G.R. No.

108253 February 23, 1994 Hence, the instant petition from which, after sifting through the blades of contentions alternately
thrust and parried in the exchanges of the parties, the pivotal issue that emerges is whether or not
LYDIA L. GERALDEZ, petitioner, vs. HON. COURT OF APPEALS and KENSTAR TRAVEL private respondent acted in bad faith or with gross negligence in discharging its obligations under
CORPORATION, respondents. the contract.

Natividad T. Perez for petitioner. Both the respondent court and the court a quo agree that private respondent failed to comply
Bito, Lozada, Ortega & Castillo for private respondent. faithfully with its commitments under the Volare 3 tour program, more particularly in not providing
the members of the tour group with a European tour manger whose duty, inter alia, was to explain
REGALADO, J.:
the points of interest of and familiarize the tour group with the places they would visit in Europe,
and in assigning instead a first timer Filipino tour guide, in the person of Rowena Zapanta, 11 to
Our tourism industry is not only big business; it is a revenue support of the nation's economy. It
perform that role which definitely requires experience and knowledge of such places. It is likewise
has become a matter of public interest as to call for its promotion and regulation on a cabinet level.
undisputed that while the group was able to pay a visit to the site of the UGC Leather Factory, they
We have special laws and policies for visiting tourists, but such protective concern has not been
were brought there at a very late hour such that the factory was already closed and they were
equally extended to Filipino tourists going abroad. Thus, with the limited judicial relief available
unable to make purchases at supposedly discounted prices. 12 As to the first-class hotels, however,
within the ambit of present laws, our tourists often prefer who fail to deliver on their undertakings.
while the court a quo found that the hotels were not fist-class, respondent court believed otherwise,
This case illustrates the recourse of one such tourist who refused to forget.
or that, at least, there was substantial compliance with such a representation.
An action for damages by reason of contractual breach was filed by petitioner Lydia L. Geraldez
While clearly there was therefore a violation of the rights of petitioner under the aforementioned
against private respondent Kenstar Travel Corporation, docketed as Civil Case No. Q-90-4649 of the
circumstances, respondent court, contrary to the findings of the trial court, ruled that no malice or
Regional Trial Court of Quezon City, Branch 80.1 After the parties failed to arrive at an amicable
bad faith could be imputed to private respondent, hence there is no justification for the award of
settlement, trial on the merits ensued.
moral and exemplary damages. Furthermore, it held that while petitioner is entitled to nominal
Culling from the records thereof, we find that sometime in October, 1989, Petitioner came to know damages, the amount awarded by the trial court was unconscionable since petitioner did not suffer
about private respondent from numerous advertisements in newspapers of general circulation actual or substantial damage from the breach of contract, 13 hence its reduction of such award as
regarding tours in Europe. She then contacted private respondent by phone and the latter sent its hereinbefore stated.
representative, Alberto Vito Cruz, who gave her the brochure for the tour and later discussed its
After thorough and painstaking scrutiny of the case records of both the trial and appellate courts,
highlights. The European tours offered were classified into four, and petitioner chose the
we are satisfactorily convinced, and so hold, that private respondent did commit fraudulent
classification denominated as "VOLARE 3" covering a 22-day tour of Europe for $2,990.00. She paid
misrepresentations amounting to bad faith, to the prejudice of petitioner and the members of the
the total equivalent amount of P190,000.00 charged by private respondent for her and her sister,
tour group.
Dolores.
By providing the Volare 3 tourist group, of which petitioner was a member, with an inexperienced
Petitioner claimed that, during the tour, she was very uneasy and disappointed when it turned out
and a first timer tour escort, private respondent manifested its indifference to the convenience,
that, contrary to what was stated in the brochure, there was no European tour manager for their
satisfaction and peace of mind of its clients during the trip, despite its express commitment to
group of tourists, the hotels in which she and the group were bullited were not first-class, the UGC
provide such facilities under the Volare 3 Tour Program which had the grandiose slogan "Let your
Leather Factory which was specifically added as a highlight of the tour was not visited, and the
heart sing. 14
Filipino lady tour guide by private respondent was a first timer, that is, she was performing her
duties and responsibilities as such for the first time. 2 Evidently, an inexperienced tour escort, who admittedly had not even theretofore been to
Europe, 15 cannot effectively acquaint the tourists with the interesting areas in the cities and places
In said action before the Regional Trial Court of Quezon City, petitioner likewise moved for the
included in the program, or to promptly render necessary assistance, especially where the latter are
issuance of a writ of preliminary attachment against private respondent on the ground that it
complete strangers thereto, like witnesses Luz Sui Haw and her husband who went to Europe for
committed fraud in contracting an obligation, as contemplated in Section 1(d), Rule 57 of the Rules
their honeymoon. 16
of Court, to which no opposition by the latter appears on the record. This was granted by the court a
quo3 but the preliminary attachment was subsequently lifted upon the filing by private respondent
We agree with petitioner that the selection of Zapanta as the group's tour guide was deliberate and
of a counterbond amounting to P990,000.00.4
conscious choice on the part of private respondent in order to afford her an on-the-job training and
equip her with the proper opportunities so as to later qualify her as an "experienced" tour guide and
During the pendency of said civil case for damages, petitioner also filed other complaints before the
eventually be an asset of respondent corporation. 17 Unfortunately, this resulted in a virtual project
Department of Tourism in DOT Case No. 90-121 and the Securities and Exchange Commission in
experimentation with petitioner and the members of the tour as the unwitting participants.
PED Case No. 90-3738,5wherein, according to petitioner, herein private respondent was meted out
a fine of P10,000.00 by the Commission and P5,000.00 by the Department, 6 which facts are not
We are, therefore, one with respondent court in faulting private respondent's choice of Zapanta as
disputed by private respondent in its comment on the present petition.
a qualified tour guide for the Volare 3 tour package. It brooks no argument that to be true to its
undertakings, private respondent should have selected an experienced European tour guide, or it
On July 9, 1991, the court a quo rendered its decision7 ordering private respondent to pay petitioner
could have allowed Zapanta to go merely as an understudy under the guidance, control and
P500.000.00 as moral damages, P200,000.00 as nominal damages, P300,000.00 as exemplary
supervision of an experienced and competent European or Filipino tour guide, 18 who could give her
damages, P50,000.00 as and for attorney's fees, and the costs of the suit.8 On appeal, respondent
the desired training.
court9 deleted the award for moral and exemplary damages, and reduced the awards for nominal
damages and attorney's fees to P30,000.00 and P10,000.00, respectively. 10
Moreover, a tour guide is supposed to attend to the routinary needs of the tourists, not only when
the latter ask for assistance but at the moment such need becomes apparent. In other words, the
tour guide, especially by reason of her experience in previous tours, must be able to anticipate the
possible needs and problems of the tourists instead of waiting for them to bring it to her attention.
While this is stating the obvious, it is her duty to see to it that basic personal necessities such as
soap, towels and other daily amenities are provided by the hotels. It is also expected of her to see
to it that the tourists are provided with sanitary surroundings and to actively arrange for medical
attention in case of accidents, as what befell petitioner's sister and wherein the siblings had to
practically fend for themselves since, after merely calling for an ambulance, Zapanta left with the
other tour participants. 19
Zapanta fell far short of the performance expected by the tour group, her testimony in open court
being revelatory of her inexperience even on the basic function of a tour guide, to wit:
Q Now, are you aware that there were times that the tourists under the "Volare 3" were not
provided with soap and towels?
A They did not tell me that but I was able to ask them later on but then nobody is
complaining. 20 . . . .
The inability of the group to visit the leather factory is likewise reflective of the neglect and ineptness
of Zapanta in attentively following the itinerary of the day. This incompetence must necessarily be
traced to the lack of due diligence on the part of private respondent in the selection of its employees.
It is true that among the thirty-two destinations, which included twenty-three cities and special visits
to nine tourist spots, this was the only place that was not visited. 21 It must be noted, however, that
the visit to the UGC Leather Factory was one of the highlights 22 of the Volare 3 program which even
had to be specifically inserted in the itinerary, hence it was incumbent upon the organizers of the
tour to take special efforts to ensure the same. Besides, petitioner did expect much from the visit
to that factory since it was represented by private respondent that quality leather goods could be
bought there at lower prices. 23
Private respondent represents Zapanta's act of making daily overseas calls to Manila as an exercise
of prudence and diligence on the latter's part as a tour guide. 24 It further claims that these calls
were needed so that it could monitor the progress of the tour and respond to any problem
immediately. 25 We are not persuaded. The truth of the matter is that Zapanta, as an inexperienced
trainee-on-the-job, was required to make these calls to private respondent for the latter to gauge
her ability in coping with her first assignment and to provide instructions to her. 26
Clearly, therefore, private respondent's choice of Zapanta as the tour guide is a manifest disregard
of its specific assurances to the tour group, resulting in agitation and anxiety on their part, and
which deliberate omission is contrary to the elementary rules of good faith and fair play. It is
extremely doubtful if any group of Filipino tourists would knowingly agree to be used in effect as
guinea pigs in an employees' training program of a travel agency, to be conducted in unfamiliar
European countries with their diverse cultures, lifestyles and languages.
On the matter of the European tour manager, private respondent's advertisement in its tour contract
declares and represents as follows:
FILIPINO TOUR ESCORT! He will accompany you throughout Europe. He speaks your language,
shares your culture and feels your excitement. He won't be alone because you will also be
accompanied by a . . .
EUROPEAN TOUR MANAGER! You get the best of both worlds. Having done so may tours in the
past with people like you, he knows your sentiments, too. So knowledgeable about Europe, there
is hardly a question he can't answer. 27
Private respondent contends that the term "European Tour Manager" does not refer to an individual
but to an organization, allegedly the Kuoni Travel of Switzerland which supposedly prepared the
itinerary for its "Volare Europe Tour," negotiated with all the hotels in Europe, selected tourist spots
and historical places to visit, and appointed experienced local tour guides for the tour group. 28
We regret this unseemly quibbling which perforce cannot be allowed to pass judicial muster.
A cursory reading of said advertisement will readily reveal the express representation that the
contemplated European tour manager is a natural person, and not a juridical one as private
respondent asserts. A corporate entity could not possibly accompany the members of the tour group
to places in Europe; neither can it answer questions from the tourists during the tour. Of course, it
is absurd that if a tourist would want to know how he could possibly go to the nearest store or
supermarket, he would still have to call Kuoni Travel of Switzerland.
Furthermore, both lower courts observed, and we uphold their observations, that indeed private
respondent had the obligation to provide the tour group not only with a European tour manger, but
also with local European tour guides. The latter, parenthetically, were likewise never made
available. 29 Zapanta claims that she was accompanied by a European local tour guide in most of
the major cities in Europe. We entertain serious doubts on, and accordingly reject, this pretension
for she could not even remember the name of said European tour guide. 30 If such a guide really
existed, it is incredible why she could not even identify the former when she testified a year later,
despite the length of their sojourn and the duration of their association.
As to why the word "he" was used in the aforequoted advertisement, private respondent maintains
that the pronoun "he" also includes the word "it," as where it is used as a "nominative case form in
general statements (as in statutes) to include females, fictitious persons (as corporations)." 31 We
are constrained to reject this submission as patently strained and untenable. As already
demonstrated, it is incredible that the word "he" was used by private respondent to denote an
artificial or corporate being. From its advertisement, it is beyond cavil that the import of the word
"he" is a natural and not a juridical person. There is no need for further interpretation when the
wordings are clear. The meaning that will determine the legal effect of a contract is that which is
arrived at by objective standards; one is bound, not by what he subjectively intends, but by what
he leads others reasonably to think he intends. 32
In an obvious but hopeless attempt to arrive at a possible justification, private respondent further
contends that it explained the concept of a European tour manager to its clients at the pre-departure
briefing, which petitioner did not attend. 33 Significantly, however, private respondent failed to
present even one member of the tour group to substantiate its claim. It is a basic rule of evidence
that a party must prove his own affirmative allegations. 34Besides, if it was really its intention to
provide a juridical European tour manager, it could not have kept on promising its tourists during
the tour that a European tour manager would come, 35 supposedly to join and assist them.
Veering to another line of defense, private respondent seeks sanctuary in the delimitation of its
responsibility as printed on the face of its brochure on the Volare 3 program, to wit:
RESPONSIBILITIES: KENSTAR TRAVEL CORPORATION, YOUR TRAVEL AGENT, THEIR
EMPLOYEES OR SUB-AGENTS SHALL BE RESPONSIBLE ONLY FOR BOOKING AND MAKING
ARRANGEMENTS AS YOUR AGENTS. Kenstar Travel Corporation, your travel Agent, their
employees or sub-agents assume no responsibility or liability arising out of or in connection with
the services or lack of services, of any train, vessel, other conveyance or station whatsoever in
the performance of their duty to the passengers or guests, neither will they be responsible for
any act, error or omission, or of any damages, injury, loss, accident, delay or irregularity which
may be occasioned by reason (of) or any defect in . . . lodging place or any facilities . . .
. (Emphasis by private respondent.) 36
While, generally, the terms of a contract result from the mutual formulation thereof by the parties
thereto, it is of common knowledge that there are certain contracts almost all the provisions of which
have been drafted by only one party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the party is the affixing of his signature or his "adhesion"
thereto. 37 In situations like these, when a party imposes upon another a ready-made form of
contract, 38 and the other is reduced to the alternative of taking it or leaving it, giving no room for
negotiation and depriving the latter of the opportunity to bargain on equal footing, a contract of
adhesion results. While it is true that an adhesion contract is not necessarily void, it must
nevertheless be construed strictly against the one who drafted the same. 39 This is especially true
where the stipulations are printed in fine letters and are hardly legible as is the case of the tour
contract 40 involved in the present controversy.
Yet, even assuming arguendo that the contractual limitation aforequoted is enforceable, private
respondent still cannot be exculpated for the reason that responsibility arising from fraudulent acts,
as in the instant case, cannot be stipulated against by reason of public policy. Consequently, for the
foregoing reasons, private respondent cannot rely on its defense of "substantial compliance" with
the contract.
Private respondent submits likewise that the tour was satisfactory, considering that only petitioner,
out of eighteen participants in the Volare 3 Tour Program, actually complained. 41 We cannot accept
this argument. Section 28, Rule 130 of the Rules of Court declares that the rights of a party cannot
be prejudiced by an act, declaration, or omissionof another, a statutory adaptation of the first branch
of the hornbook rule of res inter alios acta 42 which we do not have to belabor here.
Besides, it is a commonly known fact that there are tourists who, although the tour was far from
what the tour operator undertook under the contract, choose to remain silent and forego recourse
to a suit just to avoid the expenses, hassle and rancor of litigation, and not because the tour was in
accord with was promised. One does not relish adding to the bitter memory of a misadventure the
unpleasantness of another extended confrontation. Furthermore, contrary to private respondent's
assertion, not only petitioner but two other members of the tour group, Luz Sui Haw and Ercilla
Ampil, confirmed petitioner's complaints when they testified as witnesses for her as plaintiff in the
court below. 43
Private respondent likewise committed a grave misrepresentation when it assured in its Volare 3
tour package that the hotels it had chosen would provide the tourists complete amenities and were
conveniently located along the way for the daily itineraries. 44 It turned out that some of the hotels
were not sufficiently equipped with even the basic facilities and were at a distance from the cities
covered by the projected tour. Petitioner testified on her disgust with the conditions and locations
of the hotels, thus:
Q And that these bathrooms ha(ve) bath tub(s) and hot and cold shower(s)?
A Not all, sir.
Q Did they also provide soap and towels?
A Not all, sir, some (had) no toilet paper. 45
Q Which one?
A The 2 stars, the 3 stars and some 4 stars (sic) hotels.
Q What I am saying . . .
A You are asking a question? I am answering you. 2 stars, 3 stars and some 4 stars (sic) hotels,
no soap, toilet paper and (the) bowl stinks. . . .
Q And that except for the fact that some of these four star hotels were outside the city they
provided you with the comfort?
A Not all, sir.
Q Can you mention some which did not provide you that comfort?
A For example, if Ramada Hotel Venezia is in Quezon City, our hotel is in Meycauayan. And if
Florence or Ferenze is in manila, our hotel is in Muntinlupa. 46
A One more hotel, sir, in Barcelona, Hotel Saint Jacques is also outside the city. Suppose
Barcelona is in Quezon City, our hotel is in Marilao. We looked for this hotel inside the city of
Barcelona for three (3) hours. We wasted our time looking for almost all the hotels and places
where to eat. That is the kind of tour that you have. 47
Luz Sui Haw, who availed of the Volare 3 tour package with her husband for their honeymoon,
shared the sentiments of petitioner and testified as follows:
Q . . . Will you kindly tell us why the hotels where you stayed are not considered first class
hotels?
A Because the hotels where we went, sir, (are) far from the City and the materials used are not
first class and at times there were no towels and soap. And the two (2) hotels in Nevers and
Florence the conditions (are) very worse (sic). 48
Q Considering that you are honeymooners together with your husband, what (were) your
feelings when you found out that the condition were not fulfilled by the defendant?
A I would like to be very honest. I got sick when I reached Florence and half of my body got itch
(sic). I think for a honeymooner I would like to emphasize that we should enjoy that day of our
life and it seems my feet kept on itching because of the condition of the hotel. And I was so
dissatisfied because the European Tour Manager was not around there (were) beautiful
promises. They kept on telling us that a European Tour Manager will come over; until our Paris
tour was ended there was no European tour manager. 49
Q You will file an action against the defendant because there was a disruption of your happiness,
in your honeymoon, is that correct?
A That is one of my causes of (sic) coming up here. Secondly, i was very dissatisfied (with) the
condition. Thirdly, that Volare 89 it says it will let your heart sing. That is not true. There was
no European tour (manager) and the highlights of the tour (were) very poor. The hotels were
worse (sic) hotels. 50
Q All the conditions of the hotels as you . . .
A Not all but as stated in the brochure that it is first class hotel. The first class hotels state that
all things are beautiful and it is neat and clean with complete amenities and I encountered the
Luxembourg hotel which is quite very dilapidated because of the flooring when you step on the
side "kumikiring" and the cabinets (are) antiques and as honeymooners we don't want to be
disturbed or seen. 51
Q None of these are first class hotels?
A Yes, sir.
Q So, for example Ramada Hotel Venezia which according to Miss Geraldez is first class hotel is
not first class hotel?
A Yes, sir.
Q You share the opinion of Miss Geraldez?
A Yes, sir.
Q The same is true with Grand Hotel Palatino which is not a first class hotel?
A Yes, sir.
Q And Hotel Delta Florence is not first class hotel?
A That is how I got my itch, sir. Seven (7) days of itch.
Q How about Hotel Saint-Jacquez, Paris?
A It is far from the city. It is not first class hotel.
Q So with Hotel Le Prieure Du Coeur de Jesus neither a first class hotel?
A Yes, sir.
Q Hotel De Nevers is not a first class hotel?
A Yes, sir.
Q Hotel Roc Blanc Andorra is not a first class hotel?
A Yes, sir.
Q Saint Just Hotel, Barcelona is not a first class hotel?
 A Yes, sir.
Q Hotel Pullman Nice neither is not a first class hotel?
A Yes, sir.
Q Hotel Prinz Eugen and Austrotel are not first class hotels?
A Yes, sir. 52
Private respondent cannot escape responsibility by seeking refuge under the listing of first-class
hotels in publications like the "Official Hotel and Resort Guide" and Worldwide Hotel Guide." 53 Kuoni
Travel, its tour operator, 54 which prepared the hotel listings, is a European-based travel
agency 55 and, as such, could have easily verified the matter of first-class accommodations. Nor can
it logically claim that the first-class hotels in Europe may not necessarily be the first-class hotels
here in the Philippines. 56 It is reasonable for petitioner to assume that the promised first-class hotels
are equivalent to what are considered first-class hotels in Manila. Even assuming arguendo that
there is indeed a difference in classifications, it cannot be gainsaid that a first-class hotel could at
the very least provide basic necessities and sanitary accommodations. We are accordingly not at all
impressed by private respondent's attempts to trivialize the complaints thereon by petitioner and
her companions.
In a last ditch effort to justify its choice of the hotels, private respondent contends that it merely
provided such "first class" hotels which are commensurate to the tourists budget, or which were,
under the given circumstances, the "best for their money." It postulated that it could not have
offered better hostelry when the consideration paid for hotel accommodations by the tour
participants was only so much,57 and the tour price of $2,990.00 covers a European tour for 22 days
inclusive of lower room rates and meals. 58 this is implausible, self-serving and borders on sophistry.
The fact that the tourists were to pay a supposedly lower amount, such that private respondent
allegedly retained hardly enough as reasonable profit, 59 does not justify a substandard form of
service in return. It was private respondent, in the first place, which fixed the charges for the
package tour and determined the services that could be availed of corresponding to such price.
Hence, it cannot now be heard to complain that it only made a putative marginal profit out of the
transaction. if it could not provide the tour participants with first-class lodgings on the basis of the
amount that they paid, it could and should have instead increased the price to enable it to arrange
for the promised first-class accommodations.
On the foregoing considerations, respondent court erred in deleting the award for moral and
exemplary damages. Moral damages may be awarded in breaches of contract where the obligor
acted fraudulently or in bad faith. 60 From the facts earlier narrated, private respondent can be
faulted with fraud in the inducement, which is employed by a party to a contract in securing the
consent of the other.
This fraud or dolo which is present or employed at the time of birth or perfection of a contract may
either be dolocausante or dolo incidente. The first, or causal fraud referred to in Article 1338, are
those deceptions or misrepresentations of a serious character employed by one party and without
which the other party would not have entered into the contract. Dolo incidente, or incidental fraud
which is referred to in Article 1344, are those which are not serious in character and without which
the other party would still have entered into the contract. 61 Dolo causantedetermines or is the
essential cause of the consent, while dolo incidente refers only to some particular or accident of the
obligations. 62 The effects of dolo causante are the nullity of the contract and the indemnification of
damages, 63 and dolo incidente also obliges the person employing it to pay damages. 64
In either case, whether private respondent has committed dolo causante or dolo incidente by
making misrepresentations in its contracts with petitioner and other members of the tour group,
which deceptions became patent in the light of after-events when, contrary to its representations,
it employed an inexperienced tour guide, housed the tourist group in substandard hotels, and
reneged on its promise of a European tour manager and the visit to the leather factory, it is
indubitably liable for damages to petitioner.
In the belief that an experienced tour escort and a European tour manager would accompany them,
with the concomitant reassuring and comforting thought of having security and assistance readily
at hand, petitioner was induced to join the Volare 3 tourists, instead of travelling alone 65 She
likewise suffered serious anxiety and distress when the group was unable to visit the leather factory
and when she did not receive first-class accommodations in their lodgings which were
misrepresented as first-class hotels. These, to our mind, justify the award for moral damages, which
are in the category of an award designed to compensate the claimant for that injury which she had
suffered, and not as a penalty on the wrongdoer, 66 we believe that an award of P100,000.00 is
sufficient and reasonable.
When moral damages are awarded, especially for fraudulent conduct, exemplary damages may also
be decreed. Exemplary damages are imposed by way of example or correction for the public good,
in addition to moral, temperate, liquidated or compensatory damages. According to the code
Commission, exemplary damages are required by public policy, for wanton acts must be
suppressed. 67 An award, therefore, of P50,000.00 is called for to deter travel agencies from
resorting to advertisements and enticements with the intention of realizing considerable profit at the
expense of the public, without ensuring compliance with their express commitments. While, under
the present state of the law, extraordinary diligence is not required in travel or tour contracts, such
as that in the case at bar, the travel agency acting as tour operator must nevertheless be held to
strict accounting for contracted services, considering the public interest in tourism, whether in the
local or in the international scene. Consequently, we have to likewise reject the theory of private
respondent that the promise it made in the tour brochure may be regarded only as "commendatory
trade talk." 68
With regard to the honorarium for counsel as an item of damages, since we are awarding moral and
exemplary damages, 69 and considering the legal importance of the instant litigation and the efforts
of counsel evident from the records of three levels of the judicial hierarchy, we favorably consider
the amount of P20,000.00 therefor.
WHEREFORE, premises considered, the decision of respondent Court of Appeals is hereby SET
ASIDE, and another one rendered, ordering private respondent Kenstar Travel Corporation to pay
petitioner Lydia L. Geraldez the sums of P100,000.00 by way of moral damages, P50,000.00 as
exemplary damages, and P20,000.00 as and for attorney's fees, with costs against private
respondent. The award for nominal damages is hereby deleted.
G.R. No. 34840 September 23, 1931 members of the owner's family than the child driving it. The theory of the law is that the running of
the machine by a child to carry other members of the family is within the scope of the owner's
NARCISO GUTIERREZ, plaintiff-appellee, business, so that he is liable for the negligence of the child because of the relationship of master
vs. and servant. (Huddy On Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Atl., 322.) The
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco rests on
VELASCO, and SATURNINO CORTEZ, defendants-appellants. a different basis, namely, that of contract which, we think, has been sufficiently demonstrated by
the allegations of the complaint, not controverted, and the evidence. The reason for this conclusion
reaches to the findings of the trial court concerning the position of the truck on the bridge, the speed
L.D. Lockwood for appellants Velasco and Cortez.
in operating the machine, and the lack of care employed by the chauffeur. While these facts are not
San Agustin and Roxas for other appellants.
as clearly evidenced as are those which convict the other defendant, we nevertheless hesitate to
Ramon Diokno for appellee.
disregard the points emphasized by the trial judge. In its broader aspects, the case is one of two
drivers approaching a narrow bridge from opposite directions, with neither being willing to slow up
MALCOLM, J.: and give the right of way to the other, with the inevitable result of a collision and an accident.

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five
defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a result
of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both sets of
defendants appealed.
On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of
Las Piñas, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was owned
by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18 years of
age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At the time
of the collision, the father was not in the car, but the mother, together will several other members
of the Gutierrez family, seven in all, were accommodated therein. A passenger in the autobus, by
the name of Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The collision
between the bus and the automobile resulted in Narciso Gutierrez suffering a fracture right leg which
required medical attendance for a considerable period of time, and which even at the date of the
trial appears not to have healed properly.
The defendants Velasco and Cortez further contend that there existed contributory negligence on
the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the case
is contradictory in the extreme and leads us far afield into speculative matters.
The last subject for consideration relates to the amount of the award. The appellee suggests that
the amount could justly be raised to P16,517, but naturally is not serious in asking for this sum,
since no appeal was taken by him from the judgment. The other parties unite in challenging the
award of P10,000, as excessive. All facts considered, including actual expenditures and damages for
the injury to the leg of the plaintiff, which may cause him permanent lameness, in connection with
other adjudications of this court, lead us to conclude that a total sum for the plaintiff of P5,000 would
be fair and reasonable. The difficulty in approximating the damages by monetary compensation is
well elucidated by the divergence of opinion among the members of the court, three of whom have
inclined to the view that P3,000 would be amply sufficient, while a fourth member has argued that
P7,500 would be none too much.

It is conceded that the collision was caused by negligence pure and simple. The difference between In consonance with the foregoing rulings, the judgment appealed from will be modified, and the
the parties is that, while the plaintiff blames both sets of defendants, the owner of the passenger plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo Velasco,
truck blames the automobile, and the owner of the automobile, in turn, blames the truck. We have and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both instances.
given close attention to these highly debatable points, and having done so, a majority of the court
are of the opinion that the findings of the trial judge on all controversial questions of fact find
sufficient support in the record, and so should be maintained. With this general statement set down,
we turn to consider the respective legal obligations of the defendants.

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

We are dealing with the civil law liability of parties for obligations which arise from fault or
negligence. At the same time, we believe that, as has been done in other cases, we can take
cognizance of the common law rule on the same subject. In the United States, it is uniformly held
that the head of a house, the owner of an automobile, who maintains it for the general use of his
family is liable for its negligent operation by one of his children, whom he designates or permits to
run it, where the car is occupied and being used at the time of the injury for the pleasure of other
G.R. No. L-14335 January 28, 1920
MANUEL DE GUIA, plaintiff-appellant, vs. THE MANILA ELECTRIC RAILROAD & LIGHT
COMPANY, defendant-appellant.
Sumulong and Estrada, Crossfield and O'Brien and Francisco A. Delgado for
plaintiff-appellant.
Lawrence and Ross for defendant-appellant.
STREET, J.:
This is an appeal prosecuted both by the plaintiff and the defendant from a judgment of the Court
of First Instance of the City of Manila, whereby the plaintiff was awarded the sum of P6,100, with
interest and costs, as damages incurred by him in consequence of physical injuries sustained while
riding on one of the defendant's car.
The accident which gave rise to the litigation occurred on September 4, 1915, near the end of the
street-car line in Caloocan, Rizal, a northern suburb of the city of Manila. It appears that, at about
8 o'clock p.m., of the date mentioned, the plaintiff Manuel de Guia, a physician residing in Caloocan,
boarded a car at the end of the line with the intention of coming to the city. At about 30 meters
from the starting point the car entered a switch, the plaintiff remaining on the back platform holding
the handle of the right-hand door. Upon coming out of the switch, the small wheels of the rear truck
left the track, ran for a short distance along the macadam filling, which was flush with the rails, and
struck a concrete post at the left of the tract. The post was shattered; and as the car stopped the
plaintiff was thrown against the door with some violence, receiving bruises and possibly certain
internal injuries, the extent of which is a subject of dispute.
The trial court found that the motorman of the derailed car was negligent in having maintained too
rapid a speed. This inference appears to be based chiefly upon the results of the shock, involving
the shattering of the post and the bending of the kingpost of the car. It is insisted for the defendant
company that the derailment was due to the presence of a stone, somewhat larger than a goose
egg, which had become accidentally lodged between the rails at the juncture of the switch and which
was unobserved by the motorman. In this view the derailment of the car is supposed to be due
to casus fortuitos and not chargeable to the negligence of the motorman.
Even supposing that the derailment of the car was due to the accidental presence of such a stone
as suggested, we do not think that the existence of negligence is disproved. The motorman says
that upon approaching the switch he reduced the electrical energy to the point that the car barely
entered the switch under its own momentum, and this operation was repeated as he passed out.
Upon getting again on the straight tract he put the control successively at points one, two, three
and lastly at point four. At the moment when the control was placed at point four he perceived that
the rear wheels were derailed and applied the brake; but at the same instant the car struck the post,
some 40 meters distant from the exit of the switch. One of the defendant's witnesses stated in court
that the rate of a car propelled by electricity with the control at point "four" should be about five or
6 miles per hour. There was some other evidence to the effect that the car was behind schedule
time and that it was being driven after leaving the switch, at a higher rate than would ordinarily be
indicated by the control at point four. This inference is rendered more tenable by the circumstance
that the car was practically empty. On the whole, we are of the opinion that the finding of negligence
in the operation of the car must be sustained, as not being clearly contrary to the evidence; not so
much because of excessive speed as because of the distance which the car was allowed to run with
the front wheels of the rear truck derailed. It seems to us than an experienced and attentive
motorman should have discovered that something was wrong and would have stopped before he
had driven the car over the entire distance from the point where the wheels left the track to the
place where the post was struck.
The conclusion being accepted that there was negligence on the part of the motorman in driving the
car, it results that the company is liable for the damage resulting to the plaintiff as a consequence
of that negligence. The plaintiff had boarded the car as a passenger for the city of Manila and the
company undertook to convey him for hire. The relation between the parties was, therefore, of a
contractual nature, and the duty of the carrier is to be determined with reference to the principles
of contract law, that is, the company was bound to convey and deliver the plaintiff safely and
securely with reference to the degree of care which, under the circumstances, is required by law and
custom applicable to the case (art. 1258, Civil Code). Upon failure to comply with that obligation the
company incurred the liability defined in articles 1103-1107 of the Civil Code. (Cangco vs. Manila
Railroad Company, 38 Phil. Rep., 768; Manila Railroad Company vs. Compañia Transatlantica, and
Atlantic, Gulf & Pacific Co., 38 Phil. Rep., 875.)
From the nature of the liability thus incurred, it is clear that the defendant company can not avail
itself of the last paragraph of article 1903 of the Civil Code, since that provision has reference to
liability incurred by negligence in the absence of contractual relation, that is, to the culpa aquiliana of
the civil law. It was therefore irrelevant for the defendant company to prove, as it did, that the
company had exercised due care in the selection and instruction of the motorman who was in charge
of its car and that he was in fact an experienced and reliable servant.
At this point, however, it should be observed that although in case like this the defendant must
answer for the consequences of the negligence of its employee, the court has the power to moderate
liability according to the circumstances of the case (art. 1103, Civ. Code): Furthermore, we think it
obvious that an employer who has in fact displayed due diligence in choosing and instructing his
servants is entitled to be considered a debtor in good faith, within the meaning of article 1107 of
the same Code. Construing these two provisions together, applying them to the facts of this case, it
results that the defendant's liability is limited to such damages as might, at the time of the accident,
have been reasonably foreseen as a probable consequence of the physical injuries inflicted upon the
plaintiff and which were in fact a necessary result of those injuries. There is nothing novel in this
proposition, since both the civil and the common law are agreed upon the point that the damages
ordinarily recoverable for the breach of a contractual obligation, against a person who has acted in
good faith, are such as can reasonably be foreseen at the time the obligation is contracted.
In Daywalt vs. Corporacion de PP. Agustinos Recoletos (39 Phil., 587), we said: "The extent of the
liability for the breach of a contract must be determined in the light of the situation in existence at
the time the contract is made; and the damages ordinarily recoverable are in all events limited to
such as might be reasonably foreseen in the light of the facts then known to the contracting parties."
This brings us to consider the amount which may be awarded to the plaintiff as damages. Upon this
point the trial judge found that, as a result of the physical and nervous derangement resulting from
the accident, Dr. De Guia was unable properly to attend to his professional labors for three months
and suspended his practice for that period. It was also proved by the testimony of the plaintiff that
his customary income, as a physician, was about P300 per month. The trial judge accordingly allowed
P900, as damages for loss of professional earnings. This allowance is attacked upon appeal by the
defendant as excessive both as to the period and rate of allowance. Upon examining the evidence
we fell disinclined to disturb this part of the judgment, though it must be conceded that the estimate
of the trial judge on this point was liberal enough to the plaintiff.
Another item allowed by the trial judge consists of P3,900, which the plaintiff is supposed to have
lost by reason of his inability to accept a position as district health officer in Occidental Negros. It
appears in this connection that Mr. Alunan, representative from Occidental Negros, had asked Dr.
Montinola, who supposedly had the authority to make the appointment, to nominate the plaintiff to
such position. The job was supposed to be good for two years, with a salary of P1,600 per annum,
and possibility of outside practice worth P350. Accepting these suggestions as true, it is evident that
the damages thus incurred are too speculative to be the basis of recovery in a civil action. This
element of damages must therefore be eliminated. It goes without saying that damage of this
character could not, at the time of the accident, have been foreseen by the delinquent party as a
probable consequence of the injury inflicted — a circumstance which makes applicable article 1107
of the Civil Code, as already expounded.
The last element of damages to be considered is the item of the plaintiff's doctor's bills, a subject
which we momentarily pass for discussion further on, since the controversy on this point can be
more readily understood in connection with the question raised by the plaintiff's appeal.
The plaintiff alleges in the complaint that the damages incurred by him as a result of the injuries in
question ascend to the amount of P40,000. Of this amount the sum of P10,000 is supposed to
represent the cost of medical treatment and other expenses incident to the plaintiff's cure, while the
remainder (P30,000) represents the damage resulting from the character of his injuries, which are
supposedly such as to incapacitate him for the exercise of the medical profession in the future. In
support of these claims the plaintiff introduced evidence, consisting of his own testimony and that
of numerous medical experts, tending to show that as a result of the injuries in question he had
developed infarct of the liver and traumatic neurosis, accompanied by nervousness, vertigo, and
other disturbing symptoms of a serious and permanent character, it being claimed that these
manifestations of disorder rendered him liable to a host of other dangerous diseases, such as
pleuresy, tuberculosis, pneumonia, and pulmonary gangrene, and that restoration to health could
only be accomplished, if at all, after long years of complete repose. The trial judge did not take these
pretensions very seriously, and, as already stated, limited the damages to the three items of
professional earnings, expenses of medical treatment, and the loss of the appointment as medical
treatment, and the loss of the appointment as medical inspector in Occidental Negros. As the appeal
of the plaintiff opens the whole case upon the question of damages, it is desirable to present a
somewhat fuller statement than that already given with respect to extent and character of the
injuries in question.
The plaintiff testified that, at the time the car struck against the concrete post, he was standing on
the rear platform, grasping the handle of the right-hand door. The shock of the impact threw him
forward, and the left part of his chest struck against the door causing him to fall. In falling, the
plaintiff says, his head struck one of the seats and he became unconscious. He was presently taken
to his home which was only a short distance away, where he was seen at about 10 o'clock p. m., by
a physician in the employment of the defendant company. This physician says that the plaintiff was
then walking about and apparently suffering somewhat from bruises on his chest. He said nothing
about his head being injured and refused to go to a hospital. Later, during the same night Dr.
Carmelo Basa was called in to see the plaintiff. This physician says that he found Doctor De Guia
lying in bed and complaining of a severe pain in the side. During the visit of Doctor Basa the plaintiff
several times spit up blood, a manifestation no doubt due to the effects of the bruises received in
his side. The next day Doctor De Guia went into Manila to consult another physician, Doctor Miciano,
and during the course of a few weeks he called into consultation other doctors who were introduced
as witnesses in his behalf at the trial of this case. According to the testimony of these witnesses, as
well as that of the plaintiff himself, the symptoms of physical and nervous derangement in the
plaintiff speedily developed in portentous degree.
Other experts were introduced by the defendant whose testimony tended to show that the plaintiff's
injuries, considered in their physical effects, were trivial and that the attendant nervous
derangement, with its complicated train of ailments, was merely simulated.
Upon this question the opposing medical experts ventilated a considerable mass of professional
learning with reference to the nature and effects of the baffling disease known as traumatic neurosis,
or traumatic hysteria — a topic which has been the occasion of much controversy in actions of this
character in the tribunals of Europe and America. The subject is one of considerable interest from a
medico-legal point of view, but we deem it unnecessary in this opinion to enter upon a discussion of
its voluminous literature. It is enough to say that in our opinion the plaintiff's case for large damages
in respect to his supposed incapacitation for future professional practice is not made out. Of course
in this jurisdiction damages can not be assessed in favor of the plaintiff as compensation for the
physical or mental pain which he may have endured (Marcelo vs. Velasco, 11 Phil. Rep. 287); and
the evidence relating to the injuries, both external and internal, received by him must be examined
chiefly in its bearing upon his material welfare, that is, in its results upon his earning capacity and
the expenses incurred in restoration to the usual condition of health.
The evidence before us shows that immediately after the accident in question Doctor De Guia,
sensing in the situation a possibility of profit, devoted himself with great assiduity to the promotion
of this litigation; and with the aid of his own professional knowledge, supplemented by suggestions
obtained from his professional friends and associates, he enveloped himself more or less
unconsciously in an atmosphere of delusion which rendered him incapable of appreciating at their
true value the symptoms of disorder which he developed. The trial court was in our opinion fully
justified in rejecting the exaggerated estimate of damages thus created.
We now pass to the consideration of the amount allowed to the plaintiff by the trial judge as the
expense incurred for medical service. In this connection Doctor Montes testified that he was first
called to see the plaintiff upon September 14, 1915, when he found him suffering from traumatic
neurosis. Three months later he was called upon to treat the same patient for an acute catarrhal
condition, involving disturbance in the pulmonary region. The treatment for this malady was
successful after two months, but at the end of six months the same trouble recurred and required
further treatment. In October of the year 1916, or more than a year after the accident in question
occurred, Doctor Montes was called in consultation with Doctor Guerrero to make an examination of
the plaintiff. Doctor Montes says that his charges altogether for services rendered to the plaintiff
amount to P350, of which the sum of P200 had been paid by the plaintiff upon bills rendered from
time to time. This physician speaks in the most general terms with respect to the times and extent
of the services rendered; and it is by no means clear that those services which were rendered many
months, or year, after the accident had in fact any necessary or legitimate relation to the injuries
received by the plaintiff. In view of the vagueness and uncertainty of the testimony relating to Doctor
Montes' services, we are of the opinion that the sum of P200, or the amount actually paid to him by
the plaintiff, represents the extent of the plaintiff's obligation with respect to treatment for said
injuries.
With regard to the obligation supposedly incurred by the plaintiff to three other physicians, we are
of the opinion that they are not a proper subject of recovery in this action; and this for more than
one reason. In the first place, it does not appear that said physicians have in fact made charges for
those services with the intention of imposing obligations on the plaintiff to pay for them. On the
contrary it would seem that said services were gratuitously rendered out of courtesy to the plaintiff
as a member of the medical profession. The suggestions made on the stand by these physicians to
the effect that their services were worth the amounts stated by them are not sufficient to proved
that the plaintiff had incurred the obligation to pay those amounts. In the second place, we are
convinced that in employing so many physicians the plaintiff must have had in view of the successful
promotion of the issue of this lawsuit rather than the bona fide purpose of effecting the cure of his
injuries. In order to constitute a proper element of recovery in an action of this character, the medical
service for which reimbursement is claimed should not only be such as to have created a legal
obligation upon the plaintiff but such as was reasonably necessary in view of his actual condition. It
can not be permitted that a litigant should retain an unusual and unnecessary number of professional
experts with a view to the successful promotion of a lawsuit and expect to recover against his
adversary the entire expense thus incurred. His claim for medical services must be limited to such
expenditures as were reasonably suited to the case.
The second error assigned in the brief of the defendant company presents a question of practice
which, though not vital to the solution of this case, is of sufficient general importance to merit notice.
It appears that four of the physicians examined as witnesses for the plaintiff had made written
statements at various dates certifying the results of their respective examinations into the condition
of the plaintiff. When these witnesses were examined in court the identified their respective
signatures to these certificates and the trial judge, over the defendant's objection, admitted the
documents as primary evidence in the case. This was undoubtedly erroneous. A document of this
character is not primary evidence in any sense, since it is fundamentally of a hearsay nature; and
the only legitimate use to which one of these certificates could be put, as evidence for the plaintiff,
was to allow the physician who issued it to refer thereto to refresh his memory upon details which
he might have forgotten. In Zwangizer vs. Newman (83 N. Y. Supp., 1071) which was also an action
to recover damages for personal injury, it appeared that a physician, who had been sent by one of
the parties to examine the plaintiff, had made at the time a written memorandum of the results of
the examination; and it was proposed to introduce this document in evidence at the trial. It was
excluded by the trial judge, and it was held upon appeal that this was proper. Said the court: "There
was no failure or exhaustion of the memory, and no impeachment of the memorandum on cross-
examination; and the document was clearly incompetent as evidence in chief."
It results from the foregoing that the judgment appealed from must be modified by reducing the
amount of the recovery to eleven hundred pesos (1,100), with legal interest from November 8,
1916. As thus modified the judgment is affirmed, without any special pronouncement as to costs of
this instance. So ordered.
G.R. No. 141258 April 9, 2003
TOMASA SARMIENTO, petitioner, vs. SPS. LUIS & ROSE SUN-CABRIDO and MARIA LOURDES
SUN, respondents.
CORONA, J.:
This appeal by certiorari stems from the Decision 1 of respondent Court of Appeals promulgated on
November 26, 1999 in CA-G.R. SP No. 47431 declaring the private respondents not liable for
damages.
Petitioner, Tomasa Sarmiento, states that sometime in April 1994, a friend, Dra. Virginia Lao,
requested her to find somebody to reset a pair of diamond earrings into two gold rings. 2 Accordingly,
petitioner sent a certain Tita Payag with the pair of earrings to Dingding’s Jewelry Shop, owned and
managed by respondent spouses Luis and Rose Cabrido,3 which accepted the job order for P400.4
Petitioner provided 12 grams of gold to be used in crafting the pair of ring settings. 5 After 3 days,
Tita Payag delivered to the jewelry shop one of Dra. Lao’s diamond earrings which was earlier
appraised as worth .33 carat and almost perfect in cut and clarity. 6 Respondent Ma. Lourdes
(Marilou) Sun went on to dismount the diamond from its original setting. Unsuccessful, she asked
their goldsmith, Zenon Santos, to do it. Santos removed the diamond by twisting the setting with a
pair of pliers, breaking the gem in the process.7
Petitioner required the respondents to replace the diamond with the same size and quality. When
they refused, the petitioner was forced to buy a replacement in the amount of P30,000.8
Respondent Rose Cabrido, manager of Dingding’s Jewelry Shop, denied having entered into any
transaction with Tita Payag whom she met only after the latter came to the jewelry shop to seek
compensation from Santos for the broken piece of jewelry. 9 However, it was possible that Payag
may have availed of their services as she could not have known every customer who came to their
shop. Rose disclosed that she usually arrived at 11:00 a.m. When she was not around, her mother
and sister tended the shop.10
Marilou admitted knowing Payag who came to Dingding’s Jewelry Shop to avail of their services
regarding a certain piece of jewelry. After a short conversation, Payag went inside the shop to see
Santos. When the precious stone was broken by Santos, Payag demanded P15,000 from him. As the
latter had no money, she turned to Marilou for reimbursement apparently thinking that Marilou was
the owner of the shop.11
For his part, Santos recalled that Payag requested him to dismount what appeared to him was a
sapphire. While clipping the setting with the use of a small pair of pliers, the stone accidentally
broke. Santos denied being an employee of Dingding’s Jewelry Shop. 12
Attempts to settle the controversy before the barangay lupon proved futile.13 Consequently,
petitioner filed a complaint for damages on June 28, 1994 with the Municipal Trial Court in Cities
(MTCC) of Tagbilaran City docketed as Civil Case No. 2339 which rendered a decision 14 in favor of
the petitioner, the dispositive portion of which reads:
WHEREFORE, Decision is hereby rendered in favor of plaintiff Tomasa Sarmiento and against
defendants Spouses Luis and Rose Sun-Cabrido, ordering defendants to pay jointly and severally
the amount of Thirty Thousand Pesos (P30,000.00) as actual or compensatory damages; Three
Thousand Pesos (P3,000.00) as moral damages; Five Thousand Pesos (P5,000.00) as attorney’s
fees; Two Thousand Pesos (P2,000.00) as litigation expenses, with legal interest of 6% per
 annum from the date of this decision and 12% per annum from the date when this decision
becomes final until the amounts shall have been fully paid and to pay the costs.
This case as against defendant Maria Lourdes Sun as well as defendants’ counterclaim are
dismissed for lack of merit.
On appeal, the Regional Trial Court (RTC) of Tagbilaran City, Branch 3, reversed the decision of the
MTCC, thus absolving the respondents of any responsibility arising from breach of contract. 15 Finding
no reversible error, the Court of Appeals (CA) affirmed the judgment of the RTC in its Decision
promulgated on November 26, 1999.16
Unable to accept the decision, the petitioner filed the instant petition for review with the following
assigned errors:
I. THE COURT OF APPEALS ERRED IN MAINTAINING AND SO HOLDING THAT ZENON SANTOS
IS NOT AN EMPLOYEE OF DEFENDANT (herein respondent) ROSE SUN-CABRIDO, AND IS
THEREFORE ANSWERABLE FOR HIS OWN ACTS OR OMISSIONS
II. THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE REGIONAL TRIAL COURT’S
PRONOUNCEMENTS THAT THERE EXISTS NO AGREEMENT BETWEEN THE PETITIONER AND
RESPONDENTS THAT THE LATTER WOULD ANSWER FOR ANY LIABILITY SHOULD THE DIAMOND
BE DAMAGED IN THE PROCESS OF DISMOUNTING THEM FROM THE EARRINGS.
Essentially, petitioner claims that the dismounting of the diamond from its original setting was part
of the obligation assumed by the private respondents under the contract of service. Thus, they
should be held liable for damages arising from its breakage. On the other hand, the version of the
private respondents, upheld by the RTC and the CA, is that their agreement with the petitioner was
for crafting two gold rings mounted with diamonds only and did not include the dismounting of the
said diamonds from their original setting.17 Consequently, the crux of the instant controversy is the
scope of the obligation assumed by the private respondents under the verbal contract of service with
the petitioner.
The Court notes that, during the trial, private respondents vigorously denied any transaction
between Dingdings’ Jewelry Shop and the petitioner, through Tita Payag. Rose Cabrido, for instance,
denied having ever met Payag before the latter came to seek reimbursement for the value of the
broken diamond. Likewise, while Marilou acknowledged acquaintance with Payag, she nevertheless
denied accepting any job order from her. Debunking their protestations, however, the MTCC of
Tagbilaran City rendered its decision on November 26, 1999 in favor of herein petitioner.
Apparently realizing the weakness and futility of their position, private respondents conceded, on
appeal, the existence of an agreement with the petitioner for crafting a pair of gold rings mounted
with diamonds. This apparent concession by the private respondents, however, was really nothing
but an ingenious maneuver, designed to preclude, just the same, any recovery for damages by the
petitioner. Thus, while ostensibly admitting the existence of the said agreement, private
respondents, nonetheless denied assuming any obligation to dismount the diamonds from their
original settings.18
The inconsistent position of the private respondents impugns their credibility. They cannot be
permitted to adopt a certain stance, only to vacillate later to suit their interest. We are therefore
inclined to agree with the MTCC in giving credence to the version of the petitioner. The MTCC had
the unique opportunity to actually observe the behavior and demeanor of the witnesses as they
testified during the trial.19
At any rate, the contemporaneous and subsequent acts of the parties20 support the version of the
petitioner. Thus, when Tita Payag asked Marilou of Dingding’s Jewelry Shop to reset a pair of
diamond earrings, she brought with her the said pieces of jewelry so that the diamonds which were
still mounted could be measured and the new ring settings crafted accordingly. On the said occasion,
Marilou expressed no reservation regarding the dismounting of the diamonds which, after all, was
an integral part of petitioner’s job order. She should have instructed Payag to have them dismounted
first if Marilou had actually intended to spare the jewelry shop of the task but she did not. Instead,
petitioner was charged P400 for the job order which was readily accepted. Thus, a perfected contract
to reset the pair of diamond earrings arose between the petitioner, through Payag, and Dingding’s
Jewelry Shop, through Marilou.
Marilou’s subsequent actuations were even more revealing as regards the scope of obligation
assumed by the jewelry shop. After the new settings were completed in 3 days, she called up the
petitioner to bring the diamond earrings to be reset. 21 Having initially examined one of them, Marilou
went on to dismount the diamond from its original setting. Unsuccessful, she then delegated the
task to their goldsmith, Zenon Santos. Having acted the way she did, Marilou cannot now deny the
shop’s obligation to reset the pair of earrings.
Obligations arising from contracts have the force of law between the contracting
parties.22 Corollarily, 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. 23 The
fault or negligence of the obligor consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the persons, of the time and of
the place.24
In the case at bar, it is beyond doubt that Santos acted negligently in dismounting the diamond from
its original setting. It appears to be the practice of the trade to use a miniature wire saw in
dismounting precious gems, such as diamonds, from their original settings. 25 However, Santos
employed a pair of pliers in clipping the original setting, thus resulting in breakage of the diamond.
The jewelry shop failed to perform its obligation with the ordinary diligence required by the
circumstances. It should be pointed out that Marilou examined the diamond before dismounting it
from the original setting and found the same to be in order. Its subsequent breakage in the hands
of Santos could only have been caused by his negligence in using the wrong equipment. Res ipsa
loquitur.
Private respondents seek to avoid liability by passing the buck to Santos who claimed to be an
independent worker. They also claim, rather lamely, that Marilou simply happened to drop by at
Dingding’s Jewelry Shop when Payag arrived to place her job order. 26
We do not think so.
The facts show that Santos had been working at Dingding’s Jewelry Shop as goldsmith for about 6
months accepting job orders through referrals from private respondents. 27 On the other hand, Payag
stated that she had transacted with Dingding’s Jewelry Shop on at least 10 previews occasions,
always through Marilou.28 The preponderance of evidence supports the view that Marilou and Zenon
Santos were employed at Dingding’s Jewelry Shop in order to perform activities which were usually
necessary or desirable in its business.29
We therefore hold that an obligation to pay actual damages arose in favor of the petitioner against
the respondents spouses who admittedly owned and managed Dingding’s Jewelry Shop. It was
proven that petitioner replaced the damaged jewelry in the amount of P30,000.30
The facts of the case also justify the award of moral damages. As a general rule, moral damages G.R. No. 193577 September 7, 2011
are not recoverable in actions for damages predicated on a breach of contract for it is not one of the
items enumerated under Article 2219 of the Civil Code. 31 Moral damages may be awarded in a breach ANTONIO FRANCISCO, substituted by his heirs: NELIA E.S. FRANCISCO, EMILIA F. BERTIZ,
of contract only when there is proof that defendant acted in bad faith, or was guilty of gross REBECCA E.S. FRANCISCO, ANTONIO E.S. FRANCISCO, JR., SOCORRO F. FONTANILLA, and
negligence amounting to bad faith, or in wanton disregard of his contractual obligation. 32 Santos JOVITO E.S. FRANCISCO, Petitioners, vs. CHEMICAL BULK CARRIERS, INCORPORATED,
was a goldsmith for more than 40 years.33 Given his long experience in the trade, he should have Respondent.
known that using a pair of pliers instead of a miniature wire saw in dismounting a precious stone
like a diamond would have entailed an unnecessary risk of breakage. He went on with it anyway.
The Case
Hence, respondent spouses are liable for P10,000 as moral damages due to the gross negligence of
their employee.
This is a petition for review1 of the 31 May 2010 Decision2 and 31 August 2010 Resolution3 of the
Court of Appeals in CA G.R. CV No. 63591. In its 31 May 2010 Decision, the Court of Appeals set
However, private respondent’s refusal to pay the value of the damaged jewelry emanated from an
aside the 21 August 1998 Decision4 of the Regional Trial of Pasig City, Branch 71 (trial court), and
honest belief that they were not responsible therefor, hence, negating any basis for the award of
ordered petitioner Antonio Francisco (Francisco) to pay respondent Chemical Bulk Carriers,
attorney’s fees.34
Incorporated (CBCI) ₱1,119,905 as actual damages. In its 31 August 2010 Resolution, the Court of
Appeals denied Francisco’s motion for reconsideration.
WHEREFORE, the instant petition is GRANTED and the assailed decision of the Court of Appeals
dated November 26, 1999 is hereby reversed and set aside. Private respondents Luis Cabrido and
The Facts
Rose Sun-Cabrido are hereby ordered to pay, jointly and severally, the amount of P30,000 as actual
damages and P10,000 as moral damages in favor of the petitioner.
Since 1965, Francisco was the owner and manager of a Caltex station in Teresa, Rizal. Sometime in
March 1993, four persons, including Gregorio Bacsa (Bacsa), came to Francisco’s Caltex station and
introduced themselves as employees of CBCI. Bacsa offered to sell to Francisco a certain quantity
of CBCI’s diesel fuel.

After checking Bacsa’s identification card, Francisco agreed to purchase CBCI’s diesel fuel. Francisco
imposed the following conditions for the purchase: (1) that Petron Corporation (Petron) should
deliver the diesel fuel to Francisco at his business address which should be properly indicated in
Petron’s invoice; (2) that the delivery tank is sealed; and (3) that Bacsa should issue a separate
receipt to Francisco.

The deliveries started on 5 April 1993 and lasted for ten months, or up to 25 January 1994. 5 There
were 17 deliveries to Francisco and all his conditions were complied with.

In February 1996, CBCI sent a demand letter to Francisco regarding the diesel fuel delivered to him
but which had been paid for by CBCI.6 CBCI demanded that Francisco pay CBCI ₱1,053,527 for the
diesel fuel or CBCI would file a complaint against him in court. Francisco rejected CBCI’s demand.

On 16 April 1996, CBCI filed a complaint for sum of money and damages against Francisco and other
unnamed defendants.7 According to CBCI, Petron, on various dates, sold diesel fuel to CBCI but
these were delivered to and received by Francisco. Francisco then sold the diesel fuel to third persons
from whom he received payment. CBCI alleged that Francisco acquired possession of the diesel fuel
without authority from CBCI and deprived CBCI of the use of the diesel fuel it had paid for. CBCI
demanded payment from Francisco but he refused to pay. CBCI argued that Francisco should have
known that since only Petron, Shell and Caltex are authorized to sell and distribute petroleum
products in the Philippines, the diesel fuel came from illegitimate, if not illegal or criminal, acts. CBCI
asserted that Francisco violated Articles 19,8 20,9 21,10 and 2211 of the Civil Code and that he should
be held liable. In the alternative, CBCI claimed that Francisco, in receiving CBCI’s diesel fuel, entered
into an innominate contract of do ut des (I give and you give) with CBCI for which Francisco is
obligated to pay CBCI ₱1,119,905, the value of the diesel fuel. CBCI also prayed for exemplary
damages, attorney’s fees and other expenses of litigation.

