principle of mutuality of contracts under Article 1308
of the Civil Code?
Held: No. In the past, this Court has distinguished
between a condition imposed on the perfection of a
contract and a condition imposed merely on the
performance of an obligation. While failure to comply
with the first condition results in the failure of a
contract, failure to comply with the second merely
gives the other party the option to either refuse to
proceed with the sale or to waive the condition. This
principle is evident in Article 1545 of the Civil Code on
sales, which provides in part:
Art. 1545. Where the obligation of
either party to a contract of sale is subject to any
condition which is not performed, such party may
refuse to proceed with the contract or he may
waive performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of
Sale, stating that respondent shall pay the balance of
the purchase price when he has successfully
negotiated and secured a road right of way, is not a
condition on the perfection of the contract nor on the
validity of the entire contract or its compliance as
contemplated in Article 1308. It is a condition
imposed only on respondent’s obligation to pay the
remainder of the purchase price. In our view and
applying Article 1182, such a condition is not purely
potestative as petitioners contend. It is not dependent
on the sole will of the debtor but also on the will of
third persons who own the adjacent land and from
whom the road right of way shall be negotiated.
The condition is a mixed condition which is allowed by
Article 1182.
"potestative condition" is imposed not on the
birth of the obligation but on its fulfillment, only the
condition is avoided, leaving unaffected the obligation
itself. With respect to petitioners’ argument that
paragraph 5 of the Conditional Deed of Sale likewise
rendered the said contract void, we find no merit to
this theory. Reading paragraph 5 in its entirety will
show that Rodriguez’s option to rescind the contract is
not absolute as it undeniably only limited to the
contingency that Rodriguez shall not be able to
secure the road right of way. . In sum, Rodriguez’s
option to rescind the contract is not purely potestative
but rather also subject to the same mixed
condition as his obligation to pay the balance of the
purchase price – i.e., the negotiation of a road right of
way. In the event the condition is fulfilled (or the
negotiation is successful), Rodriguez must pay the
balance of the purchase price. In the event the
condition is not fulfilled (or the negotiation fails),
Rodriguez has the choice either (a) to not proceed
with the sale and demand return of his downpayment
or (b) considering that the condition was imposed for
his benefit, to waive the condition and still pay the
purchase price despite the lack of road access. This
is the most just interpretation of the parties’ contract
that gives effect to all its provisions.
In any event, even if we assume for the sake
of argument that the grant to Rodriguez of an option
to rescind, in the manner provided for in the contract,
is tantamount to a potestative condition, not being a
condition affecting the perfection of the contract, only
the said condition would be considered void and the
rest of the contract will remain valid.
WHEREFORE, the Decision dated August 8, 2000
and the Resolution dated January 30, 2001 of the
Court of Appeals in CA-G.R. CV No. 40627

consolidated with CA-G.R. SP No. 27565
are AFFIRMED with the following MODIFICATION: If
still warranted, respondent Angel S. Rodriguez is
given a period of thirty (30) days from the finality of
this Decision to negotiate a road right of way. In the
event no road right of way is secured by respondent
at the end of said period, the parties shall reassess
and discuss other options as stipulated in paragraph
1(b) of the Conditional Deed of Sale and, for this
purpose, they are given a period of thirty (30) days to
agree on a course of action. Should the discussions of
the parties prove futile after the said thirty (30)-day
period, immediately upon the expiration of said period
for discussion, Rodriguez may (a) exercise his option
to rescind the contract, subject to the return of his
downpayment, in accordance with the provisions of
paragraphs 1(b) and 5 of the Conditional Deed of Sale
or (b) waive the road right of way and pay the balance
of the deducted purchase price as determined in the
RTC Decision dated May 30, 1992.
ERMINDA F. FLORENTINO, Petitioner,
vs.