On 20 May 1996, Francisco filed a Motion to Dismiss on the ground of forum shopping. 12 CBCI filed
its Opposition.13 In an Order dated 15 November 1996, the trial court denied Francisco’s motion. 14
Thereafter, Francisco filed his Answer.15 Francisco explained that he operates the Caltex station with
the help of his family because, in February 1978, he completely lost his eyesight due to sickness.
Francisco claimed that he asked Jovito, his son, to look into and verify the identity of Bacsa, who
introduced himself as a radio operator and confidential secretary of a certain Mr. Inawat (Inawat),
CBCI’s manager for operations. Francisco said he was satisfied with the proof presented by Bacsa.
When asked to explain why CBCI was selling its fuel, Bacsa allegedly replied that CBCI was in
immediate need of cash for the salary of its daily paid workers and for petty cash. Francisco
maintained that Bacsa assured him that the diesel fuel was not stolen property and that CBCI
enjoyed a big credit line with Petron. Francisco agreed to purchase the diesel fuel offered by Bacsa
on the following conditions:
1) Defendant [Francisco] will not accept any delivery if it is not company (Petron) delivered,
with his name and address as shipping point properly printed and indicated in the invoice of
Petron, and that the product on the delivery tank is sealed; [and]
2) Although the original invoice is sufficient evidence of delivery and payment, under ordinary
course of business, defendant still required Mr. Bacsa to issue a separate receipt duly signed by
him acknowledging receipt of the amount stated in the invoice, for and in behalf of CBCI. 16
During the first delivery on 5 April 1993, Francisco asked one of his sons to verify whether the
delivery truck’s tank was properly sealed and whether Petron issued the invoice. Francisco said all
his conditions were complied with. There were 17 deliveries made from 5 April 1993 to 25 January
1994 and each delivery was for 10,000 liters of diesel fuel at ₱65,865.17 Francisco maintained that
he acquired the diesel fuel in good faith and for value. Francisco also filed a counterclaim for
exemplary damages, moral damages and attorney’s fees.
In its 21 August 1998 Decision, the trial court ruled in Francisco’s favor and dismissed CBCI’s
complaint. The dispositive portion of the trial court’s 21 August 1998 Decision reads:
WHEREFORE, Judgment is hereby rendered:
1. Dismissing the complaint dated March 13, 1996 with costs.
2. Ordering plaintiff (CBCI), on the counterclaim, to pay defendant the amount of ₱100,000.00
as moral damages and ₱50,000.00 as and by way of attorney’s fees.
CBCI appealed to the Court of Appeals.19 CBCI argued that Francisco acquired the diesel fuel from
Petron without legal ground because Bacsa was not authorized to deliver and sell CBCI’s diesel fuel.
CBCI added that Francisco acted in bad faith because he should have inquired further whether
Bacsa’s sale of CBCI’s diesel fuel was legitimate.
In its 31 May 2010 Decision, the Court of Appeals set aside the trial court’s 21 August 1998 Decision
and ruled in CBCI’s favor. The dispositive portion of the Court of Appeals’ 31 May 2010 Decision
reads:
IN VIEW OF THE FOREGOING, the assailed decision is hereby REVERSED and SET ASIDE. Antonio
Francisco is ordered to pay Chemical Bulk Carriers, Incorporated the amount of ₱1,119,905.00
as actual damages.
21
On 15 January 2001, Francisco died. Francisco’s heirs, namely: Nelia E.S. Francisco, Emilia F.
Bertiz, Rebecca E.S. Francisco, Antonio E.S. Francisco, Jr., Socorro F. Fontanilla, and Jovito E.S.
Francisco (heirs of Francisco) filed a motion for substitution. 22 The heirs of Francisco also filed a
motion for reconsideration.23 In its 31 August 2010 Resolution, the Court of Appeals granted the
motion for substitution but denied the motion for reconsideration.
Hence, this petition.
The Ruling of the Trial Court
The trial court ruled that Francisco was not liable for damages in favor of CBCI because the 17
deliveries were covered by original and genuine invoices. The trial court declared that Bacsa, as
confidential secretary of Inawat, was CBCI’s authorized representative who received Francisco’s full
payment for the diesel fuel. The trial court stated that if Bacsa was not authorized, CBCI should have
sued Bacsa and not Francisco. The trial court also considered Francisco a buyer in good faith who
paid in full for the merchandise without notice that some other person had a right to or interest in
such diesel fuel. The trial court pointed out that good faith affords protection to a purchaser for
value. Finally, since CBCI was bound by the acts of Bacsa, the trial court ruled that CBCI is liable to
pay damages to Francisco.
The Ruling of the Court of Appeals
The Court of Appeals set aside the trial court’s 21 August 1998 Decision and ruled that Bacsa’s act
of selling the diesel fuel to Francisco was his personal act and, even if Bacsa connived with Inawat,
the sale does not bind CBCI.
The Court of Appeals declared that since Francisco had been in the business of selling petroleum
products for a considerable number of years, his blindness was not a hindrance for him to transact
business with other people. With his condition and experience, Francisco should have verified
whether CBCI was indeed selling diesel fuel and if it had given Bacsa authority to do so. Moreover,
the Court of Appeals stated that Francisco cannot feign good faith since he had doubts as to the
authority of Bacsa yet he did not seek confirmation from CBCI and contented himself with an
improvised receipt. Francisco’s failure to verify Bacsa’s authority showed that he had an ulterior
motive. The receipts issued by Bacsa also showed his lack of authority because it was on a plain
sheet of bond paper with no letterhead or any indication that it came from CBCI. The Court of
Appeals ruled that Francisco cannot invoke estoppel because he was at fault for choosing to ignore
the tell-tale signs of petroleum diversion and for not exercising prudence.
The Court of Appeals also ruled that CBCI was unlawfully deprived of the diesel fuel which, as
indicated in the invoices, CBCI had already paid for. Therefore, CBCI had the right to recover the
diesel fuel or its value from Francisco. Since the diesel fuel can no longer be returned, the Court of
Appeals ordered Francisco to give back the actual amount paid by CBCI for the diesel fuel.
The Issues
The heirs of Francisco raise the following issues:
I. WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT DEFENDANT ANTONIO
FRANCISCO EXERCISED THE REQUIRED DILIGENCE OF A BLIND PERSON IN THE CONDUCT OF
HIS BUSINESS; and
II. WHETHER ON THE BASIS OF THE FACTUAL FINDINGS OF THE COURT OF APPEALS AND THE
TRIAL COURT AND ADMITTED FACTS, IT CAN BE CONCLUDED THAT THE PLAINTIFF APPROVED
EXPRESSLY OR TACITLY THE TRANSACTIONS.24
The Ruling of the Court
The petition has no merit.
Required Diligence of a Blind Person
The heirs of Francisco argue that the Court of Appeals erred when it ruled that Francisco was liable
to CBCI because he failed to exercise the diligence of a good father of a family when he bought the
diesel fuel. They argue that since Francisco was blind, the standard of conduct that was required of
him was that of a reasonable person under like disability. Moreover, they insist that Francisco
exercised due care in purchasing the diesel fuel by doing the following: (1) Francisco asked his son
to check the identity of Bacsa; (2) Francisco required direct delivery from Petron; (3) Francisco
required that he be named as the consignee in the invoice; and (4) Francisco required separate
receipts from Bacsa to evidence actual payment.
Standard of conduct is the level of expected conduct that is required by the nature of the obligation
and corresponding to the circumstances of the person, time and place. 25 The most common standard
of conduct is that of a good father of a family or that of a reasonably prudent person.26 To determine
the diligence which must be required of all persons, we use as basis the abstract average standard
corresponding to a normal orderly person.27
However, one who is physically disabled is required to use the same degree of care that a reasonably
careful person who has the same physical disability would use.28 Physical handicaps and infirmities,
such as blindness or deafness, are treated as part of the circumstances under which a reasonable
person must act. Thus, the standard of conduct for a blind person becomes that of a reasonable
person who is blind.
We note that Francisco, despite being blind, had been managing and operating the Caltex station
for 15 years and this was not a hindrance for him to transact business until this time. In this instance,
however, we rule that Francisco failed to exercise the standard of conduct expected of a reasonable
person who is blind. First, Francisco merely relied on the identification card of Bacsa to determine if
he was authorized by CBCI. Francisco did not do any other background check on the identity and
authority of Bacsa. Second, Francisco already expressed his misgivings about the diesel fuel, fearing
that they might be stolen property,29 yet he did not verify with CBCI the authority of Bacsa to sell
the diesel fuel. Third, Francisco relied on the receipts issued by Bacsa which were typewritten on a
half sheet of plain bond paper.30 If Francisco exercised reasonable diligence, he should have asked
for an official receipt issued by CBCI. Fourth, the delivery to Francisco, as indicated in Petron’s
invoice, does not show that CBCI authorized Bacsa to sell the diesel fuel to Francisco. Clearly,
Francisco failed to exercise the standard of conduct expected of a reasonable person who is blind.
Express or Tacit Approval of the Transaction
The heirs of Francisco argue that CBCI approved expressly or tacitly the transactions. According to
them, there was apparent authority for Bacsa to enter into the transactions. They argue that even
if the agent has exceeded his authority, the principal is solidarily liable with the agent if the former
allowed the later to act as though he had full powers.31 They insist CBCI was not unlawfully deprived
of its property because Inawat gave Bacsa the authority to sell the diesel fuel and that CBCI is bound
by such action. Lastly, they argue that CBCI should be considered in estoppel for failure to act during
the ten month period that deliveries were being made to Francisco.
32
The general principle is that a seller without title cannot transfer a better title than he has. Only
the owner of the goods or one authorized by the owner to sell can transfer title to the
buyer.33 Therefore, a person can sell only what he owns or is authorized to sell and the buyer can,
as a consequence, acquire no more than what the seller can legally transfer. 34
Moreover, the owner of the goods who has been unlawfully deprived of it may recover it even from
a purchaser in good faith.35 Thus, the purchaser of property which has been stolen from the owner
has been held to acquire no title to it even though he purchased for value and in good faith.
The exception from the general principle is the doctrine of estoppel where the owner of the goods is
precluded from denying the seller’s authority to sell. 36 But in order that there may be estoppel, the
owner must, by word or conduct, have caused or allowed it to appear that title or authority to sell
is with the seller and the buyer must have been misled to his damage. 37 1avvphi1
In this case, it is clear that Bacsa was not the owner of the diesel fuel.1âwphi1 Francisco was aware
of this but he claimed that Bacsa was authorized by CBCI to sell the diesel fuel. However, Francisco’s
claim that Bacsa was authorized is not supported by any evidence except his self-serving testimony.
First, Francisco did not even confirm with CBCI if it was indeed selling its diesel fuel since it is not
one of the oil companies known in the market to be selling petroleum products. This fact alone
should have put Francisco on guard. Second, it does not appear that CBCI, by some direct and
equivocal act, has clothed Bacsa with the indicia of ownership or apparent authority to sell CBCI’s
diesel fuel. Francisco did not state if the identification card presented by Bacsa indicated that he was
CBCI’s agent or a mere employee. Third, the receipt issued by Bacsa was typewritten on a half sheet
of plain bond paper. There was no letterhead or any indication that it came from CBCI. We agree
with the Court of Appeals that this was a personal receipt issued by Bacsa and not an official receipt
issued by CBCI. Consequently, CBCI is not precluded by its conduct from denying Bacsa’s authority
to sell. CBCI did not hold out Bacsa or allow Bacsa to appear as the owner or one with apparent
authority to dispose of the diesel fuel.
Clearly, Bacsa cannot transfer title to Francisco as Bacsa was not the owner of the diesel fuel nor
was he authorized by CBCI to sell its diesel fuel. CBCI did not commit any act to clothe Bacsa with
apparent authority to sell the diesel fuel that would have misled Francisco. Francisco, therefore, did
not acquire any title over the diesel fuel. Since CBCI was unlawfully deprived of its property, it may
recover from Francisco, even if Francisco pleads good faith.
WHEREFORE, we DENY the petition. We AFFIRM the 31 May 2010 Decision and 31 August 2010
Resolution of the Court of Appeals.
Footnotes
8
ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith.
9
ART. 20. Every person who, contrary to law, willfully or negligently causes damage to another,
shall indemnify the latter for the same.
10
ART. 21. Any person who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
11
ART. 22. Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just or legal
ground, shall return the same to him.
2112
G.R. No. 153004 November 5, 2004
SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs. ERNESTO V. SANTOS and
RIVERLAND, INC., respondents.
QUISUMBING, J.:
Subject of the present petition for review on certiorari is the Decision, 1 dated January 30, 2002, as
well as the April 12, 2002, Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122. The appellate
court reversed the Decision,3dated October 4, 1996, of the Regional Trial Court of Makati City,
Branch 148, in Civil Case No. 95-811, and likewise denied petitioner's Motion for Reconsideration.
The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and
defendant, respectively, in several civil cases filed in different courts in the Philippines. On October
26, 1990, the parties executed a Compromise Agreement 4 which amicably ended all their pending
litigations. The pertinent portions of the Agreement read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:
a. P1.5 Million immediately upon the execution of this agreement;
b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at
the discretion of the Foundation, within a period of not more than two (2) years from the
execution of this agreement; provided, however, that in the event that the Foundation does
not pay the whole or any part of such balance, the same shall be paid with the corresponding
portion of the land or real properties subject of the aforesaid cases and previously covered
by the notices of lis pendens, under such terms and conditions as to area, valuation, and
location mutually acceptable to both parties; but in no case shall the payment of such
balance be later than two (2) years from the date of this agreement; otherwise, payment of
any unpaid portion shall only be in the form of land aforesaid;
2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million),
plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR, TC-
1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968 (C.A.-
G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting
of the aforesaid various notices of lis pendens on the real properties aforementioned (by signing
herein attached corresponding documents, for such lifting); provided, however, that in the event
that defendant Foundation shall sell or dispose of any of the lands previously subject of lis
pendens, the proceeds of any such sale, or any part thereof as may be required, shall be partially
devoted to the payment of the Foundation's obligations under this agreement as may still be
subsisting and payable at the time of any such sale or sales;
5. Failure of compliance of any of the foregoing terms and conditions by either or both parties
to this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a
writ of execution for the enforcement of this agreement. [Emphasis supplied] 5
In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the
aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties
involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of
P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real
properties, which were previously subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining
P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the Regional Trial
Court of Makati City, Branch 62, issued a Decision 6approving the compromise agreement.
On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would
pay the balance of P13 million. There was no response from petitioner. Consequently, respondent
Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of
execution of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus,
on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were formerly
subjects of the lis pendens. Petitioner, however, filed numerous motions to block the enforcement
of the said writ. The challenge of the execution of the aforesaid compromise judgment even reached
the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were auctioned.
In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was issued a
Certificate of Sale covering the real properties subject of the auction sale. Subsequently, another
auction sale was held on February 8, 1995, for the sale of real properties of petitioner in Bacolod
City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for both properties
provided for the right of redemption within one year from the date of registration of the said
properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and
Damages7 alleging that there was delay on the part of petitioner in paying the balance of P13 million.
They further alleged that under the Compromise Agreement, the obligation became due on October
26, 1992, but payment of the remaining P12 million was effected only on November 22, 1994. Thus,
respondents prayed that petitioner be ordered to pay legal interest on the obligation, penalty,
attorney's fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared
final and not subject to legal redemption.
In its Answer,8 petitioner countered that respondents have no cause of action against it since it had
fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the
balance was due to its valid exercise of its rights to protect its interests as provided under the Rules.
Petitioner counterclaimed for attorney's fees and exemplary damages.
On October 4, 1996, the trial court rendered a Decision 9 dismissing herein respondents' complaint
and ordering them to pay attorney's fees and exemplary damages to petitioner. Respondents then
appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court:
WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and
judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland,
Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per annum from
the date of demand on October 28, 1992 up to the date of actual payment of the whole
obligation; and (2) P20,000 as attorney's fees and costs of suit.
Hence this petition for review on certiorari where petitioner assigns the following issues:
I. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT
AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND,
INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE AGREEMENT NOR IN
THE COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF
INTEREST TO THE RESPONDENT
II. WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST IN
FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE
FACT THAT THE OBLIGATION OF THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF
MONEY HAD BEEN CONVERTED TO AN OBLIGATION TO PAY IN KIND – DELIVERY OF REAL
PROPERTIES OWNED BY THE PETITIONER – WHICH HAD BEEN FULLY PERFORMED
 III. WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF INTEREST
BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE AGREEMENT, WHICH BECAME
THE LAW AMONG THE PARTIES10
The only issue to be resolved is whether the respondents are entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not
provide for the payment of interest, the legal interest by way of penalty on account of fault or delay
shall not be due and payable, considering that the obligation or loan, on which the payment of legal
interest could be based, has been superseded by the compromise agreement. 11 Furthermore, the
petitioner argues that the respondents are barred by res judicata from seeking legal interest on
account of the waiver clause in the duly approved compromise agreement.12 Article 4 of the
compromise agreement provides:
Plaintiff Santos waives and renounces any and all other claims that he and his family may have
on the defendant Foundation arising from and in connection with the aforesaid civil cases, and
defendant Foundation, on the other hand, also waives and renounces any and all claims that it
may have against plaintiff Santos in connection with such cases.13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement did not provide for a period within
which the obligation will become due and demandable, it is incumbent upon respondent Santos to
ask for judicial intervention for purposes of fixing the period. It is only when a fixed period exists
that the legal interests can be computed.
Respondents profer that their right to damages is based on delay in the payment of the obligation
provided in the Compromise Agreement. The Compromise Agreement provides that payment must
be made within the two-year period from its execution. This was approved by the trial court and
became the law governing their contract. Respondents posit that petitioner's failure to comply
entitles them to damages, by way of interest.14
The petition lacks merit.
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation
or put an end to one already commenced.15 It is an agreement between two or more persons, who,
for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner
which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the
danger of losing.16
The general rule is that a compromise has upon the parties the effect and authority of res judicata,
with respect to the matter definitely stated therein, or which by implication from its terms should be
deemed to have been included therein.17 This holds true even if the agreement has not been judicially
approved.18
In the case at bar, the Compromise Agreement was entered into by the parties on October 26,
1990.19 It was judicially approved on September 30, 1991.20 Applying existing jurisprudence, the
compromise agreement as a consensual contract became binding between the parties upon its
execution and not upon its court approval. From the time a compromise is validly entered into, it
becomes the source of the rights and obligations of the parties thereto. The purpose of the
compromise is precisely to replace and terminate controverted claims. 21
In accordance with the compromise agreement, the respondents asked for the dismissal of the
pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution
of the agreement. This act of the petitioner showed that it acknowledges that the agreement was
immediately executory and enforceable upon its execution.
As to the remaining P13 million, the terms and conditions of the compromise agreement are clear
and unambiguous. It provides:
b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of not more than two (2) years from the execution
of this agreement…22[Emphasis supplied.]
The two-year period must be counted from October 26, 1990, the date of execution of the
compromise agreement, and not on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand letter to petitioner on October 28, 1992,
the obligation was already due and demandable. When the petitioner failed to pay its due obligation
after the demand was made, it incurred delay.
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]
Delay as used in this article is synonymous to default or mora which means delay in the fulfillment
of obligations. It is the non-fulfillment of the obligation with respect to time.23
In order for the debtor to be in default, it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance judicially or extrajudicially. 24
In the case at bar, the obligation was already due and demandable after the lapse of the two-year
period from the execution of the contract. The two-year period ended on October 26, 1992. When
the respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was
already due and demandable. Furthermore, the obligation is liquidated because the debtor knows
precisely how much he is to pay and when he is to pay it.
The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle
its outstanding balance only on February 8, 1995, which is more than two years after the extra-
judicial demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate
court to hinder the execution of a final and executory judgment, and further delay the fulfillment of
its obligation.
Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an
extra-judicial demand contemplated by law.
Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is
provided for in Article 117025 of the New Civil Code.
When the debtor knows the amount and period when he is to pay, interest as damages is generally
allowed as a matter of right.26 The complaining party has been deprived of funds to which he is
entitled by virtue of their compromise agreement. The goal of compensation requires that the
complainant be compensated for the loss of use of those funds. This compensation is in the form of
interest.27 In the absence of agreement, the legal rate of interest shall prevail. 28 The legal interest
for loan as forbearance of money is 12% per annum29 to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.30
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the
Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs
against petitioner.
Footnotes
25
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.
G.R. No. 149734 November 19, 2004
DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners, vs. AYALA CORPORATION,
respondent.
TINGA, J.:
The rise in value of four lots in one of the country's prime residential developments, Ayala Alabang
Village in Muntinlupa City, over a period of six (6) years only, represents big money. The huge price
difference lies at the heart of the present controversy. Petitioners insist that the lots should be sold
to them at 1984 prices while respondent maintains that the prevailing market price in 1990 should
be the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition for Review on Certiorari2 dated October
11, 2001 assailing the Decision3 of the Court of Appeals dated September 6, 2001 which reversed
the Decision4 of the Regional Trial Court (RTC) and dismissed their complaint for specific performance
and damages against Ayala Corporation.
Despite their disparate rulings, the RTC and the appellate court agree on the following antecedents: 5
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter, Vasquez
spouses) entered into a Memorandum of Agreement (MOA) with Ayala Corporation (hereafter,
AYALA) with AYALA buying from the Vazquez spouses, all of the latter's shares of stock in Conduit
Development, Inc. (hereafter, Conduit). The main asset of Conduit was a 49.9 hectare property
in Ayala Alabang, Muntinlupa, which was then being developed by Conduit under a development
plan where the land was divided into Villages 1, 2 and 3 of the "Don Vicente Village." The
development was then being undertaken for Conduit by G.P. Construction and Development
Corp. (hereafter, GP Construction).
Under the MOA, Ayala was to develop the entire property, less what was defined as the "Retained
Area" consisting of 18,736 square meters. This "Retained Area" was to be retained by the
Vazquez spouses. The area to be developed by Ayala was called the "Remaining Area". In this
"Remaining Area" were 4 lots adjacent to the "Retained Area" and Ayala agreed to offer these
lots for sale to the Vazquez spouses at the prevailing price at the time of purchase. The relevant
provisions of the MOA on this point are:
"5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the
date of this Agreement. x x x"
5.15. The BUYER agrees to give the SELLERS a first option to purchase four developed lots next
to the "Retained Area" at the prevailing market price at the time of the purchase."
The parties are agreed that the development plan referred to in paragraph 5.7 is not Conduit's
development plan, but Ayala's amended development plan which was still to be formulated as
of the time of the MOA. While in the Conduit plan, the 4 lots to be offered for sale to the Vasquez
Spouses were in the first phase thereof or Village 1, in the Ayala plan which was formulated a
year later, it was in the third phase, or Phase II-c.
Under the MOA, the Vasquez spouses made several express warranties, as follows:
"3.1. The SELLERS shall deliver to the BUYER:
3.1.2. The true and complete list, certified by the Secretary and Treasurer of the Company
showing:
xxx
D. A list of all persons and/or entities with whom the Company has pending contracts, if any.
xxx
3.1.5. Audited financial statements of the Company as at Closing date.
4. Conditions Precedent
All obligations of the BUYER under this Agreement are subject to fulfillment prior to or at the
Closing, of the following conditions:
4.1. The representations and warranties by the SELLERS contained in this Agreement shall be
true and correct at the time of Closing as though such representations and warranties were
made at such time; and
6. Representation and Warranties by the SELLERS
The SELLERS jointly and severally represent and warrant to the BUYER that at the time of the
execution of this Agreement and at the Closing:
6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the SELLERS,
threatened against or affecting the SELLERS with respect to the Shares or the Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements required to be submitted at Closing in
accordance with Par. 3.1.5 above, the SELLER jointly and severally warrant to the BUYER that:
7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company
shall own the "Remaining Property", free from all liens and encumbrances and that the Company
shall have no obligation to any party except for billings payable to GP Construction &
Development Corporation and advances made by Daniel Vazquez for which BUYER shall be
responsible in accordance with Par. 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the
Company as of Closing, and those disclosed to BUYER, the Company as of the date thereof, has
no liabilities of any nature whether accrued, absolute, contingent or otherwise, including, without
limitation, tax liabilities due or to become due and whether incurred in respect of or measured
in respect of the Company's income prior to Closing or arising out of transactions or state of
facts existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at closing or any liability of any nature and in any amount not fully
reflected or reserved against such Audited Financial Statements referred to above, and those
disclosed to BUYER.
7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the
Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before any court or administrative body,
nor do the SELLERS know or have reasonable grounds to know of any basis for any such action
or proceeding or of any governmental investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and
observance by the Company of any term, covenant or condition of any instrument or agreement
 to which the company is a party or by which it is bound, and no condition exists which, with
notice or lapse of time or both, will constitute such default or breach."
After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don
Vicente Project. Ayala then received a letter from one Maximo Del Rosario of Lancer General
Builder Corporation informing Ayala that he was claiming the amount of P1,509,558.80 as the
subcontractor of G.P. Construction...
G.P. Construction not being able to reach an amicable settlement with Lancer, on March 22,
1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court of First Instance of
Manila in Civil Case No. 82-8598. G.P. Construction in turn filed a cross-claim against Ayala.
G.P. Construction and Lancer both tried to enjoin Ayala from undertaking the development of
the property. The suit was terminated only on February 19, 1987, when it was dismissed with
prejudice after Ayala paid both Lancer and GP Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots adjacent to the "Retained Area"
within 3 years from the date of the MOA, the Vasquez spouses sent several "reminder" letters
of the approaching so-called deadline. However, no demand after April 23, 1984, was ever made
by the Vasquez spouses for Ayala to sell the 4 lots. On the contrary, one of the letters signed
by their authorized agent, Engr. Eduardo Turla, categorically stated that they expected
"development of Phase 1 to be completed by February 19, 1990, three years from the settlement
of the legal problems with the previous contractor."
By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale.
The four lots were then offered to be sold to the Vasquez spouses at the prevailing price in 1990.
This was rejected by the Vasquez spouses who wanted to pay at 1984 prices, thereby leading
to the suit below.
After trial, the court a quo rendered its decision, the dispositive portion of which states:
"THEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering
defendant to sell to plaintiffs the relevant lots described in the Complaint in the Ayala Alabang
Village at the price of P460.00 per square meter amounting to P1,349,540.00; ordering
defendant to reimburse to plaintiffs attorney's fees in the sum of P200,000.00 and to pay the
cost of the suit."
In its decision, the court a quo concluded that the Vasquez spouses were not obligated to disclose
the potential claims of GP Construction, Lancer and Del Rosario; Ayala's accountants should
have opened the records of Conduit to find out all claims; the warranty against suit is with
respect to "the shares of the Property" and the Lancer suit does not affect the shares of stock
sold to Ayala; Ayala was obligated to develop within 3 years; to say that Ayala was under no
obligation to follow a time frame was to put the Vasquezes at Ayala's mercy; Ayala did not
develop because of a slump in the real estate market; the MOA was drafted and prepared by
the AYALA who should suffer its ambiguities; the option to purchase the 4 lots is valid because
it was supported by consideration as the option is incorporated in the MOA where the parties
had prestations to each other. [Emphasis supplied]
Ayala Corporation filed an appeal, alleging that the trial court erred in holding that petitioners did
not breach their warranties under the MOA6 dated April 23, 1981; that it was obliged to develop the
land where the four (4) lots subject of the option to purchase are located within three (3) years from
the date of the MOA; that it was in delay; and that the option to purchase was valid because it was
incorporated in the MOA and the consideration therefor was the commitment by Ayala Corporation
to petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the RTC Decision. According to the appellate
court, Ayala Corporation was never informed beforehand of the existence of the Lancer claim. In
fact, Ayala Corporation got a copy of the Lancer subcontract only on May 29, 1981 from G.P.
Construction's lawyers. The Court of Appeals thus held that petitioners violated their warranties
under the MOA when they failed to disclose Lancer's claims. Hence, even conceding that Ayala
Corporation was obliged to develop and sell the four (4) lots in question within three (3) years from
the date of the MOA, the obligation was suspended during the pendency of the case filed by Lancer.
Interpreting the MOA's paragraph 5.7 above-quoted, the appellate court held that Ayala Corporation
committed to develop the first phase of its own amended development plan and not Conduit's
development plan. Nowhere does the MOA provide that Ayala Corporation shall follow Conduit's
development plan nor is Ayala Corporation prohibited from changing the sequence of the phases of
the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there was no delay as petitioners never
made a demand for Ayala Corporation to sell the subject lots to them. According to the appellate
court, what petitioners sent were mere reminder letters the last of which was dated prior to April
23, 1984 when the obligation was not yet demandable. At any rate, the Court of Appeals found that
petitioners in fact waived the three (3)-year period when they sent a letter through their agent,
Engr. Eduardo Turla, stating that they "expect that the development of Phase I will be completed by
19 February 1990, three years from the settlement of the legal problems with the previous
contractor."7
The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option contract but a
right of first refusal there being no separate consideration therefor. Since petitioners refused Ayala
Corporation's offer to sell the subject lots at the reduced 1990 price of P5,000.00 per square meter,
they have effectively waived their right to buy the same.
In the instant Petition, petitioners allege that the appellate court erred in ruling that they violated
their warranties under the MOA; that Ayala Corporation was not obliged to develop the "Remaining
Property" within three (3) years from the execution of the MOA; that Ayala was not in delay; and
that paragraph 5.15 of the MOA is a mere right of first refusal. Additionally, petitioners insist that
the Court should review the factual findings of the Court of Appeals as they are in conflict with those
of the trial court.
Ayala Corporation filed a Comment on the Petition8 dated March 26, 2002, contending that the
petition raises questions of fact and seeks a review of evidence which is within the domain of the
Court of Appeals. Ayala Corporation maintains that the subcontract between GP Construction, with
whom Conduit contracted for the development of the property under a Construction Contract dated
October 10, 1980, and Lancer was not disclosed by petitioners during the negotiations. Neither was
the liability for Lancer's claim included in the Audited Financial Statements submitted by petitioners
after the signing of the MOA. These justify the conclusion that petitioners breached their warranties
under the afore-quoted paragraphs of the MOA. Since the Lancer suit ended only in February 1989,
the three (3)-year period within which Ayala Corporation committed to develop the property should
only be counted thence. Thus, when it offered the subject lots to petitioners in 1990, Ayala
Corporation was not yet in delay.
In response to petitioners' contention that there was no action or proceeding against them at the
time of the execution of the MOA on April 23, 1981, Ayala Corporation avers that the facts and
circumstances which gave rise to the Lancer claim were already extant then. Petitioners warranted
that their representations under the MOA shall be true and correct at the time of "Closing" which
shall take place within four (4) weeks from the signing of the MOA. 9 Since the MOA was signed on
April 23, 1981, "Closing" was approximately the third week of May 1981. Hence, Lancer's claims,
articulated in a letter which Ayala Corporation received on May 4, 1981, are among the liabilities
warranted against under paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under the MOA are not just against suits
but against all kinds of liabilities not reflected in the Audited Financial Statements. It cannot be
faulted for relying on the express warranty that except for billings payable to GP Construction and
advances made by petitioner Daniel Vazquez in the amount of P38,766.04, Conduit has no other
liabilities. Hence, petitioners cannot claim that Ayala Corporation should have examined and
investigated the Audited Financial Statements of Conduit and should now assume all its obligations
and liabilities including the Lancer suit and the cross-claim of GP Construction.
Furthermore, Ayala Corporation did not make a commitment to complete the development of the
first phase of the property within three (3) years from the execution of the MOA. The provision refers
to a mere declaration of intent to develop the first phase of its (Ayala Corporation's) own
development plan and not Conduit's. True to its intention, Ayala Corporation did complete the
development of the first phase (Phase II-A) of its amended development plan within three (3) years
from the execution of the MOA. However, it is not obliged to develop the third phase (Phase II-C)
where the subject lots are located within the same time frame because there is no contractual
stipulation in the MOA therefor. It is free to decide on its own the period for the development of
Phase II-C. If petitioners wanted to impose the same three (3)-year timetable upon the third phase
of the amended development plan, they should have filed a suit to fix the time table in accordance
with Article 119710 of the Civil Code. Having failed to do so, Ayala Corporation cannot be declared to
have been in delay.
Ayala Corporation further contends that no demand was made on it for the performance of its alleged
obligation. The letter dated October 4, 1983 sent when petitioners were already aware of the Lancer
suit did not demand the delivery of the subject lots by April 23, 1984. Instead, it requested Ayala
Corporation to keep petitioners posted on the status of the case. Likewise, the letter dated March 4,
1984 was merely an inquiry as to the date when the development of Phase 1 will be completed.
More importantly, their letter dated June 27, 1988 through Engr. Eduardo Turla expressed
petitioners' expectation that Phase 1 will be completed by February 19, 1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first refusal and not
an option contract.
Petitioners filed their Reply11 dated August 15, 2002 reiterating the arguments in their Petition and
contending further that they did not violate their warranties under the MOA because the case was
filed by Lancer only on April 1, 1982, eleven (11) months and eight (8) days after the signing of the
MOA on April 23, 1981. Ayala Corporation admitted that it received Lancer's claim before the
"Closing" date. It therefore had all the time to rescind the MOA. Not having done so, it can be
concluded that Ayala Corporation itself did not consider the matter a violation of petitioners'
warranty.
Moreover, petitioners submitted the Audited Financial Statements of Conduit and allowed an
acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought Conduit with "open
eyes."
Petitioners also maintain that they had no knowledge of the impending case against Conduit at the
time of the execution of the MOA. Further, the MOA makes Ayala Corporation liable for the payment
of all billings of GP Construction. Since Lancer's claim was actually a claim against GP Construction
being its sub-contractor, it is Ayala Corporation and not petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may change the sequence of its
development plan, it is obliged under the MOA to develop the entire area where the subject lots are
located in three (3) years.
They also assert that demand was made on Ayala Corporation to comply with their obligation under
the MOA. Apart from their reminder letters dated January 24, February 18 and March 5, 1984, they
also sent a letter dated March 4, 1984 which they claim is a categorical demand for Ayala Corporation
to comply with the provisions of the MOA.
The parties were required to submit their respective memoranda in the Resolution 12 dated November
18, 2002. In compliance with this directive, petitioners submitted their Memorandum 13 dated
February 14, 2003 on even date, while Ayala Corporation filed its Memorandum 14 dated February
14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the instant petition.
It is well-settled that the jurisdiction of this Court in cases brought to it from the Court of Appeals
by way of petition for review under Rule 45 is limited to reviewing or revising errors of law imputed
to it, its findings of fact being conclusive on this Court as a matter of general principle. However,
since in the instant case there is a conflict between the factual findings of the trial court and the
appellate court, particularly as regards the issues of breach of warranty, obligation to develop and
incurrence of delay, we have to consider the evidence on record and resolve such factual issues as
an exception to the general rule.15 In any event, the submitted issue relating to the categorization
of the right to purchase granted to petitioners under the MOA is legal in character.
The next issue that presents itself is whether petitioners breached their warranties under the MOA
when they failed to disclose the Lancer claim. The trial court declared they did not; the appellate
court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly breached when
they failed to disclose the Lancer claim:
a) Clause 7.1.1. – that Conduit shall not be obligated to anyone except to GP Construction for
P38,766.04, and for advances made by Daniel Vazquez;
b) Clause 7.1.2. – that except as reflected in the audited financial statements Conduit had no
other liabilities whether accrued, absolute, contingent or otherwise;
c) Clause 7.2. – that there is no basis for any assertion against Conduit of any liability of any
value not reflected or reserved in the financial statements, and those disclosed to Ayala;
d) Clause 7.6.3. – that Conduit is not threatened with any legal action or other proceedings; and
e) Clause 7.6.4. – that Conduit had not breached any term, condition, or covenant of any
instrument or agreement to which it is a party or by which it is bound. 16
The Court is convinced that petitioners did not violate the foregoing warranties.
The exchanges of communication between the parties indicate that petitioners substantially apprised
Ayala Corporation of the Lancer claim or the possibility thereof during the period of negotiations for
the sale of Conduit.
In a letter17 dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala Corporation's Mr. Adolfo
Duarte (Mr. Duarte) that prior to the completion of the sale of Conduit, Ayala Corporation asked for
and was given information that GP Construction sub-contracted, presumably to Lancer, a greater
percentage of the project than it was allowed. Petitioners gave this information to Ayala Corporation
because the latter intimated a desire to "break the contract of Conduit with GP." Ayala Corporation
did not deny this. In fact, Mr. Duarte's letter18 dated March 6, 1984 indicates that Ayala Corporation
had knowledge of the Lancer subcontract prior to its acquisition of Conduit. Ayala Corporation even
admitted that it "tried to explore…legal basis to discontinue the contract of Conduit with GP" but
found this "not feasible when information surfaced about the tacit consent of Conduit to the sub-
contracts of GP with Lancer."
At the latest, Ayala Corporation came to know of the Lancer claim before the date of Closing of the
MOA. Lancer's letter19 dated April 30, 1981 informing Ayala Corporation of its unsettled claim with
GP Construction was received by Ayala Corporation on May 4, 1981, well before the "Closing" 20 which
occurred four (4) weeks after the date of signing of the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate that certain
matters pertaining to the liabilities of Conduit were disclosed by petitioners to Ayala Corporation
although the specifics thereof were no longer included in the MOA:
7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company
shall own the "Remaining Property", free from all liens and encumbrances and that the Company
shall have no obligation to any party except for billings payable to GP Construction &
Development Corporation and advances made by Daniel Vazquez for which BUYER shall be
responsible in accordance with Paragraph 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the
Company as of Closing, and those disclosed to BUYER, the Company as of the date hereof, has
no liabilities of any nature whether accrued, absolute, contingent or otherwise, including, without
limitation, tax liabilities due or to become due and whether incurred in respect of or measured
in respect of the Company's income prior to Closing or arising out of transactions or state of
facts existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at Closing of any liability of any nature and in any amount not fully
reflected or reserved against such Audited Financial Statements referred to above, and those
disclosed to BUYER.
7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the
Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before any court or administrative body,
nor do the SELLERS know or have reasonable grounds to know of any basis for any such action
or proceeding or of any governmental investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and
observance by the Company of any term, covenant or condition of any instrument or agreement
to which the Company is a party or by which it is bound, and no condition exists which, with
notice or lapse of time or both, will constitute such default or breach." 21 [Emphasis supplied]
Hence, petitioners' warranty that Conduit is not engaged in, a party to, or threatened with any legal
action or proceeding is qualified by Ayala Corporation's actual knowledge of the Lancer claim which
was disclosed to Ayala Corporation before the "Closing."
At any rate, Ayala Corporation bound itself to pay all billings payable to GP Construction and the
advances made by petitioner Daniel Vazquez. Specifically, under paragraph 2 of the MOA referred
to in paragraph 7.1.1, Ayala Corporation undertook responsibility "for the payment of all billings of
the contractor GP Construction & Development Corporation after the first billing and any payments
made by the company and/or SELLERS shall be reimbursed by BUYER on closing which advances to
date is P1,159,012.87."22
The billings knowingly assumed by Ayala Corporation necessarily include the Lancer claim for which
GP Construction is liable. Proof of this is Ayala Corporation's letter 23 to GP Construction dated before
"Closing" on May 4, 1981, informing the latter of Ayala Corporation's receipt of the Lancer claim
embodied in the letter dated April 30, 1981, acknowledging that it is taking over the contractual
responsibilities of Conduit, and requesting copies of all sub-contracts affecting the Conduit property.
The pertinent excerpts of the letter read:
In this connection, we wish to inform you that this morning we received a letter from Mr. Maximo
D. Del Rosario, President of Lancer General Builders Corporation apprising us of the existence
of subcontracts that they have with your corporation. They have also furnished us with a copy
of their letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of Conduit Development, Inc., we
believe that it is necessary, at this point in time, that you furnish us with copies of all your
subcontracts affecting the property of Conduit, not only with Lancer General Builders
Corporation, but all subcontracts with other parties as well…24
Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief25 dated July 9, 1992 a copy of
the letter26 dated May 28, 1981 of GP Construction's counsel addressed to Conduit furnishing the
latter with copies of all sub-contract agreements entered into by GP Construction. Since it was
addressed to Conduit, it can be presumed that it was the latter which gave Ayala Corporation a copy
of the letter thereby disclosing to the latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their warranties under the MOA. The
Lancer sub-contract and claim were substantially disclosed to Ayala Corporation before the "Closing"
date of the MOA. Ayala Corporation cannot disavow knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala Corporation did mention the filing of
the Lancer suit as an obstacle to its development of the property, it never actually brought up nor
sought redress for petitioners' alleged breach of warranty for failure to disclose the Lancer claim
until it filed its Answer27 dated February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this paragraph express
a commitment or a mere intent on the part of Ayala Corporation to develop the property within three
(3) years from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the
date of this Agreement….28
Notably, while the first phrase of the paragraph uses the word "commits" in reference to the
development of the "Remaining Property" into a first class residential subdivision, the second phrase
uses the word "intends" in relation to the development of the first phase of the property within three
(3) years from the date of the MOA. The variance in wording is significant. While "commit" 29 connotes
a pledge to do something, "intend"30 merely signifies a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala Corporation's legal division who assisted in
drafting the MOA, testified:
COURT: You only ask what do you mean by that intent. Just answer on that point.
ATTY. BLANCO: Don't talk about standard.
WITNESS
A Well, the word intent here, your Honor, was used to emphasize the tentative character of the
period of development because it will be noted that the sentence refers to and I quote "to
complete the first phase under its amended development plan within three (3) years from the
date of this agreement, at the time of the execution of this agreement, your Honor." That
amended development plan was not yet in existence because the buyer had manifested to the
seller that the buyer could amend the subdivision plan originally belonging to the seller to
conform with its own standard of development and second, your Honor, (interrupted)31
It is thus unmistakable that this paragraph merely expresses an intention on Ayala Corporation's
part to complete the first phase under its amended development plan within three (3) years from
the execution of the MOA. Indeed, this paragraph is so plainly worded that to misunderstand its
import is deplorable.
More focal to the resolution of the instant case is paragraph 5.7's clear reference to the first phase
of Ayala Corporation's amended development plan as the subject of the three (3)-year intended
timeframe for development. Even petitioner Daniel Vazquez admitted on cross-examination that the
paragraph refers not to Conduit's but to Ayala Corporation's development plan which was yet to be
formulated when the MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as follows: "The Buyer
hereby commits that to develop the remaining property into a first class residential subdivision of
the same class as New Alabang Subdivision, and that they intend to complete the first phase under
its amended development plan within three years from the date of this agreement."
Now, my question to you, Dr. Vasquez is that there is no dispute that the amended development
plan here is the amended development plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit "D-5" which is the original plan of Conduit?
A: No, it is not.
Q: This Exhibit "D-5" was the plan that was being followed by GP Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the date of the agreement, this
amended development plan was still to be formulated by Ayala?
A: Yes, sir.32
As correctly held by the appellate court, this admission is crucial because while the subject lots to
be sold to petitioners were in the first phase of the Conduit development plan, they were in the third
or last phase of the Ayala Corporation development plan. Hence, even assuming that paragraph 5.7
expresses a commitment on the part of Ayala Corporation to develop the first phase of its amended
development plan within three (3) years from the execution of the MOA, there was no parallel
commitment made as to the timeframe for the development of the third phase where the subject
lots are located.
Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation to offer the
subject lots for sale to petitioners within three (3) years from the execution of the MOA. It is not
that Ayala Corporation committed or intended to develop the first phase of its amended development
plan within three (3) years. Whether it did or did not is actually beside the point since the subject
lots are not located in the first phase anyway.
We now come to the issue of default or delay in the fulfillment of the obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.
In order that the debtor may be in default it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially. 33
Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed
shall be demandable only when that day comes. However, no such day certain was fixed in the MOA.
Petitioners, therefore, cannot demand performance after the three (3) year period fixed by the MOA
for the development of the first phase of the property since this is not the same period contemplated
for the development of the subject lots. Since the MOA does not specify a period for the development
of the subject lots, petitioners should have petitioned the court to fix the period in accordance with
Article 119734 of the Civil Code. As no such action was filed by petitioners, their complaint for specific
performance was premature, the obligation not being demandable at that point. Accordingly, Ayala
Corporation cannot likewise be said to have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala Corporation to develop the subject lots
within three (3) years from date thereof, Ayala Corporation could still not be held to have been in
delay since no demand was made by petitioners for the performance of its obligation.
As found by the appellate court, petitioners' letters which dealt with the three (3)-year timetable
were all dated prior to April 23, 1984, the date when the period was supposed to expire. In other
words, the letters were sent before the obligation could become legally demandable. Moreover, the
letters were mere reminders and not categorical demands to perform. More importantly, petitioners
waived the three (3)-year period as evidenced by their agent, Engr. Eduardo Turla's letter to the
effect that petitioners agreed that the three (3)-year period should be counted from the termination
of the case filed by Lancer. The letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981, it was undertaken by your
goodselves to complete the development of Phase I within three (3) years. Dr. & Mrs. Vazquez
were made to understand that you were unable to accomplish this because of legal problems
with the previous contractor. These legal problems were resolved as of February 19, 1987, and
Dr. & Mrs. Vazquez therefore expect that the development of Phase I will be completed by
February 19, 1990, three years from the settlement of the legal problems with the previous
contractor. The reason for this is, as you know, that security-wise, Dr. & Mrs. Vazquez have
been advised not to construct their residence till the surrounding area (which is Phase I) is
developed and occupied. They have been anxious to build their residence for quite some time
now, and would like to receive assurance from your goodselves regarding this, in compliance
with the agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the intention of Dr. & Mrs. Vazquez to
exercise their option to purchase the two lots on each side (a total of 4 lots) adjacent to their
"Retained Area". They are concerned that although over a year has elapsed since the settlement
of the legal problems, you have not presented them with the size, configuration, etc. of these
lots. They would appreciate being provided with these at your earliest convenience. 35
Manifestly, this letter expresses not only petitioners' acknowledgement that the delay in the
development of Phase I was due to the legal problems with GP Construction, but also their
acquiescence to the completion of the development of Phase I at the much later date of February
19, 1990. More importantly, by no stretch of semantic interpretation can it be construed as a
categorical demand on Ayala Corporation to offer the subject lots for sale to petitioners as the letter
merely articulates petitioners' desire to exercise their option to purchase the subject lots and concern
over the fact that they have not been provided with the specifications of these lots.
The letters of petitioners' children, Juan Miguel and Victoria Vazquez, dated January 23, 1984 36 and
February 18, 198437 can also not be considered categorical demands on Ayala Corporation to develop
the first phase of the property within the three (3)-year period much less to offer the subject lots
for sale to petitioners. The letter dated January 23, 1984 reads in part:
 You will understand our interest in the completion of the roads to our property, since we cannot
develop it till you have constructed the same. Allow us to remind you of our Memorandum of
Agreement, as per which you committed to develop the roads to our property "as per the original
plans of the company", and that
1. The back portion should have been developed before the front portion – which has not been
the case.
2. The whole project – front and back portions be completed by 1984.38
The letter dated February 18, 1984 is similarly worded. It states:
In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum of Agreement
which states respectively:…39
Even petitioner Daniel Vazquez' letter 40 dated March 5, 1984 does not make out a categorical
demand for Ayala Corporation to offer the subject lots for sale on or before April 23, 1984. The letter
reads in part:
…and that we expect from your goodselves compliance with our Memorandum of Agreement,
and a definite date as to when the road to our property and the development of Phase I will be
completed.41
At best, petitioners' letters can only be construed as mere reminders which cannot be considered
demands for performance because it must appear that the tolerance or benevolence of the creditor
must have ended.42
The petition finally asks us to determine whether paragraph 5.15 of the MOA can properly be
construed as an option contract or a right of first refusal. Paragraph 5.15 states:
5.15 The BUYER agrees to give the SELLERS first option to purchase four developed lots next to
the "Retained Area" at the prevailing market price at the time of the purchase. 43
The Court has clearly distinguished between an option contract and a right of first refusal. An option
is a preparatory contract in which one party grants to another, for a fixed period and at a determined
price, the privilege to buy or sell, or to decide whether or not to enter into a principal contract. It
binds the party who has given the option not to enter into the principal contract with any other
person during the period designated, and within that period, to enter into such contract with the one
to whom the option was granted, if the latter should decide to use the option. It is a separate and
distinct contract from that which the parties may enter into upon the consummation of the option.
It must be supported by consideration.44
Art. 1324. When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when the
option is founded upon a consideration, as something paid or promised.
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.
Consequently, the "offer" may be withdrawn anytime by communicating the withdrawal to the other
party.47
In this case, Ayala Corporation offered the subject lots for sale to petitioners at the price of
P6,500.00/square meter, the prevailing market price for the property when the offer was made on
June 18, 1990.48 Insisting on paying for the lots at the prevailing market price in 1984 of
P460.00/square meter, petitioners rejected the offer. Ayala Corporation reduced the price to
P5,000.00/square meter but again, petitioners rejected the offer and instead made a counter-offer
in the amount of P2,000.00/square meter.49 Ayala Corporation rejected petitioners' counter-offer.
With this rejection, petitioners lost their right to purchase the subject lots.
It cannot, therefore, be said that Ayala Corporation breached petitioners' right of first refusal and
should be compelled by an action for specific performance to sell the subject lots to petitioners at
the prevailing market price in 1984.
WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.
Footnotes
10
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can
be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been
probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by
them.

In a right of first refusal, on the other hand, while the object might be made determinate, the
exercise of the right would be dependent not only on the grantor's eventual intention to enter into
a binding juridical relation with another but also on terms, including the price, that are yet to be
firmed up.45

Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal and not an
option contract. Although the paragraph has a definite object, i.e., the sale of subject lots, the period
within which they will be offered for sale to petitioners and, necessarily, the price for which the
subject lots will be sold are not specified. The phrase "at the prevailing market price at the time of
the purchase" connotes that there is no definite period within which Ayala Corporation is bound to
reserve the subject lots for petitioners to exercise their privilege to purchase. Neither is there a fixed
or determinable price at which the subject lots will be offered for sale. The price is considered certain
if it may be determined with reference to another thing certain or if the determination thereof is left
to the judgment of a specified person or persons.46

Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack to buy the
subject lots at the price which Ayala Corporation would be willing to accept when it offers the subject
lots for sale. It is not supported by an independent consideration. As such it is not governed by
Articles 1324 and 1479 of the Civil Code, viz:
G.R. No. L-10394 December 13, 1958 Simultaneously with such renewal, the company sublet the same buildings, except that used for the
residence of the branch manager, to the other defendant, Arturo Colmenares.
CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees, vs. MANILA MOTOR CO., INC.
and ARTURO COLMENARES, defendants-appellants. However, before resuming the collection of rentals, Dr. Alfredo Villaruel, who was entrusted with the
same, consulted Atty. Luis Hilado on whether they (the lessors) had the right to collect, from the
Hilado and Hilado for appellees. defendant company, rentals corresponding to the time during which the Japanese military forces
Ozaeta, Gibbs and Ozaeta for appellant company. had control over the leased premises. Upon being advised that they had such a right, Dr. Villaruel
Jose L. Gamboa and Napoleon Garcia for appellant Arturo Colmenares. demanded payment thereof, but the defendant company refused to pay. As a result, Dr. Villaruel
gave notice seeking the rescission of the contract of lease and the payment of rentals from June 1,
REYES, J. B. L., J.:
1942 to March 31, 1945 totalling P11,900. This was also rejected by the defendant company in its
letter to Villaruel, dated July 27, 1946.
Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal against the decision of the Court
of First Instance of Negros Occidental, in its Civil Case No. 648, ordering the defendant Manila Motor
Sometime on that same month of July, Rafael B. Grey offered to pay to Dr. Villaruel the sum of
Co., Inc. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal rest from May 18, 1953,
P350, for which, tenderer requested a receipt that would state that it was in full payment for the
on which date, the court below declared invalid the continued operation of the Debt Moratorium,
said month. The latter expressed willingness to accept the tendered amount provided, however, that
under the first cause of action; (b) P38,395 with legal interest from the date of filing of the original
his acceptance should be understood to be without prejudice to their demand for the rescission of
complaint on April 26, 1947, on the second cause of action; and against both the Manila Motor Co.,
the contract, and for increased rentals until their buildings were returned to them. Later, Dr. Villaruel
Inc. and its co-defendant, Arturo Colmenares, the sum of P30,000 to be paid, jointly and severally,
indicated his willingness to limit the condition of his acceptance to be that "neither the lessee nor
with respect to the third cause of action.
the lessors admit the contention of the other by the mere fact of payment". As no accord could still
be reached between the parties as to the context of the receipt, no payment was thereafter tendered
On May 31, 1940, the plaintiffs Villaruel and the defendant Manila Motor Co., Inc. entered into a
until the end of November, 1946. On December 4, 1946 (the day after the defendant company
contract (Exhibit "A") whereby, the former agreed to convey by way of lease to the latter the
notified Dr. Villaruel by telegram, that it cancelled the power of attorney given to Grey, and that it
following described premises;
now authorized Arturo Colmenares, instead, to pay the rent of P350 each month), the Manila Motor
(a) Five hundred (500) square meters of floor space of a building of strong materials for
Co., Inc. remitted to Dr. Villaruel by letter, the sum of P350.00. For this payment, the latter issued
automobile showroom, offices, and store room for automobile spare parts;
a receipt stating that it was "without prejudice" to their demand for rents in arrears and for the
(b) Another building of strong materials for automobile repair shop; and
rescission of the contract of lease.
(c) A 5-bedroom house of strong materials for residence of the Bacolod Branch Manager of the
defendant company.
After it had become evident that the parties could not settle their case amicably, the lessors
commenced this action on April 26, 1947 with the Court of First Instance of Negros Occidental
The term of the lease was five (5) years, to commence from the time that the building were delivered
against the appellants herein. During the pendency of the case, a fire originating from the projection
and placed at the disposal of the lessee company, ready for immediate occupancy. The contract was
room of the City Theatre, into which Arturo Colmenares, (the sublessee) had converted the former
renewable for an additional period of five (5) years. The Manila Motor Company, in consideration of
repair shop of the Manila Motor Co. Inc., completely razed the building, engulfing also the main
the above covenants, agreed to pay to the lessors, or their duly authorized representative, a monthly
building where Colmenares had opened a soda fountain and refreshment parlor, and made partitions
rental of Three Hundred (P300) pesos payable in advance before the fifth day of each month, and
for store spaces which he rented to other persons.
for the residential house of its branch manager, a monthly rental not to exceed Fifty (P50) pesos
"payable separately by the Manager".
Because of the aforesaid occurrence, plaintiffs demanded reimbursement from the defendants, but
having been refused, they filed a supplemental complaint to include as their third cause of action,
The leased premises were placed in the possession of the lessee on the 31st day of October, 1940,
the recovery of the value of the burned buildings.
from which date, the period of the lease started to run under their agreement.
Defendants filed their amended answer and also moved for the dismissal of the plaintiffs' first and
This situation, the Manila Motor Co., Inc. and its branch manager enjoying the premises, and the
second causes of action invoking the Debt Moratorium that was then in force. The dismissal was
lessors receiving the corresponding rentals as stipulated, continued until the invasion of 1941; and
granted by the trial court on February 5, 1951, but hearing was set as regards the third cause of
shortly after the Japanese military occupation of the Provincial Capital of Bacolod the enemy forces
action.
held and used the properties leased as part of their quarters from June 1, 1942 to March 29, 1945,
ousting the lessee therefrom. No payment of rentals were made at any time during the said period.
On August 11, 1952, the defendant company filed a motion for summary judgment dismissing the
plaintiffs, third cause of action, to which plaintiffs registered objection coupled with a petition for
Immediately upon the liberation of the said city in 1945, the American Forces occupied the same
reconsideration of the order of the court dismissing the first and second causes of action. Pending
buildings that were vacated by the Japanese, including those leased by the plaintiffs, until October
the resolution of this incident, plaintiffs, on October 2, 1953, called the court's attention to the
31, 1945. Monthly rentals were paid by the said occupants to the owners during the time that they
decision in the case of Rutter vs. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating the
were in possession, as the same rate that the defendant company used to pay.
continued effectivity of the Moratorium Law (R. A. 342). On November 25, 1953, the trial court
Thereafter, when the United States Army finally gave up the occupancy the premises, the Manila denied the defendant company's motion for summary judgment and set aside its previous order
Motor Co., Inc., through their branch manager, Rafael B. Grey, decided to exercise their option to dismissing the first and second causes of action. The case was accordingly heard and thereafter,
renew the contract for the additional period of five (5) years, and the parties, agreed that the seven judgment was rendered in plaintiffs' favor in the terms set in the opening paragraph of this decision.
months occupancy by the U. S. Army would not be counted as part of the new 5-year term. Thereafter, the defendants regularly appealed to this Court.
The defendants-appellants raise a number of procedural points. The first of these relates to their It the third person, be it the Government or a private individual, has acted in reliance upon a
contention that the supplemental complaint which included a third cause of action, should not have right, such action shall not be deemed a mere act of disturbance. (Emphasis supplied)
been admitted, as it brought about a change in the original theory of the case and that it raised new
issues not theretofore considered. This argument cannot be sustained under the circumstances. This Under the first paragraph of article 1560 the lessor does not answer for a mere act of trespass
action was inceptionally instituted for the rescission of the contract of lease and for the recovery of ( perturbacion de mero hecho) as distinguished from trespass under color of title ( perturbacion de
unpaid rentals before and after liberation. When the leased buildings were destroyed, the plaintiffs- derecho). As to what would constitute a mere act of trespass, this Court in the case of Goldstein vs.
lessors demanded from the defendants-lessees, instead, the value of the burned premises, basing Roces (34 Phil. 562), made this pronouncement:
their right to do so on defendants' alleged default in the payment of post-liberation rentals (which
Upon the basis of the distinction thus established between the perturbacion de hecho and
was also their basis in formerly seeking for rescission). This cannot be considered as already altering
the perturbacion de derecho, it is demonstrable that the ouster of the appellant by the Japanese
the theory of the case which is merely a change in the relief prayed for, brought about by
occupying forces belongs to the second class of disturbances, de derecho. For under the generally
circumstances occurring during the pendency of the action, and is not improper. (Southern Pacific
accepted principles of international law (and it must be remembered that those principles are made
Co. vs. Conway, 115 F. 2d 746; Suburban Improvement Company vs. Scott Lumber Co., 87 A.L.R.
by our Constitution a part of the law of our nation 1) a belligerent occupant (like the Japanese in
555, 59 F. 2d 711). The filing of the supplements complaint can well be justified also under section
1942-1945) may legitimately billet or quarter its troops in privately owned land and buildings for
2, Rule 17 of the Rules of Court (on amendments) "to the end that the real matter in dispute and
the duration of its military operations, or as military necessity should demand. The well known writer
all matters in the action in dispute between the parties may, as far as possible be completely
Oppenheim, discoursing on the laws of war on land, says upon this topic;
determined in a single proceedings". It is to be noted furthermore, that the admission or rejection
of this kind of pleadings is within the sound discretion of the court that will not be disturbed on
Immovable private enemy property may under no circumstances or conditions be appropriated
appeal in the absence of abuse thereof (see Sec. 5, Rule 17, Rules of Court), especially so, as in this
by an invading belligerent. Should he confiscate and sell private land or buildings, the buyer
case, where no substantial procedural prejudice is caused to the adverse party.
would acquire no right whatever to the property. Article 46 of the Hague Regulations expressly
It is urged that the dismissal of the first and second causes of action on February 5, 1951 had the enacts that "private property may not be confiscated." But confiscation differs from the
temporary use of private land and building for all kinds of purposes demanded by the necessities
effect of a dismissal "with prejudice" as the court did not make any qualification in its dismissal
of war. What has been said above with regard to utilization of public buildings applied equally to
order. Appellants, apparently, lost sight of the fact that the dismissal was premised on the existence
private buildings. If necessary, they maybe converted into hospital barracks, and stables without
of the "Debt Moratorium" which suspended the enforcement of the obligation up to a certain time.
compensation for the proprietors, and they may also be converted into fortifications. A humane
The reference thereto by the lower court amounted to a dismissal "without prejudice", since in effect
belligerent will not drive the wretched inhabitants into the street if he can help it. But under the
it ruled that the plaintiffs could not, at the time they sought it, enforce their right of action against
pressure of necessity he may be obliged to do this, and he is certainly not prohibited from doing
the defendants, but plaintiffs must wait until the moratorium was lifted. In this way, the court
it. (Emphasis supplied) (Oppenheim & Lauterpach, International Law, Vol. II, p. 312, 1944 Ed.)
qualified its dismissal.

The view thus expressed is concurred in by other writers. Hyde (International Law, Vol. 3, p. 1893,
Taking up the case on its merits, it is readily seen that the key to the entire dispute is the question
2nd Rev. Ed.) quotes the U. S. War Department 1940 Rules of Land Warfare (Rule No. 324) to the
whether the defendant-appellant Manila Motor Co., Inc. should be held liable for the rentals of the
effect that —
premises leased corresponding to the lapse of time that they were occupied as quarters or barracks
The measure of permissible devastation is found in the strict necessities of war. As an end in
by the invading Japanese army, and whether said appellant was placed in default by its refusal to
comply with the demand to pay such rents. For if the Motor Company was not so liable, then it never itself, as a separate measure of war, devastation is not sanctioned by the law of war. There
must be some reasonably close connection between the destruction of property and the
was in default nor was it chargeable for the accidental lose of the buildings, nor for any damages
overcoming of the enemy's army. Thus the rule requiring respect for private property is not
except the rental at the contract rate from its reoccupation of the premises leased until the same
violated through damage resulting from operations, movements, or combats of the army; that
were accidentally destroyed by fire on March 2, 1948.
is, real estate may be utilized for marches, camp sites, construction of trenches, etc. Buildings
The appellees contended, and the court below has held, that the ouster of the least company by the may be used for shelter for troops, the sick and wounded, for animals, for reconnaissance, cover
Japanese occupation forces from 1942 until liberation, while operating to deprive the lessee of the defense, etc. Fence, woods, crops, buildings, etc., may be demolished, cut down, and removed
enjoyment of the thing leased, was, nevertheless, a mere act of trespass ("perturbacion de mero to clear a field of fire, to construct bridges, to furnish fuel if imperatively needed for the army.
hecho") that, under the Spanish Civil Code of 1889 (in force here until 1950), did not exempt the (Emphasis supplied)
lessee from the duty to pay rent. We find that contention and ruling erroneous and untenable.
Reference may also be made to Rule 336:
The pertinent articles of the Civil Code of Spain of 1889 provide: What may be requisitioned. — Practically everything may be requisitioned under this article (art.
ART. 1554. It shall be the duty of the lessor; LII of the regulations above quoted) that is necessary for the maintenance of the army and not
1. To deliver to the lessee the thing which is the subject matter of the contract; of direct military use, such as fuel, food, forage, clothing, tobacco, printing presses, type,
2. To make thereon, during the lease, all repairs necessary in order to keep it in serviceable leather, cloth, etc. Billeting of troops for quarters and subsistence is also authorized. (Emphasis
condition for the purpose for which it was intended; supplied)
3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of the
And Forest and Tucker state:
contract.
The billegerent occupant may destroy or appropriate public property which may have a hostile
ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of the purpose, as forts, arms, armories, etc. The occupying force may enjoy the income from the
use of the leased property; but the lessee shall have a direct action against the trespasser. public sources. Strictly private property should be inviolable, except so far as the necessity of
war requires contrary action.
The distinction between confiscation and temporary sequestration of private property by a
belligerent occupant was also passed upon by this Court in Haw Pia vs. China Banking Corporation,
80 Phil. 604, wherein the right of Japan to sequester or take temporary control over enemy private
property in the interest of its military effort was expressly recognized.
We are thus forced to conclude that in evicting the lessee, Manila Motor Co., Inc. from the leased
buildings and occupying the same as quarters for troops, the Japanese authorities acted pursuant
to a right recognized by international and domestic law. Its act of dispossession, therefore, did not
constitute perturbacion de hecho but aperturbacion de derecho for which the lessors Villaruel (and
not the appellants lessees) were liable (Art. 1560, supra) and for the consequences of which said
lessors must respond, since the result of the disturbance was the deprivation of the lessee of the
peaceful use and enjoyment of the property leased. Wherefore, the latter's corresponding obligation
to pay rentals ceased during such deprivation.
The Supreme Court of Spain, in its Sentencia of 6 December 1944, squarely declared the resolutory
effect of the military sequestration of properties under lease upon the lessee's obligation to pay rent
(Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583, 608):.
In addition, the text of Art. 1560, in its first paragraph ( jam quot.) assumes that in case of mere
disturbance (perturbacion de mero hecho) "the lessee shall have a direct action against the
trespasser." This assumption evidently does not contemplate the case of dispossession of the lessee
by a military occupant, as pointed out by Mr. Chief Justice Paras in his dissenting opinion in Reyes
vs. Caltex (Phil.) Inc., 84 Phil. 669; for the reason that the lessee could not have a direct action
against the military occupant. It would be most unrealistic to expect that the occupation courts,
place under the authority of the occupying belligerent, should entertain at the time a suit for forcible
entry against the Japanese army. The plaintiffs, their lawyers, and in all probability, the Judge and
court personnel, would face "severest penalties" for such defiance of the invader.
The present case is distinguishable from Lo Ching vs. Archbishop of Manila (81 Phil., 601) in that
the act of the Japanese military involved in the latter case clearly went beyond the limits set by the
Hague Conventions, in seizing the property and delivering it to another private party; and
from Reyes vs. Caltex (Phil.) Inc., 84 Phil. 654, in that the rights of the military occupant under
international law were not raised or put in issue in said case; and moreover, the lessee there, by
failing to rescind the lease upon seizure of the premises by the Japanese military, despite the
stipulated power to do so, resumed business and decided to hold unto the long term lease for the
balance of its 20-year period, starting from December 23, 1940. In the case before us, the
occupation of the leased property by the Japanese army covered the major portion of the five-year
contractual period, without any option to rescind by the lessee.
The lessor's position is not improved by regarding the military seizure of the property under lease
as a case of force majeure or fortuitous event. Ordinarily, a party may not be held responsible
therefor, despite the fact that it prevented compliance of its obligations. But lease being a contract
that calls for prestations that are both reciprocal and repetitive (tractum successivum), the
obligations of either party are not discharged at any given moment, but must be fulfilled all
throughout the term of the contract. As a result, any substantial failure by one party to fulfill its
commitments at any time during the contract period gives rise to a failure of consideration (causa)
for the obligations of the other party and excuses the latter from the correlative performance,
because the causa in lease must exist not only at the perfection but throughout the term of the
contract. No lessee would agree to pay rent for premises he could not enjoy. As expressed by Marcel
Planiol (quoted in 4 Castan, Derecho Civil, 7th Edition, p. 264) —
This effect of the failure of reciprocity appears whether the failure is due to fault or to fortuitous
event; the only difference being that in case of fault, the other party is entitled to rescind the
contract in toto, and collect damages, while in casual non-performance it becomes entitled only to
a suspension pro tanto of its own commitments. This rule is recognized in par. 2 of Art. 1558,
authorizing the lessee to demand reduction of the rent in case of repairs depriving him of the
possession of part of the property; and in Art. 1575, enabling the lessee of rural property to demand
reduction of the rent if more than one-half of the fruits are lost by extraordinary fortuitous event.
Of course, where it becomes immediately apparent that the loss of possession or enjoyment will be
permanent, as in the case of accidental destruction of a leased building, the lease contract
terminates.
Applying these principles, the Sentencia of December 1944, already adverted to, ruled as follows:
We are aware that the rule in the common law is otherwise, due to its regarding a lease as a
conveyance to the lessee of a temporary estate or title to the leased property so that loss of
possession due to war or other fortuitous event leaves the tenant liable for the rent in the absence
of stipulation. The fundamental difference between the common law and the civil law concepts has
been outlined by the United States in Viterbo vs. Friedlander, 30 L. Ed. (U.S.) pp. 776, 778, in this
wise:
But as to the nature and effect of a lease for years, at a certain rent which the lessee agrees to
pay, and containing no express covenant on the part of the lessor, the two systems differ
materially. The common law regards such a lease as the grant of an estate for years, which the
lessee takes a title in, and is bound to pay the stipulated rent for, notwithstanding any injury by
flood, fire or external violence, at least unless the injury is such a destruction of the land as to
amount to an eviction; and by that law the lessor is under no implied covenant to repair, or even
that the premises shall be fit for the purpose for which they are leased. Fowler vs. Bott, 6 Mass.
63; 3 Kent, Com. 465, 466; Broom, Legal Maxims, 3d ed. 213, 214; Doupe vs. Genin, 45 N. Y.
119; Kingbury vs. Westfall, 61 N. Y. 356. Naumberg vs. Young, 15 Vroom, 331; Bowe vs.
Hunking, 135 Mass. 380; Manchester Warehouse Co. vs. Carr, L.R. 5 C.P.D. 507.
The civil law, on the other hand, regards a lease for years as a mere transfer of the use and
enjoyment of the property; and holds the landlord bound, without any express covenant, to
keep it in repair and otherwise fit for use and enjoyment for the purpose for which it is leased,
even when the need of repair or the unfitness is caused by an inevitable accident, and if he does
not do so, the tenant may have the lease annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2,
15, 1, 2; 19, 2, 25, 2; 19, 2, 39; 2 Gomez, Variae Resolutiones c. 3, secs. 1-3, 18, 19: Gregorio
Lopez in 5 Partidas, tit. 8, 11. 8, 22; Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no. 1; sec. 3
nos. 1, 3, 6, Pothier, Contract de Louage, nos. 3, 6, 11, 22, 53, 103, 106, 139-155.
It is accordingly laid down in the Pandects, on the authority of Julian, "If anyone has let an
estate, that, even if anything happens by vis major, he must make it good, he must stand by
his contract," si quis fundum locaverit, ut, etiamsi quid vi majore accidisset, hoc ei praestaretur,
pacto standum esse; Dig. 19, 2, 9, 2; and on the authority of Ulpian, that "A lease does not
change the ownership," non solet locatio dominiun mutare; Dig. 19, 2, 39; and that the lessee
has a right of action, if he cannot enjoy the thing which he has hired, si re quam conduxit frui
non liceat, whether because his possession, either of the whole or of part of the field, is not
made good, or a house, or stable or sheepfold, is not repaired; and the landlord ought to warrant
the tenant, dominum colono praestare debere, against every irresistible force, omnim vim cui
resisti non potest, such as floods, flocks of birds, or any like cause, or invasion of enemies; and
if the whole crop should be destroyed by a heavy rainfall, or the olives should be spoiled by
blight, or by extraordinary heat of the sun, solis fervore non assueto, it would be the loss of the
landlord, damnum domini futurum; and so if the field falls in by an earthquake, for there must
be made good to the tenant a field that he can enjoy, oportere enim agrum praestari conductori,
ut frui possit; but if any loss arises from defects in the thing itself, si qua tamen vitia ex ipsa re
oriantur, as if wine turns sour, or standing corn is spoiled by worms or weeds, or if nothing
extraordinary happens, si vero nihil extra consuetudinem acciderit, it is the loss of the tenant,
damnum coloni esse. Dig. 19, 2; 15, 1, 2. (Emphasis supplied)
In short, the law applies to leases the rule enunciated by the Canonists and the Bartolist School of
Post glossatorse, that "contractus qui tractum successivum habent et dependentiam de futuro, sub
conditione rebus sic stantibus intelliguntur," they are understood entered subject to the condition
that things will remain as they are, without material change.
It is also worthy of note that the lessors, through Dr. Javier Villaruel, agreed after liberation to a
renewal of the contract of lease for another five years (from June 1, 1946 to May 31 of 1951) without
making any reservation regarding the alleged liability of the lessee company for the rentals
corresponding to the period of occupancy of the premises by the Japanese army, and without
insisting that the non-payment of such rental was a breach of the contract of lease. This passivity
of the lessors strongly supports the claim of the lessees that the rentals in question were verbally
waived. The proffered explanation is that the lessors could not refuse to renew the lease, because
the privilege of renewal had been granted to the lessees in the original contract. Such excuse is
untenable: if the lessors deemed that the contract had been breached by the lessee's non-payment
of the occupation rents how could they admit the lessee's right to renew a contract that the lessee
itself had violated?
But this is not all. The lessors accepted payment of current rentals from October 1945 to June 1946.
It was only in July 1946 that they insisted upon collecting also the 1942-1945 rents, and refused to
accept further payments tendered by the lessee unless their right to collect the occupation rental
was recognized or reserved. After refusing the rents from July to November 1946, unless the lessee
recognized their right to occupation rentals, the appellees (lessors) demanded rescission of the
contract and a rental of P1,740 monthly in lieu of the stipulated P350 per month. (Exhibit "C").
This attitude of the lessors was doubly wrongful: first, because as already shown, the dispossession
by the Japanese army exempted the lessee from his obligation to pay rent for the period of its
ouster; and second, because even if the lessee had been liable for that rent, its collection in 1946
was barred by the moratorium order, Executive Order No. 32, that remained in force until replaced
by Rep. Act 342 in 1948. To apply the current rentals to the occupation obligations would amount
to enforcing them contrary to the moratorium decreed by the government.
Clearly, then, the lessor' insistence upon collecting the occupation rentals for 1942-1945 was
unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed
them in default (mora creditoris or accipiendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the leased premises. While not expressly
declared by the Code of 1889, this result is clearly inferable from the nature and effects of mora,
and from Articles 1185, 1452 [par. 3] and 1589).
ART. 1185. When the obligation to deliver a certain and determinate thing arises from the
commission of a crime or misdemeanor the obligor shall not be exempted from the payment of
its value, whatever the cause of its loss may have been, unless, having offered the thing to the
person entitled to receive it, the latter should have refused without reason to accept it.
Art. 1452. . . . . If fungible things should be sold for a price fixed with relation to weight, number,
or measure, they shall not be at the purchaser's risk until they have been weighed, counted, or
measured, unless the purchaser should be in default.
ART. 1589. If the person who contracted to do the work bound himself to furnish the materials,
he shall bear the loss in case of the destruction of the work before it is delivered, unless its
acceptance has been delayed by the default of the other party.
While there is a presumption that the loss of the thing leased is due to the fault of the lessee (Civil
Code of 1889, Art. 1563), it is noteworthy that the lessor have not invoked that presumption either
here or in the court below. On the contrary, the parties and the trial court have all proceeded and
discussed the issues taking for granted that the destruction of the leased buildings was purely
fortuitous. We see no reason for departing from that assumption and further prolonging this
litigation..
That the lessee and sublessee did not consign or deposit in court the rentals tendered to and
improperly rejected by the lessors, did not render the debtor liable for default (mora solvendi) nor
answerable for fortuitous events because, as explained by the Supreme Court of Spain in
its Sentencia of 5 June 1944 —
Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al deudor no quiere decir que
necesariamente haya de practicarse, y no baste el ofrecimiento de pago que de aquella no fuere
seguido, a efectos de exclusion de las consecuencias de la mora solvendi. (8 Manresa, Comentarios,
5th Ed., Vol. 1, p. 136).
In other words, the only effect of the failure to consign the rentals in court was that the obligation
to pay them subsisted (P.N.B. vs. Relativo, 92 Phil., 203) and the lessee remained liable for the
amount of the unpaid contract rent, corresponding to the period from July to November, 1946; it
being undisputed that, from December 1946 up to March 2, 1948, when the commercial buildings
were burned, the defendants-appellants have paid the contract rentals at the rate of P350 per
month. But the failure to consign did not eradicate the default (mora) of the lessors nor the risk of
loss that lay upon them. (3 Castan, Der. Civ., 8th Ed., p. 145; 4 Puig Peña, Der. Civ., part. 1, p.
234; Diaz Pairo, Teoria Gen. de las Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).
In view of the foregoing, we hold:
(a) That the dispossession of the lessee from the premises by the Japanese army of occupation
was not an act of mere trespass ( perturbacion de mero hecho) but one de derecho chargeable
to the lessors;
(b) That such dispossession, though not due to fault of lessors or lessee, nevertheless resulted
in the exemption of the lessee from its obligation to pay rent during the period that it was
deprived of the possession and enjoyment of the premises leased;
(c) That the insistence of the lessors to collect such rentals was unwarranted;
(d) That the lessors were not justified in refusing to accept the tender of current rentals unless
the lessee should recognize their right to the rents corresponding to the period that the lessee
was not in possession;
(e) That by their improper refusal to accept the current rents tendered by the lessee, the lessors
incurred in default (mora) and they must shoulder the subsequent accidental loss of the premises
leased;
(f) That the mora of the lessors was not cured by the failure of the lessee to make the
consignation of the rejected payments, but the lessee remained obligated to pay the amounts
tendered and not consigned by it in court.
Consequently, it was reversible error to sentence the appellants to pay P2,165 a month as
reasonable value of the occupation of the premises from July 1946, and the value of the destroyed
buildings amounting to P30,000.
Wherefore, the decision appealed from is modified in the sense that the appellant Manila Motor
Company should pay to the appellees Villaruel only the rents for the leased premises corresponding
to the period from July up to November 1946, at the rate of P350 a month, or a total of P1,750.
Costs against appellees in both instances. So ordered.
Footnotes
1 "Art. 2. Sec. 3. — The Philippines renounces war as an instrument of national policy, and
adopts the generally accepted principles of international law as part of the law of the nation."
(Constitution of the Philippines)--Applied in Go Kim Chan vs. Valdez, 75 Phil. 113; Tubb vs.
Griess, 78 Phil. 249; Dizon vs. Commanding General, 81 Phil. 286.
G.R. No. L-49852 October 19, 1989
EMILIA TENGCO, petitioner, vs. COURT OF APPEALS and BENJAMIN CIFRA JR., respondents.
De Santos, Balgos & Perez for petitioner.
Teofilo F. Manalo for respondents.
PADILLA, J.:
Review on certiorari of the decision* rendered by the Court of Appeals in CA-G.R. NO. SP-08182,
entitled: "Emilia Tengco, petitioner, versus Court of First Instance of Rizal, etc., et al,
respondents," which dismissed herein petitioner's "Appeal by Way of Certiorari" from the judgment
of the Court of First Instance of Rizal in Civil Case No. C-6625 which affirmed the decision of the
Municipal Court of Navotas, Metro Manila, in Civil Case No. 2092, entitled: "Benjamin Cifra, plaintiff,
versus Emilia Tengco defendant," ordering the herein petitioner (as defendant) to vacate the
premises at No. 164 Int Gov. Pascual St., Navotas, Metro Manila, and to pay the herein private
respondent (as plaintiff) the arrears in rentals and attorney's fees; and the Resolution denying the
herein petitioner's motion for reconsideration of the said Court of Appeals decision.
The record of the case shows that on 16 September 1976, the herein private respondent, Benjamin
Cifra, Jr., claiming to be the owner of the premises at No. 164 Int Gov. Pascual St., Navotas, Metro
Manila, which he had leased to the herein petitioner, Emilia Tengco, filed an action for unlawful
detainer with the Municipal Court of Navotas, Metro Manila, docketed therein as Civil Case No. 2092,
to evict the petitioner, Emilia Tengco, from the said premises for her alleged failure to comply with
the terms and conditions of the lease contract by failing and refusing to pay the stipulated rentals
despite repeated demands. After trial judgment was rendered against the petitioner. The decretal
portion of the decision reads, as follows:
WHEREFORE, Judgment is hereby rendered in favor of the plaintiff and against the defendant,
ordering the defendant and any and all persons claiming rights under her to vacate the premises
occupied by her at No. 164 Int Gov. Pascual Street, this town and to surrender possession
thereof to the plaintiff, condemning the defendant to pay the plaintiff the amount of THREE
HUNDRED SEVENTY SIX (P376.00) PESOS, as rentals in arrears and the sum of TWELVE PESOS
(P12.00), a month from October, 1976 until the premises is fully vacated. To pay the plaintiff
the sum of TWO HUNDRED (P200.00) PESOS as and for attorney's fees and costs of suit.
From this judgment, the herein petitioner appealed to the Court of First Instance of Rizal where the
appeal was docketed as Civil Case No. C-6625. On 18 May 1978, the Court of First Instance of Rizal
rendered judgment affirming the decision of the municipal court, the dispositive part of which reads
as follows:
WHEREFORE, premises considered, judgment is hereby rendered affirming in toto the judgment
of the lower court dated September 20, 1 977 without pronouncement as to costs.
Not satisfied, the herein petitioner filed with the respondent Court of Appeals an "Appeal by Way of
Certiorari" which was docketed as CA-G.R. NO. SP-08182. On 29 August 1978, the respondent Court
of Appeals promulgated a decision, with the following disposition:
WHEREFORE, finding that the Decision of the lower Court is supported by substantial evidence
and that its conclusions are not clearly against the law and jurisprudence, the instant petition is
hereby denied due course and is dismissed outright.
The petitioner filed a motion for reconsideration of the decision but her motion was denied on 16
January 1979.
Hence, the present recourse.
The petitioner contends that the respondent Court of Appeals erred in sustaining the decisions of
the appellate and trial courts which are allegedly contrary to the evidence and applicable
jurisprudence. The petitioner more particularly claims that (1) the private respondent Benjamin
Cifra, Jr. is not the owner of the leased premises; (2) the lessor was guilty of mora accipiendi; (3)
the petitioner's version of the facts is more credible than private respondent's; (4) laches had
deprived the lessor of the right to eject her; and (5) the private respondent failed to establish a
cause of action against the petitioner.
We find no merit in the petition. The reasons advanced by the petitioner to support her petition are
the same reasons given by her to the Court of Appeals in support of her "Appeal by Way of Certiorari"
and we find no ground to adopt a different course from that of the respondent appellate court. In
disposing of the petitioner's contentions, the Court of Appeals said:
Petitioner claims that private respondent had failed to establish his ownership of the lot in
question for while the Certificate of Title presented by him refers to a parcel of land situated at
Bo. Almacen, Navotas, the premises in question, on the other hand, is situated in Bo. Sipak
Navotas; that it was not with private respondent that she entered into the lease agreement but
with his mother; that her failure to pay the rentals on the premises was due to the refusal of
the collector to accept her tender of payment; and that laches had deprived private respondent
of whatever right he had against her considering that the Complaint was filed only in September,
1976 whereas his cause of action arose sometime in February, 1974 when she defaulted in the
payment of rentals.
We find this appeal which We consider as a Petition for Review, to be without merit.
It should be noted that petitioner admits that she is a lessee on the premises in question and
that she had been in default in the payment of the rentals thereon since February, 1974 allegedly
because of the refusal of the collector to accept her tender of payment. However, she claims
that the lease agreement was not with private respondent, but with his mother. The question as
to who is the real lessor of the premises is one of fact and the findings of the lower court that it
was private respondent is entitled to the highest respect by appellate Courts barring any material
evidence to the contrary. Neither can petitioner question private respondent's claim of ownership
of the leased premises. The tenant is not permitted to deny the title of his landlord at the time
of the commencement of the relation of landlord and tenant between them.
Petitioner's excuse for her non-payment of the rentals on the premises deserves scant
consideration. If, indeed, her offer to settle her obligation was refused by private respondent,
she should have resorted to the judicial deposit of the amount due in order to release her from
responsibility.
Petitioner's claim that private respondent's cause of' action is barred by laches is untenable.
While it is true that petitioner's arrearages date back to February, 1974, however, a tenant's
mere failure to pay rent does not ipso facto make unlawful his possession of the leased premises.
As held by respondent Court of First Instance, it is the failure to pay rents after a demand
therefor is made that entitles the lessor to bring an action of Unlawful Detainer. Moreover, the
lessor has the privilege to waive his right to bring an action against his tenant and give the latter
credit for the payment of the rents and allow him to continue indefinitely in the possession of
the premises. During such period, the tenant would not be in illegal possession of the premises
and the landlord can not maintain an action until after he has taken steps to convert the legal
possession into an illegal possession. Thus, in the case at bar, the demand on petitioner to
vacate the premises for failure to pay the rentals thereon was made by private respondent only
on August 23, 1976 and the Complaint against petitioner was filed on September 16,1976.
Consequently, petitioner's non-payment of the rentals on the premises, notwithstanding demand
made by private respondent, and her failure to avail of the remedy provided for in Article 1256
of the Civil Code, entitles private respondent to eject her from the premises.
Indeed, the question of whether or not private respondent is the owner of the leased premises is
one of fact which is within the cognizance of the trial court whose findings thereon will not be
disturbed on appeal unless there is a showing that the trial court had overlooked, misunderstood,
or misapplied some fact or circumstance of weight and substance that would have affected the result
of the case. And since the petitioner has not presented sufficient proof that the leased premises is
not the same lot registered in the name of the private respondent, the findings of the lower courts
on the fact of ownership of the leased premises will not be disturbed.
The maps attached by the petitioner to her Reply to the Comment of the private respondent which
would tend to show that Almacen and Sipac are two (2) different barangays or sitios, cannot offset
the findings of the trial court for lack of proper Identifications; in fact, these maps do not even
indicate where the property at No. 164 Int Gov. Pascual Street is located.
The petitioner's contention that the provisions of Section 1, Commonwealth Act No. 53, should be
applied in this case in determining the credibility of witnesses, is untenable. The said law provides:
Sec. 1. Where a covenant or contract made between the owner of land and a lessee or tenant
on share thereof has not been reduced to writing or has not been set forth in a document written
in a language known to the lessee or tenant, the testimony of such lessee or tenant shall be
accepted as prima facieevidence on the terms of a covenant or contract.
As can be seen, the cited law can be invoked only when there is a dispute between the owner of the
land and the lessee or tenant on share tenancy as to the terms of an unwritten contract or where
the contract is written in a language not known to the lessee or tenant. In the instant case, there is
no dispute as to the terms of the contract of lease. Hence, the cited law cannot be invoked to support
the petitioner's claim that the private respondent is not the owner of the leased premises or that the
petitioner's version of the facts of the case is more credible than that of the private respondent.
Upon receipt of this letter, petitioner forthwith went to the residence of the collector, another
sister of the private respondent to whom she had been paying her rentals, and there tendered
payment but this was refused without any justification (t.s.n. July 26, 1 977, p. 7). 2
Under the circumstances, the refusal to accept the proffered rentals is not without justification. The
ownership of the property had been transferred to the private respondent and the person to whom
payment was offered had no authority to accept payment. It should be noted that the contract of
lease between the petitioner and Lutgarda Cifra, the former owner of the land, was not in writing
and, hence, unrecorded. The Court has held that a contract of lease executed by the vendor, unless
recorded, ceases to have effect when the property is sold, in the absence of a contrary
agreement. 3 The petitioner cannot claim ignorance of the transfer of ownerhip of the property
because, by her own account, Aurora Recto and the private respondent, at various times, had
informed her of their respective claims to ownership of the property occupied by the petitioner. The
petitioner should have tendered payment of the rentals to the private respondent and if that was
not possible, she should have consigned such rentals in court.
Finally, we find no merit in the petitioner's contention that the private respondent is guilty of laches.
As the Court of Appeals had stated, the demand for the petitioner to vacate the premises and to pay
arrears in rentals was made on 23 August 1976 and the complaint seeking her ejectment was filed
a few days thereafter, or on 16 September 1976.
For reasons aforestated, the judgment of the Court of Appeals appears to be in accord with the
evidence and the law.
WHEREFORE, the petition is hereby DENIED. Without pronouncement as to costs. This decision is
immediately executory.

Besides, the petitioner's contention that the private respondent is not the owner of the leased
premises is inconsistent with her claim that she had tendered payment of the rentals for the month
of January 1976 to the private respondent. 1

There is also no merit in the petitioner's contention that the lessor is guilty of mora accipiendi. The
circumstances surrounding the alleged refusal of the lessor (private respondent) to accept the
proffered rentals, according to petitioner, are as follows:

Sometime in 1942, petitioner entered into a verbal lease agreement with Lutgarda Cifra over
the premises in question which belonged to the latter. Aside from the amount of rentals, no
other condition or term was agreed upon. The rentals were collected from her residence by the
lessor's collector who went to her house to demand and collect payment from time to time, with
no fixed frequency (Cf., t.s.n. July 28, 1977, pp. 2-6).

Sometime in 1974, the lessor's collector stopped going to the petitioner's residence to collect
her rentals, as she had done in the past. The defendant-appellant waited for the collector to
come but the latter never showed up again in his neighborhood. Since no demand for payment
was made upon her, the petitioner decided to keep the money until the collector comes again
to demand and collect payment.

Sometime in May, 1976, petitioner received a letter (Exh. 1) from Aurora C. Recto, sister of
private respondent, informing the former that the latter, was the owner of the property in
question, was offering the same for sale.

Sometime later, or in August 1977, petitioner received another letter, this time from the private
respondent, demanding the surrender of the possession of the premises in question, also
claiming to be the owner of the property.
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and
SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio
M. Tolentino for injunction, specific performance or rescission, and damages with preliminary
injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the
loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo,
Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said
title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable
in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other
property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at
12% annual interest, payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering
a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But
this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of
the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit
liabilities, the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans, provided
that such extensions or renewals shall be subject to review by the Superintendent of Banks, who
may impose such limitations as may be necessary to insure correction of the bank's deficiency
as soon as possible;
On June 14, 1968, the Monetary Board, after finding that Island Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he
is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind
the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal
of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the
Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage
nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage
be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is
not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio
M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take
over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide
vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never
an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract
by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the
pre-deducted interest was an exercise of his right to it, which right exist independently of his right
to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much
less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned
by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise
the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party,
that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts.
WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is
offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges,
for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his
PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for
the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration
of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate
mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release
on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the contract of real mortgage
(Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when
the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt
secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited
in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration,
the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172
N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the
holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be
enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d)
p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is
78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to
the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00
debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the successors
in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE
SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE
PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT
COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25
HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
G.R. No. 73345. April 7, 1993.
SOCIAL SECURITY SYSTEM, petitioner, vs. MOONWALK DEVELOPMENT & HOUSING CORPORATION,
ROSITA U. ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in
her capacity as Register of Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as
Register of Deeds for Metro Manila District IV, Makati, Metro Manila and the INTERMEDIATE
APPELLATE COURT, respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
CAMPOS, JR., J p: Before Us is a petition for review on certiorari of decision 1 of the then
Intermediate Appellate Court affirming in toto the decision of the former Court of First Instance of
Rizal, Seventh Judicial District, Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court
of First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short,
alleging that the former had committed an error in failing to compute the 12% interest due on
delayed payments on the loan of Moonwalk — resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on
the said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference, the court issued an order
giving both parties thirty (30) days within which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan
in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano
Z. Velarde and Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made
to defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE
MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex
`E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H'
on October 9, 1979 and October 11, 1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely
paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive,
of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the plaintiff
are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by
the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk.
The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still
liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?"
3 As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished
and affirmed the trial court.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred,"
the appellate court disregarded the basic tenet that waiver of a right must be express, made in
a clear and unequivocal manner. There is no evidence in the case at bar to show that SSS made
a clear, positive waiver of the penalties, made with full knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere
trustee, cannot perform acts affecting the same, including condonation of penalties, that would
diminish property rights of the owners and beneficiaries thereof. (United Christian Missionary
Society v. Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact."
The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative.
It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief,
what is sought to be recovered in this case is not the 12% interest on the loan but the 12%
penalty for failure to pay on time the amortization. What is sought to be enforced therefore is
the penal clause of the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as "an accessory obligation which the
parties attach to a principal obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special presentation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled" (3 Castan 8th
Ed. p. 118).
Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Peña Part 1 p. 76). Note therefore
that an accessory obligation is dependent for its existence on the existence of a principal obligation.
A principal obligation may exist without an accessory obligation but an accessory obligation cannot
exist without a principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal
obligation. In the present case, the principal obligation is the loan between the parties. The accessory
obligation of a penal clause is to enforce the main obligation of payment of the loan. If therefore the
principal obligation does not exist the penalty being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable in case of non performance or
late performance of the main obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment
in point of time which is called mora or delay. The debtor therefore violates the obligation in point
of time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiff-
appellant there was no demand for the payment of the penalty, hence the debtor was no in mora in
the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing
the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made several payments on
September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which was a
complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of
Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G
and H). For all purposes therefore the principal obligation of defendant-appellee was deemed
extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for
the release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation must
also be deemed extinguished considering that the principal obligation was considered extinguished,
and the penal clause being an accessory obligation. That being the case, the demand for payment
of the penal clause made by plaintiff-appellant in its demand letter dated November 28, 1979 and
its follow up letter dated December 17, 1979 (which parenthetically are the only demands for
payment of the penalties) are therefore ineffective as there was nothing to demand. It would be
otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of
the obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation
2) the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for
after demand, Moonwalk would be in mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and
December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default
since there was no mora prior to the demand. That being the case, therefore, the demand made
after the extinguishment of the principal obligation which carried with it the extinguishment of the
penal clause being merely an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October 10, 1979 together with the
12% interest by defendant-appellee Moonwalk, its obligation was extinguished. It being
extinguished, there was no more need for the penal clause. Now, it is to be noted that penalty at
anytime can be modified by the Court. Even substantial performance under Art. 1234 authorizes the
Court to consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the
Philippines 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."
If the penalty can be reduced after the principal obligation has been partly or irregularly complied
with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with since in that case there is no
breach of the obligation. In the present case, there has been as yet no demand for payment of the
penalty at the time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor,
that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That
being so, there is no basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened if the obligation was paid
on time, for then the penal clause, under the terms of the contract would not apply. Payment of the
penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of enforcing
the performance of the main obligation has been fully complied with and extinguished, the penal
clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We, however, advance the following
reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he 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." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It 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. 7 From the foregoing, it
is clear that a penal clause is intended to prevent the obligor from defaulting in the performance of
his obligation. Thus, if there should be default, the penalty may be enforced. One commentator of
the Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil
Code? We must make a distinction between a positive and a negative obligation. With regard to
obligations which are positive (to give and to do), the penalty is demandable when the debtor
is in mora; hence, the necessity of demand by the debtor unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."
There are only three instances when demand is not necessary to render the obligor in default. These
are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has rendered it beyond his power
to perform." 9
This case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that "(a)ll amortization payments shall be made every first five (5) days of the
calendar month until the principal and interest on the loan or any portion thereof actually released
has been fully paid," 10 petitioner is not excused from making a demand. It has been established
that at the time of payment of the full obligation, private respondent Moonwalk has long been
delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in
the grammatical sense, because it involves the beginning of a special condition or status which has
its own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that
the following requisites be present: (1) that the obligation be demandable and already liquidated;
(2) that the debtor delays performance; and (3) that the creditor requires the performance judicially
and extrajudicially. 12 Default generally begins from the moment the creditor demands the
performance of the obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed
was that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real
estate mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through
upon Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with said
statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never in
default because SSS never compelled performance. Though it tried to foreclose the mortgages, SSS
itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account could
properly be considered as demand for payment, the demand was complied with on time. Hence, no
delay occurred and there was, therefore, no occasion when the penalty became demandable and
enforceable. Since there was no default in the performance of the main obligation — payment of the
loan — SSS was never entitled to recover any penalty, not at the time it made the Statement of
Account and certainly, not after the extinguishment of the principal obligation because then, all the
more that SSS had no reason to ask for the penalties. Thus, there could never be any occasion for
waiver or even mistake in the application for payment because there was nothing for SSS to waive
as its right to enforce the penalty did not arise.
cannot apply in this case. First, because what was not paid were installments on a loan but premiums
required by law to be paid by the parties covered by the Social Security Act. Secondly, what is
sought to be condoned or waived are penalties not imposed by law for failure to remit premiums
required by law, but a penalty for non payment provided for by the agreement of the parties in the
contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the respondent
court is AFFIRMED.

SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it
held were trust funds and as trustee, the petitioner could not perform acts affecting the funds that
would diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS
cited the case of United Christian Missionary Society v. Social Security Commission. 14

We looked into the case and found out that it is not applicable to the present case as it dealt not
with the right of the SSS to collect penalties which were provided for in contracts which it entered
into but with its right to collect premiums and its duty to collect the penalty for delayed payment or
non-payment of premiums. The Supreme Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums
to the System within the prescribed period shall pay a penalty of three (3%) per month. The
prescribed penalty is evidently of a punitive character, provided by the legislature to assure that
employers do not take lightly the State's exercise of the police power in the implementation of
the Republic's declared policy "to develop, establish gradually and perfect a social security
system which shall be suitable to the needs of the people throughout the Philippines and (to)
provide protection to employers against the hazards of disability, sickness, old age and death .
. ."

Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:
"Note that the above case refers to the condonation of the penalty for the non remittance of the
premium which is provided for by Section 22(a) of the Social Security Act . . . In other words,
what was sought to be condoned was the penalty provided for by law for non remittance of
premium for coverage under the Social Security Act.

The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff
and defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision
of law is involved in this case, nor is there any penalty imposed by law nor a case about non-
remittance of premium required by law. The present case refers to a contract of loan payable in
installments not provided for by law but by agreement of the parties. Therefore, the ratio decidendi
of the case of United Christian Missionary Society vs. Social Security Commission which plaintiff-
appellant relies is not applicable in this case; clearly, the Social Security Commission, which is a
creature of the Social Security Act cannot condone a mandatory provision of law providing for the
payment of premiums and for penalties for non remittance. The life of the Social Security Act is in
the premiums because these are the funds from which the Social Security Act gets the money for
its purposes and the non-remittance of the premiums is penalized not by the Social Security
Commission but by law.

It is admitted that when a government created corporation enters into a contract with private party
concerning a loan, it descends to the level of a private person. Hence, the rules on contract applicable
to private parties are applicable to it. The argument therefore that the Social Security Commission
cannot waive or condone the penalties which was applied in the United Christian Missionary Society
G.R. No. 100594. March 10, 1993.]
BINALBAGAN TECH. INC., and HERMILO J. NAVA, petitioners, vs. THE COURT OF APPEALS,
MAGDALENA L. PUENTEVELLA, ANGELINA P. ECHAUS, ROMULO L. PUENTEVELLA, RENATO L.
PUENTEVELLA, NOLI L. PUENTEVELLA and NELIA LOURDES P. JACINTO, respondents.
Mateo Valenzuela for petitioners.
Hilado, Hagad & Hilado for private respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; PARTY CANNOT DEMAND PERFORMANCE OF AN
OBLIGATION UNLESS HE IS IN A POSITION TO COMPLY WITH HIS OWN OBLIGATIONS. — A
party to a contract cannot demand performance of the other party's obligations unless he is in
a position to comply with his own obligations. Similarly, the right to rescind a contract can be
demanded only if a party thereto is ready, willing and able to comply with his own obligations
thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581 [1926]; Paras, Civil Code of
the Philippines, 12th ed. Vol. IV, p. 200). In a contract of sale, the vendor is bound to transfer
the ownership of and deliver, as well as warrant, the thing which is the object of the sale (Art.
1495, Civil Code); he warrants that the buyer shall, from the time ownership is passed, have
and enjoy the legal and peaceful possession of the thing.
2. ID.; PRESCRIPTIVE PERIOD WITHIN WHICH TO INSTITUTE ACTION UPON A WRITTEN
CONTRACT; CASE AT BAR. — The prescriptive period within which to institute an action upon a
written contract is ten years (Art. 1144, Civil Code). The cause of action of private respondent
Echaus is based on the deed of sale executed on May 11, 1967, whereby ownership of the
subdivision lots was transferred to petitioner. She filed Civil Case No. 1354 for recovery of title
and damages only on October 8, 1982. From May 11, 1967 to October 8, 1982, more than fifteen
(15) years elapsed. Seemingly, the 10-year prescriptive period had expired before she brought
her action to recover title. However, the period 1974 to 1982 should be deducted in computing
the prescriptive period for the reason that from 1974 to 1982, private respondent Echaus was
not in a legal position to initiate action against petitioner since as aforestated, through no fault
of hers, her warranty against eviction was breached. Deducting eight years (1974 to 1982) from
the period 1967 to 1982, only seven years elapsed. Consequently, Civil Case No. 1354 was filed
within the 10-year prescriptive period.
DECISION
MELO, J p:
The petition for review on certiorari now before us seeks to reverse the decision of the Court of
Appeals promulgated on March 27, 1991 in CA-G.R. CV No. 24635 (de Pano, Cacdac (P), and
Vailoces, JJ .).
The facts of the case, as borne out by the record, are as follows:
On May 11, 1967, private respondents, through Angelina P. Echaus, in her capacity as Judicial
Administrator of the intestate estate of Luis B. Puentevella, executed a Contract to Sell and a Deed
of Sale of forty-two subdivision lots within the Phib-Khik Subdivision of the Puentebella family,
conveying and transferring said lots to petitioner Binalbagan Tech., Inc. (hereinafter referred to as
Binalbagan). In turn Binalbagan, through its president, petitioner Hermilio J. Nava (hereinafter
referred to as Nava), executed an Acknowledgment of Debt with Mortgage Agreement, mortgaging
said lots in favor of the estate of Puentebella.
Upon the transfer to Binalbagan of titles to the 42 subdivision lots, said petitioner took possession
of the lots and the building and improvements thereon. Binalbagan started operating a school on
the property from 1967 when the titles and possession of the lots were transferred to it.
It appears that there was a pending case, Civil Case No. 7435 of Regional Trial Court stationed at
Himamaylan, Negros Occidental. Relative to said case we shall quote the findings of fact of the Court
of Appeals in its decision dated October 30, 1978 in CA-G.R. No. 4211-R:
To have a better perspective of the background facts leading to the filing of this instant case on
appeal, there is a need to make reference to the circumstances surrounding the filing of Civil
Case No. 7435, to wit:
The intestate estate of the late Luis B. Puentebella as registered owner of several subdivision lots,
specifically mentioned in paragraph 2 of plaintiffs' complaint, thru Judicial Administratrix, Angelina
L. Puentevella sold said aforementioned lots to Raul Javellana with the condition that the vendee-
promisee would not transfer his rights to said lots without the express consent of Puentevella and
that in case of the cancellation of the contract by reason of the violation of any of the terms thereof,
all payments therefor made and all improvements introduced on the property shall pertain to the
promissor and shall be considered as rentals for the use and occupation thereof.
Javellana having failed to pay the installments for a period of five years, Civil Case No. 7435 was
filed by defendant Puentevella against Raul Javellana and the Southern Negros Colleges which was
impleaded as a party defendant it being in actual possession thereof, for the rescission of their
contract to sell and the recovery of possession of the lots and buildings with damages.
Accordingly, after trial, judgment was rendered in favor of Puentevella and thereafter, defendants
Deputy Sheriffs served a copy of the writ of execution on the Acting Director of the Southern Negros
College and delivered possession of the lots and buildings to defendant Puentevella's representative,
Mrs. Manuel Gentapanan, and further levied execution on the books and school equipment, supplies,
library, apparatus, etc. to satisfy the monetary portion of the judgment under execution on October
27, 1967. Said books, equipment, etc. as reflected in the Depositary Receipt, (Exh. "B") dated
October 28, 1965, were delivered by the Sheriffs to the Acting Director of the Southern Negros
College as depositary of the same.
Came December 29, 1965 when the plaintiffs in the instant case on appeal filed their Third-Party
Claim based on an alleged Deed of Sale executed in their favor by spouses Jose and Lolita Lopez,
thus Puentevella was constrained to assert physical possession of the premises to counteract the
fictitious and unenforceable claim of herein plaintiffs.
Upon the filing of the instant case for injunction and damages on January 3, 1966, an ex-parte writ
of preliminary injunction was issued by the Honorable Presiding Judge Carlos Abiera, which order,
however, was elevated to the Honorable Court of Appeals which issued a writ of preliminary
injunction ordering Judge Carlos Abiera or any other persons or persons in his behalf to refrain from
further enforcing the injunction issued by him in this case and from further issuing any other writs
or prohibitions which would in any manner affect the enforcement of the judgment rendered in Civil
Case 7435, pending the finality of the decision of the Honorable Court of Appeals in the latter case.
Thus, defendant Puentevella was restored to the possession of the lots and buildings subject of this
case. However, plaintiffs filed a petition for review with the Supreme Court which issued a restraining
order against the sale of the properties claimed by the spouses-plaintiffs [in Abierra vs. Court of
Appeals, 45 SCRA 314].
When the Supreme Court dissolved the aforesaid injunction issued by the Court of Appeals,
possession of the building and other property was taken from petitioner Binalbagan and given to the
third-party claimants, the de la Cruz spouses. Petitioner Binalbagan transferred its school to another
location. In the meantime, an appeal was interposed by the defendants in Civil Case No. 293 with
the Court of Appeals where the appeal was docketed as CA-G.R. No. 42211-R. On October 30, 1978,
the Court of Appeals rendered judgment, reversing the appealed decision in Civil Case No. 293. On
April 29, 1981, judgment was entered in CA-G.R. No. 42211, and the record of the case was
remanded to the court of origin on December 22, 1981. Consequently, in 1982 the judgment in Civil
Case No. 7435 was finally executed and enforced, and petitioner was restored to the possession of
the subdivision lots on May 31, 1982. It will be noted that petitioner was not in possession of the
lots from 1974 to May 31, 1982.
After petitioner Binalbagan was again placed in possession of the subdivision lots, private respondent
Angelina Echaus demanded payment from petitioner Binalbagan for the subdivision lots, enclosing
in the letter of demand a statement of account as of September 1982 showing a total amount due
of P367,509.93, representing the price of the land and accrued interest as of that date.
As petitioner Binalbagan failed to effect payment, private respondent Angelina P. Echaus filed on
October 8, 1982 Civil Case No. 1354 of the Regional Trial Court of the Sixth Judicial Region stationed
in Himamaylan, Negros Occidental against petitioners for recovery of title and damages. An amended
complaint was filed by private respondent Angelina P. Echaus by including her mother, brothers, and
sisters as co-plaintiffs, which was admitted by the trial court on March 18, 1983.
After trial, the trial court rendered a decision on August 30, 1989, the dispositive portion of which
reads as follows:
IN VIEW OF THE FOREGOING, and inasmuch as there is no fraud and since the action on the
written contract, Exh. "C", has long prescribed, judgment is hereby rendered in favor of the
defendants and against the plaintiffs dismissing the amended complaint.
The counterclaim is likewise dismissed for lack of sufficient proof. Each shall bear their respective
expenses of litigation (pp. 71-72, Rollo).
Private respondents appealed to the Court of Appeals which rendered a decision on March 27, 1991,
disposing:
WHEREFORE, premises considered, the appealed decision is REVERSED and SET ASIDE and a
new one is rendered ordering the appellee Binalbagan Tech. Inc., through any of its officers, to
execute a deed of conveyance or any other instrument, transferring and returning unto the
appellants the ownership and titles of the subject 42 subdivision lots. Costs against appellees.
(pp. 51-52, Rollo)
Thus, this petition for review on certiorari wherein petitioners assign the following alleged errors of
the Court of Appeals:
First Error: The Court of Appeals erred in holding that the cause of action of the respondents
has not prescribed.
Second Error: The Court of Appeals erred in holding that Civil Case No. 293 interrupts the
running of the period of the prescription.
Third Error: The Court of Appeals erred in citing the cases of David-Garlitos and Rivero vs. Rivero
to support its contention that the period of prescription was interrupted in the case at bar.
Fourth Error: The finding of facts of the Honorable Court of Appeals in reversing the lower court
decision has no basis and is contradicted by the evidence on record of the case at bar as well as
the admission of parties." (p. 16, Rollo)
The main issue of this case is: Whether private respondents' cause of action in Civil Case No. 1354
is barred by prescription.
On this point the Court of Appeals held:
As it is evident that there was an interruption during the period from 1974 up to 1982, the period
of prescription, as correctly maintained by the appellants, was tolled during such period, due to
the injunctive writ in Civil Case No. 293 as discussed earlier when the vendors could not maintain
the vendee in possession, and consequently was in no position to legally demand payment of
the price. Accordingly, while it may be conceded that appellants' cause of action to demand
performance had accrued on June 10, 1967 due to the appellee institution's default in the
payment of the first installment which became due on that date, the running of prescription was
interrupted in 1974 when, from the words of the lower court itself, "the Supreme Court reversed
the Court of Appeal's decision and dissolved the injunction which the latter court had earlier
issued in Civil Case No. 293, possession of the building and other properties was taken from
defendant Binalbagan Tech. Inc. and given to the de la Cruz spouses, through Southern Negros
College". And the period of prescription commenced to run anew only on May 31, 1982 when
the appellants were finally able to fully implement the already executory judgment in Case No.
7435, and thus restore appellees in possession of the 42 subdivision lots.
In other words, the period of prescription was interrupted, because from 1974 up to 1982, the
appellants themselves could not have restored unto the appellees the possession of the 42
subdivision lots precisely because of the preliminary injunction mentioned elsewhere. Consequently,
the appellants could not have prospered in any suit to compel performance or payment from the
appellees-buyers, because the appellants themselves were in no position to perform their own
corresponding obligation to deliver to and maintain said buyers in possession of the lots subject
matter of the sale. (Article 1458, 1495, 1537, Civil Code). (pp 49-50, Rollo)
We agree with the Court of Appeals.
A party to a contract cannot demand performance of the other party's obligations unless he is in a
position to comply with his own obligations. Similarly, the right to rescind a contract can be
demanded only if a party thereto is ready, willing and able to comply with his own obligations
thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581 [1926]; Paras, Civil Code of the
Philippines, 12th ed. Vol. IV, p. 200). In a contract of sale, the vendor is bound to transfer the
ownership of and deliver, as well as warrant, the thing which is the object of the sale (Art. 1495,
Civil Code); he warrants that the buyer shall, from the time ownership is passed, have and enjoy
the legal and peaceful possession of the thing —
ARTICLE 1547. In a contract of sale, unless a contrary intention appears, there is:
(1) An implied warranty on the part of the seller that he has a right to sell the thing at the time
when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal
and peaceful possession of the thing.
As afore-stated, petitioner was evicted from the subject subdivision lots in 1974 by virtue of a court
order in Civil Case No. 293 and reinstated to the possession thereof only in 1982. During the period,
therefore, from 1974 to 1982, seller private respondent Angelina Echaus' warranty against eviction
given to buyer petitioner was breached though, admittedly, through no fault of her own. It follows
that during that period, 1974 to 1982, private respondent Echaus was not in a legal position to
demand compliance of the prestation of petitioner to pay the price of said subdivision lots. In short,
her right to demand payment was suspended during that period, 1974-1982.
The prescriptive period within which to institute an action upon a written contract is ten years (Art.
1144, Civil Code). The cause of action of private respondent Echaus is based on the deed of sale
aforementioned. The deed of sale whereby private respondent Echaus transferred ownership of the
subdivision lots was executed on May 11, 1967. She filed Civil Case No. 1354 for recovery of title
and damages only on October 8, 1982. From May 11, 1967 to October 8, 1982, more than fifteen
(15) years elapsed. Seemingly, the 10-year prescriptive period had expired before she brought her
action to recover title. However, the period 1974 to 1982 should be deducted in computing the
prescriptive period for the reason that, as above discussed, from 1974 to 1982, private respondent
Echaus was not in a legal position to initiate action against petitioner since as aforestated, through
no fault of hers, her warranty against eviction was breached. In the case of Daniel vs. Garlitos, (95
Phil. 387 [1954]), it was held that a court order deferring action on the execution of judgment
suspended the running of the 5-year period for execution of a judgment. Here the execution of the
judgment in Civil Case No. 7435 was stopped by the writ of preliminary injunction issued in Civil
Case No. 293. It was only when Civil Case No. 293 was dismissed that the writ of execution in Civil
Case Na. 7435 could be implemented and petitioner Binalbagan restored to the possession of the
subject lots.
Deducting eight years (1974 to 1982) from the period 1967 to 1982, only seven years elapsed.
Consequently, Civil Case No. 1354 was filed within the 10-year prescriptive period. Working against
petitioner's position too is the principle against unjust enrichment which would certainly be the result
if petitioner is allowed to own the 42 lots without full payment thereof.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No.
24635 is AFFIRMED.
G.R. No. L-30056 August 30, 1988
MARCELO AGCAOILI, plaintiff-appellee vs. GOVERNMENT SERVICE INSURANCE SYSTEM,
defendant-appellant.
Artemio L. Agcaoili for plaintiff-appellee.
Office of the Government Corporate Counsel for defendant-appellant.
NARVASA, J.:
The appellant Government Service Insurance System, (GSIS, for short) having approved the
application of the appellee Agcaoili for the purchase of a house and lot in the GSIS Housing Project
at Nangka Marikina, Rizal, subject to the condition that the latter should forthwith occupy the house,
a condition that Agacoili tried to fulfill but could not for the reason that the house was absolutely
uninhabitable; Agcaoili, after paying the first installment and other fees, having thereafter refused
to make further payment of other stipulated installments until GSIS had made the house habitable;
and appellant having refused to do so, opting instead to cancel the award and demand the vacation
by Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance of
Manila for specific performance with damages and having obtained a favorable judgment, the case
was appealled to this Court by the GSIS. Its appeal must fail.
The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for
purchase 1 was contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager Archimedes
Villanueva in behalf of the Chairman-General Manager, reading as follows:
Please be informed that your application to purchase a house and lot in our GSIS Housing Project
at Nangka, Marikina, Rizal, has been approved by this Office. Lot No. 26, Block No. (48) 2,
together with the housing unit constructed thereon, has been allocated to you.
You are, therefore, advised to occupy the said house immediately.
If you fail to occupy the same within three (3) days from receipt of this notice, your application
shall be considered automatically disapproved and the said house and lot will be awarded to
another applicant.
Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the
very next day, because the house was nothing more than a shell, in such a state of incompleteness
that civilized occupation was not possible: ceiling, stairs, double walling, lighting facilities, water
connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask a homeless
friend, a certain Villanueva, to stay in the premises as some sort of watchman, pending completion
of the construction of the house. Agcaoili thereafter complained to the GSIS, to no avail.
The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first
monthly installment and the incidental fees, 3 but refused to make further payments until and unless
the GSIS completed the housing unit. What the GSIS did was to cancel the award and require
Agcaoili to vacate the premises. 4 Agcaoili reacted by instituting suit in the Court of First Instance of
Manila for specific performance and damages. 5 Pending the action, a written protest was lodged by
other awardees of housing units in the same subdivision, regarding the failure of the System to
complete construction of their own houses. 6 Judgment was in due course rendered ,7 on the basis
of the evidence adduced by Agcaoili only, the GSIS having opted to dispense with presentation of
its own proofs. The judgment was in Agcaoili's favor and contained the following dispositions, 8 to
wit:
1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff (Mariano
Agcaoili) illegal and void;
 2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the plaintiff
relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance System (GSIS)
low cost housing project at Nangka Marikina, Rizal;
3) Ordering the defendant to complete the house in question so as to make the same habitable
and authorizing it (defendant) to collect the monthly amortization thereon only after said house
shall have been completed under the terms and conditions mentioned in Exhibit A ;and
4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for attorney's fees,
and costs.
Appellant GSIS would have this Court reverse this judgment on the argument that—
1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness
of his housing unit, since said unit had been sold "in the condition and state of completion then
existing ... (and) he is deemed to have accepted the same in the condition he found it when he
accepted the award;" and assuming indefiniteness of the contract in this regard, such
circumstance precludes a judgment for specific performance. 9
2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's
immediate occupancy of the house subject thereof, and the latter having failed to comply with
the condition, no contract ever came into existence between them ; 10
3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or
subsequent knowledge or consent of the defendant (GSIS)" operated as a repudiation by Agcaoili
of the award and a deprivation of the GSIS at the same time of the reasonable rental value of
the property. 11
Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled
"Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, and submitted
it.12 The acceptance of the application was also set out in a form (mimeographed) also prepared by
the GSIS. As already mentioned, this form sent to Agcaoili, duly filled up, advised him of the approval
of his "application to purchase a house and lot in our GSIS Housing Project at NANGKA, MARIKINA,
RIZAL," and that "Lot No. 26, Block No. (48) 2, together with the housing unit constructed thereon,
has been allocated to you." Neither the application form nor the acceptance or approval form of the
GSIS — nor the notice to commence payment of a monthly amortizations, which again refers to "the
house and lot awarded" — contained any hint that the house was incomplete, and was being sold
"as is," i.e., in whatever state of completion it might be at the time. On the other hand, the condition
explicitly imposed on Agcaoili — "to occupy the said house immediately," or in any case within three
(3) days from notice, otherwise his "application shall be considered automatically disapproved and
the said house and lot will be awarded to another applicant" — would imply that construction of the
house was more or less complete, and it was by reasonable standards, habitable, and that indeed,
the awardee should stay and live in it; it could not be interpreted as meaning that the awardee
would occupy it in the sense of a pioneer or settler in a rude wilderness, making do with whatever
he found available in the envirornment.
There was then a perfected contract of sale between the parties; there had been a meeting of the
minds upon the purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project at
Nangka Marikina, Rizal at a definite price payable in amortizations at P31.56 per month, and from
that moment the parties acquired the right to reciprocally demand performance. 13 It was, to be
sure, the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment
by the buyer for the purpose contemplated ,14 in other words, to deliver the house subject of the
contract in a reasonably livable state. This it failed to do.
It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of
the sale. Under the circumstances there can hardly be any doubt that the house contemplated was
one that could be occupied for purposes of residence in reasonable comfort and convenience. There
would be no sense to require the awardee to immediately occupy and live in a shell of a house, a
structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does,
that this was what was intended by the parties, since the contract did not clearly impose upon it the
obligation to deliver a habitable house, is to advocate an absurdity, the creation of an unfair
situation. By any objective interpretation of its terms, the contract can only be understood as
imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return
for his undertaking to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not
willing to put the house in habitable state, it cannot invoke Agcaoili's suspension of payment of
amortizations as cause to cancel the contract between them. It is axiomatic that "(i)n reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him." 15
Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the
latter had not complied with the condition of occupying the house within three (3) days. The record
shows that Agcaoili did try to fulfill the condition; he did try to occupy the house but found it to be
so uninhabitable that he had to leave it the following day. He did however leave a friend in the
structure, who being homeless and hence willing to accept shelter even of the most rudimentary
sort, agreed to stay therein and look after it. Thus the argument that Agcaoili breached the
agreement by failing to occupy the house, and by allowing another person to stay in it without the
consent of the GSIS, must be rejected as devoid of merit.
Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or
imprecise as to its exact prestation Blame for the imprecision cannot be imputed to Agcaoili; it was
after all the GSIS which caused the contract to come into being by its written acceptance of Agcaoili's
offer to purchase, that offer being contained in a printed form supplied by the GSIS. Said appellant
having caused the ambiguity of which it would now make capital, the question of interpretation
arising therefrom, should be resolved against it.
It will not do, however, to dispose of the controversy by simply declaring that the contract between
the parties had not been validly cancelled and was therefore still in force, and that Agcaoili could not
be compelled by the GSIS to pay the stipulated price of the house and lot subject of the contract
until and unless it had first completed construction of the house. This would leave the contract
hanging or in suspended animation, as it were, Agcaoili unwilling to pay unless the house were first
completed, and the GSIS averse to completing construction, which is precisely what has been the
state of affairs between the parties for more than twenty (20) years now. On the other hand,
assuming it to be feasible to still finish the construction of the house at this time, to compel the
GSIS to do so so that Agcaoili's prestation to pay the price might in turn be demanded, without
modifying the price therefor, would not be quite fair. The cost to the GSIS of completion of
construction at present prices would make the stipulated price disproportionate, unrealistic.
The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may
render complete justice to both parties.
As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579, 589
[1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and do complete justice
where courts of law, through the inflexibility of their rules and want of power to adapt their
judgments to the special circumstances of cases, are incompetent so to do. Equity regards the
spirit of and not the letter, the intent and not the form, the substance rather than the
circumstance, as it is variously expressed by different courts... " 16
In this case, the Court can not require specific performance of the contract in question according to
its literal terms, as this would result in inequity. The prevailing rule is that in decreeing specific
performance equity requires 17 —
... not only that the contract be just and equitable in its provisions, but that the consequences
of specific performance likewise be equitable and just. The general rule is that this equitable
 relief will not be granted if, under the circumstances of the case, the result of the specific
enforcement of the contract would be harsh, inequitable, oppressive, or result in an
unconscionable advantage to the plaintiff . .
In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance
with the circumstances obtaining at the time of rendition of judgment, when these are significantly
different from those existing at the time of generation of those rights.
The Court is not restricted to an adjustment of the rights of the parties as they existed when
suit was brought, but will give relief appropriate to events occuring ending the suit. 18
While equitable jurisdiction is generally to be determined with reference to the situation existing
at the time the suit is filed, the relief to be accorded by the decree is governed by the conditions
which are shown to exist at the time of making thereof, and not by the circumstances attending
the inception of the litigation. In making up the final decree in an equity suit the judge may
rightly consider matters arising after suit was brought. Therefore, as a general rule, equity will
administer such relief as the nature, rights, facts and exigencies of the case demand at the close
of the trial or at the time of the making of the decree. 19
correspondingly adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be
effected after determination by the Court a quo of the value of said house on the basis of the
agreement of the parties, or if this is not possible by such commissioner or commissioners as the
Court may appoint. No pronouncement as to costs.
Footnotes
20 Art. 19, Civil Code: "Every person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe and good faith."
22 Am. Jur. 2nd 628-629: "Their is a general principle that a court of equity will balance the
equities' between the parties in determining what, if any, relief to give. . . Thus, for example,
wherein the effect of the only relief which can be granted to protect the plaintiff will be
destructive of the defendants' business, which would be lawful but for the harm it does to the
plaintiff, relief may be refused if, on a balancing of the respective interests, that of the defendant
is found to be relatively important, and that of the plaintiff relatively insignificant. . ."