SUPERVALUE, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari
under Rule 45 of the Revised Rules of Court, filed by
petitioner Erminda F. Florentino, seeking to reverse
and set aside the Decision,1 dated 10 October 2003
and the Resolution,2 dated 19 April 2006 of the Court
of Appeals in CA-G.R. CV No. 73853. The appellate
court, in its assailed Decision and Resolution,
modified the Decision dated 30 April 2001 of the
Regional Trial Court (RTC) of Makati, Branch 57, in
Civil Case No. 00-1015, finding the respondent
Supervalue, Inc., liable for the sum of ₱192,000.00,
representing the security deposits made by the
petitioner upon the commencement of their Contract
of Lease. The dispositive portion of the assailed
appellate court’s Decision thus reads:
WHEREFORE, premises considered, the appeal is
PARTLY GRANTED. The April 30, 2001 Decision of
the Regional Trial Court of Makati, Branch 57 is
therefore MODIFIED to wit: (a) the portion ordering
the [herein respondent] to pay the amount of
₱192,000.00 representing the security deposits and
₱50,000.00 as attorney’s fees in favor of the [herein
petitioner] as well as giving [respondent] the option to
reimburse [petitioner] ½ of the value of the
improvements introduced by the [petitioner] on the
leased [premises] should [respondent] choose to
appropriate itself or require the [petitioner] to remove
the improvements, is hereby REVERSED and SET
ASIDE; and (b) the portion ordering the return to
[petitioner] the properties seized by [respondent] after
the former settled her obligation with the latter is
however MAINTAINED.3
The factual and procedural antecedents of the instant
petition are as follows:
Petitioner is doing business under the business name
"Empanada Royale," a sole proprietorship engaged in
the retail of empanada with outlets in different malls
and business establishments within Metro Manila.4
Respondent, on the other hand, is a domestic
corporation engaged in the business of leasing stalls
and commercial store spaces located inside SM Malls
found all throughout the country.5
On 8 March 1999, petitioner and respondent executed
three Contracts of Lease containing similar terms and
conditions over the cart-type stalls at SM North Edsa
and SM Southmall and a store space at SM
Megamall. The term of each contract is for a period of
four months and may be renewed upon agreement of
the parties.6
Upon the expiration of the original Contracts of Lease,
the parties agreed to renew the same by extending
their terms until 31 March 2000.7
Before the expiration of said Contracts of Lease, or on
4 February 2000, petitioner received two letters from
the respondent, both dated 14 January 2000,
transmitted through facsimile transmissions.8
In the first letter, petitioner was charged with violating
Section 8 of the Contracts of Lease by not opening on
16 December 1999 and 26 December 1999.9
Respondent also charged petitioner with selling a new
variety of empanada called "mini-embutido" and of
increasing the price of her merchandise from ₱20.00
to ₱22.00, without the prior approval of the
respondent.10
Respondent observed that petitioner was frequently
closing earlier than the usual mall hours, either
because of non-delivery or delay in the delivery of
stocks to her outlets, again in violation of the terms of
the contract. A stern warning was thus given to
petitioner to refrain from committing similar infractions
in the future in order to avoid the termination of the
lease contract.11
In the second letter, respondent informed the
petitioner that it will no longer renew the Contracts of
Lease for the three outlets, upon their expiration on 31
March 2000.12
In a letter-reply dated 11 February 2000, petitioner
explained that the "mini-embutido" is not a new variety
of empanada but had similar fillings, taste and
ingredients as those of pork empanada; only, its size
was reduced in order to make it more affordable to the
buyers.13
Such explanation notwithstanding, respondent still
refused to renew its Contracts of Lease with the
petitioner. To the contrary, respondent took
possession of the store space in SM Megamall and
confiscated the equipment and personal belongings of
the petitioner found therein after the expiration of the
lease contract.14
In a letter dated 8 May 2000, petitioner demanded
that the respondent release the equipment and
personal belongings it seized from the SM Megamall
store space and return the security deposits, in the
sum of ₱192,000.00, turned over by the petitioner
upon signing of the Contracts of Lease. On 15 June
2000, petitioner sent respondent another letter
reiterating her previous demands, but the latter failed
or refused to comply therewith. 15
On 17 August 2000, an action for Specific
Performance, Sum of Money and Damages was filed
by the petitioner against the respondent before the
RTC of Makati, Branch 57.16
In her Complaint docketed as Civil Case No. 00-1015,
petitioner alleged that the respondent made verbal
representations that the Contracts of Lease will be
renewed from time to time and, through the said
representations, the petitioner was induced to
introduce improvements upon the store space at SM