That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a
person must act with justice, give everyone his due, and observe honesty and good
faith. 20 Adjustment of rights has been held to be particularly applicable when there has been a
depreciation of currency.

Depreciation of the currency or other medium of payment contracted for has frequently been
held to justify the court in withholding specific performance or at least conditioning it upon
payment of the actual value of the property contracted for. Thus, in an action for the specific
performance of a real estate contract, it has been held that where the currency in which the
plaintiff had contracted to pay had greatly depreciated before enforcement was sought, the relief
would be denied unless the complaint would undertake to pay the equitable value of the land.
(Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21

In determining the precise relief to give, the Court will "balance the equities" or the respective
interests of the parties, and take account of the relative hardship that one relief or another may
occasion to them .22

The completion of the unfinished house so that it may be put into habitable condition, as one form
of relief to the plaintiff Agcaoili, no longer appears to be a feasible option in view of the not
inconsiderable time that has already elapsed. That would require an adjustment of the price of the
subject of the sale to conform to present prices of construction materials and labor. It is more in
keeping with the realities of the situation, and with equitable norms, to simply require payment for
the land on which the house stands, and for the house itself, in its unfinished state, as of the time
of the contract. In fact, this is an alternative relief proposed by Agcaoili himself, i.e., "that judgment
issue . . (o)rdering the defendant (GSIS) to execute a deed of sale that would embody and provide
for a reasonable amortization of payment on the basis of the present actual unfinished and
uncompleted condition, worth and value of the said house. 23

WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the cancellation
by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26, Block No. (48) 2 of
the GSIS low cost housing project at Nangka, Marikina, Rizal, and orders the former to respect the
aforesaid award and to pay damages in the amounts specified, is AFFIRMED as being in accord with
the facts and the law. Said judgments is however modified by deleting the requirement for
respondent GSIS "to complete the house in question so as to make the same habitable," and instead
it is hereby ORDERED that the contract between the parties relative to the property above described
be modified by adding to the cost of the land, as of the time of perfection of the contract, the cost
of the house in its unfinished state also as of the time of perfection of the contract, and
G.R. No. 190601 February 7, 2011
SPOUSES LUIGI M. GUANIO and ANNA HERNANDEZ-GUANIO, Petitioners, vs. MAKATI
SHANGRI-LA HOTEL and RESORT, INC., also doing business under the name of SHANGRI-
LA HOTEL MANILA, Respondent.
CARPIO MORALES, J.:
For their wedding reception on July 28, 2001, spouses Luigi M. Guanio and Anna Hernandez-Guanio
(petitioners) booked at the Shangri-la Hotel Makati (the hotel).
Prior to the event, Makati Shangri-La Hotel & Resort, Inc. (respondent) scheduled an initial food
tasting. Petitioners claim that they requested the hotel to prepare for seven persons ─ the two of
them, their respective parents, and the wedding coordinator. At the scheduled food tasting, however,
respondent prepared for only six.
Petitioners initially chose a set menu which included black cod, king prawns and angel hair pasta
with wild mushroom sauce for the main course which cost ₱1,000.00 per person. They were,
however, given an option in which salmon, instead of king prawns, would be in the menu at ₱950.00
per person. They in fact partook of the salmon.
Three days before the event, a final food tasting took place. Petitioners aver that the salmon served
was half the size of what they were served during the initial food tasting; and when queried about
it, the hotel quoted a much higher price (₱1,200.00) for the size that was initially served to them.
The parties eventually agreed on a final price ─ ₱1,150 per person.
A day before the event or on July 27, 2001, the parties finalized and forged their contract. 1
Petitioners claim that during the reception, respondent’s representatives, Catering Director Bea
Marquez and Sales Manager Tessa Alvarez, 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 ₱8,000 per hour for the three-hour extension of
the event up to 4:00 A.M. the next day.
Petitioners 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.
Petitioners thus sent a letter-complaint to the Makati Shangri-la Hotel and Resort, Inc. (respondent)
and received an apologetic reply from Krister Svensson, 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.
In its Answer, respondent claimed that petitioners requested a combination of king prawns and
salmon, hence, the price was increased to ₱1,200.00 per person, but discounted at ₱1,150.00; that
contrary to petitioners’ claim, Marquez and Alvarez 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 that Isaac Albacea, Banquet Service Director, in fact relayed
the delay in the service of the meals to petitioner Luigi’s father, Gil Guanio.
Respecting the belated service of meals to some guests, respondent attributed it to the insistence
of petitioners’ wedding coordinator that certain guests be served first.
On Svensson’s letter, respondent, denying it as an admission of liability, claimed that it was meant
to maintain goodwill to its customers.
By Decision of August 17, 2006, Branch 148 of the Makati RTC rendered judgment in favor of
petitioners, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendant ordering the defendants to pay the plaintiff the following:
1) The amount of ₱350,000.00 by way of actual damages;
2) The amount of ₱250,000.00 for and as moral damages;
3) The amount of ₱100,000.00 as exemplary damages;
4) The amount of ₱100,000.00 for and as attorney’s fees.
With costs against the defendant.
In finding for petitioners, the trial court relied heavily on the letter of Svensson which is partly quoted
below:
Upon receiving your comments on our service rendered during your reception here with us, we
are in fact, very distressed. Right from minor issues pappadums served in the soup instead of
the creutons, lack of valet parkers, hard rolls being too hard till a major one – slow service, rude
and arrogant waiters, we have disappointed you in all means.
Indeed, we feel as strongly as you do that the services you received were unacceptable and definitely
not up to our standards. We understand that it is our job to provide excellent service and in this
instance, we have fallen short of your expectations. We ask you please to accept our profound
apologies for causing such discomfort and annoyance. 4 (underscoring supplied)
The trial court observed that from "the tenor of the letter . . . the defendant[-herein respondent]
admits that the services the plaintiff[-herein petitioners] received were unacceptable and definitely
not up to their standards."5
On appeal, the Court of Appeals, by Decision of July 27, 2009, 6 reversed the trial court’s decision, it
holding that the proximate cause of petitioners’ injury was an unexpected increase in their guests:
x x x Hence, the alleged damage or injury brought about by the confusion, inconvenience and
disarray during the wedding reception may not be attributed to defendant-appellant Shangri-la.
We find that the said proximate cause, which is entirely attributable to plaintiffs-appellants, set
the chain of events which resulted in the alleged inconveniences, to the plaintiffs-appellants.
Given the circumstances that obtained, only the Sps. Guanio may bear whatever consequential
damages that they may have allegedly suffered.7(underscoring supplied)
Petitioners’ motion for reconsideration having been denied by Resolution of November 19, 2009, the
present petition for review was filed.
The Court finds that since petitioners’ complaint arose from a contract, the doctrine of proximate
cause finds no application to it:
The doctrine of proximate cause is applicable only in actions for quasi-delicts, not in actions
involving breach of contract. x x x The doctrine is a device for imputing liability to a person
where there is no relation between him and another party. In such a case, the obligation is
created by law itself. But, where there is a pre-existing contractual relation between the parties,
it is the parties themselves who create the obligation, and the function of the law is merely to
regulate the relation thus created. 8 (emphasis and underscoring supplied)
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. 9 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 x x x or of
the attendance of fortuitous event, to excuse him from his ensuing liability. (emphasis and
underscoring in the original; capitalization supplied)
The pertinent provisions of the Banquet and Meeting Services Contract between the parties read:
4.3 The ENGAGER shall be billed in accordance with the prescribed rate for the minimum
guaranteed number of persons contracted for, regardless of under attendance or non-
appearance of the expected number of guests, except where the ENGAGER cancels the Function
in accordance with its Letter of Confirmation with the HOTEL. Should the attendance exceed the
minimum guaranteed attendance, the ENGAGER shall also be billed at the actual rate per cover
in excess of the minimum guaranteed attendance.
4.5. The ENGAGER must inform the HOTEL at least forty eight (48) hours before the scheduled
date and time of the Function of any change in the minimum guaranteed covers. In the absence
of such notice, paragraph 4.3 shall apply in the event of under attendance. In case the actual
number of attendees exceed the minimum guaranteed number by ten percent (10%),
the HOTEL shall not in any way be held liable for any damage or inconvenience which
may be caused thereby. The ENGAGER shall also undertake to advise the guests of the
situation and take positive steps to remedy the same. 10 (emphasis, italics and
underscoring supplied)
Breach of contract is defined as the failure without legal reason to comply with the terms of a
contract. It is also defined as the [f]ailure, without legal excuse, to perform any promise which forms
the whole or part of the contract.11
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.
As for petitioners’ claim that respondent departed from its verbal agreement with petitioners, the
same fails, given that the written contract which the parties entered into the day before the event,
being the law between them.
Respecting the letter of Svensson on which the trial court heavily relied as admission of respondent’s
liability but which the appellate court brushed aside, the Court finds the appellate court’s stance in
order. It is not uncommon in the hotel industry to receive comments, criticisms or feedback on the
service it delivers. It is also customary for hotel management to try to smooth ruffled feathers to
preserve goodwill among its clientele.
Kalalo v. Luz holds:12
Statements which are not estoppels nor judicial admissions have no quality of conclusiveness,
and an opponent whose admissions have been offered against him may offer any evidence which
serves as an explanation for his former assertion of what he now denies as a fact.
Respondent’s Catering Director, Bea Marquez, explained the hotel’s procedure on receiving and
processing complaints, viz:
ATTY. CALMA: Q You mentioned that the letter indicates an acknowledgement of the concern
and that there was-the first letter there was an acknowledgment of the concern and an apology,
not necessarily indicating that such or admitting fault?
A Yes. Q Is this the letter that you are referring to?
If I may, Your Honor, that was the letter dated August 4, 2001, previously marked as plaintiff’s
exhibits, Your Honor. What is the procedure of the hotel with respect to customer concern?
A Upon receipt of the concern from the guest or client, we acknowledge receipt of such concern,
and as part of procedure in service industry particularly Makati Shangri-la we apologize for
whatever inconvenience but at the same time saying, that of course, we would go through
certain investigation and get back to them for the feedback with whatever concern they may
have.
Q Your Honor, I just like at this point mark the exhibits, Your Honor, the letter dated August 4,
2001 identified by the witness, Your Honor, to be marked as Exhibit 14 and the signature of Mr.
Krister Svensson be marked as Exhibit 14-A.13
Q In your opinion, you just mentioned that there is a procedure that the hotel follows with
respect to the complaint, in your opinion was this procedure followed in this particular concern?
A Yes, ma’am.
Q What makes you say that this procedure was followed?
A As I mentioned earlier, we proved that we did acknowledge the concern of the client in this
case and we did emphatize from the client and apologized, and at the same time got back to
them in whatever investigation we have.
Q You said that you apologized, what did you apologize for?
A Well, first of all it is a standard that we apologize, right? Being in the service industry, it is a
practice that we apologize if there is any inconvenience, so the purpose for apologizing is mainly
to show empathy and to ensure the client that we are hearing them out and that we will do a
better investigation and it is not in any way that we are admitting any fault.14 (underscoring
supplied)
To the Court, the foregoing explanation of the hotel’s Banquet Director overcomes any presumption
of admission of breach which Svensson’s letter might have conveyed.
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.1avvphil
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.
In the present petition, under considerations of equity, the Court deems it just to award the amount
of ₱50,000.00 by way of nominal damages to petitioners, for the discomfiture that they were
subjected to during to the event.15 The Court recognizes that every person is entitled to respect of
his dignity, personality, privacy and peace of mind.16Respondent’s lack of prudence is an affront to
this right.
WHEREFORE, the Court of Appeals Decision dated July 28, 2009 is PARTIALLY REVERSED.
Respondent is, in light of the foregoing discussion, ORDERED to pay the amount of ₱50,000.00 to
petitioners by way of nominal damages.
Footnotes
15
Civil Code, Article 2222. The court may award nominal damages in every obligation arising from
any source enumerated in Article 1157, or in every case where any property right has been invaded.
G.R. No. 73867 February 29, 1988
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs. IGNACIO
CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO, SALVADOR
CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO, AGERICO CASTRO,
ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and HONORABLE
INTERMEDIATE APPELLATE COURT, respondents.
PADILLA, J.:
Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11
February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al., Plaintiffs-
Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."
The facts of the case are as follows:
On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of
the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C.
Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio Castro,
Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram
was accepted by the defendant in its Dagupan office, for transmission, after payment of the required
fees or charges.
The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in
attendance. Neither the husband nor any of the other children of the deceased, then all residing in
the United States, returned for the burial.
When Sofia returned to the United States, she discovered that the wire she had caused the defendant
to send, had not been received. She and the other plaintiffs thereupon brought action for damages
arising from defendant's breach of contract. The case was filed in the Court of First Instance of
Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the defendant was
that it was unable to transmit the telegram because of "technical and atmospheric factors beyond
its control." 1 No evidence appears on record that defendant ever made any attempt to advise the
plaintiff Sofia C. Crouch as to why it could not transmit the telegram.
The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay
the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:
1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as moral
damages.
2. Ignacio Castro Sr., P20,000.00 as moral damages.
3. Ignacio Castro Jr., P20,000.00 as moral damages.
4. Aurora Castro, P10,000.00 moral damages.
5. Salvador Castro, P10,000.00 moral damages.
6. Mario Castro, P10,000.00 moral damages.
7. Conrado Castro, P10,000 moral damages.
8. Esmeralda C. Floro, P20,000.00 moral damages.
9. Agerico Castro, P10,000.00 moral damages.
10. Rolando Castro, P10,000.00 moral damages.
11. Virgilio Castro, P10,000.00 moral damages.
12. Gloria Castro, P10,000.00 moral damages.
Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of
P1,000.00 to each of the plaintiffs and costs. 2
On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but
eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of
P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as
moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also
reduced to P120,000. 00 for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or
recklessness."
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is
held liable to private respondents in the following amounts:
(1) P10,000.00 as moral damages, to each of private respondents;
(2) P1,000.00 as exemplary damages, to each of private respondents;
(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;
(4) P5,000.00 as attorney's fees; and
(5) Costs of suit.
MELENCIO-HERRERA, J., concurring.

In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges [I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof. actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.
Petitioner's contention is without merit.

Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty
of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable
for damages." Art. 2176 also provides that "whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract
whereby, for a fee, petitioner undertook to send said private respondent's message overseas by
telegram. This, petitioner did not do, despite performance by said private respondent of her
obligation by paying the required charges. Petitioner was therefore guilty of contravening its
obligation to said private respondent and is thus liable for damages.

This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position
in this regard would result in an inequitous situation where petitioner will only be held liable for the
actual cost of a telegram fixed thirty (30) years ago.

We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate results of the defendant's wrongful act
or omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of
the suffering private respondents had to undergo.

As the appellate court properly observed:

[Who] can seriously dispute the shock, the mental anguish and the sorrow that the overseas
children must have suffered upon learning of the death of their mother after she had already
been interred, without being given the opportunity to even make a choice on whether they
wanted to pay her their last respects? There is no doubt that these emotional sufferings were
proximately caused by appellant's omission and substantive law provides for the justification for
the award of moral damages. 4

We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the United States to
testify before the trial court. Had petitioner not been remiss in performing its obligation, there would
have been no need for this suit or for Mrs. Crouch's testimony.

The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in
the amount of P1,000.00 for each of the private respondents, as a warning to all telegram companies
to observe due diligence in transmitting the messages of their customers.
G.R. No. 190512, June 20, 2018
D.M. RAGASA ENTERPRISES, INC., Petitioner, v. BANCO DE ORO, INC. (FORMERLY
EQUITABLE PCI BANK, INC.), Respondent.
DECISION
CAGUIOA, J.:
Before the Court is a Petition for Review1 on Certiorari (Petition) under Rule 45 of the Rules of Court
(Rules) filed by petitioner D.M. Ragasa Enterprises, Inc., (Ragasa) against respondent Banco de Oro,
Inc.,2 formerly Equitable PCI Bank, Inc. (bank), assailing the Decision 3 dated March 27, 2009
(questioned Decision) and Resolution4 dated November 25, 2009, both of the Court of Appeals (CA)
Special Thirteenth (13th) Division and Former Special Thirteenth Division, respectively, in CA-G.R.
CV. No. 88322.
The CA reversed and set aside the rulings in favor of Ragasa of the Regional Trial Court (RTC) of
Quezon City, Branch 216, in its Decision dated April 4, 2006 5 and Order dated October 3,
20066 (denying the corresponding Motion for Reconsideration) in Civil Case No. Q-02-46341.
The Facts
On January 30, 1998, Ragasa and then Equitable Banking Corporation (Equitable Bank) executed a
Contract of Lease7 (Lease Contract), as lessor and lessee, respectively, over the ground and second
floors of a commercial building located at 175 Tomas Morato Avenue corner Scout Castor, Quezon
City (subject premises), for a period of five years, commencing on February 1, 1998 8 up to January
31, 20039, with a monthly rental of P122,607.00.10 The pertinent provisions of the Lease Contract
state, viz.:
2. The TERM of this Lease shall be for a period of five (5) years, commencing on February 1,
1998. x x x
3. The TENANT shall pay a monthly rental of ONE HUNDRED TWENTY TWO THOUSAND SIX
HUNDRED SEVEN (122,607) pesos based on P463.16 per square meter per month inclusive of
Value Added Tax and withholding tax and payable in advance in the first five days of the month,
that is 1st to 5th of every month. An annual increase of 10% shall be applied during the term
of the lease.
4. The failure to pay two consecutive monthly rentals within the first five (5) days of any month,
as stated in No. 3, shall automatically terminate this Contract, without need of any further notice
to the TENANT. The LESSOR is hereby authorized, and has the right to show the premises to
prospective tenants, and within five (5) days following the last day of the grace period stated in
No. 3, the TENANT shall vacate the premises without the need of the usual judicial proceedings,
and/or the LESSOR shall padlock the premises until the TENANT settles his obligations. The
TENANT agrees to this padlocking as a sign of his good faith in his compliance with No. 3 of this
Contract and the LESSOR is not liable or answerable for any damage that the TENANT may incur
or suffer due to his non-entrance to the premises, or the LESSOR may confiscate any property
found in the premises equivalent to the unpaid rental, penalty, and interests thereto, as guaranty
and/or pledge, and can be retrieved anytime upon full payment of his accounts but must not be
for more than three (3) months from the date of default [;] otherwise, the confiscated property
or properties shall become permanently owned by the LESSOR as partial payment of his unpaid
rentals, penalties and interests, and in case of any unpaid balance, the TENANT is still liable.
7. The parties hereby covenant and agree upon the signing of this Contract of Lease that [the]
TENANT shall pay to the LESSOR or his representative, the amount of SEVEN HUNDRED THIRTY
FIVE THOUSAND SIX HUNDRED FORTY TWO (P735,642) pesos, Philippine Currency, P367,821
as three months advanced rental, and P367,821 as three months deposit, which deposit shall
be refunded to the TENANT only upon termination of this Lease, that is, after expiration of the
lease, paid occupancy of the said premises, and after vacating the same and also after deducting
the unpaid water bills[,] if any, electric bills, extraordinary wear and tear of the premises, losses
and breakages of the premises, and other damages sustained by the LESSOR.
8. The TENANT voluntarily binds himself and agrees to the following without any coercion or
force by the LESSOR;
xxxx
m) The full deposit shall be forfeited in favor of the LESSOR upon non-compliance of the Term
of the Contract of Lease by the TENANT, and cannot be applied to Rental;
n) To pay a penalty of 3% of the monthly rental, for every month of delay of payment of the
monthly rental, [with] a fraction of the month x x x considered [as] one month;
p) Breach or non-compliance of any of the provisions of this Contract, especially non-payment
of two consecutive monthly rentals on time, shall mean the termination of this Contract, and
within five (5) days from the date of breach, non-compliance, or default, the TENANT shall vacate
the premises quietly and peacefully without need of the required judicial proceedings. If he does
not vacate the premises, the TENANT has agreed that the LESSOR has no liability whatsoever
due to the padlocking of the same;
xxxx
10. In the event that a Court Litigation has been resorted to by the LESSOR or LESSEE, due to
non-compliance of any of the foregoing provisions, the aggrieved party shall be paid by the other
party, no less than fifteen thousand (P15,000) pesos, Philippine Currency, for Attorney's fees,
and other damages that the honorable court may allow; the cost of litigations shall be born[e]
or paid by the party in fault, or in default. All unpaid accounts and obligations of the TENANT
shall earn interest or bear interest at the rate of 14% per annum or at the allowable rate of
interest from the date of default. The legal suits shall be brought in the town of Quezon City. 11
Pursuant to the Lease Contract, Equitable Bank paid the amounts of P367,821.00 representing three
months advance rentals, and P367,821.00 representing three months rentals as security deposit.12
Meanwhile, Equitable Bank entered into a merger with Philippine Commercial International Bank
(PCI Bank) thereby forming Equitable PCI Bank, Inc. 13 The latter would eventually, pending the
present case, merge with Banco de Oro, Inc. to form the respondent bank.14
As a result of the merger, the bank closed and joined the branches of its constituent banks which
were in close proximity with each other as maintaining said branches would be impractical. 15 One of
the branches which had to be closed is the branch located in the subject premises.16
For this reason, the bank sent a notice dated May 28, 2001, informing Ragasa that the former was
pre-terminating their Lease Contract effective June 30, 2001 (Notice of Pre-termination)17. Ragasa
responded with a demand letter dated June 20, 2001 18 for payment of monthly rentals for the
remaining term of the Lease Contract from July 1, 2001 to January 31, 2003 totaling P3,146,596.42,
inasmuch as there is no express provision in the Lease Contract allowing pre-termination.19 The bank
countered, through a letter dated June 26, 2001, 20 that its only liability for pre-terminating the
contract is the forfeiture of its security deposit pursuant to item 8(m) of the Lease Contract. 21 On
June 30, 2001, the bank vacated the subject premises without heeding Ragasa's demand for
payment.
After sending two more reiterative demand letters, 22 which were both ignored by the bank, Ragasa
finally filed on March 11, 2002 with the RTC the Complaint for Collection of Sum of Money (amounting
to P3,146,596.42 representing the monthly rentals under the Lease Contract for the period July 1,
2001 to January 31, 2003) and Damages. Ragasa argued that under the Lease Contract, the
forfeiture of the bank's security deposit does not exempt it from payment of the rentals for the
remaining term of the lease because the bank's act of pre-terminating the contract was a major
breach of its terms. Moreover, item 8(m) expressly provides that the security deposit shall not be
applied to the rentals.
In its Answer filed on April 26, 2002, the bank argued, in gist, that item 8(m) of the Lease Contract
is actually a penalty clause which, in line with Article 1226 23 of the Civil Code, takes the place of
damages and interests in case of breach. Hence, for breaching the Lease Contract by pre-terminating
the same, the bank is liable to forfeit its security deposit in favor of Ragasa but would not be liable
for rentals corresponding to the remaining life of the Contract. Moreover, the bank is not liable for
the penalty at the rate of 3% under item 8(n) of the Lease Contract because the bank paid the due
rentals up to the time it pre-terminated the same.24
Ruling of the RTC
The RTC ruled in Ragasa's favor in a Decision dated April 4, 2006, the dispositive portion of which
reads:
WHEREFORE, the Court finds that plaintiff has established its case against defendant by
preponderance of evidence and judgment is hereby rendered ordering defendant Equitable PCI
Bank, Inc. to pay plaintiff the following:
1. The amount of Php 3,146,596.42 Philippine Currency, representing the monthly
rentals from July 1, 2001 to January 31, 2003;
2. A penalty of 3% of the monthly rental for every month of delay;
3. An interest of 14% per annum on the full amount due until fully paid;
4. Attorney's fees in the amount of Php 30,000.00; and
5. Costs of litigation.
Defendant's Counterclaim is dismissed.
The RTC held that the bank may not unilaterally pre-terminate the Lease Contract; hence, it is still
liable to pay the rentals for the remaining duration of the said contract. Likewise, in addition to item
8(m) of the Lease Contract providing for the forfeiture of the bank's security deposit, item 8(n),
another penalty clause providing for additional 3% of the monthly rental for each month of delay in
payment, also applies. Finally, pursuant to Section 10, an interest of 14% per annum on the amount
due was awarded.
The bank filed a Motion for Reconsideration which was denied by the RTC in its Order dated October
3, 2006.26
On October 23, 2006, the bank filed a Notice of Appeal to the CA, arguing that the Lease Contract
was automatically terminated by the act of the bank in pre-terminating the lease or based on the
provisions of the Lease Contract, and that upon termination of the lease, the bank has been released
from its future contractual obligations including the payment of "future rentals." 27
Ruling of the CA
In the questioned Decision dated March 27, 2009, the CA granted the bank's appeal and reversed
and set aside the RTC's ruling, disposing of the case as follows:
WHEREFORE, the appeal is hereby GRANTED. The ruling of the trial court is hereby REVERSED
and SET ASIDE. The complaint is dismissed for lack of legal basis.
The CA ruled that the bank's failure to continue the Lease Contract until its expiration constituted a
breach of its provision. As such, the Lease Contract was automatically terminated by virtue of item
8(p) thereof providing for its outright termination in case of breach of any of its provisions. Hence,
there is no legal basis to hold the bank liable for payment of rentals for the unexpired period of the
contract. However, the bank is liable to forfeit its security deposit pursuant to the penalty clause
under item 8(m) of the contract. The CA ruled that to allow Ragasa to collect the value of the
unexpired term of the lease plus penalty would constitute unjust enrichment.
Ragasa filed a Motion for Reconsideration of the questioned Decision, which the CA denied for lack
of merit, in its Resolution dated November 25, 2009.29
Refusing to concede, Ragasa filed the present Petition on January 21, 2010 raising four main issues,
namely:
Issues
1.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN GRANTING THE
APPEAL OF RESPONDENT BANK AND IN DENYING THE MOTION FOR RECONSIDERATION OF THE
PETITIONER WHICH IS CONTRARY TO ARTICLES 1170 AND 1308 OF THE NEW CIVIL CODE[.]
2.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING THAT
THE PENALTY CLAUSE APPLICABLE IN THE CASE IS ITEM NO. 8(m) OF THE CONTRACT, AND
NOT ITEM 8(n) OF THE SAME CONTRACT[.]
3.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING THAT
THE SUBJECT CONTRACT HAD BEEN TERMINATED[.]
4.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING THAT
THE PETITIONER IS GUILTY OF UNJUST ENRICHMENT[.]30
The fundamental issue that the Court is called upon to resolve is: What is the liability of the bank,
if any, for its act of pre-terminating the Lease Contract?
At the outset, it is well to remember that a contract is the law between the parties.31 Obligations
arising from contracts have the force of law between the contracting parties and should be complied
with in good faith.32 The parties are allowed by law33 to enter into stipulations, clauses, terms and
conditions they may deem convenient which bind the parties as long as they are not contrary to law,
morals, good customs, public order or public policy.34
The pertinent provisions of the Lease Contract are as follows:
2. The TERM of this Lease shall be for a period of five (5) years, commencing on February 1,
1998. x x x
7. The parties hereby covenant and agree upon the signing of this Contract of Lease that [the]
TENANT shall pay to the LESSOR or his representative, the amount of SEVEN HUNDRED THIRTY
FIVE THOUSAND SIX HUNDRED FORTY TWO (P735,642) pesos, Philippine Currency, P367,821
as three months advanced rental, and P367,821 as three months deposit, which deposit shall
be refunded to the TENANT only upon termination of this Lease, that is, after expiration of the
lease, paid occupancy of the said premises, and after vacating the same and also after deducting
the unpaid water bills[,] if any, electric bills, extraordinary wear and tear of the premises, losses
and breakages of the premises, and other damages sustained by the LESSOR.
8. The TENANT voluntarily binds himself and agrees to the following without any coercion or
force by the LESSOR;
xxxx
 m) The full deposit shall be forfeited in favor of the LESSOR upon non-compliance of the Term
of the Contract of Lease by the TENANT, and cannot be applied to Rental;
p) Breach or non-compliance of any of the provisions of this Contract, especially non-payment
of two consecutive monthly rentals on time, shall mean the termination of this Contract, and
within five (5) days from the date of breach, non-compliance, or default, the TENANT shall vacate
the premises quietly and peacefully without need of the required judicial proceedings. If he does
not vacate the premises, the TENANT has agreed that the LESSOR has no liability whatsoever
due to the padlocking of the same;
xxxx
10. In the event that a Court Litigation has been resorted to by the LESSOR or LESSEE, due to
non-compliance of any of the foregoing provisions, the aggrieved party shall be paid by the other
party, no less than fifteen thousand (P15,000) pesos, Philippine Currency, for Attorney's fees,
and other damages that the honorable court may allow; the cost of litigations shall be born[e]
or paid by the party in fault, or in default. All unpaid accounts and obligations of the TENANT
shall earn interest or bear interest at the rate of 14% per annum or at the allowable rate of
interest from the date of default. The legal suits shall be brought in the town of Quezon
City.35 (Underscoring supplied)
The foregoing stipulations are clear and show no contravention of law, morals, good customs, public
order or public policy. As such, they are valid, and the parties' rights shall be adjudicated according
to them, being the primary law between them. When the terms of the contract are clear and leave
no doubt as to the intention of the contracting parties, the rule is settled that the literal meaning of
its stipulations should control.36
In the case at bar, there is no question that the bank breached the Lease Contract. When it served
upon Ragasa the Notice of Pre-termination effective June 30, 2001 and when it, indeed, vacated the
subject premises on said date, the bank, in effect, breached item 2 of the Lease Contract, providing
for a five-year term. It must be noted that the Lease Contract does not contain a pre-termination
clause.
The Lease Contract has a specific provision in case of non-compliance of its "Term" — "a period of
five (5) years, commencing on February 1, 1998," to wit:
8. The TENANT voluntarily binds himself and agrees to the following without any coercion or
force by the LESSOR;
xxxx
m) The full deposit shall be forfeited in favor of the LESSOR upon non-compliance of the Term
of the Contract of Lease by the TENANT, and cannot be applied to Rental; 37
The word "term" appears only in three instances, but in three forms, in the five-page Lease Contract.
Firstly, "TERM" (a defined word as the letters are all capitalized) is used in item 2, as quoted above,
to indicate the five-year period of the lease. Secondly, "Term" is used in item 8(m), as quoted above,
and being with a capitalized initial letter it also indicates that it is a defined word. Lastly, it is provided
in item 8(g) that the lessee voluntarily binds itself and agrees: "To pay from time to time, during
the term of this Lease, all expenses such as salaries, wages, etc., if for business, all charges for
telephone if any, and/or any such other services in the Leased Premises." 38
Given the fact that in item 2 and item 8(g), the words "TERM" and "term" definitely refer to the
period of the lease, the word "Term" in item 8(m) should likewise be understood to have the same
meaning.
The word "Term" could not mean stipulation, provision, condition, covenant or clause as the word
"term" can also be understood. In the default clauses of the Lease Contract, i.e., items 8(p) and 10,
the word employed is "provisions." It is the word "provisions" which the parties intended to refer to
any stipulation, condition, covenant or clause and not the word "term."
Consequently, the correct interpretation of the word "Term" in item 8(m) is that it refers to the
period of the lease, and not to any other provision of the Lease Contract.
Article 1170 of the Civil Code mandates 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.
Thus, having contravened the tenor of the Lease Contract regarding its term or period, the bank
should be liable for damages. However, how much in damages should the bank be liable?
Generally, if the lessor or the lessee should not comply with their obligations, the aggrieved party
may ask for either the rescission of the contract and indemnification for damages, or only the latter,
allowing the contract to remain in force.39
In the present case, there is an express stipulation in item 8(p) of the Lease Contract that "[b]reach
or non-compliance of any of the provisions of this Contract, especially non-payment of two
consecutive monthly rentals on time, shall mean the termination of this Contract." 40
The validity of an automatic termination clause such as the one quoted above is well-settled.
In Manila Bay Club Corp. v. Court of Appeals41 (Manila Bay Club Corp.), the lease period agreed
upon was from March 4, 1988 to March 4, 1998 but was short-lived because the private respondents
therein unilaterally terminated the lease with the request that petitioner therein vacate the leased
premises and peacefully surrender its possession for the failure, among others, to insure the leased
building in violation of paragraph 22 of the lease contract between the parties therein. 42 The private
respondents therein invoked the "Special Clause" as found in paragraph 19 of the said lease contract
to justify their actions, to wit:
19. If the rental herein stipulated or any part thereof at any time, shall be in arrears or unpaid,
or if the tenant shall at any time fail or neglect to perform or comply with any of the covenants,
conditions, agreements or restrictions stipulated or if the tenant shall become bankrupt or
insolvent or shall compound with his creditors, then and in any of such above cases, this lease
contract shall become automatically terminated and cancelled and the said premises shall be
peacefully vacated by the LESSEE for the LESSOR to hold and enjoy henceforth as if these
presents have not been made and it shall be lawful for the LESSOR or any person duly authorized
in his behalf, without any formal notice or demand to enter into and upon said leased premises
or any part thereof without prejudice on the part of the LESSOR to exercise all rights on the
contract of lease and those given by law. And upon such cancellation of the contract, the LESSEE
hereby grants the LESSOR the legal right to enter into and take possession of the leased
premises as though the term of the leased contract has expired.43
The Court justified the validity of the above automatic termination clause, thus:
Certainly, there is nothing wrong if the parties to the lease contract agreed on certain mandatory
provisions concerning their respective rights and obligations, such as the procurement of the
insurance and rescission clause. For it is well to recall that contracts are respected as the law
between the contracting parties, and may establish such stipulations, clauses, terms and
conditions as they may want to include. As long as such agreements are not contrary to law,
morals, good customs, public policy or public order they shall have the force of law between
them.44
In Riesenbeck v. Spouses Silvino Maceren, Jr. and Patricia Maceren 45 (Riesenbeck), the Court
observed:
The Contract of Lease was called off by respondents in virtue of Clauses No. 10 46 and No.
1347 thereof to which the parties voluntarily bound themselves. In Manila Bay Club Corp. v.
 Court of Appeals,48 this Court interpreted as requiring mandatory compliance by the parties a
provision in a lease contract that failure or neglect to perform or comply with any of the
covenants, conditions, agreements or restrictions stipulated shall result in the automatic
termination and cancellation of the lease.
In accord with this ruling is Peoples Industrial and Commercial Corp. v. Court of Appeals49where the
Court held that there is nothing wrong if the parties to a lease contract agreed on certain mandatory
provisions concerning their respective rights and obligations, such as the procurement of insurance
and the rescission clause. Thus –
[I]t is well to recall that contracts are respected as the law between the contracting parties, and
they may establish such stipulations, clauses, terms and conditions as they may want to include. As
long as such agreements are not contrary to law, morals, good customs, public policy or public order
they shall have the force of law between them.
The foregoing legal truism finds equal potency in the case at bar. No doubt, the pre-termination was
properly resorted to by respondents pursuant to Clause 10 of the Contract of Lease. Indeed, the law
on obligations and contracts does not prohibit parties from entering into agreement providing that
a violation of the terms of the contract would cause its cancellation even without judicial
intervention.50 This is what petitioner and respondents entered into, a lease contract with a
stipulation that the contract is rescinded upon violation of its substantial provisions, which petitioner,
does not deny having violated.51
Pursuant to the automatic termination clause of the Lease Contract, which is in furtherance of the
autonomy characteristic of contracts, the Lease Contract was terminated upon its unauthorized pre-
termination by the bank on June 30, 2001. Ragasa is, thus, precluded from availing of the second
option which is to claim damages by reason of the breach and allow the lease to remain in force.
With the lease having been automatically resolved or terminated by agreement of the parties,
Ragasa is entitled only to indemnification for damages.
To force either party to continue with a contract that is automatically terminated in case of its breach
by either party (pursuant to its express provision) is not in furtherance of or sanctioned by the
contract. Rather, it is a contravention thereof and it negates the autonomy characteristic of
contracts.
Is the claim of Ragasa that it is entitled to damages in the amount of P3,146,596.42, representing
the monthly rentals from July 1, 2001 to January 31, 2003, or the unexpired period of the lease,
valid?
Entitlement to rentals after the termination of the lease pursuant to an automatic rescission or
termination clause is possible in the case where the lessor invokes the clause and the lessee refuses
to vacate the leased premises. The lessee will be liable for damages equivalent to the rentals for the
duration of its possession from the termination of the lease until he vacates the premises. This was
in effect the ruling of the Court in Manila Bay Club Corp. when it affirmed the award of the monthly
rental equivalent to P 250,000.00, which was the valuation of the trial court as affirmed by the
CA, viz.:
Petitioner in its third assignment of error assails the P250,000.00 monthly rental adjudged against
it by the trial court and as affirmed by respondent Court of Appeals, claiming that there was no basis
for such finding.
Again, we disagree. In reaching that amount, the trial court took into consideration the following
factors: 1) prevailing rates in the vicinity; 2) location of the property; 3) use of the property; 4)
inflation rate; and 5) the testimony of private respondent Modesta Sabeniano that she was offered
by a Japanese-Filipino investor a monthly rental of P400,000.00 for the leased premises then
occupied by petitioner.52 Petitioner for its part should have presented its controverting evidence
below to support what it believes to be the fair rental value of the leased building since the burden
of proof to show that the rental demanded is unconscionable or exorbitant rests upon the
lessee.53 But petitioner failed to do so. Hence, the valuation by the trial court, as affirmed by
respondent Court of Appeals, stands.
It is worth stressing at this juncture that the trial court had the authority to fix the reasonable value
for the continued use and occupancy of the leased premises after the termination of the lease
contract, and that it was not bound by the stipulated rental in the contract of lease since it is equally
settled that upon termination or expiration of the contract of lease, the rental stipulated therein may
no longer be the reasonable value for the use and occupation of the premises as a result or by
reason of the change or rise in values.54 Moreover, the trial court can take judicial notice of the
general increase in rentals of real estate especially of business establishments 55 like the leased
building owned by private respondents.56
That is, however, not the situation here. The bank did not continue to possess the Leased Premises
after its automatic termination, as it vacated the same on June 30, 2001.
As explained above, the provision or clause that is applicable in case of non-compliance of the Term
or period of the Lease Contract is item 8(m) which mandates that the full deposit of P367,821.00 or
the equivalent of three months rentals shall be forfeited with the proviso that the deposit cannot be
applied to rental. This proviso as to non-application to rental of the deposit means that the forfeiture
is without prejudice to the payment of any unpaid rental at the time of the non-compliance or breach
of the Term or period of the Lease Contract. Since the bank had no unpaid rental as of June 30,
2001, the proviso finds no application in the present case.
What is the nature of item 8(m) of the Lease Contract: "The full deposit shall be forfeited in favor of
the LESSOR upon non-compliance of the Term of the Contract of Lease by the TENANT, and cannot
be applied to Rental"?
The Court believes and so holds that item No. 8(m) is a penalty or penal clause.
A penal clause is an accessory obligation which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled.57 Quite common in lease contracts, this clause functions to
strengthen the coercive force of the obligation and to provide, in effect, for what would be the
liquidated damages resulting from a breach.58
A penal clause has a three-fold purpose: (1) a coercive purpose or one of guarantee — this is to
urge the debtor to the fulfillment of the main obligation under pain of paying the penalty; (2) to
serve as liquidated damages — this is to evaluate in advance the damages that may be occasioned
by the non-compliance of the obligation; and (3) a strictly penal purpose — this is to punish the
debtor for non-fulfillment of the main obligation.59 While the first purpose is always present, the
second purpose is presumed and the third purpose must be expressly agreed upon. 60
Stated otherwise, the purposes of penalty or penal clause are: (1) funcion coercitiva o de
guarantia or to insure the performance of the obligation; (2) funcion liquidatoria or to liquidate the
amount of damages to be awarded to the injured party in case of breach of the principal obligation;
and (3) funcion estrictamente penal or to punish the obligor in case of breach of the principal
obligation, in certain exceptional cases.61 The second is evidently compensatory and the third is
punitive in character, while the first is the general purpose regardless of whether the penalty is
compensatory or punitive.62
Evidently, the penal clause may be considered either reparation, compensation or substitute for
damages, on one hand, or as a punishment in case of breach of the obligation, on the other. When
considered as reparation or compensation, the question as to the appropriate amount of damages
is resolved once and for all because the stipulated indemnity represents a legitimate estimate made
by the contracting parties of the damages caused by the nonfulfillment or breach of the obligation.
Proof of actual damages is, consequently, not necessary in order that the stipulated penalty may be
demanded. When considered as a punishment, the question of damages is not yet resolved inasmuch
as the right to damages, besides the penalty, still subsists. Thus, if the injured party desires to
recover the damages actually suffered by him in addition to the penalty, he must prove such
damages.63
Penal clause may be classified into: (1) according to source: (a) legal (when it is provided by law)
and (b) conventional (when it is provided for by stipulation of the parties); (2) according to
demandability: (a) subsidiary (when only the penalty may be enforced) and (b) complementary
(when both the principal obligation and the penalty may be enforced); and (3) according to purpose:
(a) cumulative (when damages may be collected in addition to penalty) and (b) reparatory (when
the penalty substitutes indemnity for damages).64
Item 8(m) of the Lease Contract is an accessory obligation or prestation to the principal obligation
of lease. It specifies the stipulated amount of liquidated damages — the full deposit — to be awarded
to the injured party in case of breach of the Term or period of the principal obligation. Hence, as to
source, it is conventional.
As defined, liquidated damages are those agreed upon by the parties to a contract, to be paid in
case of breach thereof.65 The amount of the liquidated damages is purely contractual between the
parties; and the courts will intervene only to equitably reduce the liquidated damages, whether
intended as an indemnity or a penalty, if they are iniquitous or unconscionable, pursuant to Articles
2227 and 122966 of the Civil Code.
Also, proof of actual damages suffered by the creditor is not necessary in order that the penalty may
be demanded.67
Item 8(m) seeks to insure or guarantee the completion of the lease period since its non-compliance
shall be met with a penalty. The degree of the coercive effect or impact of the penalty to insure or
guarantee the performance of the principal obligation depends largely on the stipulated amount of
the liquidated damages. If the amount is substantial, then the compulsion to perform may be
greater. The obligor may not, however, be willing to accept a very stiff penalty. As expressed earlier,
the amount is purely discretionary on the parties provided that it will pass the test of
unconscionability or excessiveness. Since the herein parties have agreed on a specific amount of
penalty, P367,821.00 or the full deposit, the Court will not even second guess whether it is
substantial enough to insure the compliance of the lease period. The Court will simply rule that it is
reasonable.
As to the effect of the penal clause, Article 1226 of the Civil Code provides:
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.
From the first paragraph of Article 1226, it is evident that, as a rule, the penalty is fixed by the
contracting parties as a compensation or substitute for damages in case of breach of the obligation;
and it is, therefore, clear that the penalty in its compensatory aspect is the general rule, while the
penalty in its strictly penal aspect is the exception.68
It is also clear from paragraph 1 of Article 1226 that when an obligation or a contract contains a
penal clause, the penalty shall substitute the indemnity for damages and the payment of interests
in case of noncompliance with or breach of the principal obligation. This general rule, however,
admits three exceptions, namely: (1) when there is a stipulation to the contrary; (2) when the
obligor or debtor is sued for refusal to pay the agreed penalty; and (3) when the obligor or debtor
is guilty of fraud. In these exceptions, it is evident that the purpose of the penalty is to punish since
the obligee or creditor can recover from the obligor or debtor not only the penalty, but also the
damages or interests resulting from the breach of the principal obligation. 69
Is item 8(m) intended by the parties for a strictly penal purpose or a punishment on the guilty party?
If it is, then item 8(m) is both complementary and cumulative. If it is not, then it is subsidiary and
reparatory.
As earlier observed, the third purpose of a penal clause, which is strictly penal, must be expressly
agreed upon. This is in consonance with the first sentence of Article 1226 — "the penalty shall
substitute the indemnity for damages and interests in case of noncompliance, if there is no
stipulation to the contrary." Thus, the contract must expressly provide that in addition to the penalty,
the guilty party shall be liable for damages or interests resulting from the breach of the principal
obligation.
Item 8(m) does not expressly make a reservation for an additional claim for damages and interests
occasioned by the breach of the lease period. There is, however, another provision of the Lease
Contract that is triggered by a default in item 8(m), to wit:
10. In the event that a Court Litigation has been resorted to by the LESSOR or LESSEE, due to non-
compliance of any of the foregoing provisions, the aggrieved party shall be paid by the other party,
no less than fifteen thousand (P15,000) pesos, Philippine Currency, for Attorney's fees, and other
damages that the honorable court may allow; the cost of litigations shall be born[e] or paid by the
party in fault, or in default. All unpaid accounts and obligations of the TENANT shall earn interest or
bear interest at the rate of 14% per annum or at the allowable rate of interest from the date of
default. The legal suits shall be brought in the town of Quezon City. 70 (Underscoring supplied)
Being provisions on default, item 8(m) and item 10 must be applied jointly and simultaneously.
Thus, aside from the forfeiture of the full deposit, the party at fault or in default is liable, pursuant
to item 10 of the Lease Contract, for the payment of attorney's fees in an amount which is not less
than P15,000.00, other damages that the court may allow, cost of litigation, and 14% interest per
annum on unpaid accounts and obligations.
Can item 10 pass as the "stipulation to the contrary" or the express agreement required in Article
1226? A careful reading of all the pertinent provisions leads the Court to believe that when item 10
provides that "other damages that the court may allow" are recoverable in case of noncompliance
of any provision of the Lease Contract, this only means what it says, that the aggrieved party can
be awarded damages in addition to the forfeiture of the deposit that is provided in item 8(m). In
fine, item 8(m) and item 10, construed together, form a complementary and cumulative penal
clause; and it is a punishment or strictly penal.
From the foregoing, the Court accordingly rules that the bank is liable for the forfeiture of the deposit
and attorney's fees in the amount of P15,000.00 and such other damages which Ragasa suffered by
reason of the breach of the lease period by the bank.
Clearly, the requisites for the demandability of the penal clause are present in this case. These are:
(1) that the total non-fulfillment of the obligation or the defective fulfillment is chargeable to the
fault of the debtor; and (2) that the penalty may be enforced in accordance with the provisions of
law. As to the second requisite, the penalty is demandable when the debtor is in mora in regard to
obligations that are positive (to give and to do) where demand may be necessary unless it is
excused; and with regard to negative obligations, when an act is done contrary to that which is
prohibited.71

In the present case, the bank pre-terminated the Lease Contract which is not expressly allowed
therein. For not complying with its Term or period, the bank did an act contrary to what is not
allowed in the Lease Contract.
Additionally, the bank cannot insist on paying only the penalty. This is proscribed under Article 1227,
to wit:
Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying
the penalty, save in the case where this right has been expressly reserved for him. Neither can
the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the
same time, unless this right has been clearly granted him. However, if after the creditor has
decided to require the fulfillment of the obligation, the performance thereof should become
impossible without his fault, the penalty may be enforced.
47
13. VIOLATION AND DAMAGES – In case of violation of any terms and conditions contained herein
will be a ground for the offended party to terminate the contract even before the end of its term and
in case the LESSEE violates the same the LESSOR have the option to terminate the contract without
prejudice to his rights to collect whatever rentals due for the remaining years of the contract plus
damages.
66
CIVIL CODE, Art. 1229 provides:
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.

There is nothing in the Lease Contract which provides that the bank can exempt itself from the
performance of any provision therein, including the Term or period, by simply paying the penalty.
Items 8(m) and 10 do not contain any such exemption.

As discussed above, Ragasa cannot insist on the performance of the lease, i.e., for the lease to
continue until expiration of its term, because the lease has been automatically terminated when the
bank breached it by pre-terminating its terms. Thus, Ragasa is only entitled to damages.

That said, that is, even as items 8(m) and 10 are considered strictly penal or punishment, Ragasa,
as the injured party, is nonetheless required to prove the "other damages" that it actually suffered
before it can be entitled thereto. However, a review of the records shows that Ragasa presented
nothing. Ragasa simply insisted that the bank should be liable for the amount representing the
monthly rentals from July 1, 2001 up to January 31, 2003 or the unexpired term of the Lease
Contract, equivalent to P3,146,596.42. Ragasa did not adduce any evidence to support its claim that
it actually suffered damages of such amount in terms of lost income. In this regard, it must be
emphasized that Ragasa could have leased the Leased Premises as early as July 1, 2001 because
the bank had completely vacated the same as of June 30, 2001. That Ragasa chose not to lease the
Leased Premises and not earn any rental therefrom in the meantime that its complaint for damages
against the bank was being litigated was its own decision and doing.

Article 2203 of the Civil Code provides that "[t]he party suffering loss or injury must exercise the
diligence of a good father of a family to minimize the damages resulting from the act or omission."
Ragasa likewise failed in this respect.

In conclusion, the Court rules that Ragasa is not entitled to the rental for the unexpired period of
the Lease Contract, and it is only entitled to the forfeiture of the full deposit pursuant to item 8(m)
and P15,000.00 as attorney's fees pursuant to item 10.

WHEREFORE, premises considered, the instant petition for review is hereby partly GRANTED. The
Decision dated March 27, 2009 and the Resolution dated November 25, 2009 of the CA
are AFFIRMED WITH MODIFICATION, awarding attorney's fees in the amount of P15,000.00 in
favor of petitioner D.M. Ragasa Enterprises, Inc.

Endnotes:

23
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.

46
10. SUB-LEASE – The SUBSTITUTE LESSEE cannot sublease the leased premises to any party
without first securing the prior written consent of the LESSOR, otherwise the sublease shall not be
respected by the latter;
G.R. No. 117190 January 2, 1997 system included the installation of a deep well and, secondly, whether petitioner is under obligation
to reconstruct the windmill after it collapsed.
JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
GENERAL MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE HERCE We reverse the appellate court on the first issue but sustain it on the second.
JR., respondents.
The preponderance of evidence supports the finding of the trial court that the installation of a deep
BELLOSILLO, J.: 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
This case involves the proper interpretation of the contract entered into between the parties. 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
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style of P60,000.00 (Exh. "A"). The latter proposal was accepted by respondent and the construction
J.M.T. Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to construct
immediately followed. The pertinent portions of the first letter-proposal (Exh. "1") are reproduced
a windmill system for him. After some negotiations they agreed on the construction of the windmill
hereunder —
for a consideration of P60,000.00 with a one-year guaranty from the date of completion and
In connection with your Windmill System and Installation, we would like to quote to you as
acceptance by respondent Herce Jr. of the project. Pursuant to the agreement respondent paid
follows:
petitioner a down payment of P30,000.00 and an installment payment of P15,000.00, leaving a
One (1) Set — Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in
balance of P15,000.00.
diameter, with 20 pieces blade, Tower 40 feet high, including mechanism which is not
advisable to operate during extra-intensity wind. Excluding cylinder pump.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed
UNIT CONTRACT PRICE P87,000.00
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)
The second letter-proposal (Exh. "A") provides as follows:
which constructed the deep well to which the windmill system was to be connected. According to
In connection with your Windmill system, Supply of Labor Materials and Installation, operated
respondent, since the deep well formed part of the system the payment he tendered to SPGMI should
water pump, we would like to quote to you as follows —
be credited to his account by petitioner. Moreover, assuming that he owed petitioner a balance of
One (1) set — Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet
P15,000.00, this should be offset by the defects in the windmill system which caused the structure
diameter, 1-lot blade materials, 40 feet Tower complete with standard appurtenances up to
to collapse after a strong wind hit their place.1 Cylinder pump, shafting U.S. adjustable International Metal.
One (1) lot — Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.
Petitioner denied that the construction of a deep well was included in the agreement to build the
One (1) lot — Float valve.
windmill system, for the contract price of P60,000.00 was solely for the windmill assembly and its
One (1) lot — Concreting materials foundation.
installation, exclusive of other incidental materials needed for the project. He also disowned any
F. O. B. Laguna
obligation to repair or reconstruct the system and insisted that he delivered it in good and working
Contract Price P60,000.00
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.
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
In finding for plaintiff, the trial court held that the construction of the deep well was not part of the
well. There is absolutely no mention in the two (2) documents that a deep well pump is a component
windmill project as evidenced clearly by the letter proposals submitted by petitioner to
of the proposed windmill system. The contract prices fixed in both proposals cover only the features
respondent.2 It noted that "[i]f the intention of the parties is to include the construction of the deep
specifically described therein and no other. While the words "deep well" and "deep well pump" are
well in the project, the same should be stated in the proposals. In the absence of such an agreement,
mentioned in both, these do not indicate that a deep well is part of the windmill system. They merely
it could be safely concluded that the construction of the deep well is not a part of the project
describe the type of deep well pump for which the proposed windmill would be suitable. As correctly
undertaken by the plaintiff."3 With respect to the repair of the windmill, the trial court found that
pointed out by petitioner, the words "deep well" preceded by the prepositions "for" and "suitable
"there is no clear and convincing proof that the windmill system fell down due to the defect of the
for" were meant only to convey the idea that the proposed windmill would be appropriate for a deep
construction."4
well pump with a diameter of 2 to 3 inches. For if the real intent of petitioner was to include a deep
The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was well in the agreement to construct a windmill, he would have used instead the conjunctions "and"
included in the agreement of the parties because the term "deep well" was mentioned in both or "with." Since the terms of the instruments are clear and leave no doubt as to their meaning they
proposals. It also gave credence to the testimony of respondent's witness Guillermo Pili, the should not be disturbed.
proprietor of SPGMI which installed the deep well, that petitioner Tanguilig told him that the cost of
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall
constructing the deep well would be deducted from the contract price of P60,000.00. Upon these
be accorded primordial consideration5 and, in case of doubt, their contemporaneous and subsequent
premises the appellate court concluded that respondent's payment of P15,000.00 to SPGMI should
acts shall be principally considered.6 An examination of such contemporaneous and subsequent acts
be applied to his remaining balance with petitioner thus effectively extinguishing his contractual
of respondent as well as the attendant circumstances does not persuade us to uphold him.
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.
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
His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks
the pump the latter agreed to have a third party do the work the cost of which was to be deducted
relief from this Court. He raises two issues: firstly, whether the agreement to construct the windmill
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 case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong wind should
deep well pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig." 7 be present in places where windmills are constructed, otherwise the windmills will not turn.

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
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.

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 been constituted,
or his successor in 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
G.R. No. L-47851 October 3, 1986
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, vs. THE COURT OF APPEALS, UNITED
CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR ASSOCIATION,
respondents.
G.R. No. L-47863 October 3, 1986
THE UNITED CONSTRUCTION CO., INC., petitioner, vs. COURT OF APPEALS, ET AL., respondents.
G.R. No. L-47896 October 3, 1986
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, vs. COURT OF APPEALS, ET AL., respondents.
PARAS, J.:
These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals
in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in
Civil Case No. 74958 dated September 21, 1971 as modified by the Order of the lower court dated
December 8, 1971. The Court of Appeals in modifying the decision of the lower court included an
award of an additional amount of P200,000.00 to the Philippine Bar Association to be paid jointly
and severally by the defendant United Construction Co. and by the third-party defendants Juan F.
Nakpil and Sons and Juan F. Nakpil.
The dispositive portion of the modified decision of the lower court reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except
Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with
interest at the legal rate from November 29, 1968, the date of the filing of the complaint
until full payment;
(b) Dismissing the complaint with respect to defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;
(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit;
(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except
Roman Ozaeta) to pay the costs in equal shares.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in
favor of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from
November 29, 1968 until full payment to be paid jointly and severally by defendant United
Construction Co., Inc. and third party defendants (except Roman Ozaeta). In all other respects,
the judgment dated September 21, 1971 as modified in the December 8, 1971 Order of the
lower court is hereby affirmed with COSTS to be paid by the defendant and third party defendant
(except Roman Ozaeta) in equal shares.
Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in
L-47863 seek the reversal of the decision of the Court of Appeals, among other things, for
exoneration from liability while petitioner Philippine Bar Association in L-47896 seeks the
modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss of the PBA
building plus four (4) times such amount as damages resulting in increased cost of the building,
P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.
These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective respondents to
comment. (Rollo, L-47851, p. 172).
The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348;
pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:
The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the
Corporation Law, decided to construct an office building on its 840 square meters lot located at the
comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction was undertaken by
the United Construction, Inc. on an "administration" basis, on the suggestion of Juan J. Carlos, the
president and general manager of said corporation. The proposal was approved by plaintiff's board
of directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The
plans and specifications for the building were prepared by the other third-party defendants Juan F.
Nakpil & Sons. The building was completed in June, 1966.
In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs
and the building in question sustained major damage. The front columns of the building buckled,
causing the building to tilt forward dangerously. The tenants vacated the building in view of its
precarious condition. As a temporary remedial measure, the building was shored up by United
Construction, Inc. at the cost of P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising
from the partial collapse of the building against United Construction, Inc. and its President and
General Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building was
accused by defects in the construction, the failure of the contractors to follow plans and specifications
and violations by the defendants of the terms of the contract.
Defendants in turn filed a third-party complaint against the architects who prepared the plans and
specifications, alleging in essence that the collapse of the building was due to the defects in the said
plans and specifications. Roman Ozaeta, the then president of the plaintiff Bar Association was
included as a third-party defendant for damages for having included Juan J. Carlos, President of the
United Construction Co., Inc. as party defendant.
On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil
presented a written stipulation which reads:
1. That in relation to defendants' answer with counterclaims and third- party complaints and the
third-party defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint
by including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties defendant.
2. That in the event (unexpected by the undersigned) that the Court should find after the trial
that the above-named defendants Juan J. Carlos and United Construction Co., Inc. are free from
any blame and liability for the collapse of the PBA Building, and should further find that the
collapse of said building was due to defects and/or inadequacy of the plans, designs, and
specifications p by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way jointly and solidarily
liable with the defendants, judgment may be rendered in whole or in part. as the case may be,
against Juan F. Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and
purposes as if plaintiff's complaint has been duly amended by including the said Juan F. Nakpil
& Sons and Juan F. Nakpil as parties defendant and by alleging causes of action against them
including, among others, the defects or inadequacy of the plans, designs, and specifications
prepared by them and/or failure in the performance of their contract with plaintiff.
3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record
on Appeal, pp. 274-275; Rollo, L-47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among
others, the parties agreed to refer the technical issues involved in the case to a Commissioner. Mr.
Andres O. Hizon, who was ultimately appointed by the trial court, assumed his office as
Commissioner, charged with the duty to try the following issues:
1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake
had been caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans and specifications prepared by third-party
defendants;
(b) The deviations, if any, made by the defendants from said plans and specifications and how
said deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building;
(d) The alleged failure to exercise the requisite degree of supervision expected of the architect,
the contractor and/or the owner of the building;
(e) An act of God or a fortuitous event; and
The trial court agreed with the findings of the Commissioner except as to the holding that the owner
is charged with full nine supervision of the construction. The Court sees no legal or contractual basis
for such conclusion. (Record on Appeal, pp. 309-328; Ibid).
Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified
by the Intermediate Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these
petitions.
On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and
the Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae. They
proposed to present a position paper on the liability of architects when a building collapses and to
submit likewise a critical analysis with computations on the divergent views on the design and plans
as submitted by the experts procured by the parties. The motion having been granted, the amicus
curiae were granted a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due course to the petitions in Our Resolution
of July 21, 1978.

(f) Any other cause not herein above specified.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

2. If the cause of the damage suffered by the building arose from a combination of the above-
The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
enumerated factors, the degree or proportion in which each individual factor contributed to the
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion that the
damage sustained;
defects in the plans and specifications indeed existed.

3. Whether the building is now a total loss and should be completely demolished or whether it Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131)
may still be repaired and restored to a tenantable condition. In the latter case, the determination
and the 1966 Asep Code, the Commissioner added that even if it can be proved that the defects in
of the cost of such restoration or repair, and the value of any remaining construction, such as
the constructionalone (and not in the plans and design) caused the damage to the building, still the
the foundation, which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo,
deficiency in the original design and jack of specific provisions against torsion in the original plans
L-47851, p. 169).
and the overload on the ground floor columns (found by an the experts including the original
designer) certainly contributed to the damage which occurred. (Ibid, p. 174).
Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues were
In their respective briefs petitioners, among others, raised the following assignments of errors:
tried by the Court.
Philippine Bar Association claimed that the measure of damages should not be limited to
P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals while
Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple
United Construction Co., Inc. and the Nakpils claimed that it was an act of God that caused the
down in case of a strong earthquake. The motions were opposed by the defendants and the matter
failure of the building which should exempt them from responsibility and not the defective
was referred to the Commissioner. Finally, on April 30, 1979 the building was authorized to be
construction, poor workmanship, deviations from plans and specifications and other imperfections
demolished at the expense of the plaintiff, but not another earthquake of high intensity on April 7,
in the case of United Construction Co., Inc. or the deficiencies in the design, plans and specifications
1970 followed by other strong earthquakes on April 9, and 12, 1970, caused further damage to the
prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils object to the payment
property. The actual demolition was undertaken by the buyer of the damaged building. (Record on
of the additional amount of P200,000.00 imposed by the Court of Appeals. UCCI also claimed that
Appeal, pp. 278-280; Ibid.)
it should be reimbursed the expenses of shoring the building in the amount of P13,661.28 while the
After the protracted hearings, the Commissioner eventually submitted his report on September 25, Nakpils opposed the payment of damages jointly and solidarity with UCCI.
1970 with the findings that while the damage sustained by the PBA building was caused directly by
The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which
the August 2, 1968 earthquake whose magnitude was estimated at 7.3 they were also caused by
caused the failure of the building, exempts from liability, parties who are otherwise liable because
the defects in the plans and specifications prepared by the third-party defendants' architects,
of their negligence.
deviations from said plans and specifications by the defendant contractors and failure of the latter
to observe the requisite workmanship in the construction of the building and of the contractors,
The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New
architects and even the owners to exercise the requisite degree of supervision in the construction of
Civil Code, which provides:
subject building.
Art. 1723. The engineer or architect who drew up the plans and specifications for a building is
All the parties registered their objections to aforesaid findings which in turn were answered by the
liable for damages if within fifteen years from the completion of the structure the same should
Commissioner.
collapse by reason of a defect in those plans and specifications, or due to the defects in the
ground. The contractor is likewise responsible for the damage if the edifice fags within the same
 period on account of defects in the construction or the use of materials of inferior quality
furnished by him, or due to any violation of the terms of the contract. If the engineer or architect
supervises the construction, he shall be solidarily liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the causes of action
by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.
On the other hand, the general rule is that no person shall be responsible for events which could not
be foreseen or which though foreseen, were inevitable (Article 1174, New Civil Code).
An act of God has been defined as an accident, due directly and exclusively to natural causes without
human intervention, which by no amount of foresight, pains or care, reasonably to have been
expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation
due to an "act of God," the following must concur: (a) the cause of the breach of the obligation must
be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable;
(c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to
the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423;
Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA
279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation
as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot
escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and
removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of God in producing
a loss, such person is not exempt from liability by showing that the immediate cause of the damage
was the act of God. To be exempt from liability for loss because of an act of God, he must be free
from any previous negligence or misconduct by which that loss or damage may have been
occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379;
Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
The negligence of the defendant and the third-party defendants petitioners was established beyond
dispute both in the lower court and in the Intermediate Appellate Court. Defendant United
Construction Co., Inc. was found to have made substantial deviations from the plans and
specifications. and to have failed to observe the requisite workmanship in the construction as well
as to exercise the requisite degree of supervision; while the third-party defendants were found to
have inadequacies or defects in the plans and specifications prepared by them. As correctly assessed
by both courts, the defects in the construction and in the plans and specifications were the proximate
causes that rendered the PBA building unable to withstand the earthquake of August 2, 1968. For
this reason the defendant and third-party defendants cannot claim exemption from liability.
(Decision, Court of Appeals, pp. 30-31).
It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and
on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January
17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on
speculation, surmise and conjectures; (2) the inference made is manifestly mistaken; (3) there is
grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings
of fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings
are contrary to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co.,
February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7)
the findings of facts of the Court of Appeals are contrary to those of the trial court; (8) said findings
of facts are conclusions without citation of specific evidence on which they are based; (9) the facts
set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30,
1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on the
supposed absence of evidence and is contradicted by evidence on record (Salazar vs. Gutierrez, May
29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986).
It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the
contrary, the records show that the lower court spared no effort in arriving at the correct appreciation
of facts by the referral of technical issues to a Commissioner chosen by the parties whose findings
and conclusions remained convincingly unrebutted by the intervenors/amicus curiae who were
allowed to intervene in the Supreme Court.
In any event, the relevant and logical observations of the trial court as affirmed by the Court of
Appeals that "while it is not possible to state with certainty that the building would not have collapsed
were those defects not present, the fact remains that several buildings in the same area withstood
the earthquake to which the building of the plaintiff was similarly subjected," cannot be ignored.
The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial
collapse (and eventual complete collapse) of its building.
The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner
that the total amount required to repair the PBA building and to restore it to tenantable condition
was P900,000.00 inasmuch as it was not initially a total loss. However, while the trial court awarded
the PBA said amount as damages, plus unrealized rental income for one-half year, the Court of
Appeals modified the amount by awarding in favor of PBA an additional sum of P200,000.00
representing the damage suffered by the PBA building as a result of another earthquake that
occurred on April 7, 1970 (L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total
value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and
UNITED question the additional award of P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief
as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further urges that the unrealized
rental income awarded to it should not be limited to a period of one-half year but should be computed
on a continuing basis at the rate of P178,671.76 a year until the judgment for the principal amount
shall have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and
it is undisputed that the building could then still be repaired and restored to its tenantable condition.
The PBA, however, in view of its lack of needed funding, was unable, thru no fault of its own, to
have the building repaired. UNITED, on the other hand, spent P13,661.28 to shore up the building
after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the earthquake on
April 7, 1970, the trial court after the needed consultations, authorized the total demolition of the
building (L-47896, Vol. 1, pp. 53-54).
There should be no question that the NAKPILS and UNITED are liable for the damage resulting from
the partial and eventual collapse of the PBA building as a result of the earthquakes.
We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez
(now an Associate Justice of the Supreme Court) while still an Associate Justice of the Court of
Appeals:
There is no question that an earthquake and other forces of nature such as cyclones, drought,
floods, lightning, and perils of the sea are acts of God. It does not necessarily follow, however,
that specific losses and suffering resulting from the occurrence of these natural force are also
acts of God. We are not convinced on the basis of the evidence on record that from the thousands
of structures in Manila, God singled out the blameless PBA building in Intramuros and around
six or seven other buildings in various parts of the city for collapse or severe damage and that
God alone was responsible for the damages and losses thus suffered.
The record is replete with evidence of defects and deficiencies in the designs and plans, defective
construction, poor workmanship, deviation from plans and specifications and other
imperfections. These deficiencies are attributable to negligent men and not to a perfect God.
The act-of-God arguments of the defendants- appellants and third party defendants-appellants
presented in their briefs are premised on legal generalizations or speculations and on theological
fatalism both of which ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous events and
extraordinary fortuitous events leads to its argument that the August 2, 1968 earthquake was
of such an overwhelming and destructive character that by its own force and independent of the
particular negligence alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a situation scores of
buildings in the vicinity and in other parts of Manila would have toppled down. Following the
same line of reasoning, Nakpil and Sons alleges that the designs were adequate in accordance
with pre-August 2, 1968 knowledge and appear inadequate only in the light of engineering
information acquired after the earthquake. If this were so, hundreds of ancient buildings which
survived the earthquake better than the two-year old PBA building must have been designed
and constructed by architects and contractors whose knowledge and foresight were
unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more down to
earth explanation of the collapse. The failure of the PBA building, as a unique and distinct
construction with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective construction, factors which
are neither mysterious nor esoteric. The theological allusion of appellant United that God acts in
mysterious ways His wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about these acts of
negligence. The collapse of the PBA building was no wonder performed by God. It was a result
of the imperfections in the work of the architects and the people in the construction company.
More relevant to our mind is the lesson from the parable of the wise man in the Sermon on the
Mount "which built his house upon a rock; and the rain descended and the floods came and the
winds blew and beat upon that house; and it fen not; for it was founded upon a rock" and of the
"foolish upon the sand. And the rain descended and man which built his house the floods came,
and the winds blew, and beat upon that house; and it fell and great was the fall of it. (St.
Matthew 7: 24-27)." The requirement that a building should withstand rains, floods, winds,
earthquakes, and natural forces is precisely the reason why we have professional experts like
architects, and engineers. Designs and constructions vary under varying circumstances and
conditions but the requirement to design and build well does not change.
The findings of the lower Court on the cause of the collapse are more rational and accurate.
Instead of laying the blame solely on the motions and forces generated by the earthquake, it
also examined the ability of the PBA building, as designed and constructed, to withstand and
successfully weather those forces.
The evidence sufficiently supports a conclusion that the negligence and fault of both United and
Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible for the damages.
The Report of the Commissioner, Plaintiff's Objections to the Report, Third Party Defendants'
Objections to the Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to the
Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply
to the Commissioner's Report not to mention the exhibits and the testimonies show that the
main arguments raised on appeal were already raised during the trial and fully considered by
the lower Court. A reiteration of these same arguments on appeal fails to convince us that we
should reverse or disturb the lower Court's factual findings and its conclusions drawn from the
facts, among them:
The Commissioner also found merit in the allegations of the defendants as to the physical
evidence before and after the earthquake showing the inadequacy of design, to wit:
Physical evidence before the earthquake providing (sic) inadequacy of design;
1. inadequate design was the cause of the failure of the building.
2. Sun-baffles on the two sides and in front of the building;
a. Increase the inertia forces that move the building laterally toward the Manila Fire
Department.
b. Create another stiffness imbalance.
3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the
cross-sectional area of each of the columns and the strength thereof.
4. Two front corners, A7 and D7 columns were very much less reinforced.
Physical Evidence After the Earthquake, Proving Inadequacy of design;
1. Column A7 suffered the severest fracture and maximum sagging. Also D7.
2. There are more damages in the front part of the building than towards the rear, not only
in columns but also in slabs.
3. Building leaned and sagged more on the front part of the building.
4. Floors showed maximum sagging on the sides and toward the front corner parts of the
building.
5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at
the column A7 where the floor is lower by 80 cm. than the highest slab level.
6. Slab at the corner column D7 sagged by 38 cm.
The Commissioner concluded that there were deficiencies or defects in the design, plans and
specifications of the PBA building which involved appreciable risks with respect to the accidental
forces which may result from earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too conservative code or even
a code that does not require a design for earthquake forces mitigates in a large measure the
responsibility or liability of the architect and engineer designer.
The Third-party defendants, who are the most concerned with this portion of the Commissioner's
report, voiced opposition to the same on the grounds that (a) the finding is based on a basic
erroneous conception as to the design concept of the building, to wit, that the design is
essentially that of a heavy rectangular box on stilts with shear wan at one end; (b) the finding
that there were defects and a deficiency in the design of the building would at best be based on
an approximation and, therefore, rightly belonged to the realm of speculation, rather than of
certainty and could very possibly be outright error; (c) the Commissioner has failed to back up
or support his finding with extensive, complex and highly specialized computations and analyzes
which he himself emphasizes are necessary in the determination of such a highly technical
question; and (d) the Commissioner has analyzed the design of the PBA building not in the light
of existing and available earthquake engineering knowledge at the time of the preparation of
the design, but in the light of recent and current standards.
The Commissioner answered the said objections alleging that third-party defendants' objections
were based on estimates or exhibits not presented during the hearing that the resort to
engineering references posterior to the date of the preparation of the plans was induced by the
third-party defendants themselves who submitted computations of the third-party defendants
are erroneous.
The issue presently considered is admittedly a technical one of the highest degree. It involves
questions not within the ordinary competence of the bench and the bar to resolve by themselves.
Counsel for the third-party defendants has aptly remarked that "engineering, although dealing
in mathematics, is not an exact science and that the present knowledge as to the nature of
earthquakes and the behaviour of forces generated by them still leaves much to be desired; so
much so "that the experts of the different parties, who are all engineers, cannot agree on what
equation to use, as to what earthquake co-efficients are, on the codes to be used and even as
to the type of structure that the PBA building (is) was (p. 29, Memo, of third- party defendants
before the Commissioner).
The difficulty expected by the Court if tills technical matter were to be tried and inquired into by
the Court itself, coupled with the intrinsic nature of the questions involved therein, constituted
the reason for the reference of the said issues to a Commissioner whose qualifications and
experience have eminently qualified him for the task, and whose competence had not been
questioned by the parties until he submitted his report. Within the pardonable limit of the Court's
ability to comprehend the meaning of the Commissioner's report on this issue, and the objections
voiced to the same, the Court sees no compelling reasons to disturb the findings of the
Commissioner that there were defects and deficiencies in the design, plans and specifications
prepared by third-party defendants, and that said defects and deficiencies involved appreciable
risks with respect to the accidental forces which may result from earthquake shocks.
(2) (a) The deviations, if any, made by the defendants from the plans and specifications, and
how said deviations contributed to the damage sustained by the building.
(b) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building.
These two issues, being interrelated with each other, will be discussed together.
The findings of the Commissioner on these issues were as follows:
We now turn to the construction of the PBA Building and the alleged deficiencies or defects in
the construction and violations or deviations from the plans and specifications. All these may be
summarized as follows:
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.
(1) Wrongful and defective placing of reinforcing bars.
(2) Absence of effective and desirable integration of the 3 bars in the cluster.
(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than
1 inch.
(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when
on one face the main bars are only 1 1/2' from the surface.
(5) Prevalence of honeycombs,
(6) Contraband construction joints,
(7) Absence, or omission, or over spacing of spiral hoops,
(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,
(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,
(10) Undergraduate concrete is evident,
(11) Big cavity in core of Column 2A-4, second floor,
(12) Columns buckled at different planes. Columns buckled worst where there are no spirals
or where spirals are cut. Columns suffered worst displacement where the eccentricity of the
columnar reinforcement assembly is more acute.
b. Summary of alleged defects as reported by Engr. Antonio Avecilla.
Columns are first (or ground) floor, unless otherwise stated.
(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,
(2) Column D5 — No spiral up to a height of 22" from the ground floor,
(3) Column D6 — Spacing of spiral over 4 l/2,
(4) Column D7 — Lack of lateral ties,
(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals are at
2" from the exterior column face and 6" from the inner column face,
(6) Column B6 — Lack of spiral on 2 feet below the floor beams,
(7) Column B5 — Lack of spirals at a distance of 26' below the beam,
(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",
(9) Column A3 — Lack of lateral ties,
(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,
(11) Column A4 — (second floor Column is completely hollow to a height of 30"
(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel beam
to a height of 6 feet,
(13) Column A6 — No spirals up to a height of 30' above the ground floor level,
(14) Column A7— Lack of lateralties or spirals,
c. Summary of alleged defects as reported by the experts of the Third-Party defendants.
Ground floor columns.
(1) Column A4 — Spirals are cut,
(2) Column A5 — Spirals are cut,
(3) Column A6 — At lower 18" spirals are absent,
(4) Column A7 — Ties are too far apart,
(5) Column B5 — At upper fourth of column spirals are either absent or improperly spliced,
(6) Column B6 — At upper 2 feet spirals are absent,
(7) Column B7 — At upper fourth of column spirals missing or improperly spliced.
(8) Column C7— Spirals are absent at lowest 18"
(9) Column D5 — At lowest 2 feet spirals are absent,
(10) Column D6 — Spirals are too far apart and apparently improperly spliced,
(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.
There is merit in many of these allegations. The explanations given by the engineering experts
for the defendants are either contrary to general principles of engineering design for reinforced
concrete or not applicable to the requirements for ductility and strength of reinforced concrete
in earthquake-resistant design and construction.
We shall first classify and consider defects which may have appreciable bearing or relation to'
the earthquake-resistant property of the building.
As heretofore mentioned, details which insure ductility at or near the connections between
columns and girders are desirable in earthquake resistant design and construction. The omission
of spirals and ties or hoops at the bottom and/or tops of columns contributed greatly to the loss
of earthquake-resistant strength. The plans and specifications required that these spirals and
ties be carried from the floor level to the bottom reinforcement of the deeper beam (p. 1,
Specifications, p. 970, Reference 11). There were several clear evidences where this was not
done especially in some of the ground floor columns which failed.
There were also unmistakable evidences that the spacings of the spirals and ties in the columns
were in many cases greater than those called for in the plans and specifications resulting again
in loss of earthquake-resistant strength. The assertion of the engineering experts for the
defendants that the improper spacings and the cutting of the spirals did not result in loss of
strength in the column cannot be maintained and is certainly contrary to the general principles
of column design and construction. And even granting that there be no loss in strength at the
yield point (an assumption which is very doubtful) the cutting or improper spacings of spirals
will certainly result in the loss of the plastic range or ductility in the column and it is precisely
this plastic range or ductility which is desirable and needed for earthquake-resistant strength.
There is no excuse for the cavity or hollow portion in the column A4, second floor, and although
this column did not fail, this is certainly an evidence on the part of the contractor of poor
construction.
The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum
may be approximated in relation to column loads and column and beam moments. The main
effect of eccentricity is to change the beam or girder span. The effect on the measured
eccentricity of 2 inches, therefore, is to increase or diminish the column load by a maximum of
about 1% and to increase or diminish the column or beam movements by about a maximum of
2%. While these can certainly be absorbed within the factor of safety, they nevertheless diminish
said factor of safety.
The cutting of the spirals in column A5, ground floor is the subject of great contention between
the parties and deserves special consideration.
The proper placing of the main reinforcements and spirals in column A5, ground floor, is the
responsibility of the general contractor which is the UCCI. The burden of proof, therefore, that
this cutting was done by others is upon the defendants. Other than a strong allegation and
assertion that it is the plumber or his men who may have done the cutting (and this was flatly
denied by the plumber) no conclusive proof was presented. The engineering experts for the
defendants asserted that they could have no motivation for cutting the bar because they can
simply replace the spirals by wrapping around a new set of spirals. This is not quite correct.
There is evidence to show that the pouring of concrete for columns was sometimes done through
the beam and girder reinforcements which were already in place as in the case of column A4
second floor. If the reinforcement for the girder and column is to subsequently wrap around the
spirals, this would not do for the elasticity of steel would prevent the making of tight column
spirals and loose or improper spirals would result. The proper way is to produce correct spirals
down from the top of the main column bars, a procedure which can not be done if either the
beam or girder reinforcement is already in place. The engineering experts for the defendants
strongly assert and apparently believe that the cutting of the spirals did not materially diminish
the strength of the column. This belief together with the difficulty of slipping the spirals on the
top of the column once the beam reinforcement is in place may be a sufficient motivation for
the cutting of the spirals themselves. The defendants, therefore, should be held responsible for
the consequences arising from the loss of strength or ductility in column A5 which may have
contributed to the damages sustained by the building.
The lack of proper length of splicing of spirals was also proven in the visible spirals of the columns
where spalling of the concrete cover had taken place. This lack of proper splicing contributed in
a small measure to the loss of strength.
The effects of all the other proven and visible defects although nor can certainly be accumulated
so that they can contribute to an appreciable loss in earthquake-resistant strength. The
engineering experts for the defendants submitted an estimate on some of these defects in the
amount of a few percent. If accumulated, therefore, including the effect of eccentricity in the
column the loss in strength due to these minor defects may run to as much as ten percent.
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some
of the ground floor columns contributed greatly to the collapse of the PBA building since it is at
these points where the greater part of the failure occurred. The liability for the cutting of the
spirals in column A5, ground floor, in the considered opinion of the Commissioner rests on the
shoulders of the defendants and the loss of strength in this column contributed to the damage
which occurred.
It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of
the plans and specifications of the PBA building contributed to the damages which resulted during
the earthquake of August 2, 1968 and the vice of these defects and deficiencies is that they not
only increase but also aggravate the weakness mentioned in the design of the structure. In other
words, these defects and deficiencies not only tend to add but also to multiply the effects of the
shortcomings in the design of the building. We may say, therefore, that the defects and
deficiencies in the construction contributed greatly to the damage which occurred.
Since the execution and supervision of the construction work in the hands of the contractor is
direct and positive, the presence of existence of all the major defects and deficiencies noted and
proven manifests an element of negligence which may amount to imprudence in the construction
work. (pp. 42-49, Commissioners Report).
As the parties most directly concerned with this portion of the Commissioner's report, the defendants
voiced their objections to the same on the grounds that the Commissioner should have specified the
defects found by him to be "meritorious"; that the Commissioner failed to indicate the number of
cases where the spirals and ties were not carried from the floor level to the bottom reinforcement
of the deeper beam, or where the spacing of the spirals and ties in the columns were greater than
that called for in the specifications; that the hollow in column A4, second floor, the eccentricities in
the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5,
ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects
in the construction were within the tolerable margin of safety; and that the cutting of the spirals in
column A5, ground floor, was done by the plumber or his men, and not by the defendants.
Answering the said objections, the Commissioner stated that, since many of the defects were minor
only the totality of the defects was considered. As regards the objection as to failure to state the
number of cases where the spirals and ties were not carried from the floor level to the bottom
reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the first one without
spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom.
The Commissioner likewise specified the first storey columns where the spacings were greater than
that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection
to the failure of the Commissioner to specify the number of columns where there was lack of proper
length of splicing of spirals, the Commissioner mentioned groundfloor columns B-6 and B-5 where
all the splices were less than 1-1/2 turns and were not welded, resulting in some loss of strength G.R. No. L-47851 April 15, 1988
which could be critical near the ends of the columns. He answered the supposition of the defendants
that the spirals and the ties must have been looted, by calling attention to the fact that the missing JUAN F. NAKPIL & SONS and JUAN F. NAKPIL, petitioners, vs. THE COURT OF APPEALS, UNITED
spirals and ties were only in two out of the 25 columns, which rendered said supposition to be CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR
improbable. ASSOCIATION, respondents.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or G.R. No. L-47863 April 15, 1988
contribute to the damage, but averred that it is "evidence of poor construction." On the claim that
THE UNITED CONSTRUCTION CO., INC. and JUAN J. CARLOS, petitioners, vs. THE COURT OF
the eccentricity could be absorbed within the factor of safety, the Commissioner answered that,
APPEALS, THE PHILIPPINE BAR ASSOCIATION, JUAN F. NAKPIL & SONS, and JUAN F.
while the same may be true, it also contributed to or aggravated the damage suffered by the
NAKPIL, respondents.
building.

G.R. No. L-47896 April 15, 1988

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by the
Commissioner by reiterating the observation in his report that irrespective of who did the cutting of
PHILIPPINE BAR ASSOCIATION, petitioner, vs. THE COURT OF APPEALS, UNITED CONSTRUCTION
the spirals, the defendants should be held liable for the same as the general contractor of the
COMPANY, INC., and JUAN J. CARLOS, and JUAN F. NAKPIL & SONS and JUAN F.
building. The Commissioner further stated that the loss of strength of the cut spirals and inelastic
NAKPIL, respondents.
deflections of the supposed lattice work defeated the purpose of the spiral containment in the column
and resulted in the loss of strength, as evidenced by the actual failure of this column. RESOLUTION

Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any
sufficient cause to disregard or modify the same. As found by the Commissioner, the "deviations
made by the defendants from the plans and specifications caused indirectly the damage sustained
and that those deviations not only added but also aggravated the damage caused by the defects in
the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142)
The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the
third-party defendants in effecting the plans, designs, specifications, and construction of the PBA
building and We hold such negligence as equivalent to bad faith in the performance of their
respective tasks.
Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which
may be in point in this case reads:
One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which he is
not responsible, intervenes to precipitate the loss.
As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient
buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out the fatal
difference; gross negligence and evident bad faith, without which the damage would not have
occurred.
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, We deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine
Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of
attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the
total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve
(12%) per cent interest per annum shall be imposed upon afore-mentioned amounts from finality
until paid. Solidary costs against the defendant and third-party defendants (except Roman Ozaeta).
PARAS, J.:
This is a motion for reconsideration of the October 3, 1986 decision of this Court, filed by the United
Construction Co., Inc., the decretal portion of which reads:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing,
as We do hereby impose, upon the defendant and the third-party defendants (with the exception
of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the
Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with
the exception of attorney's fees) occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as
and for attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs against the defendant and third-
party defendants (except Roman Ozaeta).
Plaintiff-appellant Philippine Bar Association (PBA for short) decided to construct an office building
on its 840 square meters lot located at the corner of Aduana and Arzobispo Streets, Intramuros,
Manila. For the plans, specifications and design, PBA contracted the services of third-party
defendants-appellants Juan F. Nakpil & Sons and Juan F. Nakpil (NAKPILS for short). For the
construction of the building, PBA contracted the services of United Construction Company, Inc.
(UNITED for short) on an administration basis. The building was completed in June 1966.
On August 2, 1968, an unusually strong earthquake hit Manila and its environs and the building in
question sustained major damage. The front columns of the building buckled causing the building to
tilt forward dangerously. As a temporary remedial measure, the building was shored up by UCCI at
the expense of P13,661.28.
On November 29, 1968, PBA commenced this action for recovery of damages against UCCI and its
President and General Manager Juan J. Carlos, claiming that the collapse of the building was caused
by defects in the construction. UNITED, in turn, filed a third-party complaint against the NAKPILS,
alleging in essence that the collapse of the building was due to the defects in the architects" plans,
specifications and design. Roman Ozaeta, the then President of PBA, was included as a third-party
defendant for damages for having included Juan J. Carlos, President of UNITED as party defendant.
At the pre-trial, the parties agreed to refer the technical issues in the case to a commissioner. Andres
O. Hizon, a lawyer and structural engineer, was appointed by the Court as commissioner.
Meanwhile, PBA moved twice for the demolition of the building on the ground that it might topple
down in case of a strong earthquake. The motions were opposed by the defendants and the matter
was referred to the Commissioner. Finally, on April 30, 1979, the building was authorized to be
demolished at the expense of PBA, but not before another earthquake of high intensity on April 7,
1970 followed by other strong earthquakes on April 9 and 12, 1970, caused further damage to the
property. The actual demolition was undertaken by the buyer of the damaged buiding.
After the protracted hearings, the Commissioner eventually submitted his report on September 25,
1970 with the findings that while the damage sustained by the PBA building was caused directly by
the August 2, 1968 earthquake, they were also caused by the defects in the plans and specifications
prepared by the NAKPILS; UNITED"s deviations from said plans and specifications and its failure to
observe the requisite workmanship in the construction of the building; and failure of PBA to exercise
the requisite degree of supervision in the construction of the building.
All the parties registered their objections to aforesaid findings which in turn were answered by the
Commissioner.
The court agreed with the findings of the Commissioner except as to the holding that the owner is
charged with full time supervision of the construction. The court saw no legal or contractual basis
for such conclusion. Thus, on September 21, 1971, the lower court rendered a decision, the decretal
portion of which, reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta), the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the
date of the filing of the complaint until full payment;
(b) Dismissing the complaint with respect to defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;
(d) Dismissing the defendants" and third-party defendants" counterclaim for lack of merit;
(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta) to pay the cost in equal shares.
On appeal, the Court of Appeals modified the abovesaid decision of the lower court. The dispositive
portion of the decision of the Court of Appeals, reads:
WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in
favor of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from
November 29, 1968 until full payment to be paid jointly and severally by defendant United
Construction Co., Inc. and third-party defendants (except Roman Ozaeta). In all other respects,
the judgment dated September 21,1971 as modified in the December 8, 1971 Order of the lower
court is hereby dated with COSTS to be paid by the defendant and third Patty defendant (except
Roman Ozaeta) in equal shares.
All the parties herein appealed the aforestated decision of the Court of Appeals.
This Court promulgated on October 3, 1986 a decision in favor of the Philippine Bar Association
which modified the appealed decision of the Court of Appeals, as abovequoted (Rollo of G.R. No. L-
47851, pp. 634-662).
On December 24,1986, UNITED filed a Motion for Reconsideration (Rollo of L-47863, pp. 683-707).
On the other hand, on January 15,1987, the NAKPILS filed a Motion to Refer Case to Supreme Court
En Banc and for Reconsideration of aforesaid decision (Rollo of L-47851, pp. 717-751).
On February 11, 1987, UNITED filed a Manifestation (Rollo of L-47863, pp. 796-797) that it is joining
the NAKPILS in regard to their prayer to refer the present case to the Court En Banc.
The Second Division of this Court, in a Resolution dated April 1, 1987 (Rollo of L-47851, p. 788)
denied the NAKPILS" Motion for Reconsideration.
On April 15, 1987, PBA filed its Comment to UNITED's Motion for Reconsideration (Rollo of L-47896,
pp. 828-835) while on April 24, 1987, the NAKPILS filed a Motion For Leave To File Second Motion
For Reconsideratio (En Banc) (Rollo of L-47851, pp. 791-797). On May 7, 1987, PBA filed its
Comment to the NAKPILS" Motion for Leave To File Second Motion For Reconsideration (En Banc)
(Rollo of L-47851, pp. 790-795). On May 14,1987, UNITED filed a Reply to PBA's comment (Rollo of
L-47863, pp. 844-853), while the NAKPILS filed a Reply to the same comment on May 22,1987
(Rollo of L-47851, pp. 798-801).
The issues raised in subject motion for reconsideration of UCCI of the decision of this Court of
October 3, 1986, are as follows:
I. THE FINDINGS OF THE COMMISSIONER, AS ADOPTED BY THE TRIAL COURT, AND AFFIRMED
BOTH BY THE COURT OF APPEALS AND THIS HONORABLE COURT NEGATE THE PREMISE THAT,
THE SUBJECT BUILDING COLLAPSED; HENCE, ARTICLE 1723 DOES NOT APPLY.
II. THE LEGAL DUTY OF PBA TO PROVIDE FULLTIME AND ACTIVE SUPERVISION IN THE
CONSTRUCTION OF THE SUBJECT BUILDING IS IMIPOSED BY PUBLIC INTTEREST USAGE AND
CUSTOM; FAILING IN THAT DUTY, PBA MUST BEAR AND/OR SHARE IN ANY LIABILITY FOR
DAMAGES IN THE PREMISES.
III. LIABILITY, IF ANY, FOR THE DAMAGE OF THE SUBJECT BUILDING MUST BE BORNE BY ALL
THE PARTIES IN ACCORDANCE WITH THE COMMISSIONER'S FINDINGS AND WITH DUE REGARD
TO THE CONDITION OF THE BUILDING PRIOR TO PBA'S DEMOLITION THEREOF.
IV. THE FINDING OF BAD FAITH IS NOT WARRANTED IN FACT AND IS WITHOUT BASIS IN LAW.
V. THE AWARD OF DAMAGES COUCHED IN GENERAL TERMS IS DEFECTIVE; MOREOVER IT IS
UNWARRANTED BY THE FACTS AND THE LAW.
VI. THE AWARD OF ATTORNEYS FEES IN THE AMOUNT OF P100,000.00 IS UWARRANTED.
VII. THE INTEREST OF TWELVE PER CENT (12%) PER ANNUM IMPOSED ON THE TOTAL AMOUNT
OF THE MONETARY AWARD IS IN CONTRAVENTION OF LAW.
It will be noted that not unlike the motion for reconsideration filed by petitioner Juan F. Nakpil and
Sons, which was denied in the resolution of April 1, 1987, there is nothing in the motion for
reconsideration filed by the United Construction Co., Inc. that was not fully discussed in the assailed
decision of October 3, 1986.
I
United Construction Co., Inc. (UNITED for short), gave considerable emphasis on the fact that the
PBA building did not collapse as found by the trial court and affirmed by the Court of Appeals.
Otherwise stated, UNITED wishes to stress that subject building did not disintegrate completely as
the term "collapse" is supposed to connote.
Be that as it may, it will be observed that in the assasiled decision, this Court is in complete accord
with the findings of the trial court and affirmed by the Court of Appeals, that after the April 2, 1968
earthquake the building in question was not totally lost, the collapse was only partial and the building
could still be restored at the expense of P900,000.00. But after the subsequent earthquake on April
7, 9, and 12, 1970 there was no question that further damage was caused to the property resulting
in an eventual and unavoidable collapse or demolition (compete collapse). In fact, on April 30, 1970
the building was authorized by the trial court to be demolished at the expense of the plaintiff. Note
that a needed demolition is in fact a form of "collapse".
The bone of contention is therefore, not on the fact of collapse but on who should shoulder the
damages resulting from the partial and eventual collapse. As ruled by this Court in said decision,
there should be no question that the NAKPILS and UNITED are liable for the damage.
Citing the case of Tucker v. Milan (49 O.G. 4379, 4380) as the case in point, the pertinent portion
of the decision reads:
One who negligently creates a dangerous condition cannot escape hability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which
he is not responsible, intervenes to precipitate the loss.
of P178,671.76 a year until judgment for the principal amount shag have been satisfied. Thus, this
Court awarded an "indemnity in favor of the Philippine Bar Assodation of FIVE MILLION
(P5,000,000.00) Pesos to cover damages (with the exception of attorney's fees) occasioned by the
loss of the building (including interest charges and lost rentals) ...
As for the award of attorney's fees, there is no question that the size of attorney's fees as well as
the amount of damages, is subject to the sound discretion of the court (Magbanua v. IAC, 137 SCRA
332 [1985]). Earlier, this Court has ruled that an award of 10% of the amount of total recovery, for
attomey's fees, is reasonable. (Central Bank of the Phil. v. Court of Appeals, 63 SCRA 435 (1975]).

II VI

UNITED argues that it is the legal duty of PBA to provide full-time and active supervision in the co
on of subject building. Failing to cite any provision of law to support its arguments, UNITED insists
on the inherent legal duty of the owner, reinforced by practice, usage and custom, to exercise such
supervision. Apart from the fact that UNITED seems to have completely contradicted its own view
that this construction involves highly technical matters and therefore beyond the ambit of ordinary
understanding and experience, the contrary appears to be more in accord with ordinary practice,
which is to avail oneself of the services of architects and engineers whose training and expertise
make them more qualified to provide effective supervision of the construction. In fact, it was on the
suggestion of Juan F. Nakpil, one of the petitioners herein, that the construction was undertaken on
an administration basis (Decision, p. 3). Thus, the trial court did not err in holding that charging the
owner with fun time supervision of the construction has no legal or contractual basis (Decision, p.
7).
III
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular
No. 416 (passed pursuant to the authority granted to the Central Bank by P.D. No. 116 which
amended Act No. 2655, otherwise known as the Usury Law) is applicable only in the following: (1)
loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments
spoken of refer to judgments involving loans or forbearance of any money, goods or credits).
(Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139
SCRA 260 (1985)). It is true that in the instant case, there is neither a loan or a forbearance, but
then no interest is actually being imposed provided the sums referred to in the judgment are paid
upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause
the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total
sum from the filing of the complaint until paid; in other words, as part of the judgment for damages.
Clearly they are not applicable to the instant case.

UNITED points out that bad faith is a question of fact which was not established. The Commissioner, PREMISES CONSIDERED, UNITED's motion for reconsideration is hereby DENIED; the NAKPILS"
the trial court and the Court of Appeals, all of which are triers of fact, allegedly concede that there motion for leave to file second motion for reconsideration is also DENIED, the latters" first motion
was negligence but not bad faith. on the same grounds having been already denied with finality in the resolution of April 3, 1987.
Needless to say, the Motion to Refer this case to the Court En Banc is DENIED, in view of all the
A careful study of the decision will show that there is no contradiction between the above finding of things stated in this Resolution.
negligence by the trial court which was formed by the Court of Appeals and the ruling of this Court.
On the contrary, on the basis of such finding, it was held that such wanton negligence of both the
defendant and the third-party defendants in effecting the plans, designs, specifications, and
construction of the PBA building is equivalent to bad faith in the performance of their respective
tasks (Decision, p. 28).

IV & V

UNITED takes exception to the five (5) fold increase in the award of damages from P1,189,335.00
to P5 million pesos. It is claimed that the report of the Commissioner speaks of only P1,100,000.00
so that there is no basis for such award. It will be recalled that the estimate of the Commissioner
was limited to P1,100,000.00 for cost of repairs after the partial collapse of the building on April 2,
1968 but not after its total collapse reswting from the subsequent earthquakes. It is therefore
evident that the actual cost of total reconstruction of the building him question was not considered
by the commissioner in the computation. Considering further the present cost of reconstruction, the
new amount (arrived at almost 20 years later) is far from being excessive. It is indeed a very
conservative estimate.

Any allegation that PBA could have mitigated its loss by executing an offer to purchase the building
prior to its complete demolition loses sight of the fact, that the offer was very low, considering the
combined value of the building and the lot.

In addition, there is merit in the PBA claim that the unrealized rental income awarded to it should
not be limited to a period of one-half year but should be computed on a continuing basis at the rate
G.R. No. L-21749 September 29, 1967
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. LUZON STEVEDORING
CORPORATION, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
H. San Luis and L.V. Simbulan for defendant-appellant.
REYES, J.B.L., J.:
The present case comes by direct appeal from a decision of the Court of First Instance of Manila
(Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in
damages to the plaintiff-appellee Republic of the Philippines.
In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero" 1 also
belonging to the same corporation, when the barge rammed against one of the wooden piles of the
Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at the time,
was swollen and the current swift, on account of the heavy downpour of Manila and the surrounding
provinces on August 15 and 16, 1960.
Sued by the Republic of the Philippines for actual and consequential damage caused by its
employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon
Stevedoring Corporation disclaimed liability therefor, on the grounds that it had exercised due
diligence in the selection and supervision of its employees; that the damages to the bridge were
caused by force majeure; that plaintiff has no capacity to sue; and that the Nagtahan bailey bridge
is an obstruction to navigation.
After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the
damage caused by its employees and ordering it to pay to plaintiff the actual cost of the repair of
the Nagtahan bailey bridge which amounted to P192,561.72, with legal interest thereon from the
date of the filing of the complaint.
Defendant appealed directly to this Court assigning the following errors allegedly committed by the
court a quo, to wit:
I — The lower court erred in not holding that the herein defendant-appellant had exercised the
diligence required of it in the selection and supervision of its personnel to prevent damage or
injury to others.1awphîl.nèt
II — The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by
barge L-1892 was caused by force majeure.
III — The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if
not a menace, to navigation in the Pasig river.
IV — The lower court erred in not blaming the damage sustained by the Nagtahan bailey bridge
to the improper placement of the dolphins.
V — The lower court erred in granting plaintiff's motion to adduce further evidence in chief after
it has rested its case.
VI — The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 for
damages which is clearly exorbitant and without any factual basis.
However, it must be recalled that the established rule in this jurisdiction is that when a party appeals
directly to the Supreme Court, and submits his case there for decision, he is deemed to have waived
the right to dispute any finding of fact made by the trial Court. The only questions that may be
raised are those of law (Savellano vs. Diaz, L-17441, July 31, 1963; Aballe vs. Santiago, L-16307,
April 30, 1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A converso, a party who resorts to
the Court of Appeals, and submits his case for decision there, is barred from contending later that
his claim was beyond the jurisdiction of the aforesaid Court. The reason is that a contrary rule would
encourage the undesirable practice of appellants' submitting their cases for decision to either court
in expectation of favorable judgment, but with intent of attacking its jurisdiction should the decision
be unfavorable (Tyson Tan, et al. vs. Filipinas Compañia de Seguros) et al., L-10096, Res. on Motion
to Reconsider, March 23, 1966). Consequently, we are limited in this appeal to the issues of law
raised in the appellant's brief.
Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this appeal
are reduced to two:
1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan
bridge was in law caused by fortuitous event or force majeure, and
2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to introduce
additional evidence of damages after said party had rested its case.
As to the first question, considering that the Nagtahan bridge was an immovable and stationary
object and uncontrovertedly provided with adequate openings for the passage of water craft,
including barges like of appellant's, it is undeniable that the unusual event that the barge, exclusively
controlled by appellant, rammed the bridge supports raises a presumption of negligence on the part
of appellant or its employees manning the barge or the tugs that towed it. For in the ordinary course
of events, such a thing does not happen if proper care is used. In Anglo American Jurisprudence,
the inference arises by what is known as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2
H & C 596; San Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs.
Wolf, 127 Minn. 529, 149 N.W. 299; Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168
N.E. 540; Gribsby vs. Smith, 146 S.W. 2d 719).
The appellant strongly stresses the precautions taken by it on the day in question: that it assigned
two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the task
the more competent and experienced among its patrons, had the towlines, engines and equipment
double-checked and inspected; that it instructed its patrons to take extra precautions; and
concludes that it had done all it was called to do, and that the accident, therefore, should be held
due to force majeure or fortuitous event.
These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure(which in law are identical in so far as they exempt an obligor from
liability)2 by definition, are extraordinary events not foreseeable or avoidable, "events that could
not be foreseen, or which, though foreseen, were inevitable" (Art. 1174, Civ. Code of the
Philippines). It is, therefore, not enough that the event should not have been foreseen or anticipated,
as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: "un hecho no constituye caso fortuito
por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del
presento ofensor" (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud Trait de la
Responsibilite Civil, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito.
Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the perils
posed by the swollen stream and its swift current, voluntarily entered into a situation involving
obvious danger; it therefore assured the risk, and can not shed responsibility merely because the
precautions it adopted turned out to be insufficient. Hence, the lower Court committed no error in
holding it negligent in not suspending operations and in holding it liable for the damages caused.
It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located.
Even if true, these circumstances would merely emphasize the need of even higher degree of care
on appellant's part in the situation involved in the present case. The appellant, whose barges and
tugs travel up and down the river everyday, could not safely ignore the danger posed by these
allegedly improper constructions that had been erected, and in place, for years.
On the second point: appellant charges the lower court with having abused its discretion in the
admission of plaintiff's additional evidence after the latter had rested its case. There is an insinuation
that the delay was deliberate to enable the manipulation of evidence to prejudice defendant-
appellant.
We find no merit in the contention. Whether or not further evidence will be allowed after a party
offering the evidence has rested his case, lies within the sound discretion of the trial Judge, and this
discretion will not be reviewed except in clear case of abuse. 3
In the present case, no abuse of that discretion is shown. What was allowed to be introduced, after
plaintiff had rested its evidence in chief, were vouchers and papers to support an item of P1,558.00
allegedly spent for the reinforcement of the panel of the bailey bridge, and which item already
appeared in Exhibit GG. Appellant, in fact, has no reason to charge the trial court of being unfair,
because it was also able to secure, upon written motion, a similar order dated November 24, 1962,
allowing reception of additional evidence for the said defendant-appellant.4
WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is hereby
affirmed. Costs against the defendant-appellant.
G.R. No. L-25906 May 28, 1970
PEDRO D. DIOQUINO, plaintiff-appellee, vs. FEDERICO LAUREANO, AIDA DE LAUREANO and
JUANITO LAUREANO, defendants-appellants.
Pedro D. Dioquino in his own behalf.
Arturo E. Valdomero, Jose L. Almario and Rolando S. Relova for defendants-appellants.
FERNANDO, J.:
The present lawsuit had its origin in a relationship, if it could be called such, the use of a car owned
by plaintiff Pedro D. Dioquino by defendant Federico Laureano, clearly of a character casual and
temporary but unfortunately married by an occurrence resulting in its windshield being damaged. A
stone thrown by a boy who, with his other companions, was thus engaged in what undoubtedly for
them must have been mistakenly thought to be a none too harmful prank did not miss its mark.
Plaintiff would hold defendant Federico Laureano accountable for the loss thus sustained, including
in the action filed the wife, Aida de Laureano, and the father, Juanito Laureano. Plaintiff prevail in
the lower court, the judgment however going only against the principal defendant, his spouse and
his father being absolved of any responsibility. Nonetheless, all three of them appealed directly to
us, raising two questions of law, the first being the failure of the lower court to dismiss such a suit
as no liability could have been incurred as a result of a fortuitous event and the other being its failure
to award damages against plaintiff for the unwarranted inclusion of the wife and the father in this
litigation. We agree that the lower court ought to have dismissed the suit, but it does not follow that
thereby damages for the inclusion of the above two other parties in the complaint should have been
awarded appellants.
The facts as found by the lower court follow: "Attorney Pedro Dioquino, a practicing lawyer of
Masbate, is the owner of a car. On March 31, 1964, he went to the office of the MVO, Masbate, to
register the same. He met the defendant Federico Laureano, a patrol officer of said MVO office, who
was waiting for a jeepney to take him to the office of the Provincial Commander, PC, Masbate.
Attorney Dioquino requested the defendant Federico Laureano to introduce him to one of the clerks
in the MVO Office, who could facilitate the registration of his car and the request was graciously
attended to. Defendant Laureano rode on the car of Atty. Dioquino on his way to the P.C. Barracks
at Masbate. While about to reach their destination, the car driven by plaintiff's driver and with
defendant Federico Laureano as the sole passenger was stoned by some 'mischievous boys,' and its
windshield was broken. Defendant Federico Laureano chased the boys and he was able to catch one
of them. The boy was taken to Atty. Dioquino [and] admitted having thrown the stone that broke
the car's windshield. The plaintiff and the defendant Federico Laureano with the boy returned to the
P.C. barracks and the father of the boy was called, but no satisfactory arrangements [were] made
about the damage to the windshield."1
It was likewise noted in the decision now on appeal: "The defendant Federico Laureano refused to
file any charges against the boy and his parents because he thought that the stone-throwing was
merely accidental and that it was due to force majeure. So he did not want to take any action and
after delaying the settlement, after perhaps consulting a lawyer, the defendant Federico Laureano
refused to pay the windshield himself and challenged that the case be brought to court for judicial
adjudication. There is no question that the plaintiff tried to convince the defendant Federico Laureano
just to pay the value of the windshield and he even came to the extent of asking the wife to convince
her husband to settle the matter amicably but the defendant Federico Laureano refused to make
any settlement, clinging [to] the belief that he could not be held liable because a minor child threw
a stone accidentally on the windshield and therefore, the same was due to force majeure."2
1. The law being what it is, such a belief on the part of defendant Federico Laureano was justified.
The express language of Art. 1174 of the present Civil Code which is a restatement of Art. 1105 of
the Old Civil Code, except for the addition of the nature of an obligation requiring the assumption of
risk, compels such a conclusion. It reads thus: "Except in cases expressly specified by the law, or If the lower court, therefore, were duly mindful of what this particular legal provision contemplates,
when it is otherwise declared by stipulation, or when the nature of the obligation requires the it could not have reached the conclusion that defendant Federico Laureano could be held liable. To
assumption of risk, no person shall be responsible for those events which could not be, foreseen, or repeat, that was clear error on its part.
which, though foreseen were inevitable." Even under the old Civil Code then, as stressed by us in
the first decision dating back to 1908, in an opinion by Justice Mapa, the rule was well-settled that 2. Appellants do not stop there. It does not suffice for them that defendant Federico Laureano would
in the absence of a legal provision or an express covenant, "no one should be held to account for be freed from liability. They would go farther. They would take plaintiff to task for his complaint
fortuitous cases."3 Its basis, as Justice Moreland stressed, is the Roman law principle major casus having joined the wife, Aida de Laureano, and the father, Juanita Laureano. They were far from
est, cui humana infirmitas resistere non potest.4Authorities of repute are in agreement, more satisfied with the lower court's absolving these two from any financial responsibility. Appellants
specifically concerning an obligation arising from contract "that some extraordinary circumstance would have plaintiff pay damages for their inclusion in this litigation. We are not disposed to view
independent of the will of the obligor, or of his employees, is an essential element of a caso the matter thus.
fortuito."5 If it could be shown that such indeed was the case, liability is ruled out. There is no
It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have exercised
requirement of "diligence beyond what human care and foresight can provide." 6
greater care in selecting the parties against whom he would proceed. It may be said that his view
The error committed by the lower court in holding defendant Federico Laureano liable appears to be of the law that would consider defendant Federico Laureano liable on the facts as thus disclosed,
thus obvious. Its own findings of fact repel the motion that he should be made to respond in damages while erroneous, is not bereft of plausibility. Even the lower court, mistakenly of course, entertained
to the plaintiff for the broken windshield. What happened was clearly unforeseen. It was a fortuitous similar view. For plaintiff, however, to have included the wife and the father would seem to indicate
event resulting in a loss which must be borne by the owner of the car. An element of reasonableness that his understanding of the law is not all that it ought to have been.
in the law would be manifestly lacking if, on the circumstances as thus disclosed, legal responsibility
Plaintiff apparently was not entirely unaware that the inclusion in the suit filed by him was
could be imputed to an individual in the situation of defendant Laureano. Art. 1174 of the Civil Code
characterized by unorthodoxy. He did attempt to lend some color of justification by explicitly setting
guards against the possibility of its being visited with such a reproach. Unfortunately, the lower court
was of a different mind and thus failed to heed its command. forth that the father was joined as party defendant in the case as he was the administrator of the
inheritance of an undivided property to which defendant Federico Laureano could lay claim and that
It was misled, apparently, by the inclusion of the exemption from the operation of such a provision the wife was likewise proceeded against because the conjugal partnership would be made to respond
of a party assuming the risk, considering the nature of the obligation undertaken. A more careful for whatever liability would be adjudicated against the husband.
analysis would have led the lower court to a different and correct interpretation. The very wording
of the law dispels any doubt that what is therein contemplated is the resulting liability even if caused It cannot be said that such an attempt at justification is impressed with a high persuasive quality.
Far from it. Nonetheless, mistaken as plaintiff apparently was, it cannot be concluded that he was
by a fortuitous event where the party charged may be considered as having assumed the risk
prompted solely by the desire to inflict needless and unjustified vexation on them. Considering the
incident in the nature of the obligation to be performed. It would be an affront, not only to the logic
equities of the situation, plaintiff having suffered a pecuniary loss which, while resulting from a
but to the realities of the situation, if in the light of what transpired, as found by the lower court,
fortuitous event, perhaps would not have occurred at all had not defendant Federico Laureano
defendant Federico Laureano could be held as bound to assume a risk of this nature. There was no
borrowed his car, we, feel that he is not to be penalized further by his mistaken view of the law in
such obligation on his part.
including them in his complaint. Well-worth paraphrasing is the thought expressed in a United States
Reference to the leading case of Republic v. Luzon Stevedoring Corp.7 will illustrate when the nature Supreme Court decision as to the existence of an abiding and fundamental principle that the
of the obligation is such that the risk could be considered as having been assumed. As noted in the expenses and annoyance of litigation form part of the social burden of living in a society which seeks
opinion of Justice J.B.L. Reyes, speaking for the Court: "The appellant strongly stresses the to attain social control through law.8
precautions taken by it on the day in question: that it assigned two of its most powerful tugboats to
WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders defendant
tow down river its barge L-1892; that it assigned to the task the more competent and experienced
Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus the payment of costs,
among its patrons, had the towlines, engines and equipment double-checked and inspected; that it
instructed its patrons to take extra-precautions; and concludes that it had done all it was called to is hereby reversed. It is affirmed insofar as it dismissed the case against the other two defendants,
Juanita Laureano and Aida de Laureano, and declared that no moral damages should be awarded
do, and that the accident, therefore, should be held due to force majeure or fortuitous event." Its
the parties. Without pronouncement as to costs.
next paragraph explained clearly why the defense of caso fortuito or force majeure does not lie.
Thus: "These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure (which in law are identical in so far as they exempt an obligor from liability)
by definition, are extraordinary events not foreseeable or avoidable, 'events that could not be
foreseen, or which, though foreseen, were inevitable' (Art. 1174, Civil Code of the Philippines). It is,
therefore, not enough that the event should not have been foreseen or participated, as is commonly
believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same: un hecho no constituye caso fortuito por la sola
circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del presente
ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud, Traite de la
Responsibilite Civile, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito."