Megamall in the sum of ₱200,000.00, only to find out
a year later that the respondent will no longer renew
her lease contracts for all three outlets.17
In addition, petitioner alleged that the respondent,
without justifiable cause and without previous
demand, refused to return the security deposits in the
amount of ₱192,000.00.18
Further, petitioner claimed that the respondent seized
her equipment and personal belongings found inside
the store space in SM Megamall after the lease
contract for the said outlet expired and despite
repeated written demands from the petitioner,
respondent continuously refused to return the seized
items.19
Petitioner thus prayed for the award of actual
damages in the sum of ₱472,000.00, representing the
sum of security deposits, cost of improvements and
the value of the personal properties seized. Petitioner
also asked for the award of ₱300,000.00 as moral
damages; ₱50,000.00 as exemplary damages; and
₱80,000.00 as attorney’s fees and expenses of
litigation.20
For its part, respondent countered that petitioner
committed several violations of the terms of their
Contracts of Lease by not opening from 16 December
1999 to 26 December 1999, and by introducing a new
variety of empanada without the prior consent of the
respondent, as mandated by the provision of Section
2 of the Contract of Lease. Respondent also alleged
that petitioner infringed the lease contract by
frequently closing earlier than the agreed closing
hours. Respondent finally averred that petitioner is
liable for the amount ₱106,474.09, representing the
penalty for selling a new variety of empanada,
electricity and water bills, and rental adjustment,
among other charges incidental to the lease
agreements. Respondent claimed that the seizure of
petitioner’s personal belongings and equipment was
in the exercise of its retaining lien, considering that
the petitioner failed to settle the said obligations up to
the time the complaint was filed.21
Considering that petitioner already committed several
breaches of contract, the respondent thus opted not to
renew its Contracts of Lease with her anymore. The
security deposits were made in order to ensure faithful
compliance with the terms of their lease agreements;
and since petitioner committed several infractions
thereof, respondent was justified in forfeiting the
security deposits in the latter’s favor.
On 30 April 2001, the RTC rendered a Judgment22 in
favor of the petitioner and found that the physical
takeover by the respondent of the leased premises
and the seizure of petitioner’s equipment and
personal belongings without prior notice were illegal.
The decretal part of the RTC Judgment reads:
WHEREFORE, premises duly considered, judgment
is hereby rendered ordering the [herein respondent] to
pay [herein petitioner] the amount of ₱192,000.00
representing the security deposits made by the
[petitioner] and ₱50,000.00 as and for attorney’s fees.
The [respondent] is likewise ordered to return to the
[petitioner] the various properties seized by the former
after settling her account with the [respondent].
Lastly, the [respondent] may choose either to
reimburse the [petitioner] one half (1/2) of the value of
the improvements introduced by the plaintiff at SM
Megamall should [respondent] choose to appropriate
the improvements to itself or require the [petitioner] to
remove the improvements, even though the principal
thing may suffer damage thereby. [Petitioner] shall
not, however, cause anymore impairment upon the
said leased premises than is necessary.
The other damages claimed by the plaintiff are denied
for lack of merit.
Aggrieved, the respondent appealed the adverse RTC
Judgment to the Court of Appeals.
In a Decision23 dated 10 October 2003, the Court of
Appeals modified the RTC Judgment and found that
the respondent was justified in forfeiting the security
deposits and was not liable to reimburse the petitioner
for the value of the improvements introduced in the
leased premises and to pay for attorney’s fees. In
modifying the findings of the lower court, the appellate
court declared that in view of the breaches of contract
committed by the petitioner, the respondent is justified
in forfeiting the security deposits. Moreover, since the
petitioner did not obtain the consent of the respondent
before she introduced improvements on the SM
Megamall store space, the respondent has therefore
no obligation to reimburse the petitioner for the
amount expended in connection with the said
improvements.24 The Court of Appeals, however,
maintained the order of the trial court for respondent
to return to petitioner her properties after she has
settled her obligations to the respondent. The
appellate court denied petitioner’s Motion for
Reconsideration in a Resolution25 dated 19 April
2006.
Hence, this instant Petition for Review on
Certiorari26 filed by the petitioner assailing the Court of
Appeals Decision. For the resolution of this Court are
the following issues:
I. Whether or not the respondent is liable to
return the security deposits to the petitions.
II. Whether or not the respondent is liable to
reimburse the petitioner for the sum of the
improvements she introduced in the leased
premises.