In that case then, the risk was quite evident and the nature of the obligation such that a party could
rightfully be deemed as having assumed it. It is not so in the case before us. It is anything but that.
G.R. No. L-29640 December 22, 1928
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellant, vs. DOMINGO CALABON, defendant.
VALERIANA RAYMUNDO and TEODORA FALCONAN, sureties-appellees.
It appears from the record that on September 5, 1925, one Domingo Calabon was convicted of
homicide by the Court of First Instance of Laguna and sentenced to suffer twelve years and one day
of reclusion temporal. Calabon appealed and gave a bail bond in the sum of P12,000 and in which
Valeriana Raymundo an Teodora Falconan were sureties jointly and severally. The case was finally
decided by this court on July 31, 1926, 1 and the judgment of the trial court affirmed. Upon the
return of the record to the Court of First Instance, both Calabon an his sureties were notified of the
sentence, but the accused failed to appear, and on September 21, 1926, the Court of First Instance
issued an order for his arrest and declared his bail forfeited. On October 19, 1926, the surety
Valeriano Raymundo filed a motion setting forth that the accused had not been found
notwithstanding the efforts of the Constabulary and the municipal police of San Pablo and prayed
that she be given extension of thirty days for the apprehension of the accused. On December 13,
1926, the court extended the time until the 20th of the same month. Notwithstanding this extension,
the sureties were unsuccessful in their search for the accused, and on January 7, 1927, the Court of
First Instance rendered a judgment, ordering the sureties to jointly and severally pay the sum of
P12,000 with the costs. From this judgment the sureties appealed to the Supreme Court, where the
appeals were dismissed on the ground that the appellants had failed to file their briefs within the
time prescribed by the rules (case G. R. No. 28635). 2
Upon the return of the record to the Court of First Instance the surety Victoriana Raymundo
presented a motion to the lower court asking that she be relieved from all responsibility on the bond
on the ground that she ha made all possible efforts to secure the arrest of Calabon; that she had
offered a prize of P500 for his capture; and that she had expanded considerable money in search
for the convict; that due to these efforts he had been apprehended on October 10, 1927, and that
he was already serving his sentence in Bilibid Prison. On January 17, 1928, the other surety Teodora
Falconan filed a similar motion an asked for the same relief. The motions were opposed by the
provincial fiscal of Laguna, but the court nevertheless, granted the motions and cancelled the bond,
whereupon the Attorney-General brought this appeal.1awphi1.net
The appellant contends that considering the provisions of section 76 of General Order No. 58, the
court below exceeded its jurisdiction in discharging the sureties from all liability upon a bail bon
which had been declared forfeited more than thirty days before the issuance of the order of
discharge.
There is some merit in this contention; section 76, supra, only authorizes the courts to discharge a
forfeiture within the period of thirty days from the time of the declaration of such forfeiture, and it
seems obvious that a complete discharge cannot be granted after the expiration of that period. But
this court has held that does not entirely deprive the court of its inherent discretionary powers in
regard to the amount of the liability of the sureties and that where after forfeiture of bail, the purpose
of the recognizance has been accomplished by placing the principal in prison to serve sentence, the
bondsmen may be relieved from a part of the liability according to the merits of the particular case
(People vs. Reyes, 48 Phil., 139). Following this rule and taking into consideration the efforts of one
of the sureties to apprehend the convict and the fact that said convict finally was arrested an
commended to serve his sentence before the appeal of the sureties in case G. R. No. 28635 had
been dismissed by this court, we are of the opinion that the liability of said sureties upon the bond
may properly be reduced to P3,000.
The order appealed from is therefore modified, an it is hereby ordered that upon the payment of the
Government of the sum of P3,000 by the aforesaid sureties, jointly an severally, within the period
of sixty days from the return of the record to the court below, the said sureties will be relieved from
further liability upon the bond. Not costs will be allowed. So ordered.
G.R. Nos. 103442-45 May 21, 1993
NATIONAL POWER CORPORATION, ET AL., petitioners, vs. THE COURT OF APPEALS,
GAUDENCIO C. RAYO, ET AL., respondents.
DAVIDE, JR., J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court urging this
Court to set aside the 19 August 1991 consolidated Decision of the Court of Appeals in CA.-G.R. CV
Nos. 27290-931 which reversed the Decision of Branch 5 of the then Court of First Instance (now
Regional Trial Court) of Bulacan, and held petitioners National Power Corporation (NPC) and
Benjamin Chavez jointly and severally liable to the private respondents for actual and moral
damages, litigation expenses and attorney's fees.
This present controversy traces its beginnings to four (4) separate complaints2 for damages filed
against the NPC and Benjamin Chavez before the trial court. The plaintiffs therein, now private
respondents, sought to recover actual and other damages for the loss of lives and the destruction
to property caused by the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978.
The flooding was purportedly caused by the negligent release by the defendants of water through
the spillways of the Angat Dam (Hydroelectric Plant). In said complaints, the plaintiffs alleged, inter
alia, that: 1) defendant NPC operated and maintained a multi-purpose hydroelectric plant in the
Angat River at Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez was the plant supervisor
at the time of the incident in question; 3) despite the defendants' knowledge, as early as 24 October
1978, of the impending entry of typhoon "Kading," they failed to exercise due diligence in monitoring
the water level at the dam; 4) when the said water level went beyond the maximum allowable limit
at the height of the typhoon, the defendants suddenly, negligently and recklessly opened three (3)
of the dam's spillways, thereby releasing a large amount of water which inundated the banks of the
Angat River; and 5) as a consequence, members of the household of the plaintiffs, together with
their animals, drowned, and their properties were washed away in the evening of 26 October and
the early hours of 27 October 1978.3
In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised due care,
diligence and prudence in the operation and maintenance of the hydroelectric plant; 2) the NPC
exercised the diligence of a good father in the selection of its employees; 3) written notices were
sent to the different municipalities of Bulacan warning the residents therein about the impending
release of a large volume of water with the onset of typhoon "Kading" and advise them to take the
necessary precautions; 4) the water released during the typhoon was needed to prevent the collapse
of the dam and avoid greater damage to people and property; 5) in spite of the precautions
undertaken and the diligence exercised, they could still not contain or control the flood that resulted
and; 6) the damages incurred by the private respondents were caused by a fortuitous event or force
majeure and are in the nature and character of damnum absque injuria. By way of special affirmative
defense, the defendants averred that the NPC cannot be sued because it performs a purely
governmental function.4
Upon motion of the defendants, a preliminary hearing on the special defense was conducted. As a
result thereof, the trial court dismissed the complaints as against the NPC on the ground that the
provision of its charter allowing it to sue and be sued does not contemplate actions based on tort.
The parties do not, however, dispute the fact that this Court overruled the trial court and ordered
the reinstatement of the complaints as against the NPC.5
Being closely interrelated, the cases were consolidated and trial thereafter ensued.
The lower court rendered its decision on 30 April 1990 dismissing the complaints "for lack of sufficient
and credible evidence."6 Consequently, the private respondents seasonably appealed therefrom to
the respondent Court which then docketed the cases as CA-G.R. CV Nos. 27290-93.
In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the appealed
decision and awarded damages in favor of the private respondents. The dispositive portion of the
decision reads:
CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby REVERSED and
SET ASIDE, and a new one is hereby rendered:
1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and severally,
plaintiffs-appellants, with legal interest from the date when this decision shall become final and
executory, the following:
A. Actual damages, to wit:
1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred Sixty Pesos
(P231,260.00);
2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred Pesos (P204.500.00);
3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos (P155,000.00);
4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos (P147,000.00);.
5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred Fifty Two Pesos and
Fifty Centavos (P143,552.50);
6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00);
7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00);
8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and
B. Litigation expenses of Ten Thousand Pesos (P10,000.00);
2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and severally, plaintiff-
appellant, with legal interest from the date when this decision shall have become final and
executory, the following :
A. Actual damages of Five Hundred Twenty Thousand Pesos (P520,000.00);.
B. Moral damages of five hundred Thousand Pesos (P500,000.00); and.
C. Litigation expenses of Ten Thousand Pesos (P10,000.00);.
3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and severally, with
legal interest from the date when this decision shall have become final and executory;
A. Plaintiff-appellant Angel C. Torres:
1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty Pesos
(P199,120.00);
2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00);
B. Plaintiff-appellant Norberto Torres:
1) Actual damages of Fifty Thousand Pesos (P50,000.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
C. Plaintiff-appellant Rodelio Joaquin:
1) Actual damages of One Hundred Thousand Pesos (P100,000.00);
2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and
D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos (P10,000.00);
4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and severally, with
legal interest from the date when this decision shall have become final and executory:
A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo:
1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred Pesos (P256,600.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
B. Plaintiff-appellant Consolacion Guzman :
1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
C. Plaintiff-appellant Virginia Guzman :
1) Actual damages of Two Hundred Five Hundred Twenty Pesos (205,520.00); and
D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos (10,000.00).
In addition, in all the four (4) instant cases, ordering defendants-appellees to pay, jointly and
severally, plaintiffs-appellants attorney fees in an amount equivalent to 15% of the total amount
awarded.
No pronouncement as to costs.7
The foregoing judgment is based on the public respondent's conclusion that the petitioners were
guilty of:
. . . a patent gross and evident lack of foresight, imprudence and negligence . . . in the
management and operation of Angat Dam. The unholiness of the hour, the extent of the opening
of the spillways, And the magnitude of the water released, are all but products of defendants-
appellees' headlessness, slovenliness, and carelessness. The resulting flash flood and inundation
of even areas (sic) one (1) kilometer away from the Angat River bank would have been avoided
had defendants-appellees prepared the Angat Dam by maintaining in the first place, a water
elevation which would allow room for the expected torrential rains.8
This conclusion, in turn, is anchored on its findings of fact, to wit:
As early as October 21, 1978, defendants-appellees knew of the impending onslaught of and
imminent danger posed by typhoon "Kading". For as alleged by defendants-appellees
themselves, the coming of said super typhoon was bannered by Bulletin Today, a newspaper of
national circulation, on October 25, 1978, as "Super Howler to hit R.P." The next day, October
26, 1978, said typhoon once again merited a headline in said newspaper as "Kading's Big Blow
expected this afternoon" (Appellee's Brief, p. 6). Apart from the newspapers, defendants-
appellees learned of typhoon "Kading' through radio announcements.
Defendants-appellees doubly knew that the Angat Dam can safely hold a normal maximum
headwater elevation of 217 meters.
Yet, despite such knowledge, defendants-appellees maintained a reservoir water elevation even
beyond its maximum and safe level, thereby giving no sufficient allowance for the reservoir to
contain the rain water that will inevitably be brought by the coming typhoon.
On October 24, 1978, before typhoon "Kading" entered the Philippine area of responsibility,
water elevation ranged from 217.61 to 217.53, with very little opening of the spillways, ranging
 from 1/2 to 1 meter. On October 25, 1978, when typhoon "Kading" entered the Philippine area
of responsibility, and public storm signal number one was hoisted over Bulacan at 10:45 a.m.,
later raised to number two at 4:45 p.m., and then to number three at 10:45 p.m., water
elevation ranged from 217.47 to 217.57, with very little opening of the spillways, ranging from
1/2 to 1 meter. On October 26, 1978, when public storm signal number three remained hoisted
over Bulacan, the water elevation still remained at its maximum level of 217.00 to 218.00 with
very little opening of the spillways ranging from 1/2 to 2 meters, until at or about midnight, the
spillways were suddenly opened at 5 meters, then increasing swiftly to 8, 10, 12, 12.5, 13, 13.5,
14, 14.5 in the early morning hours of October 27, 1978, releasing water at the rate of 4,500
cubic meters per second, more or less. On October 27, 1978, water elevation remained at a
range of 218.30 to 217.05 (Civil Case No. SM-950, Exhibits "D" and series, "L", "M", "N", and
"O" and Exhibits "3" and "4"; Civil Case No. SM-951, Exhibits "H" and "H-1"; Civil Case No. SM-
953, Exhibits "I" and "I-1"; Civil Case No. SM 1247, Exhibits "F" and "F-1").
From the mass of evidence extant in the record, We are convinced, and so hold that the flash
flood on October 27, 1978, was caused not by rain waters (sic), but by stored waters (sic)
suddenly and simultaneously released from the Angat Dam by defendants-appellees, particularly
from midnight of October 26, 1978 up to the morning hours of October 27,
1978.9
The appellate court rejected the petitioners' defense that they had sent "early warning written
notices" to the towns of Norzagaray, Angat, Bustos, Plaridel, Baliwag and Calumpit dated 24 October
1978 which read:
TO ALL CONCERN (sic):
Please be informed that at present our reservoir (dam) is full and that we have been releasing
water intermittently for the past several days.
With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume of water,
if it pass (sic) over our place.
In view of this kindly advise people residing along Angat River to keep alert and stay in safe
places.
because:
Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by defendants-
appellees driver, Leonardo Nepomuceno (Civil Case No. SM-950, TSN, Benjamin Chavez,
December 4, 1984, pp. 7-11 and TSN, Leonardo Nepomuceno, March 7, 1985, pp. 10-12).
Said notice is ineffectual, insufficient and inadequate for purposes of the opening of the spillway
gates at midnight of October 26, 1978 and on October 27, 1978. It did not prepare or warn the
persons so served, for the volume of water to be released, which turned out to be of such
magnitude, that residents near or along the Angat River, even those one (1) kilometer away,
should have been advised to evacuate. Said notice, addressed "TO ALL CONCERN (sic)," was
delivered to a policeman (Civil Case No. SM-950, pp. 10-12 and Exhibit "2-A") for the
municipality of Norzagaray. Said notice was not thus addressed and delivered to the proper and
responsible officials who could have disseminated the warning to the residents directly affected.
As for the municipality of Sta. Maria, where plaintiffs-appellants in Civil Case No. SM-1246
reside, said notice does not appear to have been served. 11
Relying on Juan F. Nakpil & Sons vs. Court of Appeals,12 public respondent rejected the petitioners'
plea that the incident in question was caused by force majeure and that they are, therefore, not
liable to the private respondents for any kind of damage — such damage being in the nature
of damnum absque injuria.
The motion for reconsideration filed by the petitioners, as well as the motion to modify judgment
filed by the public respondents,13 were denied by the public respondent in its Resolution of 27
December 1991.14
Petitioners thus filed the instant petition on 21 February 1992.
After the Comment to the petition was filed by the private respondents and the Reply thereto was
filed by the petitioners, We gave due course to the petition on 17 June 1992 and directed the parties
to submit their respective Memoranda,15 which they subsequently complied with.
The petitioners raised the following errors allegedly committed by the respondent Court :
I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL & SONS V. COURT OF
APPEALS AND HOLDING THAT PETITIONERS WERE GUILTY OF NEGLIGENCE.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN NOTICES OF WARNING
ISSUED BY PETITIONERS WERE INSUFFICIENT.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE SUFFERED BY PRIVATE
RESPONDENTS WAS NOT DAMNUM ABSQUE INJURIA.
IV. THE COURT OF APPEALS ERRED IN NOT AWARDING THE COUNTERCLAIM OF PETITIONERS
FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION.16
These same errors were raised by herein petitioners in G.R. No. 96410, entitled National Power
Corporation, et al., vs. Court of Appeals, et al.,17 which this Court decided on 3 July 1992. The said
case involved the very same incident subject of the instant petition. In no uncertain terms, We
declared therein that the proximate cause of the loss and damage sustained by the plaintiffs therein
— who were similarly situated as the private respondents herein — was the negligence of the
petitioners, and that the 24 October 1978 "early warning notice" supposedly sent to the affected
municipalities, the same notice involved in the case at bar, was insufficient. We thus cannot now
rule otherwise not only because such a decision binds this Court with respect to the cause of the
inundation of the town of Norzagaray, Bulacan on 26-27 October 1978 which resulted in the loss of
lives and the destruction to property in both cases, but also because of the fact that on the basis of
its meticulous analysis and evaluation of the evidence adduced by the parties in the cases subject
of CA-G.R. CV Nos. 27290-93, public respondent found as conclusively established that indeed, the
petitioners were guilty of "patent gross and evident lack of foresight, imprudence and negligence in
the management and operation of Angat Dam," and that "the extent of the opening of the spillways,
and the magnitude of the water released, are all but products of defendants-appellees' headlessness,
slovenliness, and carelessness."18 Its findings and conclusions are biding upon Us, there being no
showing of the existence of any of the exceptions to the general rule that findings of fact of the
Court of Appeals are conclusive upon this Court. 19 Elsewise stated, the challenged decision can stand
on its own merits independently of Our decision in G.R. No. 96410. In any event, We reiterate here
in Our pronouncement in the latter case that Juan F. Nakpil & Sons vs. Court of Appeals20 is still
good law as far as the concurrent liability of an obligor in the case of force majeure is concerned. In
the Nakpil case, We held:
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God," the following must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor
to fulfill his obligation in a moral manner; and (d) the debtor must be free from any participation
in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553;
Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of
the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
 Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation
as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor
cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were,
and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate cause
of the damage was the act of God. To be exempt from liability for loss because of an act of God,
he must be free from any previous negligence or misconduct by which that loss or damage may
have been occasioned.
Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to escape liability
for the loss or damage sustained by private respondents since they, the petitioners, were guilty of
negligence. The event then was not occasioned exclusively by an act of God or force majeure; a
human factor — negligence or imprudence — had intervened. The effect then of the force majeure in
question may be deemed to have, even if only partly, resulted from the participation of man. Thus,
the whole occurrence was thereby humanized, as it were, and removed from the laws applicable to
acts of God.
WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the Consolidated
Decision of the Court of Appeals in CA-G.R. CV Nos. 27290-93 is AFFIRMED, with costs against the
petitioners.
G.R. No. 113003 October 17, 1997
ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners, vs. COURT OF APPEALS, LENY
TUMBOY, ARDEE TUMBOY and JASMIN TUMBOY, respondents.
ROMERO, J.: In this petition for review on certiorari of the decision of the Court of Appeals, the
issue is whether or not the explosion of a newly installed tire of a passenger vehicle is a fortuitous
event that exempts the carrier from liability for the death of a passenger.
On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee and Jasmin,
bearded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao City. Along Picop Road
in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus exploded. The bus fell into a
ravine around three (3) feet from the road and struck a tree. The incident resulted in the death of
28-year-old Tito Tumboy and physical injuries to other passengers.
On November 21, 1988, a complaint for breach of contract of carriage, damages and attorney's fees
was filed by Leny and her children against Alberta Yobido, the owner of the bus, and Cresencio
Yobido, its driver, before the Regional Trial Court of Davao City. When the defendants therein filed
their answer to the complaint, they raised the affirmative defense of caso fortuito. They also filed a
third-party complaint against Philippine Phoenix Surety and Insurance, Inc. This third-party
defendant filed an answer with compulsory counterclaim. At the pre-trial conference, the parties
agreed to a stipulation of facts.1
Upon a finding that the third party defendant was not liable under the insurance contract, the lower
court dismissed the third party complaint. No amicable settlement having been arrived at by the
parties, trial on the merits ensued.
The plaintiffs asserted that violation of the contract of carriage between them and the defendants
was brought about by the driver's failure to exercise the diligence required of the carrier in
transporting passengers safely to their place of destination. According to Leny Tumboy, the bus left
Mangagoy at 3:00 o'clock in the afternoon. The winding road it traversed was not cemented and
was wet due to the rain; it was rough with crushed rocks. The bus which was full of passengers had
cargoes on top. Since it was "running fast," she cautioned the driver to slow down but he merely
stared at her through the mirror. At around 3:30 p.m., in Trento, she heard something explode and
immediately, the bus fell into a ravine.
For their part, the defendants tried to establish that the accident was due to a fortuitous event.
Abundio Salce, who was the bus conductor when the incident happened, testified that the 42-seater
bus was not full as there were only 32 passengers, such that he himself managed to get a seat. He
added that the bus was running at a speed of "60 to 50" and that it was going slow because of the
zigzag road. He affirmed that the left front tire that exploded was a "brand new tire" that he mounted
on the bus on April 21, 1988 or only five (5) days before the incident. The Yobido Liner secretary,
Minerva Fernando, bought the new Goodyear tire from Davao Toyo Parts on April 20, 1988 and she
was present when it was mounted on the bus by Salce. She stated that all driver applicants in Yobido
Liner underwent actual driving tests before they were employed. Defendant Cresencio Yobido
underwent such test and submitted his professional driver's license and clearances from the
barangay, the fiscal and the police.
On August 29, 1991, the lower court rendered a decision2 dismissing the action for lack of merit. On
the issue of whether or not the tire blowout was a caso fortuito, it found that "the falling of the bus
to the cliff was a result of no other outside factor than the tire blow-out." It held that the ruling in
the La Mallorca and Pampanga Bus Co. v. De Jesus3 that a tire blowout is "a mechanical defect of
the conveyance or a fault in its equipment which was easily discoverable if the bus had been
subjected to a more thorough or rigid check-up before it took to the road that morning" is
inapplicable to this case. It reasoned out that in said case, it was found that the blowout was caused
by the established fact that the inner tube of the left front tire "was pressed between the inner circle
of the left wheel and the rim which had slipped out of the wheel." In this case, however, "the cause
of the explosion remains a mystery until at present." As such, the court added, the tire blowout was
"a caso fortuito which is completely an extraordinary circumstance independent of the will" of the
defendants who should be relieved of "whatever liability the plaintiffs may have suffered by reason
of the explosion pursuant to Article 11744 of the Civil Code."
Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower court the
following errors: (a) finding that the tire blowout was a caso fortuito; (b) failing to hold that the
defendants did not exercise utmost and/or extraordinary diligence required of carriers under Article
1755 of the Civil Code, and (c) deciding the case contrary to the ruling in Juntilla v. Fontanar,5 and
Necesito v. Paras.6
On August 23, 1993, the Court of Appeals rendered the Decision 7 reversing that of the lower court.
It held that:
To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the blow-
out, if due to a factory defect, improper mounting, excessive tire pressure, is not an unavoidable
event. On the other hand, there may have been adverse conditions on the road that were
unforeseeable and/or inevitable, which could make the blow-out a caso fortuito. The fact that
the cause of the blow-out was not known does not relieve the carrier of liability. Owing to the
statutory presumption of negligence against the carrier and its obligation to exercise the utmost
diligence of very cautious persons to carry the passenger safely as far as human care and
foresight can provide, it is the burden of the defendants to prove that the cause of the blow-out
was a fortuitous event. It is not incumbent upon the plaintiff to prove that the cause of the blow-
out is not caso-fortuito.
Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge
defendants' burden. As enunciated in Necesito vs. Paras, the passenger has neither choice nor
control over the carrier in the selection and use of its equipment, and the good repute of the
manufacturer will not necessarily relieve the carrier from liability.
Moreover, there is evidence that the bus was moving fast, and the road was wet and rough. The
driver could have explained that the blow-out that precipitated the accident that caused the
death of Toto Tumboy could not have been prevented even if he had exercised due care to avoid
the same, but he was not presented as witness.
The Court of Appeals thus disposed of the appeal as follows:
WHEREFORE, the judgment of the court a quo is set aside and another one entered ordering defendants to pay
plaintiffs the sum of P50,000.00 for the death of Tito Tumboy, P30,000.00 in moral damages, and P7,000.00
for funeral and burial expenses.
The defendants filed a motion for reconsideration of said decision which was denied on November
4, 1993 by the Court of Appeals. Hence, the instant petition asserting the position that the tire
blowout that caused the death of Tito Tumboy was a caso fortuito. Petitioners claim further that the
Court of Appeals, in ruling contrary to that of the lower court, misapprehended facts and, therefore,
its findings of fact cannot be considered final which shall bind this Court. Hence, they pray that this
Court review the facts of the case.
The Court did re-examine the facts and evidence in this case because of the inapplicability of the
established principle that the factual findings of the Court of Appeals are final and may not be
reviewed on appeal by this Court. This general principle is subject to exceptions such as the one
present in this case, namely, that the lower court and the Court of Appeals arrived at diverse factual
findings.8 However, upon such re-examination, we found no reason to overturn the findings and
conclusions of the Court of Appeals.
As a rule, when a passenger boards a common carrier, he takes the risks incidental to the mode of travel he has
taken. After all, a carrier is not an insurer of the safety of its passengers and is not bound absolutely and at all events
to carry them safely and without injury.9 However, when a passenger is injured or dies while travelling, the law
presumes that the common carrier is negligent. Thus, the Civil Code provides:
Art. 1756. In case of death or injuries to passengers, common carriers are presumed to have been at fault or to
have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in articles
1733 and 1755.
Article 1755 provides that "(a) common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the
circumstances." Accordingly, in culpa contractual, once a passenger dies or is injured, the carrier is presumed to
have been at fault or to have acted negligently. This disputable presumption may only be overcome by evidence that
the carrier had observed extraordinary diligence as prescribed by Articles 1733,10 1755 and 1756 of the Civil Code
or that the death or injury of the passenger was due to a fortuitous event. 11 Consequently, the court need not make
an express finding of fault or negligence on the part of the carrier to hold it responsible for damages sought by the
passenger.12
In view of the foregoing, petitioners' contention that they should be exempt from liability because
the tire blowout was no more than a fortuitous event that could not have been foreseen, must fail.
A fortuitous event is possessed of the following characteristics: (a) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligations, must be
independent of human will; (b) it must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as
to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obliger
must be free from any participation in the aggravation of the injury resulting to the creditor. 13 As
Article 1174 provides, no person shall be responsible for a fortuitous event which could not be
foreseen, or which, though foreseen, was inevitable. In other words, there must be an entire
exclusion of human agency from the cause of injury or loss. 14
Under the circumstances of this case, the explosion of the new tire may not be considered a
fortuitous event. There are human factors involved in the situation. The fact that the tire was new
did not imply that it was entirely free from manufacturing defects or that it was properly mounted
on the vehicle. Neither may the fact that the tire bought and used in the vehicle is of a brand name
noted for quality, resulting in the conclusion that it could not explode within five days' use. Be that
as it may, it is settled that an accident caused either by defects in the automobile or through the
negligence of its driver is not a caso fortuito that would exempt the carrier from liability for
damages.15
Moreover, a common carrier may not be absolved from liability in case of force majeure or fortuitous
event alone. The common carrier must still prove that it was not negligent in causing the death or
injury resulting from an accident.16 This Court has had occasion to state:
While it may be true that the tire that blew-up was still good because the grooves of the tire
were still visible, this fact alone does not make the explosion of the tire a fortuitous event. No
evidence was presented to show that the accident was due to adverse road conditions or that
precautions were taken by the jeepney driver to compensate for any conditions liable to cause
accidents. The sudden blowing-up, therefore, could have been caused by too much air pressure
injected into the tire coupled by the fact that the jeepney was overloaded and speeding at the
time of the accident.17
It is interesting to note that petitioners proved through the bus conductor, Salce, that the bus was
running at "60-50" kilometers per hour only or within the prescribed lawful speed limit. However,
they failed to rebut the testimony of Leny Tumboy that the bus was running so fast that she
cautioned the driver to slow down. These contradictory facts must, therefore, be resolved in favor
of liability in view of the presumption of negligence of the carrier in the law. Coupled with this is the
established condition of the road — rough, winding and wet due to the rain. It was incumbent upon
the defense to establish that it took precautionary measures considering partially dangerous
condition of the road. As stated above, proof that the tire was new and of good quality is not sufficient
proof that it was not negligent. Petitioners should have shown that it undertook extraordinary
diligence in the care of its carrier, such as conducting daily routinary check-ups of the vehicle's parts.
As the late Justice J.B.L. Reyes said:
It may be impracticable, as appellee argues, to require of carriers to test the strength of each
and every part of its vehicles before each trip; but we are of the opinion that a due regard for
the carrier's obligations toward the traveling public demands adequate periodical tests to
determine the condition and strength of those vehicle portions the failure of which may endanger
the safety of the passengers.18
Having failed to discharge its duty to overthrow the presumption of negligence with clear and
convincing evidence, petitioners are hereby held liable for damages. Article 1764 19 in relation to
Article 220620 of the Civil Code prescribes the amount of at least three thousand pesos as damages
for the death of a passenger. Under prevailing jurisprudence, the award of damages under Article
2206 has been increased to fifty thousand pesos (P50,000.00). 21
Moral damages are generally not recoverable in culpa contractual except when bad faith had been
proven. However, the same damages may be recovered when breach of contract of carriage results
in the death of a passenger,22 as in this case. Exemplary damages, awarded by way of example or
correction for the public good when moral damages are awarded, 23 may likewise be recovered in
contractual obligations if the defendant acted in wanton, fraudulent, reckless, oppressive, or
malevolent manner.24 Because petitioners failed to exercise the extraordinary diligence required of
a common carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted
recklessly.25 As such, private respondents shall be entitled to exemplary damages.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the modification that petitioners
shall, in addition to the monetary awards therein, be liable for the award of exemplary damages in the amount of
P20,000.00. Costs against petitioners.
Footnotes
4 Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen, were inevitable.
10 Art. 1733. Common carriers, from the nature of their business and for reasons of public policy, are bound to
observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods is further expressed in articles 1734, 1735, and
1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in
articles 1755 and 1756.
19 Art. 1764. Damages in cases comprised in this Section shall be awarded in accordance with Title XVIII of this
Book, concerning Damages. Article 2206 shall also apply to the death of a passenger caused, by the breach of
contract by a common carrier.
20 Art. 2206. The amount of damages for death caused by a crime or quasi-delict shall be at least three thousand
pesos, even though there may have been mitigating circumstances.
G.R. No. 147324 May 25, 2004
PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner, vs. GLOBE
TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.
x-----------------------------x
GLOBE TELECOM, INC., petitioner, vs. PHILIPPINE COMMUNICATION SATELLITE
CORPORATION, respondent.
TINGA, J.: Before the Court are two Petitions for Review assailing the Decision of the Court of
Appeals, dated 27 February 2001, in CA-G.R. CV No. 63619.1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc.
(Globe), had been engaged in the coordination of the provision of various communication facilities
for the military bases of the United States of America (US) in Clark Air Base, Angeles, Pampanga
and Subic Naval Base in Cubi Point, Zambales. The said communication facilities were installed and
configured for the exclusive use of the US Defense Communications Agency (USDCA), and for
security reasons, were operated only by its personnel or those of American companies contracted
by it to operate said facilities. The USDCA contracted with said American companies, and the latter,
in turn, contracted with Globe for the use of the communication facilities. Globe, on the other hand,
contracted with local service providers such as the Philippine Communications Satellite Corporation
(Philcomsat) for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated
itself to establish, operate and provide an IBS Standard B earth station (earth station) within Cubi
Point for the exclusive use of the USDCA.2 The term of the contract was for 60 months, or five (5)
years.3 In turn, Globe promised to pay Philcomsat monthly rentals for each leased circuit involved. 4
At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement
between the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was
the basis for the occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire
in 1991. Under Section 25, Article XVIII of the 1987 Constitution, foreign military bases, troops or
facilities, which include those located at the US Naval Facility in Cubi Point, shall not be allowed in
the Philippines unless a new treaty is duly concurred in by the Senate and ratified by a majority of
the votes cast by the people in a national referendum when the Congress so requires, and such new
treaty is recognized as such by the US Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA
made use of the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its
decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and
its Supplementary Agreements that was supposed to extend the term of the use by the US of Subic
Naval Base, among others.5 The last two paragraphs of the Resolution state:
FINDING that the Treaty constitutes a defective framework for the continuing relationship
between the two countries in the spirit of friendship, cooperation and sovereign equality: Now,
therefore, be it Resolved by the Senate, as it is hereby resolved, To express its decision not to
concur in the ratification of the Treaty of Friendship, Cooperation and Security and its
Supplementary Agreements, at the same time reaffirming its desire to continue friendly relations
with the government and people of the United States of America. 6
On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government
through the US Embassy, notifying it of the Philippines’ termination of the RP-US Military Bases
Agreement. The Note Verbalestated that since the RP-US Military Bases Agreement, as amended,
shall terminate on 31 December 1992, the withdrawal of all US military forces from Subic Naval
Base should be completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of
the earth station effective 08 November 1992 in view of the withdrawal of US military personnel
from Subic Naval Base after the termination of the RP-US Military Bases Agreement. Globe invoked
as basis for the letter of termination Section 8 (Default) of the Agreement, which provides:
Neither party shall be held liable or deemed to be in default for any failure to perform its
obligation under this Agreement if such failure results directly or indirectly from force majeure
or fortuitous event. Either party is thus precluded from performing its obligation until such force
majeure or fortuitous event shall terminate. For the purpose of this paragraph, force majeure
shall mean circumstances beyond the control of the party involved including, but not limited to,
any law, order, regulation, direction or request of the Government of the Philippines, strikes or
other labor difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire,
floods, typhoons or other catastrophies or acts of God.
Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to
know its commitment to pay the stipulated rentals for the remaining terms of the Agreement even
after [Globe] shall have discontinue[d] the use of the earth station after November 08,
1992."7 Philcomsat referred to Section 7 of the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the earth station after it has been put into
operation, a written notice shall be served to PHILCOMSAT at least sixty (60) days prior to the
expected date of termination. Notwithstanding the non-use of the earth station, [Globe] shall
continue to pay PHILCOMSAT for the rental of the actual number of T1 circuits in use, but in no
case shall be less than the first two (2) T1 circuits, for the remaining life of the agreement.
However, should PHILCOMSAT make use or sell the earth station subject to this agreement, the
obligation of [Globe] to pay the rental for the remaining life of the agreement shall be at such
monthly rate as may be agreed upon by the parties.8
After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November
1993 demanding payment of its outstanding obligations under the Agreement amounting to
US$4,910,136.00 plus interest and attorney’s fees. However, Globe refused to heed Philcomsat’s
demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against
Globe, praying that the latter be ordered to pay liquidated damages under the Agreement, with legal
interest, exemplary damages, attorney’s fees and costs of suit. The case was raffled to Branch 59
of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due
to the termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of
the Treaty of Friendship and Cooperation, which events constituted force majeure under the
Agreement. Globe explained that the occurrence of said events exempted it from paying rentals for
the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two
Hundred Thirty Eight US Dollars (US$92,238.00) or its equivalent in Philippine Currency
(computed at the exchange rate prevailing at the time of compliance or payment)
representing rentals for the month of December 1992 with interest thereon at the legal rate
of twelve percent (12%) per annum starting December 1992 until the amount is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand
(P300,000.00) Pesos as and for attorney’s fees;
3. Ordering the DISMISSAL of defendant’s counterclaim for lack of merit; and
4. With costs against the defendant.
Both parties appealed the trial court’s Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of
the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements constitutes
force majeure which exempts Globe from complying with its obligations under the Agreement; (2)
Globe is not liable to pay the rentals for the remainder of the term of the Agreement; and (3) Globe
is not liable to Philcomsat for exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of
the earth station for December 1992 and of attorney’s fees. It explained that it terminated
Philcomsat’s services on 08 November 1992; hence, it had no reason to pay for rentals beyond that
date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsat’s appeal
for lack of merit and affirming the trial court’s finding that certain events constituting force
majeure under Section 8 the Agreement occurred and justified the non-payment by Globe of rentals
for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship,
Cooperation and Security, and its Supplementary Agreements, and the termination by the Philippine
Government of the RP-US Military Bases Agreement effective 31 December 1991 as stated in the
Philippine Government’s Note Verbale to the US Government, are acts, directions, or requests of the
Government of the Philippines which constitute force majeure. In addition, there were circumstances
beyond the control of the parties, such as the issuance of a formal order by Cdr. Walter Corliss of
the US Navy, the issuance of the letter notification from ATT and the complete withdrawal of all US
military forces and personnel from Cubi Point, which prevented further use of the earth station under
the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsat’s services
by 08 November 1992, it is still liable to pay rentals for the December 1992, amounting to
US$92,238.00 plus interest, considering that the US military forces and personnel completely
withdrew from Cubi Point only on 31 December 1992.10
Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.
In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE
MAJEUREDIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE
CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS
OBLIGATIONS UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT
LIABLE TO PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT,
DESPITE THE CLEAR TENOR OF SECTION 7 OF THE AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURT’S AWARD OF
ATTORNEY’S FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT
LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered
a fortuitous event because the happening thereof was foreseeable. Although the Agreement was
freely entered into by both parties, Section 8 should be deemed ineffective because it is contrary to
Article 1174 of the Civil Code. Philcomsat posits the view that the validity of the parties’ definition
of force majeure in Section 8 of the Agreement as "circumstances beyond the control of the party
involved including, but not limited to, any law, order, regulation, direction or request of the
Government of the Philippines, strikes or other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of
God," should be deemed subject to Article 1174 which defines fortuitous events as events which
could not be foreseen, or which, though foreseen, were inevitable. 13
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay
for the rental of the earth station for the entire term of the Agreement because it runs counter to
what was plainly stipulated by the parties in Section 7 thereof. Moreover, said ruling is inconsistent
with the appellate court’s pronouncement that Globe is liable to pay rentals for December 1992 even
though it terminated Philcomsat’s services effective 08 November 1992, because the US military
and personnel completely withdrew from Cubi Point only in December 1992. Philcomsat points out
that it was Globe which proposed the five-year term of the Agreement, and that the other provisions
of the Agreement, such as Section 4.114 thereof, evince the intent of Globe to be bound to pay
rentals for the entire five-year term.15
Philcomsat also maintains that contrary to the appellate court’s findings, it is entitled to attorney’s
fees and exemplary damages.16
In its Comment to Philcomsat’s Petition, Globe asserts that Section 8 of the Agreement is not
contrary to Article 1174 of the Civil Code because said provision does not prohibit parties to a
contract from providing for other instances when they would be exempt from fulfilling their
contractual obligations. Globe also claims that the termination of the RP-US Military Bases
Agreement constitutes force majeure and exempts it from complying with its obligations under the
Agreement.17 On the issue of the propriety of awarding attorney’s fees and exemplary damages to
Philcomsat, Globe maintains that Philcomsat is not entitled thereto because in refusing to pay rentals
for the remainder of the term of the Agreement, Globe only acted in accordance with its rights. 18
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in
finding it liable for the amount of US$92,238.00, representing rentals for December 1992, since
Philcomsat’s services were actually terminated on 08 November 1992. 20
In its Comment, Philcomsat claims that Globe’s petition should be dismissed as it raises a factual
issue which is not cognizable by the Court in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to Philcomsat’s Petition in G.R.
No. 147324 and required the parties to submit their respective memoranda. 22
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed
by Globe in G.R. No. 147334 and required both parties to submit their memoranda.23
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two
cases, reiterating their arguments in their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military
Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and
the consequent withdrawal of US military forces and personnel from Cubi Point constitute force
majeure which would exempt Globe from complying with its obligation to pay rentals under its
Agreement with Philcomsat; (2) whether Globe is liable to pay rentals under the Agreement for the
month of December 1992; and (3) whether Philcomsat is entitled to attorney’s fees and exemplary
damages.
No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence
the petitions are denied.
There is no merit is Philcomsat’s argument that Section 8 of the Agreement cannot be given effect
because the enumeration of events constituting force majeure therein unduly expands the concept
of a fortuitous event under Article 1174 of the Civil Code and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event
must be unforeseen in order to exempt a party to a contract from complying with its obligations
therein. It insists that since the expiration of the RP-US Military Bases Agreement, the non-
ratification of the Treaty of Friendship, Cooperation and Security and the withdrawal of US military
forces and personnel from Cubi Point were not unforeseeable, but were possibilities known to it and
Globe at the time they entered into the Agreement, such events cannot exempt Globe from
performing its obligation of paying rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous events
or force majeure, refers not only to events that are unforeseeable, but also to those which are
foreseeable, but inevitable:
Art. 1174. Except in cases specified by the law, or when it is otherwise declared by stipulation,
or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which, could not be foreseen, or which, though foreseen were
inevitable.
A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as
floods or typhoons,24 or an "act of man," such as riots, strikes or wars.25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be
deemed events constituting force majeure:
1. Any law, order, regulation, direction or request of the Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties.
There is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous
event under Article 1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not run
counter to the law, morals, good customs, public order or public policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force
of law between the contracting parties and should be complied with in good faith." 28 Courts cannot
stipulate for the parties nor amend their agreement where the same does not contravene law,
morals, good customs, public order or public policy, for to do so would be to alter the real intent of
the parties, and would run contrary to the function of the courts to give force and effect thereto.29
Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the
Agreement which Philcomsat and Globe freely agreed upon has the force of law between them. 30
In order that Globe may be exempt from non-compliance with its obligation to pay rentals under
Section 8, the concurrence of the following elements must be established: (1) the event must be
independent of the human will; (2) the occurrence must render it impossible for the debtor to fulfill
the obligation in a normal manner; and (3) the obligor must be free of participation in, or aggravation
of, the injury to the creditor.31
The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites
are present in the instant case. Philcomsat and Globe had no control over the non-renewal of the
term of the RP-US Military Bases Agreement when the same expired in 1991, because the
prerogative to ratify the treaty extending the life thereof belonged to the Senate. Neither did the
parties have control over the subsequent withdrawal of the US military forces and personnel from
Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its
Supplemental Agreements) under its Resolution No. 141. (Exhibit "2") on September 16, 1991
is beyond the control of the parties. This resolution was followed by the sending on December
31, 1991 o[f] a "Note Verbale" (Exhibit "3") by the Philippine Government to the US
Government notifying the latter of the former’s termination of the RP-US Military Bases
Agreement (as amended) on 31 December 1992 and that accordingly, the withdrawal of all U.S.
military forces from Subic Naval Base should be completed by said date. Subsequently,
defendant [Globe] received a formal order from Cdr. Walter F. Corliss II Commander USN dated
July 31, 1992 and a notification from ATT dated July 29, 1992 to terminate the provision of T1s
services (via an IBS Standard B Earth Station) effective November 08, 1992. Plaintiff
[Philcomsat] was furnished with copies of the said order and letter by the defendant on August
06, 1992.
Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine Government
to the US Government are acts, direction or request of the Government of the Philippines and
circumstances beyond the control of the defendant. The formal order from Cdr. Walter Corliss
of the USN, the letter notification from ATT and the complete withdrawal of all the military forces
and personnel from Cubi Point in the year-end 1992 are also acts and circumstances beyond the
control of the defendant.
Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances
constitute "force majeure or fortuitous event(s) as defined under paragraph 8 of the Agreement.
From the foregoing, the Court finds that the defendant is exempted from paying the rentals for
the facility for the remaining term of the contract.
As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the
continued stay of all US Military forces and personnel from Subic Naval Base would no longer be
allowed, hence, plaintiff would no longer be in any position to render the service it was obligated
under the Agreement. To put it blantly (sic), since the US military forces and personnel left or
withdrew from Cubi Point in the year end December 1992, there was no longer any necessity
for the plaintiff to continue maintaining the IBS facility…. 32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until the end of its
five-year term without fault on the part of either party. The Court of Appeals was thus correct in
ruling that the happening of such fortuitous events rendered Globe exempt from payment of rentals
for the remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat
cannot be compelled to perform its corresponding obligation under the Agreement. As noted by the
appellate court:
We also point out the sheer inequity of PHILCOMSAT’s position. PHILCOMSAT would like to
charge GLOBE rentals for the balance of the lease term without there being any corresponding
telecommunications service subject of the lease. It will be grossly unfair and iniquitous to hold
GLOBE liable for lease charges for a service that was not and could not have been rendered due
to an act of the government which was clearly beyond GLOBE’s control. The binding effect of a
contract on both parties is based on the principle that the obligations arising from contracts have
the force of law between the contracting parties, and there must be mutuality between them
based essentially on their equality under which it is repugnant to have one party bound by the
contract while leaving the other party free therefrom (Allied Banking Corporation v. Court
of Appeals, 284 SCRA 357)….33
With respect to the issue of whether Globe is liable for payment of rentals for the month of December
1992, the Court likewise affirms the appellate court’s ruling that Globe should pay the same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November
1992 pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually
ceased using the earth station subject of the Agreement was not established during the
trial.34 However, the trial court found that the US military forces and personnel completely withdrew
from Cubi Point only on 31 December 1992.35 Thus, until that date, the USDCA had control over the
earth station and had the option of using the same. Furthermore, Philcomsat could not have removed
or rendered ineffective said communication facility until after 31 December 1992 because Cubi Point
was accessible only to US naval personnel up to that time. Hence, the Court of Appeals did not err
when it affirmed the trial court’s ruling that Globe is liable for payment of rentals until December
1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled to
attorney’s fees and exemplary damages.
The award of attorney’s fees is the exception rather than the rule, and must be supported by factual,
legal and equitable justifications.36 In previously decided cases, the Court awarded attorney’s fees
where a party acted in gross and evident bad faith in refusing to satisfy the other party’s claims and
compelled the former to litigate to protect his rights; 37 when the action filed is clearly
unfounded,38 or where moral or exemplary damages are awarded.39 However, in cases where both
parties have legitimate claims against each other and no party actually prevailed, such as in the
present case where the claims of both parties were sustained in part, an award of attorney’s fees
would not be warranted.40
Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring
party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. 41 In the present
case, it was not shown that Globe acted wantonly or oppressively in not heeding Philcomsat’s
demands for payment of rentals. It was established during the trial of the case before the trial court
that Globe had valid grounds for refusing to comply with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of
Appeals in CA-G.R. CV No. 63619 is AFFIRMED.
G.R. No. 165164 August 17, 2007
FIL-ESTATE PROPERTIES, INC., Petitioner, vs. SPOUSES GONZALO and CONSUELO
GO, Respondents.
QUISUMBING, J.: For review on certiorari are the Decision 1 dated June 9, 2004 of the Court of
Appeals in CA-G.R. SP No. 79624, and its Resolution2 dated August 3, 2004, denying the motion for
reconsideration.
The basic facts in this case are undisputed.
On December 29, 1995, petitioner Fil-Estate Properties, Inc. (Fil-Estate) entered into a contract to
sell a condominium unit to respondent spouses Gonzalo and Consuelo Go at "Eight Sto. Domingo
Place," a condominium project of petitioner located on Sto. Domingo Avenue, Quezon City. The
spouses paid a total of ₱3,439,000.07 of the full contract price set at ₱3,620,000.00.
Because petitioner failed to develop the condominium project, on August 4, 1999, the spouses
demanded the refund of the amount they paid, plus interest. When petitioner did not refund the
spouses, the latter filed a complaint against petitioner for reimbursement of ₱3,620,000 representing
the lump sum price of the condominium unit, plus interest, ₱100,000 attorney’s fees, and expenses
of litigation before the Housing and Land Use Regulatory Board (HLURB).
In answer, petitioner claimed that respondents had no cause of action since the delay in the
construction of the condominium was caused by the financial crisis that hit the Asian region, a
fortuitous event over which petitioner had no control.
On July 18, 2000, the HLURB Regional Director approved the decision of the Housing and Land Use
Arbiter in favor of the spouses Go. The HLURB ratiocinated that the Asian financial crisis that resulted
in the depreciation of the peso is not a fortuitous event as any fluctuation in the value of the peso
is a daily occurrence which is foreseeable and its deleterious effects avoided by economic measures.
The HLURB went on to say that when petitioner discontinued the development of its condominium
project, it failed to fulfill its contractual obligations to the spouses. And following Article 1475 3 of the
Civil Code, upon perfection of the contract, the parties, here the spouses Go, may demand
performance. And under Article 11914 of the same code, should one of the parties, in this instance
Fil-Estate, fail to comply with the obligation, the aggrieved party may choose between fulfillment or
rescission of the obligation, with damages in either case. Inasmuch as Fil-Estate could no longer
fulfill its obligation, the spouses Go may ask for rescission of the contract with damages. The
dispositive portion of the decision reads:
WHEREFORE, the foregoing considered, judgment is hereby rendered as follows:
1. Ordering the respondent, Fil-Estate Properties, Inc., to refund to the complainants,
₱3,439,000.07 (the amount proved) plus 12% interest thereon reckoned from 09 August 1999
(the date the respondent received the demand letter) until the same is fully paid.
2. Ordering the respondent to pay to the complainants ₱25,000.00 attorney’s fees as and by
way of damages.
All other claims and counterclaims are dismissed.
The Board of Commissioners of the HLURB denied petitioner’s petition for review and consequent
motion for reconsideration.6 The Office of the President dismissed petitioner’s appeal and denied its
motion for reconsideration.7
On appeal, asserting that both the HLURB and the Office of the President committed reversible
errors, Fil-Estate asked the Court of Appeals to set aside the orders it is appealing.
The Court of Appeals affirmed the actions taken by the HLURB and the Office of the President and
declared that the Asian financial crisis could not be considered a fortuitous event and that
respondents’ right is provided for in Section 23 8 of Presidential Decree (P.D.) No. 957, otherwise
known as "The Subdivision and Condominium Buyers’ Protective Decree." The appellate court also
noted that there was yet no crisis in 1995 and 1996 when the project should have been started, and
petitioner cannot blame the 1997 crisis for failure of the project, nor for even not starting it, because
the project should have been completed by 1997.
The appellate court denied petitioner’s motion for reconsideration.
Hence, this petition raising two issues for our resolution as follows:
I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE ASIAN FINANCIAL
CRISIS IS NOT A FORTUITOUS EVENT THAT WOULD EXCUSE THE DELIVERY BY PETITIONER OF
THE SUBJECT CONDOMINIUM UNIT TO RESPONDENTS.
II. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER LIABLE FOR THE
PAYMENT OF ATTORNEY’S FEES.9
On the first issue, did the Court of Appeals err in ruling that the Asian financial crisis was not a
fortuitous event?
Petitioner, citing Article 117410 of the Civil Code, argues that the Asian financial crisis was a
fortuitous event being unforeseen or inevitable. Petitioner likewise cites Servando v. Philippine
Steam Navigation Co.,11 to bolster its case. Petitioner explains that the extreme economic exigency
and extraordinary currency fluctuations could not have been reasonably foreseen and were beyond
the contemplation of both parties when they entered the contract. Petitioner further asserts that the
resultant economic collapse of the real estate industry was unforeseen by the whole Asia and if it
was indeed foreseeable, then all those engaged in the real estate business should have foreseen the
impending fiasco. Petitioner adds that it had not committed any fraud; that it had all the required
government permits; and that it had not abandoned the project but only suspended the work. It
also admits its obligation to complete the project. It says that it had in fact asked the HLURB for
extension to complete it.12
In their Comment, respondents submit that the instant petition be rejected outright for the reason
that petitioner has not raised any question of law in the instant petition. The questions of whether
or not the Asian financial crisis is a fortuitous event, and whether or not attorney’s fees should be
granted, are questions of facts which the Court of Appeals recognized as such.
Respondent spouses reiterate that contrary to what petitioner avers, the delay in the construction
of the building was not attributable to the Asian financial crisis which happened in 199713 because
petitioner did not even start the project in 1995 when it should have done, so that it could have
finished it in 1997, as stipulated in the contract.
Preliminarily, respondents bring to the attention of this Court the strange discrepancy in the dates
of notarization of the Certification of Non-Forum Shopping and the Affidavit of Service both notarized
on September 24, 2004, while the Secretary’s Certification was notarized a day earlier on September
23, 2004. However, we shall not delve into technicalities, but we shall proceed with the resolution
of the issues raised on the merits.1awph!l
Indeed, the question of whether or not an event is fortuitous is a question of fact. As a general rule,
questions of fact may not be raised in a petition for review for as long as there is no variance between
the findings of the lower court and the appellate court, as in this case where the HLURB, the Office
of the President, and the Court of Appeals were agreed on the fact.
Worthy of note, in a previous case, Asian Construction and Development Corporation v. Philippine
Commercial International Bank,14 the Court had said that the 1997 financial crisis that ensued in
Asia did not constitute a valid justification to renege on obligations. We emphatically stressed the
same view in Mondragon Leisure and Resorts Corporation v. Court of Appeals,15 that the Asian
financial crisis in 1997 is not among the fortuitous events contemplated under Article 1174 of the
Civil Code.1avvphi1
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the
control of a business corporation. It is unfortunate that petitioner apparently met with considerable
difficulty e.g. increase cost of materials and labor, even before the scheduled commencement of its
real estate project as early as 1995. However, a real estate enterprise engaged in the pre-selling of
condominium units is concededly a master in projections on commodities and currency movements
and business risks. The fluctuating movement of the Philippine peso in the foreign exchange market
is an everyday occurrence, and fluctuations in currency exchange rates happen everyday, thus, not
4
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.
8
SEC. 23. Non-Forfeiture of Payments. – No installment payment made by a buyer in a subdivision or condominium
project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer,
after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer
to develop the subdivision or condominium project according to the approved plans and within the time limit for
complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization
interest[s] but excluding delinquency interests, with interest thereon at the legal rate.
10
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which though foreseen, were inevitable.
17
G.R. No. 97412, July 12, 1994, 234 SCRA 78, 96-97. The rule partly reads:

an instance of caso fortuito.

Are respondents entitled to reimbursement of the amount paid, plus interest and attorney’s fees?
Yes. Section 23 of P.D. No. 957 is clear on this point.
It will be noted that respondents sent a demand letter dated August 4, 1999 to Fil-Estate asking for
the return of "the total amount paid including amortization interests" and "legal interest due
thereon."16 The latter did not respond favorably, and so the spouses filed a complaint demanding
the reimbursement of ₱3,620,000 representing the lump sum price of the condominium unit with
interest at the legal rate, and ₱100,000 attorney’s fees. But the respondents actually sought the
refund of ₱3,620,000.00, the lump sum cost of the condominium, more than their actual payment
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest … shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.

of ₱3,439,000.07. We are thus constrained to award only ₱3,439,000.07, representing the sum of
their actual payments plus amortization interests and interest at legal rate which is 6% per annum
from the date of demand on August 4, 1999. We are not unaware that the appellate court pegged
the interest rate at 12% on the basis of Resolution No. R-421, Series of 1988 of the HLURB. But,
conformably with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,17 the award of 12%
interest on the amount of refund must be reduced to 6%.

Moreover, we are constrained to modify the Court of Appeals’ grant of attorney’s fees from ₱25,000
to ₱100,000 as just and equitable since respondents were compelled to secure the services of
counsel over eight years to protect their interest due to petitioner’s delay in the performance of their
clear obligation.

WHEREFORE, the petition is DENIED for lack of merit. Petitioner is hereby ordered (1) to
reimburse respondents ₱3,439,000.07 at 6% interest starting August 4, 1999 until full payment,
and (2) to pay respondents ₱100,000.00 attorney’s fees. Costs against petitioner.

Footnotes

3
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contracts.
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND
MERCANTILE INSURANCE COMPANY, INC., respondents.
VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision appealed
from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder
for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee
who paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of
Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody
of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order,
which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from
defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad
Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained
spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee
suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were
presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all
the rights of action of said consignee against defendants (per "Form of Subrogation", "Release"
and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:
Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged
in good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no
longer its liability (p. 17, Record); Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault
for the shipment was already in damage and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the
cargo to consignee in the same condition shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of defendants (in
whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-
Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two
drums were shipped in good order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But
when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in
the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre
operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo
Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is
stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila
on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that
when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody
on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents
intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was
found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred
before the shipment reached the consignee while under the successive custodies of defendants.
Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence
in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded
and stored in transit in the warehouse of the carrier at the place of destination, until the consignee
has been advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738,
NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes"
(Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant
Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the
 extent of the actual invoice value of each package, crate box or container in no case to
exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage
Corporation.
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount
it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse
of discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN
THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely
tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from
the time the articles are surrendered to or unconditionally placed in the possession of, and received
by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped
either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure
to observe that diligence, and there need not be an express finding of negligence to hold it liable
(Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port
Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such
presumption of fault is not observed but these cases, enumerated in Article 17341 of the Civil Code,
are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and
the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a
depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The
relationship between the consignee and the common carrier is similar to that of the consignee
and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]).
Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and
to deliver them in good condition to the consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to
deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor
that attendant facts in a given case may not vary the rule. The instant petition has been brought
solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the
presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of
both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that
the shipment sustained damage while in the successive possession of appellants" (the herein
petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole
petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, decided on 15 May 1969,
involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this
case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the
total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This
demand, however, was neither established in its totality nor definitely ascertained. In the stipulation
of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon.
The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and
Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal
interest thereon from the date the complaint was filed on 28 December 1962 until full payment
thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the
appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the
legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial.
The trial court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered
upon unliquidated claims or damages, except when the demand can be established with
reasonable certainty." And as was held by this Court in Rivera vs. Perez,4 L-6998, February 29,
1956, if the suit were for damages, "unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos,25
Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the
decision." (Emphasis supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages for
Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants
and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a
month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up
to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972
with legal interest from the filing of the complaint until paid and to pay attorney's fees of
P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained
the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the
appellate court's decision became final, the case was remanded to the lower court for execution,
and this was when the trial court issued its assailed resolution which applied the 6% interest per
annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the
petitioners contended that Central Bank Circular No. 416, providing thus —
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary
Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for
the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in
the absence of express contract as to such rate of interest, shall be twelve (12%) percent per
annum. This Circular shall take effect immediately. (Emphasis found in the text) —
should have, instead, been applied. This Court6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or
forbearance of any money, goods or credits. Any other kind of monetary judgment which has
nothing to do with, nor involving loans or forbearance of any money, goods or credits does not
fall within the coverage of the said law for it is not within the ambit of the authority granted to
the Central Bank.
Coming to the case at bar, the decision herein sought to be executed is one rendered in an
Action for Damages for injury to persons and loss of property and does not involve any loan,
much less forbearances of any money, goods or credits. As correctly argued by the private
respondents, the law applicable to the said case is Article 2209 of the New Civil Code which
reads —
Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of interest agreed upon, and in the absence of stipulation, the legal interest
which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat actual and compensatory damages in the amount
of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully
paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co.,
Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at
the legal rate from November 29, 1968, the date of the filing of the complaint until full payment . .
. ." Save from the modification of the amount granted by the lower court, the Court of Appeals
sustained the trial court's decision. When taken to this Court for review, the case, on 03 October
1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing,
as We do hereby impose, upon the defendant and the third-party defendants (with the exception
of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the
Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with
the exception to attorney's fees) occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as
and for attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs against the defendant and third-
party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount of the monetary award was in contravention
of law." The Court10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases
and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods
or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving
loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz,
143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in
the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed
provided the sums referred to in the judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total
sum, from the filing of the complaint until paid; in other words, as part of the judgment for
damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate
Court11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the
then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded
by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April
1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral
damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from
notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while
recognizing the right of the private respondent to recover damages, held the award, however, for
moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The
Court12 thus set aside the decision of the appellate court and rendered a new one, "ordering the
petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as
moral damages, with six (6%) percent interest thereon computed from the finality of this decision
until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose from
a breach of employment contract. For having been illegally dismissed, the petitioner was awarded
by the trial court moral and exemplary damages without, however, providing any legal interest
thereon. When the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants,
except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts
stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal rate from the date of the filing of the complaint
until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed
that only compensatory damages should earn interest at 6% per annum from the date of the filing
of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition
for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal
rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416]
does not apply to actions based on a breach of employment contract like the case at bar.
(Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the
time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas,14decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to
pay the private respondents certain sums of money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal
interest per annum under the Civil Code, the Court15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form of indemnity for damages
for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is interest by way of damages,
and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina
v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance
Company v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American
Express International v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases
that there has been a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum,17depending on whether or not the amount involved is a loan or forbearance, on
the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group"
which remained consistent in holding that the running of the legal interest should be from the time
of the filing of the complaint until fully paid, the "second group" varied on the commencement of
the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of
the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be
from the date of the decision.'" American Express International v. IAC, introduced a different time
frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision
until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on
the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title
XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing.21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.22 In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 116923 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court24 at the rate of
6% per annum.25 No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.26 Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an G.R. No. 189871 August 13, 2013
equivalent to a forbearance of credit.
DARIO NACAR, PETITIONER,
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the vs.
legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on
such amount upon finality of this decision until the payment thereof.
PERALTA, J.: This is a petition for review on certiorari assailing the Decision 1 dated September 23,
#Footnotes
2008 of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9,
2009 denying petitioner’s motion for reconsideration.
1 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same
is due to any of the following causes only: The factual antecedents are undisputed.
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers; the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or
(5) Order or act of competent public authority. Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.

17 In the case of Malayan Insurance, the application of the 6% and 12% interest per annum has no bearing
considering that this case was decided upon before the issuance of Circular No. 416 by the Central Bank.
19 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.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and found that
he was dismissed from employment without a valid or just cause. Thus, petitioner was awarded
backwages and separation pay in lieu of reinstatement in the amount of ₱158,919.92. The dispositive
portion of the decision, reads:

With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
20 Art. 2195. The provisions of this Title (on Damages) shall be respectively applicable to all obligations mentioned
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear
in article 1157.
from the records that complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainant’s prayer for the payments of separation pay
21 Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
in lieu of reinstatement to his former position, considering the strained relationship between the
parties, and his apparent reluctance to be reinstated, computed only up to promulgation of this
22 Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation
decision as follows:
may be silent upon this point.

23 Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or SEPARATION PAY
extrajudicially demands from them the fulfillment of their obligation.

Date Hired = August 1990

"However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or Rate = ₱198/day
(2) When from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a controlling motive for the
Date of Decision = Aug. 18, 1998
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
"In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in Length of Service = 8 yrs. & 1 month
a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation,
delay by the other begins." ₱198.00 x 26 days x 8 months = ₱41,184.00

24 Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.
BACKWAGES
Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in
the discretion of the court. Date Dismissed = January 24, 1997

25 Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the Rate per day = ₱196.00
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per annum. Date of Decisions = Aug. 18, 1998

26 Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be a) 1/24/97 to 2/5/98 = 12.36 mos.
established with reasonable certainty.

₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76
xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of
constructive dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (₱95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5 dated
February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents
filed a motion for reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000,
the CA issued a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration,
but it was likewise denied in a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no
reversible error on the part of the CA, this Court denied the petition in the Resolution dated April
17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became final and executory on
May 27, 2002.9The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear. 10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages
be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the Supreme Court on May 27, 2002.11 Upon recomputation, the Computation and Examination
Unit of the NLRC arrived at an updated amount in the sum of ₱471,320.31. 12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to
collect from respondents the total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ
of Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay of
₱62,986.56 and limited backwages of ₱95,933.36, no more recomputation is required to be made
of the said awards. They claimed that after the decision becomes final and executory, the same
cannot be altered or amended anymore.14 On January 13, 2003, the Labor Arbiter issued an
Order15 denying the motion. Thus, an Alias Writ of Execution 16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting
the appeal in favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be
final and executory. Consequently, another pre-execution conference was held, but respondents
failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to
enforce the earlier recomputed judgment award in the sum of ₱471,320.31. 18
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount of
only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the
final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of ₱147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the amount
of ₱11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and executory. However, the Labor Arbiter
reasoned that since the decision states that the separation pay and backwages are computed only
up to the promulgation of the said decision, it is the amount of ₱158,919.92 that should be executed.
Thus, since petitioner already received ₱147,560.19, he is only entitled to the balance of ₱11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution23dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already
became final and executory, a belated correction thereof is no longer allowed. The CA stated that
there is nothing left to be done except to enforce the said judgment. Consequently, it can no longer
be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9,
2009.
Hence, the petition assigning the lone error:
I. WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED
GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15,
1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN
THE BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiter’s decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17,
2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on
May 27, 2002, the reckoning point for the computation of the backwages and separation pay should
be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15,
1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality
of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation
is required to be made of said awards. Respondents insist that since the decision clearly stated that
the separation pay and backwages are "computed only up to [the] promulgation of this decision,"
and considering that petitioner no longer appealed the decision, petitioner is only entitled to the
award as computed by the Labor Arbiter in the total amount of ₱158,919.92. Respondents added
that it was only during the execution proceedings that the petitioner questioned the award, long
after the decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it violates the rule on immutability of
judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the propriety
of the computation of the awards made, and whether this violated the principle of immutability of
judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided for the computation of the payable
separation pay and backwages due and did not further order the computation of the monetary
awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor
arbiter's original computation of the awards made, pegged as of the time the decision was rendered
and confirmed with modification by a final CA decision, is legally proper. The question is posed, given
that the petitioner did not immediately pay the awards stated in the original labor arbiter's decision;
it delayed payment because it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way
the original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with
finality. This is the finding of the illegality of the dismissal and the awards of separation pay in lieu
of reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the computation.
This part, being merely a computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiter's decision that the
CA had affirmed. The public and private respondents, on the other hand, posit that a re-computation
is necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement
if reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given
in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of
the then NLRC Rules of Procedure which requires that a computation be made. This Section in part
states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation itself,
and no question would have arisen had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding
of illegality as well as on all the consequent awards made. Hence, the petitioner appealed the case
to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a
timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority
in affirming the payment of 13th month pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the
original labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the computation due had the case
been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed
the award to include the separation pay and the backwages due up to the finality of the CA decision
that fully terminated the case on the merits. Unfortunately, the labor arbiter's approved computation
went beyond the finality of the CA decision (July 29, 2003) and included as well the payment for
awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the
indemnity awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the Labor
Arbiter in that decision.29 A recomputation (or an original computation, if no previous computation
has been made) is a part of the law – specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision – that is read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon execution of the decision
does not constitute an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this dismissal is affected,
and this is not a violation of the principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement
is allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning
point instead of the reinstatement that the law decrees. In allowing separation pay, the final decision
effectively declares that the employment relationship ended so that separation pay and backwages
are to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing legal
interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013, approved the amendment of Section 2 34 of Circular No. 905, Series of
1982 and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks
and Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-
Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum - as
reflected in the case of Eastern Shipping Lines40and Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will now be six percent
(6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could
only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest
rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or
credits, including those for loans of low priority such as consumer loans, as well as such loans made
by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1,
2013, said judgments shall not be disturbed and shall continue to be implemented applying the rate
of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of G.R. No. 211228 November 12, 2014
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an UNIVERSITY OF PANGASINAN, INC., CESAR DUQUE/JUAN LLAMAS AMOR/DOMINADOR
equivalent to a forbearance of credit. REYES,Petitioners,
vs.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, FLORENTINO FERNANDEZ and HEIRS OF NILDA FERNANDEZ, Respondents.
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein. DECISION

WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals REYES, J.:
in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE.
Respondents are Ordered to Pay petitioner:
University of Pangasinan, Inc. (UPI), an educational institution, and its former officials, Cesar Duque,
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997
Juan Llamas Amor and Dominador Reyes (collectively referred to as the petitioners), are before this
up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and
Court with a petition for review on certiorari1 filed under Rule 45 of the Rules of Court to assail the
executory;
Decision2 rendered by the Court of Appeals (CA) on November 5, 2013 and the Resolution 3 thereafter
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month
issued on February 7, 2014 in CA-G.R. SP No. 107230. The CA reversed and set aside the
pay per year of service; and
Decision4 dated July 21, 2008 and Resolution5 dated November 11, 2008 of the National Labor
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from
Relations Commission’s (NLRC) First Division in NLRC-NCR CA No. 027116-01 (AE-09-06) granting
May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their
the appeal filed by the petitioners against the Order 6 dated August 22, 2006 ofLabor Arbiter [LA]
full satisfaction.
Luis D. Flores (LA Flores). The CA, ineffect, reinstated LA Flores’ order approving an updated
computation of the money claims of Florentino Fernandez (Florentino) and his now deceased wife,
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits Nilda Fernandez (Nilda),7 both faculty members of UPI, who were illegally dismissed from service on
awarded and due to petitioner in accordance with this Decision. May 9, 2000 for alleged dishonesty, abuse of authority and unbecoming conduct.

Antecedents

The CA aptly summarized the facts of the case up to the filing before it of the Petition for
Certiorari8 by Florentino and the heirs of Nilda (respondents), viz:

This case arose from a complaint for illegal dismissal filed by [Florentino and Nilda] on May 18, 2000
against [UPI], its President Cesar Duque, Executive Vice-President Juan Llamas Amor and Director
for Student Affairs Dominador Reyes x x x.

In a Decision dated November 6, 2000, [Labor Arbiter Rolando D. Gambito (LA Gambito)] ruled that
[Florentino and Nilda] were illegally dismissed by [the petitioners]. The dispositive portion of the
Decision reads:

"ACCORDINGLY, judgment is hereby rendered as follows:

1. Declaring that [the petitioners] are not liable for unfair labor practice;
2. Declaring that [Florentino and Nilda] were dismissed from their positions as college instructors
without just and valid cause;
3. Ordering [UPI] and/or its president Cesar T. Duque, and vice-president, Juan Llamas Amor to
pay [Florentino and Nilda] backwages, allowances and other benefits computed from the date
of their dismissal on May 9, 2000 up to November 6, 2000, date of promulgation of decision;
4. Ordering that instead of reinstatement of [Florentino and Nilda] to their former positions, [the
petitioners] should pay them separation pay equivalent to one (1) month salary for every year
of service, a fraction of at least six (6) months shall be considered as one (1) whole year;
5. Ordering the [petitioners] to pay [Florentino and Nilda] attorney’s fees inthe amount of
₱20,000[.00];
6. Denying [Florentino and Nilda’s] claim for moral and exemplary damages and all other claims
for want of merit.

[The petitioners] interposed anappeal to the NLRC, which affirmed [LA Gambito’s] Decision in a
Resolution dated June 29, 2001 x x x[.]
[The petitioners] filed a Motion for Reconsiderationwhich was granted by the NLRC in a Resolution
dated February 21, 2002, the dispositive portion of which reads:
"WHEREFORE, finding compelling reasons to reverse Our previous ruling, the Motion for
Reconsideration is hereby GRANTED, the Resolution dated June 29, 2001 is hereby SET ASIDE
and the decision of [LA Gambito] REVERSED. The complaint is hereby DISMISSED with costs
against [Florentino and Nilda].
Aggrieved, [Florentino and Nilda] filed a Petition for Certiorari with [the CA] to annul the NLRC’s
Resolution dated February 21, 2002. On September 13, 2004, [the CA] rendered a Decision granting
the petition. The dispositive portion thereof reads:
"WHEREFORE, premises considered, the petition is hereby GRANTED. The assailed resolution
dated February 21, 2002 of x x x NLRC (First Division) in NLRC NCR Case No. SUB-RAB 01-07-
05-0092-00; NLRC NCR CA No. 027116-2001 is hereby REVERSED and SET ASIDE. The decision
of [LA Gambito] dated November 6, 2000 is hereby REINSTATED.
[UPI] appealed [the CA’s] Decision to the Supreme Court but which was denied by the Supreme
Court in a Resolution dated February 21, 2005 on the ground that [UPI] failed toproperly verify its
petition in accordance with Section 1, Rule 45 in relation to Section 4, Rule 7, and A.M. No. 00-2-
10-SC. [UPI’s] motion for reconsideration was likewise denied with finality by the Supreme Court in
a Resolution dated June 6, 2005.
As a consequence, an Entry of Judgment was issued by the Supreme Court declaring its Resolution
dated February 21, 2005 final and executory as of July 11, 2005.
Subsequently, [Florentino and Nilda] moved for a re-computation of their award to include their
backwages and other benefits from the date of the decision of [LA Gambito] up to the finality of the
decision on July 11, 2005. They likewise moved for the issuance of a writ of execution. During the
pre-execution conference, [UPI] questioned the re-computation of [Florentino and Nilda’s]
backwages and awards. In view of a stand-off, [LA Flores] required both parties to submit their
respective computations and justifications.
On August 22, 2006, [LA Flores] issued an Order ruling as follows:
"Before Us is an OmnibusMotion filed by [UPI] through its legal counsel alleging among other
things the adoption of the final decision of [LA Gambito] dated November 6, 2000.
"xxx Please take note that x x x the decision rendered by the [CA] reinstating the decision of
[LA Gambito] x x x was declared final and executory by no less than the Supreme Court of the
Philippines by its issuance of a final entry of Judgment dated July 11, 2005.
Hence, there is a need to update and upgrade the computation of money claims and separation
pay which has amounted now to ₱2,165,467.02 as finally completed by our Labor Arbitration
Associate Galo Regino L. Esperanza hereto attached as Annex "A".
The pending motion to Dismiss is hereby set aside for lack of merit.
The substitution of [the] heirs of [Nilda] is hereby granted.
On the same date (August 22, 2006),[LA Flores] issued a writ of execution.
[UPI] filed a Motion for Reconsiderationof the above Order but it was denied by [LA Flores] in an
Order dated September 12, 2006 on the ground that no motion for reconsideration of any order or
decision is allowed under Section 19, Rule V of the NLRC Rules of Procedure.
In another Order likewise dated September 12, 2006, [LA Flores] denied [UPI’s] Motion to Quash
Writ of Executionand directed the sheriff to proceed with the due execution of the writ.
[The petitioners] interposed an appeal to the NLRC questioning [LA Flores’] Orders dated August 22,
2006 and September 12, 2006 basically alleging that [Florentino and Nilda] are only entitled to the
amount of ₱756,502.47 awarded by [LA Gambito] in the Decision dated November 6, 2000, and not
the recomputed amount of ₱2,165,467.02.
In the assailed Decision dated July 21, 2008, the NLRC granted the appeal. x x x
[Florentino and Nilda] filed a Motion for Reconsiderationbut it was denied by the NLRC in a
Resolution dated November 11, 2008 x x x[.]
Proceedings before the CA
The respondents filed before the CA a Petition for Certiorari 10 primarily anchored on the issue of
what the proper basis was for the computation of backwages and benefits to be paid to an employee.
They claimed that the reckoning period should be from the time of illegal dismissal on May 9, 2000
up to the finalityof the decision to be executed on July 11, 2005 as stated in the Entry of Judgment.
Further, an interest of 12% per annumshould be imposed upon the total adjudged award.
On November 5, 2013, the CA rendered the assailed Decision, the decretal portion of which reads:
WHEREFORE, premises considered, the Petition for Certiorari is GRANTED. The Decision dated July
21, 2008 and Resolution dated November 11, 2008 of the [NLRC] are REVERSED and SET ASIDE
and [LA Flores’] Order dated August 22, 2006 is REINSTATED.
[The petitioners] are ORDERED to PAY[the respondents] the following:
1) backwages computed from May 9, 2000 (the date when [Florentino and Nilda] were illegally
dismissed from employment) up to July 11, 2005 (the date of the finality of the Supreme Court’s
Resolution per Entry of Judgment);
2) separation pay computed from [Florentino and Nilda’s] respective first day[s] of employment
with [UPI] up to July 11, 2005 at the rate of one month pay per year of service;
3) attorney’s fees inthe amount of ₱20,000.00; and
4) legal interest of twelve percent (12%) per annum of the total monetary awards computed
from July 11, 2005 until their full satisfaction.
The [LA] is hereby ORDERED to make another re-computation according to the above directives.
In explaining its decision, the CA cited the following reasons:
We are mindful of the principle of immutability of judgment [and] that the fallo embodies the
court’s decisive action on the issue/s posed, and is thus the part of the decision that must be
enforced during execution. However, said doctrine finds no application in the case at bench.
It must be stressed that in illegal dismissal cases, the re- computation of backwages and similar
benefits is merely an inevitable consequence of the delay in paying the awards stated in the [LA’s]
decision. The instant controversy is not novel and was settled and adequately explained by the
Supreme Court in the case of Session Delights Ice Cream and Fast Foods vs. [CA], viz: x x x x
In concrete terms, the question is whether a re-computation in the course of execution of the [LA’s]
original computation of the awards made, pegged as of the time the decision was rendered and
confirmed with modification by a final CA decision, is legally proper. The question is posed, given
that the petitioner did not immediately pay the awards stated in the original [LA’s] decision; it
delayed payment because it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way
the original [LA] framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with
finality.This is the finding of the illegality of the dismissal and the awards of separation pay in lieu
of reinstatement, backwages, attorney’s fees, and legal interests.
The second part is the computation of the awards made.On its face, the computation the [LA] made
shows that it was time-bound as can be seen from the figures used in the computation. This part,
being merely a computation of what the first part of the decision established and declared, can, by
its nature, be re-computed. This is the part, too, that the petitioner now posits should no longer be
re-computed because the computation is already in the [LA’s] decision that the CA had affirmed.
The public and private respondents, on the other hand, posit that a re-computation is necessary
because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.
That the [LA’s] decision, at the same time that it found that an illegal dismissal had taken place,
also made a computation of the award, is understandable in light of Section 3, Rule VIII of the then
NLRC Rules of Procedure which requires that a computation be made. This Section in part states:
[T]he [LA] of origin, in cases involving monetary awards and at all events, as far as practicable,
shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the [LA’s] decision.
As we noted above, this implication is apparent from the terms of the computation itself, and no
question would have arisen had the parties terminated the case and implemented the decision at
that point.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the [LA’s] original decision in accordance with its basic component parts as we discussed
above. To reiterate, the first part contains the finding of illegality and its monetary consequences;
the second part is the computation of the awards or monetary consequences of the illegal dismissal,
computed as of the time of the [LA’s] original decision. To illustrate these points,had the case
involved a pure money claim for a specific sum (e.g., salary for a specific period) or a specific benefit
(e.g., 13th month pay for a specific year) made by a former employee, the [LA’s] computation would
admittedly have continuing currency because the sum is specific and any variation may only be on
the interests that may run from the finality of the decision ordering the payment of the specific sum.
In contrast with a ruling on a specific pure money claim, is a claim that relates to status (as in this
case, where the claim is the legality of the termination of the employment relationship). Inthis type
of cases, the decision or ruling is essentially declaratory of the status and of the rights, obligations
and monetary consequences that flow from the declared status (in this case, the payment of
separation pay and backwages and attorney’s fees when illegal dismissal is found). When this type
of decision is executed, what is primarily implemented is the declaratory finding on the status and
the rights and obligations of the parties therein; the arising monetary consequences from the
declaration only follow as component of the parties’rights and obligations.
In the present case, the CA confirmed that indeed an illegal dismissal had taken place, so that
separation pay in lieu of reinstatement and backwages should be paid. How much that separation
pay would be, would ideally be stated in the final CA decision; if not, the matter is for handling and
computation by the [LA] of origin as the labor official charged with the implementation of decisions
before the NLRC.
As the CA correctly pointed out, the basis for the computation of separation pay and backwages is
Article 279 of the Labor Code, as amended, which reads:
"xxx An employee who is unjustly dismissed from work shall be entitled to reinstatement without
loss of seniority rights and other privileges and to his full backwages, inclusive of allowances,
and to his other benefits or their monetary equivalent computed from the time his compensation
was withheld from him up to the time of his actual reinstatement."
Consistent with what we discussed above, we hold that under the terms of the decision under
execution, no essential change is made bya re-computation as this step is a necessary consequence
that flows from the nature of the illegality of dismissal declared in that decision. A re-computation
(or an original computation, if no previous computation has been made) is a part of the law –
specifically, Article 279 of the Labor Code and the established jurisprudence on this provision – that
is read into the decision. By the nature of an illegal dismissal case, the reliefs continue to add on
until full satisfaction, as expressed under Article 279 of the Labor Code. The re-computation of the
consequences of illegal dismissal upon execution of the decision does not constitute an alteration or
amendment of the final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected and this is not a violation of the
principle of immutability of final judgments.
That the amount the petitioner shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the [LA’s] decision.
Article 279 provides for the consequences of illegal dismissal in no uncertain terms, qualified only
by jurisprudence in its interpretation of when separation pay in lieu of reinstatement is allowed.
When that happens, the finality of the illegal dismissal decision becomes the reckoning point instead
of the reinstatement that the law decrees. In allowing separation pay, the final decision effectively
declares that the employment relationship ended so that separation pay and backwages are to be
computed up to that point. The decision also becomes a judgment for money from which another
consequence flows – the payment of interest in case ofdelay. This was what the CA correctly decreed
when it provided for the payment of the legal interest of 12% from the finality of the judgment, in
accordance with our ruling in Eastern Shipping Lines, Inc. v. [CA].
x x x The strict legalism in limiting the computation of the backwages and other benefits simply
because the Decision of the [LA] provided a computation only up to the date of the promulgation of
his Decision on November 6, 2000 cannotoverride or prejudice the substantive rights of anillegally
dismissed employee under the law and extant jurisprudence.
Likewise, pursuant to the above ruling of the Supreme Court, the monetary award in favor of [the
respondents] should earn legal interest at the rate of 12% fromJuly 11, 2005, the date of the finality
of the Decision, as a necessary consequence of [the petitioners’] legal actions in questioning the
execution of the [LA’s] Decision x x x.
With regard to [the respondents’] claims for additional attorney’s fees as well as moral and
exemplary damages, suffice it to state that the [LA] has already awarded [in their favor] the amount
of ₱20,000.00 as attorney’s feesbut denied [their] claim for damages in his Decision dated November
6, 2000. Any modification, which effectively increases or decreases the original amount awarded as
attorney’s fees is not included or contemplated in the discussion above on re-computation of
monetary awards. Pursuant to the Session Delights Ice Cream and Fast Foodsruling, the award of
attorney’s fees involves a specific sum and "would have continuing currency". If at all, the attorney’s
fees awarded in favor of[the respondents] will earn legal interest pursuant to the rules laid down in
Eastern Shipping Lines vs. [CA].
[The respondents’] claim for moral and exemplary damages was correctly denied by the [LA]. While
their dismissal may be illegal, there was no showing that [the petitioners] acted in bad faith. x x
x.12 (Citations omitted)
B. EVEN ASSUMING ARGUENDOTHAT THE RE-COMPUTATION OF AWARDS IS VALID, [UPI] IS NOT
LIABLE TO PAY BACKWAGES AND SEPARATION PAY FOR THE FULL PERIOD FROM 06 NOVEMBER
2000 UP TO 11 JULY 2005. RESPONDENTS WERE NOT REINSTATED IN THE GAMBITO DECISION.
C. RESPONDENTS ARE NOT ENTITLED TO BACKWAGES AND SEPARATION PAY BEYOND THEIR
RETIREMENT AGES. NEITHER ARE THEY ENTITLED TO LEGAL INTEREST AT 12%. 14
In support of the instant petition,the petitioners allege that the doctrines enunciated in Session
Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth Division)15 do not apply in the case at
bar. LA Gambito explicitly qualified the award of backwages and separation pay to be computed
from the date of dismissal up to November 6, 2000. The said qualification appears both in the
immutable and computation portions of the judgment.16
The petitioners also lament that the writ of execution issued by LA Flores included an award of 13th
month pay, which is nowhere to be found in LA Gambito’s decision. 17
It is further claimed that the petitioners did not immediately satisfy LA Gambito’s award because
the NLRC reversed the same. Hence, the petitioners cannot be faulted for relying upon the NLRC
decision and defending it before the CA. Consequently, even if backwages and separation pay were
really due, their computation should not include the period from February 21, 2002 to September
13, 2004,18 during which time the NLRC’s disquisition that there was no illegal dismissal stood.19
The petitioners likewise aver that since Florentino and Nilda turned 60 on December 11, 2002 and
April 30, 2002, respectively, backwages and separation pay could only be computed up to those
dates. Under both UPI’s retirement plan and Article 287 20 of the Labor Code, 60 is the optional
retirement age. On July 18, 2005, Florentino and Nilda filed separate claims for retirement benefits.
They, in effect, had admitted that 60 and not 65 is the retirement age for UPI’s faculty members.
Relevantly, in Espejo v. NLRC,21 the Court ruled that an employee may retire, or may be retired by
his employer upon reaching the age of 60.22
Lastly, the petitioners cite Nacar v. Gallery Frames23 to argue that legal interest should only be 6%
and not 12%.24
In their Comment,25 the respondents insist that Florentino’s compulsory retirement was due only on
the day before he turned 65 on December 11, 2002. Nilda, on the other hand, would have been
retired only on the day before she died on May 7, 2006. 26 The respondents likewise claim that 12%
and not 6% should be imposed upon the award as annual interest. Ruling of the Court

This Court affirms but modifies the ruling of the CA.

The CA, in the herein assailed Resolution issued on February 7, 2014, denied the petitioners’ Motion
for Reconsideration.13
The issues, being interrelated, shall be discussed jointly.

Issues
Updating the computation of awards to include as well backwages and separation pay
corresponding to the period after the rendition of LA Gambito’s decision on November 6,
Unperturbed, the petitioners seekto reverse the CA’s ruling by presenting before this Court the
2000 up to its finality on July 11, 2005 is not violative of the principle of immutability of
arguments below:
a final and executory judgment.

A. A FINAL AND EXECUTORY DECISION IS IMMUTABLE AND CAN NO LONGER BE MODIFIED. THE
This Court need not belabor the first two issues raised since they have been amply discussed by the
ORDER OF [LA] FLORES, AS SUSTAINED IN THE ASSAILED RULINGS, CANNOT MODIFY THE
CA in the assailed decision and resolution.
FINALAND EXECUTORY GAMBITO DECISION.
In Session Delightsaptly quoted by the CA and reiterated in several cases including Nacarand
Gonzales v. Solid Cement Corporation,27 the Court was emphatic that:
[N]o essential change is made by a re-computation as this step is a necessary consequence that
flows fromthe nature of the illegality of dismissal declared in that decision. A re-computation (or
an original computation, if no previous computation has been made) is a part of the law—
specifically, Article 279 of the Labor Code and the established jurisprudence on this provision—
that is read into the decision. By the nature of an illegal dismissal case, the reliefs continue to
add on until full satisfaction, as expressed under Article 279 of the Labor Code. The re-
computation of the consequencesof illegal dismissal upon execution of the decision does not
constitute an alteration or amendment of the final decision being implemented. The
illegaldismissal ruling stands; only the computation of monetary consequences of this dismissal
is affected and this is not a violation of the principle of immutability of final judgments.
That the amount the petitioner shall now pay has greatly increased is a consequence that it cannot
avoid asit is the risk that it ran when it continued to seek recourses against the labor arbiter’s
decision. Article 279 provides for the consequences ofillegal dismissal in no uncertain terms, qualified
only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement is allowed.
When that happens, the finality of the illegal dismissal decision becomes the reckoning point instead
of the reinstatement that the law decrees. In allowing separation pay, the final decision effectively
declares that the employment relationship ended so that separation pay and backwages are to be
computed up to that point. x x x.28 (Citation omitted and underscoring ours)
Prescinding from the above, the Court finds no reversible error committed by the CA when it affirmed
LA Flores’ Order dated August 22, 2006, which allowed the updating beyond November 6, 2000 of
the computation of backwages and separation pay awarded to the respondents. The CA correctly
ruled that the backwages should be computed from May 9, 2000, the date of illegal dismissal, up
toJuly 11, 2005, the date of the Entry of Judgment, while separation pay should be reckoned from
the respective first days of employment of Florentino and Nilda up to July 11, 2005 as well.
While the dispositive portion of theherein assailed CA decision did not explicitly refer to
the 13th month pay, its inclusion in the computation approved by LA Flores is proper.
Presidential Decree No. 85129 (P.D. No. 851) is the law directing the 13th month payment. On the
other hand, Article 279 of the Labor Code in part provides that an illegally-dismissed employee shall
be entitled to full backwages, inclusive of allowances, and other benefits ortheir monetary equivalent
computed from the time compensation was withheld up to the time of actual reinstatement.
In Gonzales, a final and executory decision of the LA did not explicitly award the 13th month pay.
During the execution proceedings, the NLRC included it in the computation. The CA deleted the
same. This Court thereafter ruled that the CA abused its discretion since "the 13th month pay fell
due x x x by legal mandate."30
31
In the body and dispositive portion of LA Gambito’s Decision dated November 6, 2000, which
became final and executory on July 11, 2005, he did not explicitly include the 13th month pay in the
award. However, the decision stated that Florentino and Nilda were entitled to full backwages and
other benefits.
Subsequently, the Labor Arbitration Associate’s updated computation of the award 32 included the
13th month pay and was approved by LA Flores through the latter’s August 22, 2006 Order. The
NLRC set aside LA Flores’ order, but the CA reinstated the same. The dispositive portion of the CA
decision expressly ordered the award of backwages, separation pay, attorney’s fees and legal
interest, but conspicuously absent was a reference to the inclusion of the 13th month pay.33
The Court finds that despite the CA’s non-explicit reference to the 13th month pay, following the
doctrine in Gonzales, its inclusion in the computation is proper. Entitlement to it is a right granted
by P.D. No. 851. Besides, the computation of award for backwages and other benefits is a mere
legal consequence of the finding that there was illegal dismissal. 34
In computing the backwages and benefits awarded to the respondents, the reckoning
period is not interrupted by the NLRC’s reversal of LA Gambito’s finding of illegal
dismissal.
The petitioners argue that even if backwages and benefits were really due, the computation should
not includethe period from February 21, 2002 to September 13, 2004, during which time the NLRC’s
disquisition that there was no illegal dismissal stood.
The argument fails to persuade.
In Gonzales, the Court stated that the increase in the amount that the corporation had to pay "is a
consequence that it cannot avoid as it is the risk that it ran when it continued to seek recourses
against the [LA’s] decision."35
Further, in Reyes v. NLRC, et al.,36 the Court declared that:
One of the natural consequences of a finding that an employee has been illegally dismissed is
the payment of backwages corresponding to the period from his dismissal up to actual
reinstatement. The statutory intent of this matter is clearly discernible. The payment of
backwages allows the employee to recover from the employer that which he has lost by way of
wages as a result of his dismissal. Logically, it must be computed from the date of petitioner’s
illegal dismissal up to the time of actual reinstatement. There can be no gap or interruption, lest
we defeat the very reason of the law in granting the same. x x x. 37 (Citation omitted and
underscoring ours)
Although in Reyes, the issue relates to the delay in filing of the complaint for illegal dismissal from
the time of termination, there is no preclusion to apply the doctrine that there should be no gap or
interruption in the reckoning period during which the dismissed employee is entitled to backwages
and benefits. The statutory intent in the award of backwages and benefits is clear. Further, as
declared in Gonzales, an employer takes a risk in assailing the LA’s finding of illegal dismissal, but
there is no insulation from the consequences therefrom.
The CA properly imposed a legal interest upon the total monetary award reckoned from
the Entry of Judgment on July 11, 2005 until full satisfaction thereof, but the Court
modifies the rate indicated in the assailed decision to conform to the doctrine in Nacar.
In Gonzales, the Court stated that when there is a finding of illegal dismissal and an award of
backwages and separation pay, "[t]he decision also becomes a judgment for money from which
another consequence flows—the payment of interest in case of delay."38
Again in Gonzales, the Court instructed that legal interest is imposable upon the "total unpaid
judgment amount, from the time x x x the decision (on the merits in the original case) became
final."39
In the case at bar, the CA properly imposed the legal interest upon the total monetary award even
if none was explicitly included in the fine print of LA Gambito’s decision and LA Flores’ order. The
imposition of legal interest is not to be considered as an alteration of the final judgment to be
executed. The legal interest is already deemed read into the decision.
As to the correct rate of imposable interest, the petitioners argue that only 6% and not 12% is
mandated pursuant to the ruling in Nacar.
Nacaris instructive anent the rate ofinterest imposable upon the total adjudged monetary award,
viz:
[T]he Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 2 40 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799,41 Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or for bearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance ofany money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum– as
reflected in the case of Eastern Shipping Linesand Subsection X305.1 of the Manual of Regulationsfor
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No. 799 – but will now be six percent
(6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could
only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per
annumlegal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable.
Nonetheless, with regard to those judgments that have become final and executory prior to July 1,
2013, saidjudgments shall not be disturbed and shall continue to be implemented applying the rate
of interest fixed therein.42 (Some citations omitted and underscoring ours)
In Nacar, during the execution proceedings, the LA, NLRC and the CA did not impose a legal
interestupon the total adjudged award. Thereafter, this Court granted the petition filed before it by
the dismissed employee pleading for the imposition upon the monetary award of the legal interest,
which the Court declared to be 12% per annumfrom the date of the Entry of Judgment on May 27,
2002 to June 30, 2013, and 6% per annum from July 1, 2013 until their full satisfaction.
Similarly, in the case of Florentino and Nilda, LA Gambito’s decision became final and executory on
July11, 2005, during which time, the prevailing rate of legal interest was 12%. Note, however, that
LA Gambito’s decision and subsequently, even LA Flores’ Order, dated August 22, 2006, made no
explicit award of legal interest. As discussed above though, the imposition of the legal interest is
already deemed read into the decision and order. For the same reason, the CA, in the herein assailed
decision, expressly included the said interest in the computation.
In Nacar, and in the case before this Court now, the judgments finding that the employees were
illegally dismissed became final and executory before July 1, 2013. In both cases too, the said
judgments did not explicitly include the imposition of the legal interest upon the total adjudged
award. In the case of Florentino and Nilda, it was the CA, which first expressly included the legal
interest in the equation. In Nacar, this Court made the explicit inclusion and pegged the rate at12%
from the date of the Entry of Judgment up to June 30, 2013, and at 6% from July 1, 2013 until full
satisfaction thereof. The circumstances in the instant petition are similar to the foregoing, hence,
Nacarfinds application. Consequently, the Court imposes upon the total adjudged award an interest
of 12% interest per annum reckoned from July 11, 2005 until June30, 2013. The interest of 6% per
annumis imposed from July 1, 2013 until full satisfaction of the judgment award.
The computation of backwages and separation pay due to Florentino and Nilda properly
includes the period from 2002 to 2005.
The petitioners point out that Florentino and Nilda turned 60 on December 11, 2002 and April 30,
2002, respectively. Thus, backwages and separation pay could only be computed up to those dates
since under both UPI’s retirement plan and Article 287 ofthe Labor Code, 60 is the optional
retirement age. Further, on July 18, 2005, Florentino and Nilda filed separate claims for retirement
benefits, hence, effectively admitting that 60 and not 65 is the retirement age for UPI’s faculty
members.
Nilda and Florentino were born on April 30, 1942 and December 11, 1942, respectively. In 2002,
both had turned 60 and can opt to retire. The Court cannot, however, agree that this isthe cut-off
date for the computation of backwages and separation pay due to them because of the reasons
discussed below.
First, 60 is merely an optional but not the mandatory retirement age. Second, the evidence
submitted do not showat whose option it is to retire the faculty members before the age of 65. Third,
there is no proof whatsoever that the faculty members of UPI indeed retire at 60 years of age.
Fourth, Florentino and Nilda filed claims for retirement pay in 2005 when they were both 63, hence,
their acts did not necessarily constitute an admission that 60 is the retirement age for UPI’s faculty
members.
In view of the above, the Court finds that no mistake was committed by LA Flores and the CA in
allowing the computation of backwages and separation pay due to Florentino and Nilda to include
the period beyond 2002.
WHEREFORE, premises considered, the Decision of the Court of Appeals rendered on November 5,
2013,and the Resolution issued on February 7, 2014 in CA-G.R. SP No. 107230 are AFFIRMED with
MODIFICATIONS. The petitioners herein, University of Pangasinan, Inc. and its former officials, Cesar
Duque, Juan Llamas Amor and Dominador Reyes are ORDERED TO PAY Florentino Fernandez and
the Heirs of Nilda Fernandez the following:
(1) backwages, including the 13th month pay, to be computed from May 9, 2000, the date of
illegal dismissal from employment, up to July 11, 2005, the date of finalityof the Court Resolution
in G.R. No. 166103 per Entry of Judgment;
(2) separation pay computed from Florentino Fernandez and Nilda Fernandez’s respective first
days of employment with the University of Pangasinan, Inc. up to July 11, 2005 at the rate of
one month pay per year of service;
(3) attorney's fees in the amount of ₱20,000.00; and
(4) interest of twelve percent ( 12%) per annum of the total monetary award, computed from
July 11, 2005 to June 30, 2013, and six percent (6%) per annum from July 1, 2013 until full
satisfaction.
The LABOR ARBITER is hereby ORDERED to make a RECOMPUTATION of the total monetary benefits
awarded and due to Florentino Fernandez and Nilda Fernandez in accordance with this Resolution.
Footnotes
20
Article 287. Retirement. Any employee may be retired upon reaching the retirement age established in the
collective bargaining agreement or other applicable employment contract.
In case of retirement, the employee shall beentitled to receive such retirement benefits as he may have earned under
existing laws and any collective bargaining agreement and other agreements: Provided, however, That an employee’s
retirement benefits under any collective bargaining and other agreements shall not be less than those provided
therein.
In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment,
an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby
declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire
and shall be entitled toretirement pay equivalent to at least one-half (1/2) month salary for every year of service, a
fraction of at least six (6) months being considered as one whole year.
Unless the parties provide for broader inclusions, the term ‘one-half (1/2) month salary’ shall mean fifteen (15) days
plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service
incentive leaves.
Retail, service and agricultural establishments oroperations employing not more than ten (10) employees or workers
are exempted from the coverage of this provision.
Violation of this provision is hereby declared unlawful and subject to the penal provisions under Article 288 of this
Code.
40
SEC. 2. The rate of interest for the loan or for bearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve percent (12%)
per annum.
G.R. No. 206459
SPOUSES FLORANTE E. JONSAY and LUZVIMINDA L. JONSAY and MOMARCO IMPORT CO.,
INC., Petitioners,
vs.
SOLIDBANK CORPORATION (now METROPOLITAN BANK AND TRUST
COMPANY), Respondent.
REYES, J.:
Before this Court is a Petition for Review1 from the Amended Decision 2 dated November 26, 2012 of
the Court of Appeals (CA) in CA-G.R. CV No. 94012, which reconsidered its earlier Decision 3 therein
dated April 27, 2012, and granted in part the appeal of herein respondent Solidbank Corporation
(Solidbank) from the Amended Decision4dated July 7, 2009 of the Regional Trial Court (RTC) of
Calamba City, Branch 35, in Civil Case No. 2912-2000-C, which annulled the extrajudicial foreclosure
proceedings instituted by Solidbank against the Spouses Florante E. Jonsay (Florante) and
Luzviminda L. Jonsay (Luzviminda) (Spouses Jonsay) and Momarco Import Co., Inc. (Momarco)
(petitioners) over the mortgaged properties.
Factual Antecedents
Momarco, controlled and owned by the Spouses Jonsay, is an importer, manufacturer and distributor
of animal health and feedmill products catering to cattle, hog and poultry producers. On November
9, 1995, and again on April 28, 1997, Momarco obtained loans of P40,000,000.00 and
P20,000,000.00, respectively, from Solidbank for which the Spouses Jonsay executed a blanket
mortgage over three parcels of land they owned in Calamba City, Laguna registered in their names
under Transfer Certificates of Title Nos. T-224751, T-210327 and T-269668 containing a total of
23,733 square meters.5 On November 3, 1997,6 the loans were consolidated under one promissory
note7 for the combined amount of P60,000,000.00, signed by Florante as President of Momarco,
with his wife Luzviminda also signing as co-maker.8 The stipulated rate of interest was 18.75% per
annum, along with an escalation clause tied to increases in pertinent Central Bank-declared interest
rates, by which Solidbank was eventually able to unilaterally increase the interest charges up to
30% per annum. 9
Momarco religiously paid the monthly interests charged by Solidbank from November 199510 until
January 1998, when it paid Pl,370,321.09. Claiming business reverses brought on by the 1997 Asian
financial crisis, Momarco tried unsuccessfully to negotiate a moratorium or suspension in its interest
payments. Due to persistent demands by Solidbank, Momarco made its next, and its last, monthly
interest payment in April 1998 in the amount of Pl,000,000.00. Solidbank applied the said payment
to Momarco's accrued interest for February 1998. Momarco sought a loan from Landbank of the
Philippines to pay off its aforesaid debt but its application fell through. The anticipated expropriation
by the Department of Public Works and Highways of the mortgaged lots for the extension of the
South Luzon Expressway (SLEX) also did not materialize. 11
Solidbank proceeded to extrajudicially foreclose on the mortgage, and at the auction sale held on
March 5, 1999, it submitted the winning bid of P82,327,249.54, 12 representing Momarco's
outstanding loans, interests and penalties, plus attorney's fees of P3,600,000.00. But Momarco now
claims that on the date of the auction the fair market value of their mortgaged lots had increased
sevenfold to P441,750,000.00. 13 On March 22, 1999, Sheriff Adelio Perocho (Sheriff Perocho) issued
a certificate of sale to Solidbank, duly annotated on April 15, 1999 on the lots' titles. 14
On March 9, 2000, a month before the expiration of the period to redeem the lots, the petitioners
filed a Complaint15against Solidbank, Sheriff Perocho and the Register of Deeds of Calamba, Laguna,
docketed as Civil Case No. 2912-2000-C, for Annulment of the Extrajudicial Foreclosure of Mortgage,
Injunction, Accounting and Damages with Prayer for the Immediate Issuance of a Writ of Preliminary
Prohibitory Injunction. They averred that: (a) the amount claimed by Solidbank as Momarco's total
loan indebtedness is bloated; (b) Solidbank's interest charges are illegal for exceeding the legal rate
of 12% per annum; (c) the filing fee it charged has no legal .and factual basis; (d) the attorney's
fees of P3,600,000.00 it billed the petitioners is excessive and unconscionable; (e) their previous
payments from 1995 to 1997 were not taken into account in computing their principal indebtedness;
(t) Sheriff Perocho's certificate of posting was invalid; and (g) the publication of the notice of the
auction sale was defective because the Morning Chronicle which published the said notice was not a
newspaper of general circulation in Calamba, Laguna. 16
After Solidbank filed its Answer with Counterclaim 17 on April 12, 2000, the RTC heard and granted
the petitioners' application for temporary restraining order on April 13, 2000, 18 followed on May 2,
200019 by issuance of a writ of preliminary prohibitory injunction, thus suspending the consolidation
of Solidbank's titles to the subject lots.
The petitioners' principal witness was Florante, whose testimony was summarized by the RTC in its
amended decision, as follows:
[Florante] signed the loan documents in blank and the signing took place at his office in Quezon
City; he asserted that they were able to pay more than Twenty-Four Million Pesos but the same
were not deducted by the bank to arrive at the correct amount of indebtedness. He said that his
accountant prepared statement of payments showing the payments made to the bank. He further
claimed that there are still other payments, the receipts of which are being retrieved by his
accountant. He also asserted that the newspaper where the notice of foreclosure sale was published
is not a newspaper of general circulation.
The same cannot be found in a newspaper stand in the place where the mortgaged properties are
located; he further claimed that [he] suffered moral, emotional and mental injury; he is a graduate
of Doctor of Veterinary Medicine; a permanent member of the Philippine Veterinary Medical
Association; graduated and passed the Board; he is the President of [Momarco] and the President
of Momarco Resort; he has been engaged in this line of business for 31 years now; his wife is a
graduate of Dental Medicine and partner of [Momarco]; he has four (4) children three of them had
already graduated and one still in college; x x x he is also claiming for exemplary damages of Five
Million Pesos to set an example for other banks like Solidbank, to refrain from filing acts which are
irregular and affect borrowers like him, he claimed also for attorney[']s fees of Three
Million Pesos.20
Solidbank's witnesses, Lela Quijano, head of its collection division, and Benjamin Apan, its senior
manager for retail operations, admitted that the monthly interests it collected from 1995 to 1998
ranged from 18.75% to 30%, and that for 1998, Momarco paid P2,370,321.09 in interest. 21
Ruling of the RTC
On July 7, 2009, the RTC issued its Amended Decision, the fallo of which reads, as follows:
Wherefore, premises considered, judgment is rendered in favor of the [petitioners] and against the
defendant[s] by:
1) Declaring the extra-judicial foreclosure proceedings NULL and VOID and without any legal
effect and the defendants are prohibited to consolidate the titles in the name of [Solidbank]
without prejudice to the filing of the action for collection or recovery of the sum of money secured
by the real estate mortgage in the proper forum;
2) Ordering that the interest rates on the [petitioners'] indebtedness be reduced to 12% per
annum;
3) Declaring that the attorney's fees and filing fee being collected by [Solidbank] to be devoid
of any legal basis;
4) Ordering [Solidbank] to pay the [petitioners] the following sums, to wit:
a) Php20,000,000.00 - moral damages;
b) Php2,500,000.00 - exemplary damages;
c) Phpl,[500],000.00 - for attorney's fees.
5) Ordering the dismissal of the counterclaim for lack of merit.
The RTC ruled that the mortgage contract and the promissory notes prepared by Solidbank, which
the Spouses Jonsay signed in blank, were contracts of adhesion; that Solidbank failed to take into
account Momarco’s payments in the two years preceding 1998 totaling P24,277,293.22 (this amount
was not disputed by Solidbank); that the interest rates, ranging from 19% to 30%, as well as the
penalties, charges and attorney's fees imposed by Solidbank, were excessive, unconscionable and
immoral, and that Solidbank has no carte blanche authority under the Usury Law to unilaterally raise
the interest rates to levels as to enslave the borrower and hemorrhage its assets; that Solidbank's
verification in its application for foreclosure of mortgage was defective because it was signed not by
its President but only by a vice-president; that the Morning Chronicle, in which the notice of auction
was published, was not a newspaper of general circulation because it had no bona fide list of paying
subscribers; that Solidbank manipulated the foreclosure sale through a defective publication of the
notice of auction and by submitting an unconscionably low bid of P82,327,000.00, whereas the value
of the lots had risen sevenfold since the rehabilitation of the SLEX. 23
Ruling of the CA
On appeal to the CA, Solidbank interposed the following errors of the RTC, to wit:
THE [RTC] GRAVELY ERRED IN NULLIFYING THE FORECLOSURE PROCEEDINGS CONDUCTED
AGAINST [THE PETITIONERS'] PROPERTIES ON THE GROUND THAT THE REAL ESTATE
MORTGAGE EXECUTED BY THE PARTIES WAS A CONTRACT OF ADHESION;
THE [RTC] GRAVELY ERRED IN NULLIFYING THE FORECLOSURE PROCEEDINGS CONDUCTED
AGAINST [THE PETITIONERS'] PROPERTIES ON THE GROUND THAT THE NEWSPAPER WHERE
THE NOTICE OF FORECLOSURE WAS PUBLISHED IS NOT A NEWSPAPER OF GENERAL
CIRCULATION;
THE [RTC] GRAVELY ERRED IN NULLIFYING THE FORECLO[S]URE PROCEEDINGS CONDUCTED
AGAINST [THE PETITIONERS'] PROPERTIES ON THE GROUNDS THAT THE INTEREST RATES,
PENALTIES, ATTORNEY'S FEES CHARGED ARE EXCESSIVE, UNCONSCIONABLE AND IMMORAL
AND THAT THE [SOLIDBANK] DID NOT TAKE INTO ACCOUNT [THE PETITIONERS'] PREVIOUS
PAYMENT[S] IN THE AMOUNT OF P24,277,293.27;
THE [RTC] GRAVELY ERRED IN AWARDING MORAL DAMAGES, EXEMPLARY DAMAGES AND
ATTORNEY'S FEES IN FAVOR OF THE [PETITIONERS];
THE [RTC] GRAVE[LY] ERRED IN FAILING TO REGARD [THE PETITIONERS] [IN] ESTOPPEL
WHEN THE LATTER DID NOT IMPUGN THE VALIDITY OF THE LOAN AND MORTGAGE
DOCUMENTS· WITHIN A REASONABLE TIME.24
On April 27, 2012, the CA rendered judgment affirming the RTC in toto. It agreed that Solidbank did
not comply with the publication requirements under Section 3, Act No. 3135, which provides:
Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least
three public places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least
three consecutive weeks in a newspaper of general circulation in the municipality or
city.25 (Emphasis ours)
According to the CA, the Morning Chronicle was not a newspaper of general circulation,
notwithstanding the affidavit of publication issued by its publisher, Turing R. Crisostomo
(Crisostomo), to that effect as well as the certification of the Clerk of Court of RTC-Calamba City
that it was duly accredited by the court since May 28, 1997 to publish legal notices. The CA ruled
that it was not enough for Crisostomo to merely state in his affidavit that the Morning Chronicle was
published and edited in the province of Laguna and in San Pablo City without a showing that it was
published to disseminate local news and general information, that it had a bona fide list of paying
subscribers, that it was published at regular intervals, and that it was in general circulation in
Calamba City where the subject properties are located.26
In Metropolitan Bank and Trust Company, Inc. v. Peñafiel, 27 cited by the CA, the Court explained
that: (1) the object of a notice of sale is to achieve a reasonably wide publicity of the auction by
informing the public of the nature and condition of the property to be auctioned, and of the time,
place and terms of the sale, and thereby secure bidders and prevent a sacrifice of the property; (2)
a newspaper to be considered one of general circulation need not have the largest circulation but
must be able to appeal to the public in general and thus ensure a wide readership, and must not be
devoted solely to entertainment or the interest of a particular class, profession, trade, calling, race,
or religious denomination; and (3) Section 3 of Act No. 3135, as amended by Act No. 4118, does
not only require the newspaper to be of general circulation but also that it is circulated in the
municipality or city where the property is located. 28
The CA held that the accreditation of the Morning Chronicle by the Clerk of Court of the RTC to
publish legal notices is not determinative of whether it is a newspaper of general circulation in
Calamba City. 29
Concerning the loans due from the petitioners, the CA noted that under the proforma promissory
note which Solidbank prepared and which the Spouses Jonsay signed in blank, Solidbank enjoyed
unrestrained freedom to unilaterally increase the interest rate in any month. The note gave it
authority to increase or decrease the interest rate from time to time, "without any advance notice"
and "in the event the Monetary Board of the Central Bank of the Philippines raises or lowers the
interest rates on loans." According to the CA, this provision violated the principle of mutuality of
contracts embodied in Article 130830 of the Civil Code.31
The CA also held that the herein petitioners were not in estoppel for failing to seasonably question
the validity of the mortgage loan since the prescriptive period is reckoned from their notice of the
statements of account issued by Solidbank showing the unilateral increases in the interest, for only
by then would their cause of action have accrued. Since only three years had elapsed from the
execution of the mortgage contract to the filing of the complaint on March 15, 2000, the action was
brought within the 10-year prescriptive period.32
Solidbank moved for reconsideration 33 of the decision, which the CA granted in part on November
26, 2012, via its Amended Decision, to wit:
WHEREFORE, premises considered, the Motion is GRANTED IN PART. Our Decision promulgated
on April 27, 2012 is hereby amended. Paragraphs 2 and 5 of the dispositive portion of the July
7, 2009 Decision of the [RTC] of Calamba City, Branch 35 remain affirmed. Paragraphs 1, 3 and
4 thereof are hereby reversed and set aside.
Thus, in a complete reversal of its decision, the CA now not only found the parties' mortgage contract
valid, but also declared that Solidbank's extrajudicial foreclosure of the mortgage enjoyed the
presumption of regularity. It took into account the (a) Affidavit of Publication issued by Crisostomo
that it duly published the notice of auction sale on February 8, 15, and 22, 1999, (b) the Certification
by the Clerk of Court of the RTC-Calamba City that the Morning Chronicle was duly accredited by
the court to publish legal notices, and (c) the Raffle of Publication dated February 1, 1999 showing
that the said newspaper participated in and won the raffle on February 1, 1999 to publish the subject
notice. The CA stressed that since the selection of Morning Chronicle to publish the notice was
through a court-supervised raffle, Solidbank was fully justified in relying on the regularity of the
publication of its notice in the aforesaid newspaper, in the choice of which it had no hand
whatsoever. 35
The CA further held that no malice can be imputed on Solidbank's refusal to accept the petitioners'
offer of dacion en pago, since it was duly authorized under the parties' mortgage contract to extra
judicially foreclose on the mortgage in the event that Momarco defaulted in its interest payments.
Thus, when Solidbank opted to foreclose on the mortgage, it was merely exercising its contractual
right to protept its interest, and Solidbank's supposed insensitivity or lack of sympathy toward
Momarco's financial plight is irrelevant and is not indemnifiable as bad faith. 36
On the other hand, the CA pointed out that other than Florante's bare testimonial allegations, the
petitioners failed to adduce evidence to debunk Solidbank's compliance with the publication of its
auction notice. They were unable to show that the Morning Chronicle was not a newspaper of general
circulation in Calamba City, that it was not published once a week, or that it could not be found in
newsstands. 37
Thus, the CA in its amended decision: (a) upheld the validity of the extrajudicial foreclosure
proceedings, the consolidation of the titles of Solidbank in the foreclosed properties, and the
dismissal of Solidbank's counterclaim; (b) ordered the reduction of the interest rates on the
petitioners' indebtedness to the legal rate of 12% per annum, thereby affirming that the unilateral
increases in the monthly interest rates, which averaged 2.19% per month or 26.25% per
annum, "without notice to the mortgagors," are void for being iniquitous, excessive and
unconscionable; and (c) upheld the collection by the Solidbank of attorney's fees and filing fee.
Nonetheless, the CA invalidated for lack of basis the award by the RTC to the petitioners of
P20,000,000.00 as moral damages, P2,500,000.00 as exemplary damages, and Pl,500,000.00 as
attorney's fees. 38
The petitioners moved for partial reconsideration 39 of the CA's Amended Decision dated November
26, 2012, but the CA denied the same in its Resolution 40 dated March 19, 2013.
Petition for Review in the Supreme Court
In this petition for review, the petitioners interpose the following assignment of errors, to wit:
1. WITH ALL DUE RESPECT, THE [CA] GRAVELY ERRED BY RENDERJNG TWO (2) CONFLICTING
DECISIONS ON THE SAME SET OF FACTS AND EVIDENCE. THE AMENDED DECISION IS NOT IN
ACCORD WITH LAW AND EXISTING JURJSPRUDENCE[; AND]
 2. WITH ALL DUE RESPECT, THE [CA] GRAVELY ERRED IN NOT CORRECTLY APPLYING THE LAW
AND JURJSPRUDENCE ON EXTRAJUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGE,
DAMAGES AND CONTRACT OF ADHESION IN THE AMENDED DECISION. 41
The petitioners decry how, after first declaring that "[a]ll told, we find no reason to disturb, much
less reverse, the assailed decision of the RTC," the CA could now be permitted to make a complete
turn-around from its previous decision over the same set of facts, and declare that the subject
foreclosure is valid, order the consolidation of Solidbank's titles, and delete the award of moral and
exemplary damages, attorney's fees and costs of suit.42
Ruling of the Court
There is merit in the petition.
There is no legal proscription against an adjudicating court adopting on motion for
reconsideration by a party a position that is completely contrary to one it had previously
taken in a case.
The petitioners' dismay over how the same division of the CA could make two opposite and conflicting
decisions over exactly the same facts is understandable. Yet, what the CA simply did was to admit
that it had committed an error of judgment, one which it was nonetheless fully authorized to correct
upon a timely motion for reconsideration. Sections 1, 2 and 3 of Rule 3 7 of the Rules of Court are
pertinent:
Sec. 1. Grounds of and period for filing motion for new trial or reconsideration. - x x x.
Within the same period, the aggrieved party may move for reconsideration upon the grounds
that the damages awarded are excessive, that the evidence is insufficient to justify the decision
or final order, or that the decision or final order is contrary to law.
Sec. 2. Contents of motion for new trial or reconsideration and notice thereof - x x x.
A motion for reconsideration shall point out specifically the findings or conclusions of the
judgment or final order which are not supported by the evidence or which are contrary to law[,]
making express reference to the testimonial or documentary evidence or to the provisions of
law alleged to be contrary to such findings or conclusions.
Sec. 3. Action upon motion for new trial or reconsideration. - x x x If the court finds that
excessive damages have been awarded or that the judgment or final order is contrary to the
evidence or law, it may amend such judgment or final order accordingly.
The rule is that while the decision of a court becomes final upon the lapse of the period to appeal by
any party, 43 but the filing of a motion for reconsideration or new trial interrupts or suspends the
running of the said period, and prevents the finality of the decision or order from setting in.44 A
motion for reconsideration allows a party to request the adjudicating court or quasi-judicial body to
take a second look at its earlier judgment and correct any errors it may have committed. 45 As
explained in Salcedo II v. COMELEC,46 a motion for reconsideration allows the adjudicator or judge
to take a second opportunity to review the case and to grapple anew with the issues therein, and to
decide again a question previously raised, there being no legal proscription imposed against the
deciding body adopting thereby a new position contrary to one it had previously taken. 47
Solidbank has sufficiently complied with the requirement of publication under Section 3
of Act No. 3135.
In Philippine Savings Bank v. Spouses Geronimo, 48 the Court stressed that the right of a bank to
extrajudicially foreclose on a real estate mortgage is well-recognized, provided it faithfully complies
with the statutory requirements of foreclosure:
While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagor's failure
to pay his obligation, it is imperative that such right be exercised according to its clear mandate.
Each and every requirement of the law must be complied with, lest, the valid exercise of the
right would end. It must be remembered that the exercise of a right ends when the right
disappears, and it disappears when it is abused especially to the prejudice of others. 49
In Cristobal v. CA, 50 the Court explicitly held that foreclosure proceedings enjoy the presumption of
regularity and the mortgagor who alleges the absence of a requisite has the burden of proving such
fact:
Further, as respondent bank asserts, a mortgagor who alleges absence of a requisite has the
burden of establishing that fact. Petitioners failed in this regard. Foreclosure proceedings have
in their favor the presumption of regularility and the burden of evidence to rebut the same is on
the petitioners.x x x. 51 (Citation omitted)
The petitioners insist that the CA was correct when it first ruled in its Decision dated April 27, 2012
that there was no valid publication of the notice of auction, since the Morning Chronicle was not
shown to be a newspaper of general circulation in Calamba City. The CA disregarded the affidavit of
publication executed by its publisher to that effect, as well as the certification by the Clerk of Court
of RTC-Calamba City that the said paper was duly accredited by the court to publish legal notices.
It ruled that there was no showing by the Solidbank that the Morning Chronicle was published to
disseminate local news and general information, that it had a bona fide list of paying subscribers,
that it was published at regular intervals, and that it was in circulation in Calamba City where the
subject properties are located.
But in its Amended Decision on November 26, 2012, the CA now ruled that the questioned
foreclosure proceedings enjoy the presumption of regularity, and it is the burden of the petitioners
to overcome this presumption. The CA stated:
It is an elementary rule that the burden of proof is the duty of a party to present evidence on
the facts in issue necessary to establish his claim or defense as required by law. The Court has
likewise ruled in previous cases that foreclosure proceedings enjoy the presumption of regularity
and that the mortgagor who alleges absence of a requisite has the burden of proving such
fact. 52 (Citation omitted)
In Fortune Motors (Phils.) Inc. v. Metropolitan Bank and Trust Co., 53 it was stressed that in order
for publication to serve its intended purpose, the newspaper should be in general circulation in the
place where the foreclosed properties to be auctioned are located. 54 But in Metropolitan Bank and
Trust Co. v. Spouses Miranda, 55 the Court also clarified that the matter of compliance with the
notice and publication requirements is a factual issue which need not be resolved by the high court:
It has been our consistent ruling that the question of compliance or non-compliance with notice
and publication requirements of an extrajudicial foreclosure sale is a factual issue, and the
resolution thereof by the trial court is generally binding on this Court. The matter of sufficiency
of posting and publication of a notice of foreclosure sale need not be resolved by this Court,
especially when the findings of the RTC were sustained by the CA. Well-established is the rule
that factual findings of the CA are conclusive on the parties and carry even more weight when
the said court affirms the factual findings of the trial court. 56 (Citation omitted)
In Spouses Miranda, the Court ruled that the foreclosing bank could not invoke the presumption of
regularity of the publication of the notice of auction absent any proof whatsoever of the fact of
publication. 57 In the case at bar, there is no dispute that there was publication of the auction notice,
which the CA in its amended decision now held to have sufficiently complied with the requirement
of publication under Section 3 of Act No. 3135. Unfortunately, against the fact of publication and the
presumption of regularity of the foreclosure proceedings, the petitioners' only contrary evidence is
Florante's testimonial assertion that the Morning Chronicle was not a newspaper of general
circulation in Calamba City and that it could not be found in the local newsstands.
Admittedly, the records are sparse as to the details of the publication. In his Affidavit of Publication,
publisher Crisostomo stated concerning the circulation of his paper, as follows:
I, [CRISOSTOMO], legal age, Filipino, resident of Brgy. III-D, San Pablo City with postal address
at San Pablo City, after having been duly sworn in accordance to law, depose and say[:]
That I am the Publisher of The Morning Chronicle Weekly newspaper of Luzon Province and
Greater Manila Area, Cavite, [p ]ublished and edited in the Province of Laguna and San Pablo
City.
In Spouses Geronimo,59 it was held that the affidavit of publication executed by the account
executive of the newspaper is prima facie proof that the newspaper is generally circulated in the
place where the properties are located.60 But in substance, all that Crisostomo stated is that his
newspaper was ''published and edited in the province of Laguna and San Pablo City." He did not
particularly mention, as the CA seemed to demand in its initial decision, that the Morning
Chronicle was published and circulated to disseminate local news and general information in
Calamba City where the foreclosed properties are located.
Nonetheless, when the RTC accredited the Morning Chronicle to publish legal notices in Calamba
City, it can be presumed that the RTC had made a prior determination that the said newspaper had
met the requisites for valid publication of legal notices in the said locality, guided by the
understanding that for the publication of legal notices in Calamba City to serve its intended purpose,
it must be in general circulation therein. This presumption lays the burden upon the petitioners to
show otherwise, contrary to the CA's first ruling.
It is true that the Court also held in Peñafiel,61 concerning the evidentiary weight of the publisher's
affidavit of publication, that the accreditation by the RTC executive judge is not decisive on the issue
of whether a newspaper is of general circulation:
The accreditation of Maharlika Pilipinas by the Presiding Judge of the RTC is not decisive of
whether it is a newspaper of general circulation in Mandaluyong City. This Court is not bound to
adopt the Presiding Judge's determination, in connection with the said accreditation,
that Maharlika Pilipinas is a newspaper of general circulation. The court before which a case is
pending is bound to make a resolution of the issues based on the evidence on record. 62
But as the Court has seen, the petitioners failed to present proof to overcome the presumption of
regularity created by the publisher's affidavit of publication and the accreditation of the Morning
Chronicle by the RTC.63 Significantly, in A.M. No. 01-1-07-SC,64 the Court now requires all courts
beginning in 2001 to accredit local newspapers authorized to publish legal notices. 65
The petitioners' mere proposal to extinguish their loan obligations by way of dacion en
pago does not novate the mortgage contract.
On the question of the petitioners' failed proposal to extinguish their loan obligations by way
of dacion en pago, no bad faith can be imputed to Solidbank for refusing the offered settlement as
to render itself liable for moral and exemplary damages after opting to extrajudicially foreclose on
the mortgage. 66 In Tecnogas Philippines Manufacturing Corporation v. Philippine National
Bank,67 the Court held:
Dacion en pago is a special mode of payment whereby the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding obligation. The undertaking
is really one of sale, that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtor's debt. As such, the essential elements
of a contract of sale, namely, consent, object certain, and cause or consideration must be
present. It is only when the thing offered as an equivalent is accepted by the creditor that
novation takes place, thereby, totally extinguishing the debt.
On the first issue, the Court of Appeals did not err in ruling that Tecnogas has no clear legal right to
an injunctive relief because its proposal to pay by way of dacion en pago did not extinguish its
obligation. Undeniably, Tecnogas' proposal to pay by way of dacion en pago was not accepted by
PNB. Thus, the unaccepted proposal neither novates the parties' mortgage contract nor suspends
its execution as there was no meeting of the minds between the parties on whether the loan will be
extinguished by way of dacion en pago. Necessarily, upon Tecnogas' default in its obligations, the
foreclosure of the REM becomes a matter of right on the part of PNB, for such is the purpose of
requiring security for the loans.68 (Citation omitted)
An escalation clause in a loan agreement granting the lending bank authority to
unilaterally increase the interest rate without prior notice to and consent of the borrower
is void.
After annulling the foreclosure of mortgage, the RTC reduced the interest imposable on the
petitioners' loans to 12%, the legal interest allowed for a loan or forbearance of credit, citing Medel
v. CA.69 In effect, the RTC voided not just the unilateral increases in the monthly interest, but also
the contracted interest of 18.75%. The implication is to allow the petitioners to recover what they
may have paid in excess of what was validly due to Solidbank, if any.
In Floirendo, Jr. v. Metropolitan Bank and Trust Co., 70 the promissory note provided for interest at
15.446% per annum for the first 30 days, subject to upward/downward adjustment every 30 days
thereafter.71 It was further provided that:
The rate of interest and/or bank charges herein stipulated, during the term of this Promissory
Note, its extension, renewals or other modifications, may be increased, decreased, or otherwise
changed from time to time by the Bank without advance notice to me/us in the event of changes
in the interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, in the rediscount rate of member banks with the Central Bank of the Philippines, in
the interest rates on savings and time deposits, in the interest rates on the banks borrowings,
in the reserve requirements, or in the overall costs of funding or money[.] 72 (Italics ours)
The Court ordered the "reformation" of the real estate mortgage contract and the promissory note,
in that any increases in the interest rate beyond 15.446% per annum could not be collected by
respondent bank since it was devoid of prior consent of the petitioner, as well as ordered that the
interest paid by the debtor in excess of 15.446% be applied to the payment of the principal
obligation. 73
In Philippine National Bank v. CA, 74 the Court declared void the escalation clause in a credit
agreement whereby the "bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the future x x x." 75 The
Court said:
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who
 contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of
all the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest
is always a vital component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts. x x
x. 76 (Citation omitted and italics in the original)
In New Sampaguita Builders Construction, Inc. (NSBCJ) v. PNB,77 the Court condemned as the
"zenith of farcicality" a mortgage contract whereby the parties "specify and agree upon rates that
could be subsequently upgraded at whim by only one party to the agreement." 78 The Court declared
as a contract of adhesion a pro forma promissory note which creates a "take it or leave it" dilemma
for borrower and gives the mortgagee bank an unbridled right to adjust the interest independently
and upwardly, thereby completely taking away from the borrower the "right to assent to an
important modification in their agreement," thus negating the element of mutuality in their
contracts.79The Court quotes:
Increases in Interest Baseless
Promissorv Notes. In each drawdown, the Promissory Notes specified the interest rate to be
charged: 19.5 percent in the first, and 21.5 percent in the second and again in the third. However,
a uniform clause therein permitted respondent to increase the rate "within the limits allowed by
law at any time depending on whatever policy it may adopt in the future x x x," without
even giving prior notice to petitioners. The Court holds that petitioners' accessory duty to pay
interest did not give respondent unrestrained freedom to charge any rate other than that which was
agreed upon. No interest shall be due, unless expressly stipulated in writing. It would be the zenith
of farcicality to specify and agree upon rates that could be subsequently upgraded at whim by only
one party to the agreement.
The "unilateral detennination and imposition" of increased rates is "violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code." One-sided impositions do not have
the force of law between the parties, because such impositions are not based on the parties' essential
equality.
Although escalation clauses are valid in maintaining fiscal stability and retaining the value of money
on long-term contracts, giving respondent an unbridled right to adjust the interest independently
and upwardly would completely take away from petitioners the "right to assent to an important
modification in their agreement" and would also negate the element of mutuality in their contracts.
The clause cited earlier made the fulfillment of the contracts "dependent exclusively upon the
uncontrolled will" of respondent and was therefore void. Besides, the pro forma promissory notes
have the character of a contract d'adhesion, "where the parties do not bargain on equal footing, the
weaker party's [the debtor's] participation being reduced to the alternative 'to take it or leave it."'
"While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular No. 905, nothing
in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets." In fact, we have declared
nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury Law,
"authorized either party to unilaterally raise the interest rate without the other's consent."
Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing
signified a capital transfusion from lending institutions to businesses and industries and was done
for the purpose of stimulating their growth; yet respondent's continued "unilateral and lopsided
policy" of increasing interest rates "without the prior assent" of the borrower not only defeats this
purpose, but also deviates from this pronouncement. Although such increases are not usurious, since
the "Usury Law is now legally inexistent" - the interest ranging from 26 percent to 35 percent in the
statements of account - "must be equitably reduced for being iniquitous, unconscionable and
exorbitant." Rates found to be iniquitous or unconscionable are void, as if it there were no express
contract thereon. Above all, it is undoubtedly against public policy to charge excessively for the use
of money. 80 (Citations omitted and emphasis ours)
In New Sampaguita, the Court invoked Article 131081 of the Civil Code which grants courts authority
to reduce or increase interest rates equitably. It eliminated the escalated rates, insurance and
penalties and imposed only the stipulated interest rates of 19.5% and 21.5% on the notes, to be
reduced to the legal rate of 12% upon their automatic conversion into medium-term loans after
maturity: 82
[T]o give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and 21.5
percent stipulated in the Promissory Notes may be imposed by respondent on the respective
availments. After 730 days, the portions remaining unpaid are automatically converted into medium-
term loans at the legal rate of 12 percent. In all instances, the simple method of interest computation
is followed.x x x.83
Thus, all payments made by the petitioners were applied pro-rated to the notes, and after eliminating
the charges, penalties and insurance, the result of the recomputation was an overcollection by the
bank of P3,686, 101.52, which the Court ordered refunded to the petitioners with straight interest
at 6% per annum from the filing of the complaint until Finality.84
In Equitable PCI Bank v. Ng Sheung Ngor, 85 the Court annulled the escalation clause and imposed
the original stipulated rate of interest on the loan, until maturity, and thereafter, the legal interest
of 12% per annum was imposed on the outstanding loans. Thus, the Court ordered the borrower to
pay Equitable the stipulated interest rate of 12.66% per annum for the dollar denominated loans,
and the stipulated 20% per annum for the peso denominated loans, up to maturity, and afterwards
Equitable was to collect legal interest of 12% per annum on all loans due.86 Incidentally, under
Monetary Board Circular No. 799, the rate of interest for the loan or forbearance of money, in the
absence of stipulation, shall now be 6% per annum starting July 1, 2013.87
Thus, the Court disregarded the unilaterally escalated interest rates and imposed the mutually
stipulated rates, which it applied up to the maturity of the loans. Thereafter, the Court imposed the
legal rate of 12% per annum on the outstanding loans, or 6% per annum legal rate on the excess
of the borrower's payments.
Attorney's fees do not form an integral part of the cost of borrowing, but arise only when
collecting upon the notes or loans becomes necessary. Courts have the power to
determine their reasonableness based on quantum meruit and to reduce the amount
thereof if excessive.
Concerning the P3,000,000.00 attorney's fees charged by Solidbank and added to the amount of its
auction bid, as part of the cost of collecting the loans by way of extrajudicial foreclosure, the Court
finds no factual basis to justify such an excessive amount. The Court has not hesitated to delete or
equitably reduce attorney's fees which are baseless or excessive. In New Sampaguita, the Court
reduced from 10% to 1% the attorney's fees, holding that they are not an integral part of the cost
of borrowing but arise only on the basis of quantum meruit when the lender collects upon the
notes. 88
Mortgagee institutions are reminded that extrajudicial foreclosure proceedings are not adversarial
suits filed before a court. It is not commenced by filing a complaint but an ex-parte application for
extra judicial foreclosure of mortgage before the executive judge, pursuant to Act No. 3135, as
amended, and special administrative orders issued by this Court, particularly Administrative Matter
No. 99-10-05-0 (Re: Procedure in Extra-Judicial Foreclosure of Mortgage). The executive judge
receives the application neither in a judicial capacity nor on behalf of the court; the conduct of
extrajudicial foreclosure proceedings is not governed by the rules on ordinary or special civil actions.
The executive judge performs therein an administrative function to ensure that all requirements for
the extrajudicial foreclosure of a mortgage are satisfied before the clerk of court, as the ex-
officio sheriff, goes ahead with the public auction of the mortgaged property. Necessarily, the orders
of the executive judge in such proceedings, whether they be to allow or disallow the extrajudicial
foreclosure of the mortgage, are not issued in the exercise of a judicial function but in the exercise
of his administrative function to supervise the ministerial duty of the Clerk of Court as Ex-
Officio Sheriff in the conduct of an extrajudicial foreclosure sale. 89
The recomputation of the petitioners' total loan indebtedness based on the stipulated
interest, and the exclusion of the penalties and reduction of the attorney's fees results in
an excess of the auction proceeds which must be paid to the petitioners.
311 days, or 1.8520 years, it earned P6,945,000.00 in interest. In all, Solidbank
earned P31,828,500.00 in interest up to March 5, 1999 from both loans.1âwphi1
(2) From November 9, 1995 to April 1998, the petitioners paid monthly interests
totaling P24,277,283.22. Deducting P24,277,283.22 from the sum of the total loan principal
of P60,000,000.00 and the total interest due of P31,828,500.00, which
is P91,828,500.00, leaves the amount of P67,551,216.78 in interest owed by the petitioners
as of March 5, 1999.
(3) As in New Sampaguita Builders, the Court shall exclude all the penalties or surcharges
charged by the bank, and shall allow the bank to recover only 1% as attorney's fees,
or P675,512.17, not the P3,600,000.00 awarded by the RTC. Thus, all in all, the petitioners
owed the bank P68,226,728.95 (P67,551,216.78 plus P675,512.17) as of March 5,
1999.1âwphi1
(4) Deducting P68,226,728.95 from Solidbank's winning bid of P82,327,000.00 leaves an
excess of P14,100,271.05 in the proceeds of the auction over the outstanding loan obligation
of the petitioners. This amount must be paid by Solidbank to the petitioners.
(5) Since the P14,100,271.05 is the excess in the auction proceeds, thus an ordinary monetary
obligation and not a loan or a forbearance of credit, it shall earn simple interest at six percent
(6%) per annum from judicial demand up to finality, following Eastern Shipping Lines, Inc. v.
Court of Appeals; 94 thereafter, both the said amount and the accumulated interest shall
together earn six percent (6%) per annum, pursuant to Monetary Board Circular No. 799, until
full satisfaction.