III. Whether or not the respondent is liable for
attorney’s fees.27
The appellate court, in finding that the respondent is
authorized to forfeit the security deposits, relied on the
provisions of Sections 5 and 18 of the Contract of
Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash
deposit in the sum of SIXTY THOUSAND PESOS
(P60,000.00) equivalent to three (3) months rent as
security for the full and faithful performance to each
and every term, provision, covenant and condition of
this lease and not as a pre-payment of rent. If at any
time during the term of this lease the rent is
increased[,] the LESSEE on demand shall make an
additional deposit equal to the increase in rent. The
LESSOR shall not be required to keep the deposit
separate from its general funds and the deposit shall
not be entitled to interest. The deposit shall remain
intact during the entire term and shall not be applied
as payment for any monetary obligations of the
LESSEE under this contract. If the LESSEE shall
faithfully perform every provision of this lease[,] the
deposit shall be refunded to the LESSEE upon the
expiration of this Lease and upon satisfaction of all
monetary obligation to the LESSOR.
xxxx
Section 18. TERMINATION. Any breach, non-
performance or non-observance of the terms and
conditions herein provided shall constitute default
which shall be sufficient ground to terminate this
lease, its extension or renewal. In which event, the
LESSOR shall demand that LESSEE immediately
vacate the premises, and LESSOR shall forfeit in its
favor the deposit tendered without prejudice to any
such other appropriate action as may be legally
authorized.28
Since it was already established by the trial court that
the petitioner was guilty of committing several
breaches of contract, the Court of Appeals decreed
that she cannot therefore rightfully demand the return
of the security deposits for the same are deemed
forfeited by reason of evident contractual violations.
It is undisputed that the above-quoted provision found
in all Contracts of Lease is in the nature of a penal
clause to ensure petitioner’s faithful compliance with
the terms and conditions of the said contracts.
A penal clause is an accessory undertaking to
assume greater liability in case of breach. It is
attached to an obligation in order to insure
performance and has a double function: (1) to provide
for liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of greater
responsibility in the event of breach.29 The obligor
would then be bound to pay the stipulated indemnity
without the necessity of proof of the existence and the
measure of damages caused by the breach.30 Article
1226 of the Civil Code states:
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.
As a general rule, courts are not at liberty to ignore
the freedoms of the parties to agree on such terms
and conditions as they see fit as long as they are not
contrary to law, morals, good customs, public order or
public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contracts in two
instances: (1) if the principal obligation has been
partly or irregularly complied with; and (2) even if
there has been no compliance if the penalty is
iniquitous or unconscionable in accordance with
Article 1229 of the Civil Code which clearly provides:
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.31
In ascertaining whether the penalty is unconscionable
or not, this court set out the following standard in
Ligutan v. Court of Appeals,32 to wit:
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factor
as, but not necessarily confined to, the type, extent
and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences,
the supervening realities, the standing and
relationship of the parties, and the like, the application
of which, by and large, is addressed to the sound
discretion of the court. xxx.
In the instant case, the forfeiture of the entire amount
of the security deposits in the sum of ₱192,000.00
was excessive and unconscionable considering that
the gravity of the breaches committed by the
petitioner is not of such degree that the respondent
was unduly prejudiced thereby. It is but equitable
therefore to reduce the penalty of the petitioner to
50% of the total amount of security deposits.
It is in the exercise of its sound discretion that this
court tempered the penalty for the breaches
committed by the petitioner to 50% of the amount of
the security deposits. The forfeiture of the entire sum
of ₱192,000.00 is clearly a usurious and iniquitous
penalty for the transgressions committed by the
petitioner. The respondent is therefore under the
obligation to return the 50% of ₱192,000.00 to the
petitioner.
Turning now to the liability of the respondent to
reimburse the petitioner for one-half of the expenses
incurred for the improvements on the leased store
space at SM Megamall, the following provision in the
Contracts of Lease will enlighten us in resolving this
issue:
Section 11. ALTERATIONS, ADDITIONS,
IMPROVEMENTS, ETC. The LESSEE shall not make
any alterations, additions, or improvements without
the prior written consent of LESSOR; and all
alterations, additions or improvements made on the
leased premises, except movable or fixtures put in at
LESSEE’s expense and which are removable, without
defacing the buildings or damaging its floorings, shall
become LESSOR’s property without
compensation/reimbursement but the LESSOR
reserves the right to require the removal of the said
alterations, additions or improvements upon expiration
of the lease.
The foregoing provision in the Contract of Lease
mandates that before the petitioner can introduce any
improvement on the leased premises, she should first
obtain respondent’s consent. In the case at bar, it was
not shown that petitioner previously secured the
consent of the respondent before she made the
improvements on the leased space in SM Megamall.
It was not even alleged by the petitioner that she
obtained such consent or she at least attempted to
secure the same. On the other hand, the petitioner
asserted that respondent allegedly misrepresented to
her that it would renew the terms of the contracts from
time to time after their expirations, and that the
petitioner was so induced thereby that she expended
the sum of ₱200,000.00 for the improvement of the
store space leased.
This argument was squarely addressed by this court
in Fernandez v. Court of Appeals,33 thus:
The Court ruled that the stipulation of the parties in
their lease contract "to be renewable" at the option of
both parties stresses that the faculty to renew was
given not to the lessee alone nor to the lessor by
himself but to the two simultaneously; hence, both
must agree to renew if a new contract is to come
about.
Petitioner’s contention that respondents had verbally
agreed to extend the lease indefinitely is inadmissible
to qualify the terms of the written contract under the
parole evidence rule, and unenforceable under the
statute of frauds.34
Moreover, it is consonant with human experience that
lessees, before occupying the leased premises,
especially store spaces located inside malls and big
commercial establishments, would renovate the place
and introduce improvements thereon according to the
needs and nature of their business and in harmony
with their trademark designs as part of their marketing
ploy to attract customers. Certainly, no inducement or
misrepresentation from the lessor is necessary for this
purpose, for it is not only a matter of necessity that a
lessee should re-design its place of business but a
business strategy as well.
In ruling that the respondent is liable to reimburse
petitioner one half of the amount of improvements
made on the leased store space should it choose to
appropriate the same, the RTC relied on the provision
of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful
improvements which are suitable to the use for which
the lease is intended, without altering the form or
substance of the property leased, the lessor upon the
termination of the lease shall pay the lessee one-half
of the value of the improvements at that time. Should
the lessor refuse to reimburse said amount, the
lessee may remove the improvements, even though
the principal thing may suffer damage thereby. He
shall not, however, cause any more impairment upon
the property leased than is necessary.
While it is true that under the above-quoted provision
of the Civil Code, the lessor is under the obligation to
pay the lessee one-half of the value of the
improvements made should the lessor choose to
appropriate the improvements, Article 1678 however
should be read together with Article 448 and Article
546 of the same statute, which provide:
Art. 448. The owner of the land on which anything has
been built, sown or planted in good faith, shall have
the right to appropriate as his own the works, sowing
or planting, after payment of the indemnity provided
for in articles 546 and 548, or to oblige the one who
built or planted to pay the price of the land, and the
one who sowed, the proper rent. However, the builder
or planter cannot be obliged to buy the land if its value
is considerably more than that of the building or trees.
In such case, he shall pay reasonable rent, if the
owner of the land does not choose to appropriate the
building or trees after proper indemnity. The parties
shall agree upon the terms of the lease and in case of
disagreement, the court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to
every possessor; but only possessor in good faith
may retain the thing until he has been reimbursed
therefor.
Useful expenses shall be refunded only to the
possessor in good faith with the same right of
retention, the person who has defeated him in the
possession having the option of refunding the amount
of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof.
Thus, to be entitled to reimbursement for
improvements introduced on the property, the
petitioner must be considered a builder in good faith.
Further, Articles 448 and 546 of the Civil Code, which
allow full reimbursement of useful improvements and
retention of the premises until reimbursement is
made, apply only to a possessor in good faith, i.e.,
one who builds on land with the belief that he is the
owner thereof. A builder in good faith is one who is
unaware of any flaw in his title to the land at the time
he builds on it.35 In this case, the petitioner cannot
claim that she was not aware of any flaw in her title or
was under the belief that she is the owner of the
subject premises for it is a settled fact that she is
merely a lessee thereof.1âwphi1
In Geminiano v. Court of Appeals,36 this Court was
emphatic in declaring that lessees are not possessors
or builders in good faith, thus:
Being mere lessees, the private respondents knew
that their occupation of the premises would continue
only for the life of the lease. Plainly, they cannot be
considered as possessors nor builders in good faith.