Coming now to the question of whether Solidbank must refund any excess interest to the petitioners,
the CA agreed with the RTC that the loans should earn only 12% for Solidbank, which would result
in a drastic reduction in the interest which the petitioners would be obliged to pay to Solidbank.
Notwithstanding what this Court has said concerning the invalidity of the unilateral increases in the
interest rates, the ruling nonetheless violates the contractual agreement of the parties imposing an
interest of 18.75% per annum, besides the fact that an interest of 18.75% per annum cannot per
se be deemed as unconscionable back in 1995 or in 1997.

In the recent cases of Mallari v. Prudential Bank (now Bank of the Philippine Islands)90 and Spouses
Villanueva v. The CA, et al.,91 the Court did not consider unconscionable the contractual interest
rates of 23% or 24% per annum. In Mallari, the Court upheld the loans obtained between 1984 and
1989 which bore interest from 21 % to 23% per year; in Spouses Villanueva, the loans secured in
1994 carried interest of 24% per year were upheld. In Advocates for Truth in Lending, Inc. v. Bangko
Sentral Monetary Board,92 the Court noted that in the later 1990s, the banks' prime lending rates
which they charged to their best borrowers ranged from 26% to 31%. 93

To answer, then, the question of whether Solidbank must refund anything to the petitioners, the
contracted rate of 18.75%, not the legal rate of 12%, will be applied to the petitioners' loans. Any
excess either in the interest payments of the petitioners or in the auction proceeds, over what is
validly due to Solidbank on the loans, will be refunded or paid to the petitioners. Thus:

(1) The first loan of P40,000.000.00 carried a stipulated interest of 18.75% per annum, and
from November 9, 1995 to March 5, 1999, which is the auction date and the date the mortgage
was terminated, a period of 3 years and 116 days, or 3.3178 years, and total interest earned
by the bank thereon is P24,883,500.00; the second loan, for P20,000,000.00, was also agreed
to earn 18. 75% per annum, and from April 28, 1997 to March 5, 1999, a period of 1 year and
WHEREFORE, premises considered, the Amended Decision dated November 26, 2012 of the Court
of Appeals in CA-G.R. CV No. 94012 is AFFIRMED with MODIFICATION in that the stipulated
interest rate on the loan obligation of 18.75% shall be applied, resulting in P67,551,216.78 as the
amount due from the Spouses Florante E. Jonsay and Luzviminda L. Jonsay and Momarco Import
Co., Inc. to Solidbank Corporation (now Metropolitan Bank and Trust Company). In addition, the
Spouses Florante E. Jonsay and Luzviminda L. Jonsay and Momarco Import Co., Inc. are ORDERED
to PAY atton1ey's fees in the amount of P675,512.17, which is one percent (1%) of the loan
obligation.
Thus, Solidbank Corporation (now Metropolitan Bank and Trust Company) is ORDERED to PAY to
the petitioners the amount of P14,100,271.05, representing the excess of its auction bid over the
total loan obligation due from the petitioners, plus interest at six percent (6%) per annum computed
from the date of filing of the complaint or March 15, 2000 up to finality; and thereafter, both the
excess of the auction proceeds and the cumulative interest shall earn six percent (6%) per
annum until fully paid.
G.R. No. 144169 March 28, 200
KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY STEVEN KHE, petitioners,
vs.
COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY and PHILAM
INSURANCE CO., INC., respondents.
KAPUNAN, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45, seeking to set aside the decision
of the Court of Appeals dated April 10, 2000 and its resolution dated July 11, 2000 denying the
motion for reconsideration of the aforesaid decision. The original complaint that is the subject matter
of this case is an accion pauliana -- an action filed by Philam Insurance Company, Inc. (respondent
Philam) to rescind or annul the donations made by petitioner Khe Hong Cheng allegedly in fraud of
creditors. The main issue for resolution is whether or not the action to rescind the donations has
already prescribed. While the first paragraph of Article 1389 of the Civil Code states: "The action to
claim rescission must be commenced within four years..." the question is, from which point or event
does this prescriptive period commence to run?
The facts are as follows:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It appears that
on or about October 4, 1985, the Philippine Agricultural Trading Corporation shipped on board the
vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra at Masbate,
Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment of copra was covered
by a marine insurance policy issued by American Home Insurance Company (respondent Philam's
assured). M/V PRINCE ERlC, however, sank somewhere between Negros Island and Northeastern
Mindanao, resulting in the total loss of the shipment. Because of the loss, the insurer, American
Home, paid the amount of P354,000.00 (the value of the copra) to the consignee.1âwphi1.nêt
Having been subrogated into the rights of the consignee, American Home instituted Civil Case No.
13357 in the Regional Trial Court (RTC) of Makati , Branch 147 to recover the money paid to the
consignee, based on breach of contract of carriage. While the case was still pending, or on December
20, 1989, petitioner Khe Hong Cheng executed deeds of donations of parcels of land in favor of his
children, herein co-petitioners Sandra Joy and Ray Steven. The parcel of land with an area of 1,000
square meters covered by Transfer Certificate of Title (TCT) No. T-3816 was donated to Ray Steven.
Petitioner Khe Hong Cheng likewise donated in favor of Sandra Joy two (2) parcels of land located
in Butuan City, covered by TCT No. RT-12838. On the basis of said deeds, TCT No. T-3816 was
cancelled and in lieu thereof, TCT No. T-5072 was issued in favor of Ray Steven and TCT No. RT-
12838 was cancelled and in lieu thereof, TCT No. RT-21054 was issued in the name of Sandra Joy.
The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No.13357 on
December 29, 1993, four years after the donations were made and the TCTs were registered in the
donees' names. The decretal portion of the aforesaid decision reads:
"Wherefore, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff
and against the defendant, ordering the latter to pay the former:
1) the sum of P354,000.00 representing the amount paid by the plaintiff to the Philippine
Agricultural Trading Corporation with legal interest at 12% from the time of the filing of the
complaint in this case;
2) the sum of P50,000.00 as attorney's fees;
3) the costs.1
After the said decision became final and executory, a writ of execution was forthwith' issued on
September 14, 1995. Said writ of execution however, was not served. An alias writ of execution
was, thereafter, applied for and granted in October 1996. Despite earnest efforts, the sheriff found
no property under the name of Butuan Shipping Lines and/or petitioner Khe Hong Cheng to levy or
garnish for the satisfaction of the trial court's decision. When the sheriff, accompanied by counsel of
respondent Philam, went to Butuan City on January 17, 1997, to enforce the alias writ of execution,
they discovered that petitioner Khe Hong Cheng no longer had any property and that he had
conveyed the subject properties to his children.
On February 25, 1997, respondent Philam filed a complaint with the Regional Trial Court of Makati
City, Branch 147, for the rescission of the deeds of donation executed by petitioner Khe Hong Cheng
in favor of his children and for the nullification of their titles (Civil Case No.97-415). Respondent
Philam alleged, inter alia, that petitioner Khe Hong Cheng executed the aforesaid deeds in fraud of
his creditors, including respondent Philam.2
Petitioners subsequently filed their answer to the complaint a quo. They moved for its dismissal on
the ground that the action had already prescribed. They posited that the registration of the deeds
of donation on December 27, 1989 constituted constructive notice and since the complaint a quo was
filed only on February 25, 1997, or more than four (4) years after said registration, the action was
already barred by prescription.3
Acting thereon, the trial court denied the motion to dismiss. It held that respondent Philam's
complaint had not yet prescribed. According to the trial court, the prescriptive period began to run
only from December 29, 1993, the date of the decision of the trial court in Civil Case No. 13357. 4
On appeal by petitioners, the CA affirmed the trial court's decision in favor of respondent Philam.
The CA declared that the action to rescind the donations had not yet prescribed. Citing Articles 1381
and 1383 of the Civil Code, the CA basically ruled that the four year period to institute the action for
rescission began to run only in January 1997, and not when the decision in the civil case became
final and executory on December 29, 1993. The CA reckoned the accrual of respondent Philam's
cause of action on January 1997, the time when it first learned that the judgment award could not
be satisfied because the judgment creditor, petitioner Khe Hong Cheng, had no more properties in
his name. Prior thereto, respondent Philam had not yet exhausted all legal means for the satisfaction
of the decision in its favor, as prescribed under Article 1383 of the Civil Code. 5
The Court of Appeals thus denied the petition for certiorari filed before it, and held that the trial
court did not commit any error in denying petitioners' motion to dismiss. Their motion for
reconsideration was likewise dismissed in the appellate court's resolution dated July 11, 2000.
Petitioners now assail the aforesaid decision and resolution of the CA alleging that:
I. PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE ABUSE OF DISCRETION WHEN
IT DENIED THE PETITION TO DISMISS THE CASE BASED ON THE GROUND OF PRESCRIPTION.
II. PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY 1997 THE SHERIFF WENT TO BUTUAN CITY
IN SEARCH OF PROPERTIES OF PETITIONER FELIX KHE CHENG TO SATISFY THE JUDGMENT IN
CIVIL CASE NO.13357 AND FOUND OUT THAT AS EARLY AS DEC. 20, 1989, PETITIONERS KHE
CHENG EXECUTED THE DEEDS OF DONATIONS IN FAVOR OF HIS CO-PETITIONERS THAT THE
ACTION FOR RESCISSION ACCRUED BECAUSE PRESCRIPTION BEGAN TO RUN WHEN THESE
DONATIONS WERE REGISTERED WITH THE REGISTER OF DEEDS IN DECEMBER 1989, AND
WHEN THE COMPLAINT WAS FILED ONLY IN FEBRUARY 1997, MORE THAN FOUR YEARS HAVE
ALREADY LAPSED AND THEREFORE, IT HAS ALREADY PRESCRIBED. 6
Essentially, the issue for resolution posed by petitioners is this: When did the four (4) year
prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to file its
action for rescission of the subject deeds of donation commence to run?
The petition is without merit.
Article 1389 of the Civil Code simply provides that, "The action to claim rescission must be
commenced within four years." Since this provision of law is silent as to when the prescriptive period
would commence, the general rule, i.e., from the moment the cause of action accrues, therefore,
applies. Article 1150 of the Civil Code is particularly instructive:
Art. 1150. The time for prescription for all kinds of actions, when there is no special provision
which ordains otherwise, shall be counted from the day they may be brought.
Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which
determines the starting point for the computation of the prescriptive period for the action. 7 Article
1383 of the Civil Code provides as follows:
Art. 1383. An action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.
It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of
only after all other legal remedies have been exhausted and have been proven futile. For an accion
pauliana to accrue, the following requisites must concur:
1) That the plaintiff asking for rescission has a credit prior to, the alienation, although
demandable later; 2) That the debtor has made a subsequent contract conveying a patrimonial
benefit to a third person; 3) That the creditor has no other legal remedy to satisfy his claim, but
would benefit by rescission of the conveyance to the third person; 4) That the act being
impugned is fraudulent; 5) That the third person who received the property conveyed, if by
onerous title, has been an accomplice in the fraud.8 (Emphasis ours)
We quote with approval the following disquisition of the CA on the matter:
An accion pauliana accrues only when the creditor discovers that he has no other legal remedy
for the satisfaction of his claim against the debtor other than an accion pauliana. The accion
pauliana is an action of a last resort. For as long as the creditor still has a remedy at law for the
enforcement of his claim against the debtor, the creditor will not have any cause of action against
the creditor for rescission of the contracts entered into by and between the debtor and another
person or persons. Indeed, an accion pauliana presupposes a judgment and the issuance by the
trial court of a writ of execution for the satisfaction of the judgment and the failure of the Sheriff
to enforce and satisfy the judgment of the court. It presupposes that the creditor has exhausted
the property of the debtor. The date of the decision of the trial court against the debtor is
immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent
alienation by the debtor of his property. After all, the decision of the trial court against the debtor
will retroact to the time when the debtor became indebted to the creditor. 9
Petitioners, however, maintain that the cause of action of respondent Philam against them for the
rescission of the deeds of donation accrued as early as December 27, 1989, when petitioner Khe
Hong Cheng registered the subject conveyances with the Register of Deeds. Respondent Philam
allegedly had constructive knowledge of the execution of said deeds under Section 52 of Presidential
Decree No. 1529, quoted infra, as follows:
Section 52. Constructive knowledge upon registration. - Every conveyance, mortgage, lease,
lien, attachment, order, judgment, instrument or entry affecting registered land shall, if
registered, filed or entered in the Office of the Register of Deeds for the province or city where
the land to which it relates lies, be constructive notice to all persons from the time of such
registering, filing, or entering.
Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is
misplaced, for in no way does this imply that the specific provisions of the former may be all together
ignored. To count the four year prescriptive period to rescind an allegedly fraudulent contract from
the date of registration of the conveyance with the Register of Deeds, as alleged by the petitioners,
would run counter to Article 1383 of the Civil Code as well as settled jurisprudence. It would likewise
violate the third requisite to file an action for rescission of an allegedly fraudulent conveyance of
property, i.e., the creditor has no other legal remedy to satisfy his claim.
An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court
of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce
and satisfy the judgment of the court. It requires that the creditor has exhausted the property of
the debtor: The date of the decision of the trial court is immaterial. What is important is that the
credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his property. After
all, the decision of the trial court against the debtor will retroact to the time when the debtor became
indebted to the creditor.
Tolentino, a noted civilist, explained:
"xxx[T]herefore, credits with suspensive term or condition are excluded, because the accion
pauliana presupposes a judgment and unsatisfied execution, which cannot exist when the debt
is not yet demandable at the time the rescissory action is brought. Rescission is a subsidiary
action, which presupposes that the creditor has exhausted the property of the debtor which is
impossible in credits which cannot be enforced because of a suspensive term or condition.
While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment
be subsequent to the alienation, it is merely declaratory with retroactive effect to the date when
the credit was constituted."10
These principles were reiterated by the Court when it explained the requisites of an accion
pauliana in greater detail, to wit:
"The following successive measures must be taken by a creditor before he may bring an action
for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through
levying by attachment and execution upon all the property of the debtor, except such as are
exempt from execution; (2) exercise all the rights and actions of the debtor, save those personal
to him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in
fraud of their rights (accion pauliana). Without availing of the first and second remedies, i.e..
exhausting the properties of the debtor or subrogating themselves in Francisco Bareg's
transmissible rights and actions. petitioners simply: undertook the third measure and filed an
action for annulment of sale. This cannot be done."11 (Emphasis ours)
"That the DONOR further states, for the same purpose as expressed in the next preceding
paragraph, that this donation is not made with the object of defrauding his creditors having
reserved to himself property sufficient to answer his debts contracted prior to this date".12
As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by
petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City
to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer had any
properties in his name. It was only then that respondent Philam's action for rescission of the deeds
of donation accrued because then it could be said that respondent Philam had exhausted all legal
means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its complaint
for accion pauliana against petitioners on February 25, 1997, barely a month from its discovery that
petitioner Khe Hong Cheng had no other property to satisfy the judgment award against him, its
action for rescission of the subject deeds clearly had not yet prescribed.1âwphi1.nêt
A final point. Petitioners now belatedly raise on appeal the defense of improper venue claiming that
respondent Philam's complaint is a real action and should have been filed with the RTC of Butuan
City since the property subject matter or the donations are located therein. Suffice it to say that
petitioners are already deemed to have waived their right to question the venue of the instant case.
Improper venue should be objected to as follows 1) in a motion to dismiss filed within the time but
before the filing of the answer;13 or 2) in the answer as an affirmative defense over which, in the
discretion of the court, a preliminary hearing may be held as if a motion to dismiss had been
filed.14 Having failed to either file a motion to dismiss on the ground of improper of venue or include
the same as an affirmative defense in their answer, petitioners are deemed to have their right to
object to improper venue.
WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.

In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal of
the accion pauliana on the basis of lack of cause of action:
"In this case, plaintiffs appellants had not even commenced an action against defendants-
appellees Bareng for the collection of the alleged indebtedness, Plaintiffs-appellants had not
even tried to exhaust the property of defendants-appellees Bareng, Plaintiffs-appellants, in
seeking the rescission of the contracts of sale entered into between defendants-appellees, failed
to show and prove that defendants-appellees Bareng had no other property, either at the time
of the sale or at the time this action was filed, out of which they could have collected this (sic)
debts." (Emphasis ours)

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng
had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping
Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent Philam
had no inkling, at the time, that the trial court’s judgment would be in its favor and further, that
such judgment would not be satisfied due to the deeds of donation executed by petitioner Khe Hong
Cheng during the pendency of the case. Had respondent Philam filed his complaint on December 27,
1989, such complaint would have been dismissed for being premature. Not only were all other legal
remedies for the enforcement of respondent Philam's claims not yet exhausted at the time the needs
of donation were executed and registered. Respondent Philam would also not have been able to
prove then that petitioner Khe Hong Cheng had no more property other than those covered by the
subject deeds to satisfy a favorable judgment by the trial court.

It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he
had reserved to himself property sufficient to answer for his debts contracted prior to this date:
G.R. No. 134685 November 19, 1999
MARIA ANTONIA SIGUAN, petitioner,vs. ROSA LIM, LINDE LIM, INGRID LIM and NEIL
LIM, respondents.
DAVIDE, JR., C.J.:
May the Deed of Donation executed by respondent Rosa Lim (hereafter LIM) in favor of her children
be rescinded for being in fraud of her alleged creditor, petitioner Maria Antonia Siguan? This is the
pivotal issue to be resolved in this petition for review on certiorari under Rule 45 of the Revised
Rules of Court.
The relevant facts, as borne out of the records, are as follows:
On 25 and 26 August 1990, LIM issued two Metrobank checks in the sums of P300,000 and P241,668,
respectively, payable to "cash." Upon presentment by petitioner with the drawee bank, the checks
were dishonored for the reason "account closed." Demands to make good the checks proved futile.
As a consequence, a criminal case for violation of Batas Pambansa Blg. 22, docketed as Criminal
Cases Nos. 22127-28, were filed by petitioner against LIM with Branch 23 of the Regional Trial Court
(RTC) of Cebu City. In its decision 1 dated 29 December 1992, the court a quo convicted LIM as
charged. The case is pending before this Court for review and docketed as G.R. No. 134685.
It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of Quezon City in
Criminal Case No. Q-89-2216 2 filed by a certain Victoria Suarez. This decision was affirmed by the
Court of Appeals. On appeal, however, this Court, in a decision 3 promulgated on 7 April 1997,
acquitted LIM but held her civilly liable in the amount of P169,000, as actual damages, plus legal
interest.
Meanwhile, on 2 July 1991, a Deed of Donation 4 conveying the following parcels of land and
purportedly executed by LIM on 10 August 1989 in favor of her children, Linde, Ingrid and Neil, was
registered with the Office of the Register of Deeds of Cebu City:
(1) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 563 sq. m. and
covered by TCT No. 93433;
(2) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 600 sq. m. and
covered by TCT No. 93434;
(3) a parcel of land situated at Cebu City containing an area of 368 sq. m. and covered by TCT
No. 87019; and
(4) a parcel of land situated at Cebu City, Cebu containing an area of 511 sq. m. and covered
by TCT No. 87020.
New transfer certificates of title were thereafter issued in the names of the donees. 5
On 23 June 1993, petitioner filed an accion pauliana against LIM and her children before Branch 18
of the RTC of Cebu City to rescind the questioned Deed of Donation and to declare as null and void
the new transfer certificates of title issued for the lots covered by the questioned Deed. The
complaint was docketed as Civil Case No. CEB-14181. Petitioner claimed therein that sometime in
July 1991, LIM, through a Deed of Donation, fraudulently transferred all her real property to her
children in bad faith and in fraud of creditors, including her; that LIM conspired and confederated
with her children in antedating the questioned Deed of Donation, to petitioner's and other creditors'
prejudice; and that LIM, at the time of the fraudulent conveyance, left no sufficient properties to
pay her obligations.
On the other hand, LIM denied any liability to petitioner. She claimed that her convictions in Criminal
Cases Nos. 22127-28 were erroneous, which was the reason why she appealed said decision to the
Court of Appeals. As regards the questioned Deed of Donation, she maintained that it was not
antedated but was made in good faith at a time when she had sufficient property. Finally, she alleged
that the Deed of Donation was registered only on 2 July 1991 because she was seriously ill.
In its decision of 31 December 1994, 6 the trial court ordered the rescission of the questioned deed
of donation; (2) declared null and void the transfer certificates of title issued in the names of private
respondents Linde, Ingrid and Neil Lim; (3) ordered the Register of Deeds of Cebu City to cancel
said titles and to reinstate the previous titles in the name of Rosa Lim; and (4) directed the LIMs to
pay the petitioner, jointly and severally, the sum of P10,000 as moral damages; P10,000 as
attorney's fees; and P5,000 as expenses of litigation.
On appeal, the Court of Appeals, in a decision 7 promulgated on 20 February 1998, reversed the
decision of the trial court and dismissed petitioner's accion pauliana. It held that two of the requisites
for filing an accion pauliana were absent, namely, (1) there must be a credit existing prior to the
celebration of the contract; and (2) there must be a fraud, or at least the intent to commit fraud, to
the prejudice of the creditor seeking the rescission.
According to the Court of Appeals, the Deed of Donation, which was executed and acknowledged
before a notary public, appears on its face to have been executed on 10 August 1989. Under Section
23 of Rule 132 of the Rules of Court, the questioned Deed, being a public document, is evidence of
the fact which gave rise to its execution and of the date thereof. No antedating of the Deed of
Donation was made, there being no convincing evidence on record to indicate that the notary public
and the parties did antedate it. Since LIM's indebtedness to petitioner was incurred in August 1990,
or a year after the execution of the Deed of Donation, the first requirement for accion pauliana was
not met.
Anent petitioner's contention that assuming that the Deed of Donation was not antedated it was
nevertheless in fraud of creditors because Victoria Suarez became LIM's creditor on 8 October 1987,
the Court of Appeals found the same untenable, for the rule is basic that the fraud must prejudice
the creditor seeking the rescission.
Her motion for reconsideration having been denied, petitioner came to this Court and submits the
following issue:
WHETHER OR NOT THE DEED OF DONATION, EXH. 1, WAS ENTERED INTO IN FRAUD OF [THE]
CREDITORS OF RESPONDENT ROSA [LIM].
Petitioner argues that the finding of the Court of Appeals that the Deed of Donation was not in fraud
of creditors is contrary to well-settled jurisprudence laid down by this Court as early as 1912 in the
case of Oria v. McMicking, 8which enumerated the various circumstances indicating the existence of
fraud in a transaction. She reiterates her arguments below, and adds that another fact found by the
trial court and admitted by the parties but untouched by the Court of Appeals is the existence of a
prior final judgment against LIM in Criminal Case No. Q-89-2216 declaring Victoria Suarez as LIM's
judgment creditor before the execution of the Deed of Donation.
Petitioner further argues that the Court of Appeals incorrectly applied or interpreted Section
23, 9 Rule 132 of the Rules of Court, in holding that "being a public document, the said deed of
donation is evidence of the fact which gave rise to its execution and of the date of the latter." Said
provision should be read with Section 30 10 of the same Rule which provides that notarial documents
are prima facie evidence of their execution, not "of the facts which gave rise to their execution and
of the date of the latter."
Finally, petitioner avers that the Court of Appeals overlooked Article 759 of the New Civil Code,
which provides: "The donation is always presumed to be in fraud of creditors when at the time of
the execution thereof the donor did not reserve sufficient property to pay his debts prior to the
donation." In this case, LIM made no reservation of sufficient property to pay her creditors prior to
the execution of the Deed of Donation.
On the other hand, respondents argue that (a) having agreed on the law and requisites of accion
pauliana, petitioner cannot take shelter under a different law; (b) petitioner cannot invoke the credit
of Victoria Suarez, who is not a party to this case, to support her accion pauliana; (c) the Court of
Appeals correctly applied or interpreted Section 23 of Rule 132 of the Rules of Court; (d) petitioner
failed to present convincing evidence that the Deed of Donation was antedated and executed in
fraud of petitioner; and (e) the Court of Appeals correctly struck down the awards of damages,
attorney's fees and expenses of litigation because there is no factual basis therefor in the body of
the trial court's decision.
The primordial issue for resolution is whether the questioned Deed of Donation was made in fraud
of petitioner and, therefore, rescissible. A corollary issue is whether the awards of damages,
attorney's fees and expenses of litigation are proper.
We resolve these issues in the negative.
The rule is well settled that the jurisdiction of this Court in cases brought before it from the Court of
Appeals via Rule 45 of the Rules of Court is limited to reviewing errors of law. Findings of fact of the
latter court are conclusive, except in a number of instances. 11 In the case at bar, one of the
recognized exceptions warranting a review by this Court of the factual findings of the Court of
Appeals exists, to wit, the factual findings and conclusions of the lower court and Court of Appeals
are conflicting, especially on the issue of whether the Deed of Donation in question was in fraud of
creditors.
Art. 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are
"those contracts undertaken in fraud of creditors when the latter cannot in any other manner collect
the claims due them."
The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to
prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit
prior to the alienation, 12although demandable later; (2) the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to
satisfy his claim; 13 (4) the act being impugned is fraudulent; 14(5) the third person who received
the property conveyed, if it is by onerous title, has been an accomplice in the fraud. 15
The general rule is that rescission requires the existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement
setting aside the contract. 16 Without any prior existing debt, there can neither be injury nor fraud.
While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the
credit was constituted. 17
In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August 1990, while
the deed of donation was purportedly executed on 10 August 1989.
We are not convinced with the allegation of the petitioner that the questioned deed was antedated
to make it appear that it was made prior to petitioner's credit. Notably, that deed is a public
document, it having been acknowledged before a notary public. 18 As such, it is evidence of the fact
which gave rise to its execution and of its date, pursuant to Section 23, Rule 132 of the Rules of
Court.
Petitioner's contention that the public documents referred to in said Section 23 are only those entries
in public records made in the performance of a duty by a public officer does not hold water. Section
23 reads:
Sec. 23. Public documents as evidence. — Documents consisting of entries in public records
made in the performance of a duty by a public officer are prima facie evidence of the facts
therein stated. All other public documents are evidence, even against a third person, of the fact
which gave rise to their execution and of the date of the latter. (Emphasis supplied).
The phrase "all other public documents" in the second sentence of Section 23 means those public
documents other than the entries in public records made in the performance of a duty by a public
officer. And these include notarial documents, like the subject deed of donation. Section 19, Rule
132 of the Rules of Court provides:
Sec. 19. Classes of docum/ents. — For the purpose of their presentation in evidence, documents
are either public or private.
Public documents are:
(a) . . .
(b) Documents acknowledged before a notary public except last wills and testaments. . . .
It bears repeating that notarial documents, except last wills and testaments, are public documents
and are evidence of the facts that gave rise to their execution and of their date.
In the present case, the fact that the questioned Deed was registered only on 2 July 1991 is not
enough to overcome the presumption as to the truthfulness of the statement of the date in the
questioned deed, which is 10 August 1989. Petitioner's claim against LIM was constituted only in
August 1990, or a year after the questioned alienation. Thus, the first two requisites for the
rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of the
contract of donation, still her action for rescission would not fare well because the third requisite
was not met. Under Article 1381 of the Civil Code, contracts entered into in fraud of creditors may
be rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article
1383 of the same Code provides that the action for rescission is but a subsidiary remedy which
cannot be instituted except when the party suffering damage has no other legal means to obtain
reparation for the same. The term "subsidiary remedy" has been defined as "the exhaustion of all
remedies by the prejudiced creditor to collect claims due him before rescission is resorted to." 19 It
is, therefore, "essential that the party asking for rescission prove that he has exhausted all other
legal means to obtain satisfaction of his claim. 20 Petitioner neither alleged nor proved that she did
so. On this score, her action for the rescission of the questioned deed is not maintainable even if the
fraud charged actually did exist." 21
The fourth requisite for an accion pauliana to prosper is not present either.
Art. 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which the debtor
alienates property by gratuitous title are presumed to have been entered into in fraud of creditors
when the donor did not reserve sufficient property to pay all debts contracted before the donation.
Likewise, Article 759 of the same Code, second paragraph, states that the donation is always

presumed to be in fraud of creditors when at the time thereof the donor did not reserve sufficient
property to pay his debts prior to the donation.
For this presumption of fraud to apply, it must be established that the donor did not leave adequate
properties which creditors might have recourse for the collection of their credits existing before the
execution of the donation.
As earlier discussed, petitioner's alleged credit existed only a year after the deed of donation was
executed. She cannot, therefore, be said to have been prejudiced or defrauded by such alienation.
Besides, the evidence disclose that as of 10 August 1989, when the deed of donation was executed,
LIM had the following properties:
(1) A parcel of land containing an area of 220 square meters, together with the house
constructed thereon, situated in Sto. Niño Village, Mandaue City, Cebu, registered in the name
of Rosa Lim and covered by TCT No. 19706; 22
(2) A parcel of land located in Benros Subdivision, Lawa-an, Talisay, Cebu; 23
(3) A parcel of land containing an area of 2.152 hectares, with coconut trees thereon, situated
at Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration No. 13572. 24
(4) A parcel of land containing an area of 3.6 hectares, with coconut trees thereon, situated at
Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration No. 13571. 25
During her cross-examination, LIM declared that the house and lot mentioned in no. 1 was bought
by her in the amount of about P800,000 to P900,000. 26 Thus:
ATTY. FLORIDO: Q These properties at the Sto. Niño Village, how much did you acquire this
property?
A Including the residential house P800,000.00 to P900,000.00.
Q How about the lot which includes the house. How much was the price in the Deed of Sale of
the house and lot at Sto. Niño Violage [sic]?
A I forgot.
Q How much did you pay for it?
A That is P800,000.00 to P900,000.00.
28
(7) The failure of the vendee to take exclusive possession of all the property.
The above enumeration, however, is not an exclusive list. The circumstances evidencing fraud are
as varied as the men who perpetrate the fraud in each case. This Court has therefore declined to
define it, reserving the liberty to deal with it under whatever form it may present itself. 29
Petitioner failed to discharge the burden of proving any of the circumstances enumerated above or
any other circumstance from which fraud can be inferred. Accordingly, since the four requirements
for the rescission of a gratuitous contract are not present in this case, petitioner's action must fail.
In her further attempt to support her action for rescission, petitioner brings to our attention the 31
July 1990 Decision 30 of the RTC of Quezon City, Branch 92, in Criminal Case No. Q-89-2216. LIM
was therein held guilty of estafa and was ordered to pay complainant Victoria Suarez the sum of
P169,000 for the obligation LIM incurred on 8 October 1987. This decision was affirmed by the Court
of Appeals. Upon appeal, however, this Court acquitted LIM of estafa but held her civilly liable for
P169,000 as actual damages.
It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to the
questioned alienation, is not a party to this accion pauliana. Article 1384 of the Civil Code provides
that rescission shall only be to the extent necessary to cover the damages caused. Under this Article,
only the creditor who brought the action for rescission can benefit from the rescission; those who
are strangers to the action cannot benefit from its effects. 31And the revocation is only to the extent
of the plaintiff creditor's unsatisfied credit; as to the excess, the alienation is maintained. 32 Thus,
petitioner cannot invoke the credit of Suarez to justify rescission of the subject deed of donation.
Now on the propriety of the trial court's awards of moral damages, attorney's fees and expenses of
litigation in favor of the petitioner. We have pored over the records and found no factual or legal
basis therefor. The trial court made these awards in the dispositive portion of its decision without
stating, however, any justification for the same in the ratio decidendi. Hence, the Court of Appeals
correctly deleted these awards for want of basis in fact, law or equity.

Petitioner did not adduce any evidence that the price of said property was lower. Anent the property
WHEREFORE, the petition is hereby DISMISSED and the challenged decision of the Court of Appeals
in no. 2, LIM testified that she sold it in 1990. 27 As to the properties in nos. 3 and 4, the total market
in CA-G.R. CV. No. 50091 is AFFIRMED in toto.
value stated in the tax declarations dated 23 November 1993 was P56,871.60. Aside from these tax
declarations, petitioner did not present evidence that would indicate the actual market value of said
properties. It was not, therefore, sufficiently established that the properties left behind by LIM were No pronouncement as to costs.
not sufficient to cover her debts existing before the donation was made. Hence, the presumption of
fraud will not come into play.

Nevertheless, a creditor need not depend solely upon the presumption laid down in Articles 759 and
1387 of the Civil Code. Under the third paragraph of Article 1387, the design to defraud may be
proved in any other manner recognized by the law of evidence. Thus in the consideration of whether
certain transfers are fraudulent, the Court has laid down specific rules by which the character of the
transaction may be determined. The following have been denominated by the Court as badges of
fraud:
(1) The fact that the consideration of the conveyance is fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent
or greatly embarrassed financially;
(6) The fact that the transfer is made between father and son, when there are present other of
the above circumstances; and