In a plethora of cases, this Court has held that Article
448 of the Civil Code, in relation to Article 546 of the
same Code, which allows full reimbursement of useful
improvements and retention of the premises until
reimbursement is made, applies only to a possessor
in good faith, i.e., one who builds on land with the
belief that he is the owner thereof. It does not apply
where one's only interest is that of a lessee under a
rental contract; otherwise, it would always be in the
power of the tenant to "improve" his landlord out of his
property.
Since petitioner’s interest in the store space is merely
that of the lessee under the lease contract, she
cannot therefore be considered a builder in good faith.
Consequently, respondent may appropriate the
improvements introduced on the leased premises
without any obligation to reimburse the petitioner for
the sum expended.
Anent the claim for attorney’s fees, we resolve to
likewise deny the award of the same. Attorney’s fees
may be awarded when a party is compelled to litigate
or to incur expenses to protect its interest by reason
of unjustified act of the other.37
In the instant petition, it was not shown that the
respondent unjustifiably refused to grant the demands
of the petitioner so as to compel the latter to initiate
legal action to enforce her right. As we have found
herein, there is basis for respondent’s refusal to return
to petitioner the security deposits and to reimburse
the costs of the improvements in the leased premises.
The award of attorney’s fees is therefore not proper in
the instant case.
WHEREFORE, premises considered, the instant
Petition is PARTLY GRANTED. The Court of Appeals
Decision dated 10 October 2003 in CA-G.R. CV No.
73853 is hereby AFFIRMED with the MODIFICATION
that the respondent may forfeit only 50% of the total
amount of the security deposits in the sum of
₱192,000.00, and must return the remaining 50% to
the petitioner. No costs.
SO ORDERED.
PAN PACIFIC SERVICE CONTRACTORS, INC. and
RICARDO F. DEL
ROSARIO,
Petitioners,
vs.
EQUITABLE PCI BANK (formerly THE PHILIPPINE
COMMERCIAL
INTERNATIONAL BANK),
Respondent.
Facts:
Pan Pacific Service Contractors, Inc. (Pan Pacific) is
engaged in contracting mechanical works on
airconditioning system. On 24 November 1989, Pan
Pacific, through its President, Ricardo F. Del Rosario
(Del Rosario), entered into a contract of mechanical
works (Contract) with respondent for
P20,688,800. Pan Pacific and respondent also
agreed on nine change orders for P2,622,610.30.
Thus, the total consideration for the whole project was
P23,311,410.30. The Contract stipulated, among
others, that Pan Pacific shall be entitled to a price
adjustment in case of increase in labor costs and
prices of materials under paragraphs 70.1 and 70.2 of
the "General Conditions for the Construction
of PCIB Tower II Extension" (the escalation
clause). Pursuant to the contract, Pan Pacific
commenced the mechanical works in the project site,
the PCIB Tower II extension building in Makati City.
The project was completed in June 1992. Respondent
accepted the project on 9 July 1992. In 1990, labor
costs and prices of materials escalated. On 5 April
1991, in accordance with the escalation clause, Pan
Pacific claimed a price adjustment of P5,165,945.52.
Respondent’s appointed project engineer, TCGI
Engineers, asked for a reduction in the price
adjustment. To show goodwill, Pan Pacific reduced
the price adjustment toP4,858,548.67. On 28 April
1992, TCGI Engineers recommended to respondent
that the price adjustment should be pegged
atP3,730,957.07. TCGI Engineers based their
evaluation of the price adjustment on the following
factors: 1. Labor Indices of the Department of Labor
and Employment.
2. Price Index of the National Statistics Office.
PD 1594 and its Implementing Rules and Regulations
as amended, 15 March 1991. Shipping Documents
submitted by PPSCI. Sub-clause 70.1 of the General
Conditions of the Contract Documents. Pan Pacific
contended that with this recommendation,
respondent was already estopped from disclaiming
liability of at least P3,730,957.07 in accordance
with the escalation clause. Due to the extraordinary
increases in the costs of labor and materials, Pan
Pacific’s operational capital was becoming inadequate
for the project. However, respondent withheld the
payment of the price adjustment under the escalation
clause despite Pan Pacific’s repeated demands.
Instead, respondent offered Pan Pacific a loan of
P1.8 million. Against its will and on the strength of
respondent’s
promise that the price adjustment would be released
soon, Pan Pacific, through Del Rosario, was
constrained to execute a promissory note in the
amount of P1.8 million as a requirement for the loan.
Pan Pacific also posted a surety bond. The P1.8 1
million was released directly to laborers and suppliers
and not a single centavo was given to Pan Pacific.
Pan Pacific made several demands for payment on
the price adjustment but respondent merely kept on
promising to release the same. Meanwhile, the P1.8
million loan matured and respondent demanded
payment plus interest and penalty. Pan Pacific
refused to pay the loan. Pan Pacific insisted that it
would not have incurred the loan if respondent
released the price adjustment on time. Pan Pacific
alleged that the promissory note did not express the
true agreement of the parties. Pan Pacific maintained
that the P1.8 million was to be considered as an
advance payment on the price adjustment. Therefore,
there was really no consideration for the promissory
note; hence, it is null and void from the beginning.
Respondent stood firm that it would not release any
amount of the price adjustment to Pan Pacific but it
would offset the price adjustment with Pan Pacific’s
outstanding balance of P3,226,186.01, representing
the loan, interests, penalties and collection charges.
Pan Pacific refused the offsetting but agreed to
receive the reduced amount of P3,730,957.07 as
recommended by the TCGI Engineers for the
purpose of extrajudicial settlement, less P1.8 million
and P414,942 as advance payments. On 6 May
1994, petitioners filed a complaint for
declaration of nullity/annulment of the promissory
note, sum of money, and damages against the
respondent with the RTC.
Issue:
Whether the CA, in awarding the unpaid balance of
the price adjustment, erred in fixing the interest rate at
12% instead of the 18% bank lending rate.
Held:
Under Article 2209 of the Civil Code, the appropriate
measure for damages in case of delay in discharging
an obligation consisting of the payment of a sum of
money is the payment of penalty interest at the rate
agreed upon in the contract of the parties. In the
absence of a stipulation of a particular rate of penalty
interest, payment of additional interest at a rate equal
to the regular monetary interest becomes due and
payable. Finally, if no regular interest had been
agreed upon by the contracting parties, then the
damages payable will consist of payment of legal
interest which is 6%, or in the case of loans or
forbearances of money, 12% per annum. It is only
when the parties to a contract have failed to fix the
rate of interest or when such amount is unwarranted
that the Court will apply the 12% interest per annum
on a loan or forbearance of money. The written
agreement entered into between petitioners and
respondent
provides for an interest at the current bank lending
rate in case of delay in payment and the promissory
note charged an interest of 18%. To prove petitioners’
entitlement to the 18% bank lending rate of interest,
petitioners presented the promissory note prepared by
respondent bank itself. This promissory note, although
declared void by the lower courts because it did not
express the real intention of the parties, is substantial
proof that the bank lending rate at the time of default
was 18% per annum. Absent any evidence of fraud,
undue influence or any vice of consent
exercised by petitioners against the respondent,
the interest rate agreed upon is binding on them
Araneta v. Philippine Sugar Estate Development
Co.
G.R. No. L-22558, 31 May 1967
FACTS:
J.M. Tuason & Co., Inc. through Gregorio Araneta,
Inc. sold a portion of their land to Philippine Sugar
Estates Development with a condition that the buyer
will build a church in the said land while the seller will
construct a street within the property. The buyer had
already finished building the church while the seller
had failed to do the construction of the street in
Northeast side because a certain person was
occupying its middle portion and refused to vacate.
Now the buyer filed a case in court contending that
the seller must evict the person occupying the
property and finish the construction. The seller now
contends that the case was premature because it is
without definite period. The lower court then gave a
two year period to seller to evict the squatter and to
construct the street.
ISSUE:Whether or not the parties agreed that the
petitioner should have reasonable time to perform its
part of the bargain
RULING: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.
Article 1197 of the Civil Code involves a two-step
process. The Court must first determine that “the
obligation does not fix a period but from the nature
and the circumstances it can be inferred that a period
was intended”. The Court must then proceed to the
second step, and decide what period was “probably
contemplated by the parties” So the Court cannot 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.
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.
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.